C
11 H
A
P
T
E
R
Supply Chain Management
DISCUSSION QUESTIONS 1. Supply chain management is the the management of the the activities activities that procure raw materials, transform them into intermediate goods and final products, and deliver the products to customers through a distribution system. 2. The supply chain function’s function’s role is to help identify identify the products and services that can best be obtained externally; develop, evaluate, and determine the best supplier, price and delivery for them. 3. Logistics’ objective is to obtain efficiency of operations through the integration of all material acquisition, movement, and storage activities in the firm. 4. Supply chain management implies that the firm is working to build a supply system that includes many aspects of supplier relationships at all levels (second- and third-tier suppliers as well as first-tier suppliers). Purchasing is the procurement function that can be performed with little concern for long-term relationships with suppliers. Logistics Logistics management management is the integration of all material acquisition, movement, and storage activities in the firm. 5. Vertical integration implies that a manufacturer moves backward into purchasing raw materials for components and forward into packaging and distribution. An example would be a coffee blender moving backwards by buying coffee plantations and moving forward to develop retail coffee shops. 6.
The three three basic approaches to negotiation are:
The cost-based model The market-based model Competitive bidding
7. The adversarial relationship must be changed changed dramatically to one of trust and the establishment of long-term relationships. To implement long-term relationships, purchasers must move to communicating the broad objective of the firm and the end customer. This usually requires sharing product information and schedules. 8. There are differences differences between postponement and channel assembly. Postponement implies that the final product is not assembled until it is shipped, usually with some modular features such as the power system for a printer. However, channel assembly actually moves assembly of a PC to the wholesale level where parts are received and assembly takes place. They are related, but different. 9. Wal-Mart uses drop shipping to remove itself completely from the distribution process so that orders from various stores are received by the manufacturer and shipped directly to the store.
173
10. Blanket orders are orders that cover an extended order period, say a year, and against which releases are issued against that purchase order. Invoiceless purchasing merely implies that some other information flow has been developed besides a formal invoice. Blanket orders can be invoiceless and invoiceless purchasing can be part of the blanket order, but they can also be done separately. 11. An organization moving to JIT deliveries must ensure that the supplier is capable of delivering quality products on time, provide production schedules for their suppliers, examine its layout to ensure that deliveries can move quickly to where they are needed, and train and empower employees to evaluate quality as the product is produced. 12. E-procurement is electronic purchasing i.e., the use of the Internet to buy or sell goods. 13. The Volkswagen approach to production described in the opening Global Company Profile is an effort to remove Volkswagen from much of the labor union negotiations and leave those negotiations up to suppliers. Not incidentally, Volkswagen no doubt hopes that the small workforces working for various suppliers will be less prone to engage in adverse union practices. 14. Keiretsu networks networks are highly dependent dependent upon both culture culture and laws. The Keiretsu networks found in Japan are still unique. Neither the U.S. antitrust division nor the EC could be expected to be happy with such arrangements. Ford Motor Company has established some “profit centers” that function almost as standalone companies. So we see some indications that the concept is being tested in America. But these tentative steps are a long way from the true Keiretsu networks of Ja pan.
ETHICAL DILEMMA Sears’ position was certainly fair and equitable, and most of us would say ethical—as long as Sears was a growing company. However, once the growth stopped and the employee and investor investments were at risk, the fairness of that position—which might be seen as favoring suppliers and the communities where the suppliers are located—could be questioned. Does this suggest a change in what is ethical over time? This may be another opportunity for a heated class discussion. Certainly, Wal-Mart’s position as an aggressive cost cutter can be seen as ethical by employees with career opportunities, by investors who see their investment grow, by customers who take advantage of low prices, and suppliers that are big enough to cope with Wal-Mart’s negotiation skills.
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SUPPLY CHAIN MANAGEMENT
Wal-Mart’s position is the Utilitarian view that actions are right and acceptable if they maximize total utility or the greatest good for the greatest number of people. We also suggest that ethical decision-making requires consideration of all of the organization’s stakeholders. Wal-Mart may be doing a better job at this.
Products
11.1
11.2
Company
Donna Inc.
1 2 2 2 2 1 2 12 .2 2.4
Kay Inc.
2 2 4 3 3 2 2 18 .2 3.6
Service
3 3 2 8 2 1.6
3 3 3 9 .2 1.8
Products
4 2 2 8 .4 3.2
4 2 2 8 .4 3.2
Sales
2 1 2 5 .2 1.0 Total
8.2
1 2 3 6 .2 1.2 9.8 higher rating
11.3
Company
Donna Inc.
Kay Inc.
2 2 2 2 2 2 2 14 .2 2.8
2 2 4 3 3 2 2 18 .2 3.6
3 3 2 8 .2 1.6
3 3 3 9 .2 1.8
Service
4 2 2 8 .4 3.2
2 2 2 6 .2 1.2
2 2 3 7 .2 1.4
8.8
10.0
Sales
END-OF-CHAPTER PROBLEMS This problem provides a good way to: (1) get students involved with the Internet, (2) have them interact with members of the existing workforce, and (3) get them to take a relatively detailed look at supply chains and their relation to corporate strategy. You might consider having students study different stores (Sears, Pizza Hut, and Benetton, for example) in different industries and then compare the results in a class session.
4 2 2 8 .4 3.2
Total:
Kay Inc. maintains a higher rating. This exercise can be used to illustrate the difficulty of selecting criteria, and of “objectively” ranking similar companies and products. This is an especially good exercise when the university ranked highest by the student is not the one he or she actually attends. You can discuss the impact of “hidden” or unknown criteria (i.e., criteria which significantly impact our choices, but are not considered sufficiently important for their inclusion in the rating form). Students may be expected to arrive at different “solutions” to this problem—both in choice of criteria and with respect to ranking, and in the universities reviewed. One set of sample criteria is given on page 175. These may or may not be relevant at any particular school. 11.4
SUPPLY CHAIN MANAGEMENT
CHAPTER 11
Criteria
University 1
University 2
4
4
3
2
1
3
2
1
University 3 4
3
2
1
1
University 4
University 5
4
4
3
2
1
3
2
1
Academics Reputation Breadth of offerings Depth of offerings Variety of offerings Graduation rate Length of program Laboratory facilities Teaching facilities % honor graduates Teaching methodologies Use of IT in teaching Financial Tuition Room & Board Books, supplies, etc. Additional expenses Location Desirability Local transportation Weather Size Undergraduate class Total enrollment Campus Size Adequacy Appearance Architecture Sports Availability Variety Reputation Role of sports on campus
Students should identify a number of problems from simple communication, through product valuation, to the selection of virtual partners. In most cases similar problems existed in the single site operation, but operating in a virtual world has at least modified the characteristics of the problem and the environment within which one must work to develop a solution.
(b) Implications of added in-transit time to the customer: delivery of this product or of a major product of which this is a component may have repercussion well beyond the cost savings and a very unhappy customer.
11.5
11.6
Using Table 11.3: (a) Net profit of 4%, spends 40% of its revenue on purchases. It will take $3.13 in sales to equal $1 saved through purchasing. (b) Net profit of 6%, spends 80% of its revenue on purchases. It will take $7.69 in sales to equal $1 saved through purchasing.
11.7
(a) $4.35 (b) $7.14
11.8
11.9
(a) Daily holding cost = (annual holding cost cost)/days in year = (.3 $100,000)/365 = $82.19. Difference in cost per day between shipping options = ($4,800 – $3,800)/10 days = $100. Since the daily holding cost ($82.20) is less than the daily cost of faster shipping with option b ($100), use the slower shipping, option a.
Daily holding cost = (annual holding cost cost)/days in year = (.3 $100,000)/365 = $82.20. Difference in cost per day between shipping options = ($4,000 – $3,800)/10 days = $20.
Since the daily holding cost ($82.20) is more than the daily cost of faster shipping ($20), use the faster shipping, option a. 11.10
(a) Daily holding cost = (annual holding cost cost)/days in year = (.35 $250,000)/365 = $239.73. Difference in cost per day between shipping options = $175. Since the daily holding cost ($239.73) is more than the cost of faster shipping ($175), use the faster sub-contractor. (b) Implications of added in-transit time to the production process: potential delay in activity for which the component is destined (new product development, quality test, the production process, etc.).
SUPPLY CHAIN MANAGEMENT
CHAPTER 11
INTERNET HOMEWORK PROBLEM This problem is found on our companion web site (www.prenhall.com/heizer). 11.11
Using the following weights for the major sections: Section
Weight*
Company Service Products Sales Personnel
0.15 0.30 0.35 0.20
*Note: If you wish to imply that a tradeoff may exist, have the weights sum to 1.00; if not, then only their relative magnitude is relevant.
L I
Classic Ladies Ware International Fashions
E* 4
Company Size and/or Capacity Financial Strength Operating Profit Manufacturing Range Research Facilities Technical Service Geographical Locations Management Labor Relations
G 3
F 2
P 1
E 4 Products Quality Price Packaging Uniformity Warranty
LI I
L L I
L L LI
I L LI LI
Service Deliveries on Time Condition on Arrival Follow Instructions Number of Rejections Handling of Complaints Technical Assistance Emergency Aid Supply up-to-date Catalogues, etc Supply Price Changes Promptly
I I
L
I
L L L LI I I I
L L
LI LI
Company Service Products Sales
Total
0.15 0.30 0.35 0.20 1.00
22 28 13 34
P 1
I L L L
I
LI L I I
Sales Personnel 1. Knowledge His Company His Products Our Industry Our Company 2. Sales Calls Properly Spaced By Appointment Planned and Prepared Mutually Productive 3. Sales Service Obtain Information Furnish Quotations Promptly Follow Orders Expedite Delivery Handle Complaints
I
Weight*
F 2
I
Classic Ladies Ware Section
G 3
Total* Weight
3.3 8.4 4.6 6.8 23.1
*E = Excellent, G = Good, F = Fair, P = Poor
It appears that Classic Ladies Ware is to be slightly preferred.
International Fashions Total
18 30 12 35
Total* Weight
2.7 9.0 4.2 7.0 22.9
LI LI I
L L
I
LI LI I LI
L
LI LI L L
I I
L
I
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3.
CASE STUDY
1.
The PC manufacturer should use e-commerce to:
Sell new products or customized PC configurations whose demand is hard to forecast and let the retail store channel sell standard configurations with easier to forecast demand. Introduce new models on the Internet and only move them to the retail channel if and when sales grow. This lowers inventories by aggregating the high variability components at the manufacturer. Increase forecasting accuracy and volume while driving down cost through the use of component standard modules. Focus on standard, high-volume models in the retail chain which also saves on transportation cost, which are likely to be more significant for these low-cost configurations. Let retailers participate in e-commerce by having kiosks where customers can configure their own machines.
Dell has exploited the Internet to speed customer orders, which allows Dell to postpone assembly until the customer has placed the order (build-to-order). Several strategic advantages are noted below.
1
The main disadvantages of the direct sales model is:
DELL’S SUPPLY CHAIN AND THE IMPACT OF E-COMMERCE
SUPPLY CHAIN MANAGEMENT
Dell loses customers who are unwilling to wait 5 to 10 days to receive their PC. Dell does not attract customers who need a lot of education or help (Dell may be better off letting these “high maintenance” customers go elsewhere).
Dell does not successfully compete with the retailer who has the desired PC in stock. But the customer has to go to the store, while Dell customers can order from home via phone or Internet. For customized PCs, Dell is the leader in response time. Many of Dell’s sales are to corporate accounts where a 5 to 10 day delay is not critical. 4.
E-commerce allows Dell to improve forecasting and reduce inventories by sharing information throughout the supply chain. This dampens the bullwhip effect. This information sharing reduces costs and improves performances in the Dell supply chain by a significant amount. 5.
VIDEO CASE STUDIES
2.
Factor
Impact
Causes
Revenue
Increase
Inventory
Decrease
Facility costs
Decrease
Transportation costs
Increase
Forecasting
Faster and more accurate
Direct sales to customer Flexible pricing Large variety and customization Faster new product introduction Fast delivery of customer order Aggregation using postponement and component commonality Aggregation at manufacturing centers Information sharing No retail outlets Customer participation in order Higher outbound transportation cost Tight communication with suppliers Forecasts for 1st and 2nd tier suppliers based on very current (daily updates) actual sales. Reduced “bullwhip.”
1
ARNOLD PALMER HOSPITAL’S SUPPLY CHAIN
The 8 minute video available from Prentice Hall is designed to supplement this case and was filmed specifically for this text. This video also appears as a 2 minute video clip on the student CD in the text. 1.
How does this supply chain differ from that in a manufacturing firm? At APH most of the purchases are for supplies (MRO items: maintenance, repair, and operating supplies) rather than for items for resale. Many decisions are made on criteria that put emphasis on factors other than economics—medical outcomes, nurse preference, doctor preference, etc. as they participate in the Medical Economic Outcome Committee. 2.
What are the constraints on making decisions based on economics alone at APH? APH’s Medical Economic Outcomes Committee consists of users who evaluate purchases option. However, internal specifications are in part dependent upon nurse and doctor preference that may be hard to quantify in specifications. APH is also a member of the Health Care Purchasing Alliance (HPA), buying at the prices set by the alliance. What role do doctors and nurses play in supply chain decisions in a hospital? How is this handled at APH? 3.
Doctors can be viewed as the customer or as a member of the decision making Medical Economic Outcomes Committee, with a disproportionate voice in the decision. Doctor Smith just returned from the Annual Physicians’ Orthopedic Conference, where she saw a new hip joint replacement demonstrated. She decides she wants to start using the replacement joint at APH. What process will Dr. Smith have to go through at the hospital to introduce this new product into the supply chain for future surgical use? 4.
All such requests go through the Medical Economic Outcomes Committee for evaluation of options.
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2
SUPPLY CHAIN MANAGEMENT
SUPPLY CHAIN MANAGEMENT AT REGAL MARINE
The 7 minute video available from Prentice Hall is designed to supplement this case and was filmed specifically for this text. This video also appears as a 2 minute video clip on the student CD in the text. An additional technique that might be used by Regal Marine to improve supply chain management is to work with personnel agencies as part of the outsourcing, recruiting, and screening process for employees. Additionally, Regal can begin to incorporate suppliers into its schedule to reduce on-hand inventory and related costs. 1.
The typical response by members of the supply chain through partnering is to further the understanding of end users’ needs as the suppliers become increasingly integrated through the purchaser’s (in this case Regal’s) customer base. As they learn more about the end user, suppliers improve the products in accordance with the needs of those end users. Regal can be expected to develop long-term contracts and integrate suppliers into their strategy, aggregate scheduling, and detail scheduling so they understand Regal Marine’s requirements. 2.
Supply chain management is as important to Regal as it is to virtually all manufacturers because a huge amount of Regal Marine’s dollars are spent on purchases. Additionally, the quality of those purchases has significant impact on the quality of Regal’s end product. Consequently, enhancements in terms of quality, delivery, and price have substantial impact on Regal Marine’s market and bottom line. Regal selects suppliers whose strategy of innovation and quality matches its own. 3.
INTERNET CASE STUDIES* 1
BLUE AND GRAY, INC.
Note: The case makes a point about the standard labor hour rate. The instructor may or may not want to discuss the problem of having a standard hourly labor rate across all departments. Such a standard can make a difference in product costing when the actual labor rate varies across departments. In the Blue and Gray case, the point is made that there is very little difference in actual labor rates between departments. The solution accepts that premise. The cost to Blue and Gray of purchasing the units is given by: C =
2,000 units $0.6322/unit = $1264.40
* Solutions to case studies found at our companion web site, www.prenhall. com/heizer.
The cost to Blue and Gray to produce the units can be viewed in two fashions: 1.
a. If Blue and Gray has excess production capacity and either does not anticipate uses for this excess capacity, or is considering this as a short-term, or one-time decision, then only the “variable” costs (materials and variable overhead) should be included in the decision. The argument here is that in the short term, when excess capacity exists, fixed costs will continue even if this capacity remains unused. If a project is available that will cover variable costs and contribute additional revenue, the additional revenue will contribute to meeting these fixed costs—and, any positive contribution to fixed costs is better than none. The cost to produce is then given by: C 1,000
2,000 units 22 $ hour $1,220 200 units hour
The decision would be made to produce the part. b. If Blue and Gray does not have truly “excess” capacity; i.e., capacity can be made available but there are alternate uses, or they are considering this make/buy decision as a long-term commitment, both fixed and variable costs should be included. The cost to produce is then given by: C 1,000
2,000 units 28 $ hour $1,280 200 units hour
The decision would be made to purchase the product from the outside vendor. Viewing this decision from the short-term/long-term and excess/alternative use perspectives also enables the instructor to raise other issues, such as:
Does Blue and Gray want to give the supplier some work? Could the shop capacity be used for other jobs or to support other activities such as research and development? Does keeping the work of Blue and Gray keep the existing workforce on the payroll?
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2
FACTORY ENTERPRISES, INC.
3
SUPPLY CHAIN MANAGEMENT
1
THOMAS MANUFACTURING COMPANY
1. Logistics management is the integration of all material acquisition, movement, and storage activities in the firm. Factory Enterprises, Inc. should see a reduction in its costs because of consolidation of logistics activities. What happens to the company? The organization structure and reporting relationships change to reflect the new organization. (The following organization chart reflects some of those changes; the purchasing activities of the sales manager would also be moved to the new Logistics function.)
This is a great cas e by which to review purchasing issues, an often neglected area in Operations Management. In the machinery manufacturing industry 48% of the cost of sales is spent on purchases (this figure may be higher at Thomas Manufacturing). Therefore, purchasing is a major Operations Management issue for Thomas Manufacturing.
2. To install the Logistics management concept, the president must redefine duties and reporting relationships, and provide the needed leadership, training, and staffing to ensure a successful transition.
This is not meant to be a trick case, but neither Mr. Older or Mr. Younger seem to be focusing on developing long-term “partnering” relationships with suppliers. Consequently, some changes certainly appear warranted. By item:
3. A good relationship between purchasing and sales should provide improved coordination of purchasing, warehousing, shipping, and sales. The best way to do this may be to build a formal logistics management function. 4. Establishing ISO 9000 is probably a good move for Factory Enterprises, Inc. ISO 9000 compliance should be an effective marketing tool and also overcome any barriers that EC may establish for those firms that do not comply.
1. JIT would be a good tactic. 2. Value analysis would seem to be the operative approach here. 3. Standardization should reduce costs throughout the procurement, inventory, and use cycle. 4. As the text suggests, blanket purchase orders are usually a good idea. 5. Vendor evaluation and selection should be an ongoing process.
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SUPPLY CHAIN MANAGEMENT
6. Increasing the number of bids over Mr. Older’s comfortable approach of using existing suppliers may be a good idea, but moving toward partnership may be a better idea. 7. Aggressive negotiations does not suggest unreasonableness. It just means both sides getting all of the issues on the table, from design to delivery and payment schedule. 8. Taking discounts is basic business. Two percent is equivalent to over 24% per year (2/10 net 30 save 2% for 20 days of money). Most firms can borrow for a lot less than that.
9. Lowest price is only one criteria and may not be the most important. Local public relations may not be the best criteria either. 10. Although reciprocity is sometimes a legitimate criteria for purchases, the payoff from reciprocity in this case may be very low. 11. Investing in inventory as a hedge is dangerous. Forecasting purchase prices is chancy as is forecasting market/ sales. Most firms do not allow purchasing personnel to hedge. Ford Motor Company wrote off over a billion dollars in 2002 because of palladium hedging.
