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Operations ManagementOperations ManagementChapter 2Supply-Chain Management
PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7eOperations Management, 9e
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-2
Outline
¨ Global Company Profile: Volkswagen¨ The Strategic Importance of the Supply-
Chain¨ Global Supply-Chain Issues
¨ Purchasing¨ Manufacturing Environments¨ Service Environment¨ Make-or-Buy Decisions
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-3
Outline - continued
¨ Supply-Chain Strategies¨ Many Suppliers¨ Few Suppliers¨ Vertical Integration¨ Keiretsu Networks¨ Virtual Companies
¨ Vendor Selection¨ Vendor Evaluation¨ Vendor Development¨ Negotiations
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-4
Outline - continued
¨ Managing the Supply-Chain¨ Materials Management
¨ Distribution Systems
¨ Benchmarking Supply-Chain Management
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-5
When you complete this chapter, you should be able to :
¨ Identify or Define:¨ Supply chain management¨ Purchasing¨ E-procurement¨ Materials management¨ Keiretsu¨ Virtual companies
¨ Describe or Explain:¨ Purchasing strategies¨ Approaches to negotiations
Learning Objectives
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-6
Volkswagen
¨ Brazilian plant employs 1000 workers¨ 200 work for VW¨ 800 work for other contractors:
¨ Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc.
¨ VW responsible for overall quality, marketing, research and design
¨ VW looks to innovative supply chain to improve quality and drive down costs
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-7
Lead Figure for Chapter 11
¨ Graphic of VW plant, showing areas occupied by supply firms.
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-8
Volkswagen
¨ Unusual elements:¨ VW is buying not only materials, but also the labor
and related services¨ Suppliers are integrated tightly into VW’s own
network, right down to assembly work in the plant
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-9
¨ Planning, organizing, directing, & controlling flows of materials ¨ Begins with raw materials¨ Continues through internal operations ¨ Ends with distribution of finished goods
¨ Involves everyone in supply-chain¨ Example: Your supplier’s supplier
¨ Objective: Maximize value & lower waste
Supply-Chain Management
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-10
Consumer
Retailer
Manufacturing
Material Flow
VISA®
Credit Flow
Supplier
Supplier Wholesaler
Retailer
CashFlow
OrderFlowSchedules
The Supply-Chain
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-11
The Supply Chain
Supplier
Supplier
Supplier
Inventory
Inventory
Distributor
Inventory Inventory
Manufacturer
Customer
Customer
Customer
Market research datascheduling information
Engineering and design dataOrder flow and cash flow
Ideas and design to satisfy end customer
Material flowCredit flow
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-12
11%
31%
58%
Material
Dir Wages
Other
71%
16%13% COGS
Payroll
Other
83%
9%8%COGS
Payroll
Other
Manufacturing
Wholesale
Retail
Material Costs in Supply-Chain
Source: U.S. Department of Commerce, Bureau of Census, 1987 Census of Manufacturers: General Summary of Retail Trade (Washington, D.C.: Government Printing Office, 1991)
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-13
Supply-Chain Support for Overall Strategy
Supplier’sgoal
Primary Selection Criteria
Supply demand at lowest possible cost
Select primarily for cost
Low CostRespond quickly to changing requirements and demand to minimize stockouts
Select primarily for capacity, speed, and flexibility
ResponseShare market research; jointly develop products and options
Select primarily for product development skills
Differentiation
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-14
Supply-Chain Support for Overall Strategy - continued
Process Characteristics
Maintain high average utilization
Low CostInvest in excess capacity and flexible processes
ResponseModular processes to lend themselves to mass customization
Inventory Characteristics
Minimize inventory throughout the chain to hold down costs
Develop responsive system, with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Differentiation
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-15
Supply-Chain Support for Overall Strategy - continued
Lead-timeCharacteristics
Shorten lead-time as long as it does not increase costs
Low CostInvest aggressively to reduce production lead-time
ResponseInvest aggressively to reduce development lead-time
Differentiation
Product-design Characteristics
Maximize performance and minimize cost
Use product designs that lead to low set-up time and rapid production ramp-up
Use modular design to postpone product differentiation for as long as possible
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-16
Global Supply-Chain Issues
Supply chains in a global environment must be:¨ flexible enough to react to sudden changes in parts
availability, distribution, or shipping channels, import duties, and currency rates
¨ able to use the latest computer and transmission technologies to manage the shipment of parts in and finished products out
¨ staffed with local specialists to handle duties, trade, freight, customs and political issues
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-17
¨ Acquisition of goods & services¨ Activities
¨ Help 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
Purchasing
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-18
Purchasing Costs as a Percent of Sales
¨ All industry¨ Automobile¨ Food¨ Lumber¨ Paper¨ Petroleum¨ Transportation
¨ 52%¨ 61%¨ 60%¨ 61%¨ 55%¨ 74%¨ 63%
Industry Percent of Sales
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-19
Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing
Percent of Sales Spent for Purchases
Firm'sPercentNetProfit
30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-20
Objectives of the Purchasing Function
¨ Help identify the products and services that can be best obtained externally; and
¨ Develop, evaluate, and determine the best supplier, price, and delivery for those products and services
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-21
The Purchasing Focus
Materials Management-High transportation cost-High inventory costs
Supply Management-High costs-Scarcity: national or
international
Source Management-Unique items-Custom-made items-High technology items
PurchasingManagement-Commodity items-Standard products
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-22
ReceivingDock
PurchaseOrder
PackingList
OrderProcessing
Invoice
Receivables Report
Check Accounts Receivable
Accounts Payable
MailReconcile
Customer Supplier
Traditional Purchasing Process
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-23
Purchasing Techniques
¨ Drop shipping and special packaging¨ Blanket orders¨ Invoiceless purchasing¨ Electronic ordering and funds transfer¨ Electronic data interchange (EDI)¨ Stockless purchasing¨ Standardization
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-24
Make/Buy Considerations
¨ lower production cost¨ unsuitable suppliers¨ assure adequate supply¨ utilize surplus labor and make a
marginal contribution¨ obtain desired quantity¨ remove supplier collusion¨ obtain a unique item that would
entail a prohibitive commitment from the supplier
¨ lower acquisition cost¨ preserve supplier
commitment¨ obtain technical or
management ability¨ inadequate capacity¨ reduce inventory costs¨ ensure flexibility and
alternate source of supply¨ reciprocity
Reasons for Making Reasons for Buying
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-25
Make/Buy Considerations
¨ maintain organizational talent¨ protect proprietary design or
quality¨ increase/maintain size of
company
¨ item is protected by patent or trade secret
¨ frees management to deal with its primary business
Reasons for Making Reasons for Buying
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-26
¨ Plans to help achieve company mission¨ Affect long-term competitive position¨ Strategic options
¨ Many suppliers¨ Few suppliers¨ Keiretsu network¨ Vertical integration¨ Virtual company Plan
© 1995 Corel Corp.
Purchasing Strategies
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-27
Supply-Chain Strategies¨ Negotiate with many suppliers; play one supplier
against another¨ Develop long-term “partnering” arrangements with
a few suppliers who will work with you to satisfy the end customer
¨ Vertically integrate; buy the actual supplier¨ Keiretsu - have your suppliers become part of a
company coalition¨ Create a virtual company that uses suppliers on an
as-needed basis.
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-28
¨ Many sources per item¨ Adversarial relationship¨ Short-term¨ Little openness¨ Negotiated, sporadic PO’s¨ High prices¨ Infrequent, large lots¨ Delivery to receiving dock
© 1995 Corel Corp.
Many Suppliers Strategy
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-29
¨ 1 or few sources per item¨ Partnership (JIT)¨ Long-term, stable¨ On-site audits & visits¨ Exclusive contracts¨ Low prices (large orders)¨ Frequent, small lots¨ Delivery to point of use
© 1995 Corel Corp.
Few Suppliers Strategy
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-30
Daimler Chrysler’s Supplier Cost Reduction Effort
Supplier Suggestion Model SavingsRockwell Use passenger car door
locks on trucksDodgetrucks
$280,000
Rockwell Simplify design/substitutematerials on manualwindow system
Various $300,000
3M Change tooling for wood-grain panels to allow threefrom one die instead of two
Caravan,Voyager
$1,500,000
Trico Change wiper-bladeformulation
Various $140,000
Leslie MetalArts
Exterior lighting suggestions Various $1,500,000
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-31
Purchasers Ties Themselves to Suppliers
Tactic¨ 1. Reduce total number of
suppliers¨ Certify suppliers¨ Ask for JIT delivery from
key suppliers¨ Involve key suppliers in
new product design¨ Develop software linkages
to suppliers
Results¨ Average 20% reduction in 5
years¨ Almost 40% of all companies
surveyed were themselves currently certified
¨ About 60% ask for this¨ About 54% do this¨ Almost 80% claim to do this¨ About 50% claim this; about
15% more than have EDI links to suppliers
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-32
Raw Material(Suppliers)
BackwardIntegration
CurrentTransformation
ForwardIntegration
Finished Goods(Customers)
¨ Ability to produce goods previously purchased¨ Setup operations¨ Buy supplier
¨ Make-buy issue¨ Major financial
commitment¨ Hard to do all things
well
Vertical Integration Strategy
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-33
Forms of Vertical Integration
Iron Ore
Steel
Automobiles
DistributionSystem
Dealers
Silicon
IntegratedCircuits
Circuit Boards
ComputersWatches
Calculators
Farming
Flour Milling
Raw Material(Suppliers)
BackwardIntegration
CurrentTransformation
ForwardIntegration
Finished Goods(Customers)
Baked Goods
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-34
¨ Japanese word for ‘affiliated chain’¨ System of mutual alliances and
cross-ownership¨ Company stock is held by allied firms
¨ Lowers need for short-term profits
¨ Links manufacturers, suppliers, distributors, & lenders¨ ‘Partnerships’ extend across entire supply chain
Keiretsu Network Strategy
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-35
© 1995 Corel Corp.
Virtual Company Strategy
¨ Network of independent companies¨ Linked by technology
¨ PC’s, faxes, Internet etc.¨ Each contributes core competencies¨ Typically provide services
¨ Payroll, editing, designing
¨ May be long or short-term¨ Usually, only until opportunity is met
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-36
¨ 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.
Vendor Selection Steps
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-37
Vendor Selection Rating Form
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-38
¨ Company¨ Financial stability¨ Management¨ Location
¨ Product¨ Quality¨ Price
¨ Service¨ Delivery on time¨ Condition on arrival¨ Technical support¨ Training
Supplier Selection Criteria
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-39
Negotiation Strategies
¨ Three types:¨ cost-based price model - supplier opens its books to
purchaser; price based upon fixed cost plus escalation clause for materials and labor
¨ market-based price model - published price or index¨ competitive bidding - potential suppliers bid for contract
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-40
Managing the Supply-Chain
¨ Options:¨ Postponement ¨ Channel assembly¨ Drop shipping¨ Blanket orders ¨ Invoiceless purchasing ¨ Electronic ordering and funds transfer¨ Stockless purchasing¨ Standardization¨ Internet purchasing (e-procurement)
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-41
Managing the Supply-Chain - Other Options
¨ Establishing lines of credit for suppliers¨ Reducing bank “float”¨ Coordinating production and shipping
schedules with suppliers and distributors¨ Sharing market research¨ Making optimal use of warehouse space
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-42
Materials Management
¨ Integrates all materials functions¨ Purchasing¨ Inventory management¨ Production control¨ Inbound traffic¨ Warehousing and stores¨ Incoming quality control
¨ Objective: Efficient, low cost operations
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-43
Goods Movement Options
¨ Trucking¨ Railways¨ Airfreight¨ Waterways¨ Pipelines
PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)
© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-44
Supply-Chain Performance Compared
Number of suppliers perpurchasing agent
34 5
Purchasing costs as percent ofpurchases
3.3% 0.8%
Lead time (weeks) 15 8
Time spent in placing order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4
Typical FirmsBenchmark
Firms