BA 360 MIDTERM #3

supply chain management

art and science of the integration of the flow of products, materials, information, finances through the entire supply chain pipeline

financial significance

supply chain costs on average 60% of sales

profit leverage effect

saving money on operating costs increases profit more than increasing sales would

return on assets effect

reducing costs or assets used in operations increases how efficiently a company earns profit from its assets

holding costs 

the cost of keeping products or materials in inventory before they are sold or used

• warehouse space

• depreciation

• insurance

• spoilage

supplier selection

• the cheapest

• capacity, fastest, most flexible

• willing to share information, product development skills

supply chain inventory

• minimize inventory to hold down costs

• buffer stocks to ensure speedy response 

• minimize inventory to avoid product obsolescence 

distribution network

• inexpensive transportation/discount retailers

• reliable fast transportation 

• ability to gather/communicate market research data/knowledgeable sale staff

product design

• maximize performance

• rapid production/low set up time 

• customizable and product differentiation

buffer stocks

extra quantities of goods kept in reserve to protect against shortages or unexpected demand

make or buy

choosing between obtaining products externally as opposed to producing them internally

outsourcing 

transfer traditional interval activities to outside vendors 

reasons to make your own product

• no competent supplier

• better quality control

• better control on lead time, transportation

many suppliers method

Using multiple suppliers for the same product to gain price competition, flexibility, and reduce supply risk.

• commodity goods bc purchasing is based on price, suppliers compete with each other.

few suppliers method 

long-term partnership with a small number of suppliers to gain efficiency, quality, and innovation through collaboration and economies of scale

• Builds trust and JIT support

• switching suppliers is expensive.

backward vertical integration

company moves upstream by taking control of its suppliers (making its own parts or materials)

forward vertical integration

company moves downstream by controlling distribution or retail (selling directly to customers through its own stores) 

vertical integration 

happens when a company owns or controls more parts of its supply chain from raw materials to final sales 

keiretsu networks

business network composed of manufacturers, supply chain partners, distirbutors, financers

• middle ground between few suppliers and vertical integration

• share financial ties and cooperate for mutual success

joint venture

formal partnership where two or more firms share resources to improve skills, secure supply or reduce costs while keeping their own brands and independence

virtual companies

firms that rely on networks of suppliers and partners to operate on demand, staying lean, flexible, and agile with low capital investment and rapid response to market changes 

supply chain risk

political/currency risks, increased dependence, vendor reliability and quality risks

arms length relationship

commodity purchases, no long-term relationships, they don’t know how many you’re going to buy

type I (limited cooperation) 

companies cooperate on a smale scale 

type II (some activities coordinated)

companies coordinate more closely in areas like production or planning 

type III (view other as their extension)

deep, long-term relationship both act as one team with shared goals

the bullwhip effect

when small changes in customer demand cause increasingly larger swings in orders and inventory up the supply chain, leading to inefficiency and higher costs

• usually happens due to poor communication and inaccurate forecasts

supplier evaluation 

finding potential suppliers and determining the likelihood of them becoming good suppliers

• external certifications: ISO 9001 AND 14000

• internal certifications: 

  • qualification

  • education

  • certification

cost based price model 

supplier shares detailed cost information and the final price is based on actual costs plus a profit margin

market based price model

price is based on published market rates, index prices

• many commodities

competitive bidding

buyer requests quotes from multiple suppliers who compete for a contract by submitting bids with the best price or terms buyer picks the lowest acceptable bid

• doesn’t build long-term relationships bc everything is based on price

rewarding suppliers

free training, share of cost reduction rewards, more business/longer contracts, public recognition

punishment (negative reward) 

reduces future business, bill-back incremental costs from a late delivery or poor quality 

early supplier involvement

bringing key suppliers into the company’s product development process early before designs are finalized. helps create better, cheaper and faster-to-produce products through shared expertise and innovation

value engineering 

systematic approach to reduce costs, improve quality, shorten development time without reducing product performance

supplier co location 

supplier’s employee works onsite with the buyers team to assist in demand forecasting, inventory monitoring and order placement 

on time delivery

the #1 important supplier selection performance metric

centralization

all purchasing decisions are made by one central department for better discounts, specialization, avoids duplication 

decentralization

purchasing authority is spread across individual locations or departments, you’re more agile to responses in change, closer knowledge of local needs 

centralized-decentralized

most multinational companies use this model and combine the strengths of both systems

• centralized for large national or global contracts

• decentralized for items specific to business units or locations

logistics management

part of supply chain management that plans, implements, controls the efficient and effective forward and reverse flow and storage of goods

• usually given to third party candidates

trucking

largest volumes, flexible, truckload and less-than-truckload

• use third party company/consolidator when its less than truckload

railroads

cheapest mode of transportation on land, larger/heavier shipments, limited flexibility

airfreight

urgent, perishable, expensive items for fast and flexible

waterways 

cheapest way of transportation, used for bulky, low value cargo, used when cost is more important than speed 

pipelines

used for transporting oil, gas, and other chemical products, large product volumes, high fixed costs, low cost per unit

multimodal

combines shipping methods to look at bringing containers from ships to trucks and etc

shipment security 

seals, RFIDS, sensors to ensure the security and integrity of shipments 

last mile challenge

the problem of delivering goods quickly, efficiently, and affordably to the customer’s doorstep

warehousing consolidation

products from multiple suppliers are combined at one central warehouse before being shipped out together to customers

warehouse cross docking 

transfer point where products are unloaded from incoming trucks and immediately loaded onto outbound trucks

warehouse break-bulk

large shipments are broken down into smaller quantities for delivery to multiple destinations 

parcel carriers 

less than 150 pounds, usps, ups, fedex 

third party logistics companies (3PLs)

a company that handles logistics for others, shipping, warehousing, packaging, and more. it reduces total logistics costs as much as 10% to 20%

lead logistics provider/4PL

primary 3PL provider that oversees other 3PLs 

distribution management

managing the outbound flow of products from company to customers, networks are designed to have rapid response, product choice and services as required 

• more facilities = better response 

return/reverse logistics

sending returned products back up the supply chain for resale, repair, reuse, remanufacture, recycling, or disposal

closed loop supply chain design

proactive design of a supply chain that tries to optimize all forward and reverse flows

make-to-stock

products are manufactured in advance of customer orders and kept in inventory to meet demand, based on demand forecasts

make-to-order

products are manufactured only after a customer places an order

service level

the number of orders filled when requested

shrinkage rate

percentage of inventory that is lost, stolen, or damaged between the time is it recorded and when it is sold

SCOR model

demand/supply planning, sourcing, making, delivery, return finished goods and raw materials

inventory management

the art and science of building and keeping inventories to match supply and demand in the most cost effective way

raw material inventory

items that are purchased but not yet processed or used in production 

work in process (WIP) 

components or raw material that have undergone some change but are not completed

finished goods

products that are completely manufactured and ready for sale or shipment to customers

maintenance, repair and operating (MRO)

supplies and equipment used to keep production running smoothly, not part of the final product

• the need and timing for maintenance and repair of some equipment is unknown

operational costs

• delay in detection of quality problems

• delay in the introduction of new products

• increased throughput times

items classification

grouping inventory items based on their importance, value or usage to help manage stock efficiently

record keeping

tracking inventory data accurately to ensure reliable control and forecasting

ABC analysis 

classifying inventory into three categories based on annual dollar volume, criticality, importance

• A items: 80% of the inventory dollar value

• B items: 15% of the inventory dollar value

• C items: 5% of the inventory dollar value

Pareto analysis

principle stating that a small number of causes (20%) account for most of the results (80%)

periodic systems

regular periodic checks of inventory to determine quantity on hand

• once or twice per year

perpetual/cycle counting system

reguarly checking small portions of inventory throughout the year instead of once or twice

independent demand

demand for item is independent of the demand for any other item in inventory

• use for eoq, poq

• uncertain, must be forecasted

• items customers buy directly

dependent demand 

demand for item is dependent upon the demand for some other item in the inventory 

• use mrp

• amount needed is calculated not forecasted

• use this for any product where a schedule can be established

set up costs

cost to prepare a machine or process for manufacturing an order

ordering costs

costs of placing an order + vendors setup costs + cost of receiving the goods

EOQ (economic order quantity) 

optimal order size that minimizes total inventory costs, balancing ordering costs and holding costs 

• constant and independent demand assumed

• immediate replenishment

• if used in mrp systems, it can create excessive inventories or stock outs

• use when setup costs are significant and demand is smooth for a lower total cost

POQ (periodic order quantity)

method that orders inventory for a predetermined time period

• combines best of lot for lot and eoq

• interval = eoq / average demand per period

• use when setup costs are significant and demand is not smooth

quantity discount model

system that finds the best order quantity when suppliers offer price discounts for larger orders

reorder point

inventory level at which a new order should be placed before running out of time

probabilistic model 

inventory models that use uncertain or variable demand and lead times to decide how much safety stock to keep 

long-range operations planning

decisions about major equipment purchases and facility construction to meet future production needs

• aggregate production plan (APP)

intermediate-range planning

decides what finished products will be built and when over the next 3–18 months

• focuses on end-item quantities and timing, not the detailed parts

• master production schedule

short-range operations planning

involves detailed scheduling of components and parts needed to support the MPS, focuses on day to day production activities 

• material requirement planning 

material requirement planning

systematic framework used to plan and control purchasing, manufacturing, and delivery schedules

• ensures an efficient flow of materials and components through production

• right quantity is available at the right time

benefits of MRP

1. better response to customer orders 

2. faster response to market changes 

3. improved utilization of facilities and labor 

4. reduced inventory levels

bills of material

list of components, ingredients, and materials needed to make product

• provides product structure

parents

items above given level

components 

items below given level 

lead time

total time required to purchase, produce, or assemble an item before its ready for use in production or delivery

purchased items

materials/parts bought from suppliers, includes time you recognize the need until the item is available

production 

parts made inside your facility, lead time is the sum of several smaller time components 

move time

time spent moving materials between workstations

setup time

time to prepare machines or tools before production

assembly/run time

time it actually takes to make or assemble the product

net requirements plan

how much of an item must be ordered by comparing total requirements (gross needs + allocations) with avaiable inventory (on-hand scheduled receipts) available

system nervousness

when too many small changes in demand or scheduling cause frequent replanning causing confusion