Purchasing and logistics

Part 1: Purchasing
1.1 Consumer buying behaviour
consumer buying behaviour
➔ mental decision process and physical activities an individual involves in while searching,
evaluatig, selecting, buying, using and disposing off goods & services for personal
consumption

1.2 Model of consumer behaviour

“An election goes on every minute of
the business day across the counters
of millions of stores and shops where
the customers state their preferences
and determine which manufacturer and
which product shall be the leader
today, and which shall lead tomorrow.”
(Bruce Barton)
consumer buying decisions are vital

1.3 Factors influencing consumer behaviour

1.4 Four types of buying decisions behaviour

based on:
- degree of involvement
- degree of perceived differences between brands

1.5 The buyer decision process

Need recognition
● Triggered by internal or external stimuli
● Must reach an intensity high enough to become a drive

Information search
● Memory (internal) search
● External search: personal, commercial, public, experiential sources of information
● Word-of-mouth sources are most influential
Evaluation of alternatives
● The process of evaluating information to make a decision
● Attributes and importance weights are chosen
● Alternatives compared against the criteria

Purchase decision
● Attitudes of others and unexpected situational factors
● May come between purchase intention and decision

Postpurchase behaviour
● Relationship between consumer expectation and perceived performance
● Cognitive dissonance
● Customer satisfaction is key to consumer loyalty

1.6 Adoption of new product innovations

Stages in the adoption process
● Awareness, interest, evaluation, trial and adoption

Influence of product characteristics on rate of adoption

● Relative advantage
● Compatibility
● Complexity
● Divisibility
● Communicability

1.7 Organizational buying process

1.8 Three buying situations

1 New task
❖ The problem or need is totally different from previous experiences
● Significant amout of information is required
● Buyers operate in the extensive problem solving stage
○ Buyers lack well defined criteria
○ Lack strong predispositions toward a solution

2 Modified rebuy
❖ decision makers feel there are benefits to be drived by reevalutating alternatives
● Most likely to occur when displeased with the performance of current supplier
● Buyer operate in the limited problem solving stage
○ Buyers have well defined criteria

3 Straight rebuy
❖ The problem or need is a recurring or continuing situation
● Buyers have experience in the are in question
 ● Require little or no new information
● Buyers operate in the routine problem solving stage

1.9 Buying decision approaches

Causal purchases - involve no information search or analysis
Routine low priority - decisions are more important and involve a moderate amount of analysis

1.10 Forces influencing organizational buying behaviour

1.11 Influences on procurement strategy

Objectives Demand Supply market

Cost Non-cost factors Risks

Stakeholders
1.12 The buygrid framework for organizational buying situations
1. Problem recognition
2. Determination of characteristics and quantity of needed item
3. Description of characteristics and quantity of needed item
4. Search for and qualification of potential suppliers
5. Acquisition and analysis of proposaks
6. Evaluation of proposals and selection of suppliers
7. Selection of an order routine
8. Performance review

1.13 Clues for identifying powerful buying center members

Members of the buying center assume different throughout the procurement process
Isolate the personal stakeholders
● Those individuals who have an important personal stake in the decision will exert more
influence than other members of the buying center.
○ Example: selection of production equipment for a new plant will spawn the active
involvement of manufacturing executives

Follow the information flow

● Influential members of the buying center are central to the information flow that surrounds
buying decision. Other organizational members will direct information to them.

Identify the experts

● Expert power is an important determinant of influence in the buying center. Those buying
center members who possess the most knowledge are often influential

Trace the connections to the top

 ● Powerful buying center members often have direct access to the top-management team.
This direct link to valuable information and resources enchances the status and influence of
the buying center members

Understand purchasing’s role

● Purchasing is dominant in repetitive buying situations by virtue of technical expertise,
knowledge of the dynamics of the supplying industry, and close working relationships with
individual suppliers

1.14 Selective process & cognition

Selective exposure
➔ After having made a decision, we will tend to seek to avoid cognitive dissonance. Thus we
will avoid things which might indicate that the decision was wrong. The bigger the
potential dissonance, the more actively we will avoid.
Even when faced with disconfirming evidence, we will easily fall into denial, pretending
that we have not seen this evidence.
◆ Example: After buying something, when we see it elsewhere, we are torn between
checking the price to confirm we have bought a bargain and the fear that we will
find that we could have bought it cheaper.

Selective attention
➔ The process of focusing one's attention on something.
◆ Example: at a party you focus on one conversation and not on the others

Selective perception
➔ A perceptual process in which a person only perceives what he desires to and sets aside or
ignores other perceptions or viewpoints.
◆ Example: Racism, sexism or another form of discrimination

Selective retention
➔ People will fail to register much information to which they are exposed in memory, but
tend to retain information that supports their attitudes and beliefs.
◆ Example: Because of selective retention, we are likely to remember good points
about a product we like and forget good points about competing product.

1.15 Perceived risk components

❏ Uncertainty about the outcomes of a decision
❏ The magnitude of consequences associated with making the wrong selection

1.16 Major elements of organizational buying behaviour

The behaviour of organizational buyers is influenced by environmental, organizational, group and
individual factors
2.1 Business markets
Business buying process
➔ The process where business buyers determine, which products and services are needed to
pruchase and then find, evaluate and choose among alternative brands

Business markets differ from consumer markets in:

- Market structure and demand
- Nature of the buying unit
- Types of decisions & the decision-making process

Market structure and demand

● Fewer and larger buyers
● Geographic concentration
● Derived demand - it utlimately derives from the demand of consumer goods
○ Inelastic demand (not affected much by price changes)
○ Fluctuating demand (change more & more quickly)

Factors affecting price decisions

- Product cost
- Value to customer
- Strategic considerations
- Market considerations

Price mechanism ​= theory of supply and demand

Equilibrium price = market price

Example: derived demand simplified

You make headlamp assemblies for autos - auto
company’s demand for headlamp is affected by
the consumer’s demand for cars

Nature of the buying unit

● A business purchase involves more
decision participants (buying center or DMU) & a more professional purchasing effort
● Many companies upgrade purchasing functions to “supply management” or “supplier
development”

Types of decisions & the decision process

● Business buyers usually face more complex buygin decisions
○ More formalized
○ Buyer and seller dependency
● Supplier development
➔ The systematic development of networks of supplier-partners to ensure an
appropriate and dependable supply of products and materials that they will use in
making their own products or resell

2.2 Business buyer behavior

Business buyer behaviour refers to
➔ The buying behaviour of the organizations that buy goods and services for use in
production of other products and services that are sold, rented or supplied to others; for
facilitating their daily operations
➔ Also included are retailing and wholesaling firms that acquire goods to resell or rent to
others for profit
Marketing stimuli
● Similar to consumerbuying, business buying consists of the four Ps
○ Product
○ Price
○ Place
○ Promotion

Other stimuli
● Addition stimuli include major economic forces:
○ Political
○ Economic
○ Technological
○ Cultural
○ Competitive

Buyer response to marketing stimuli

● Product or service choice
● Supplier choice
● Order quantities
● Delivery
● Service
● Payment terms

Black box of business buying

Marketers must understand what happens in organization to turn stimuli into purchase response
● Major types of buying situations
● Participants in the business buying process
● Major influences on business buyers
● The business buying process
● e-procurement

Major types of buying situations

● Straight rebuy
➔ A routine purchase decision such as a recorder without any modification

● Modified rebuy
➔ A purchase decision that requires some research where the buyer wants to modify
the product specification, price, terms or suppliers

● New task
➔ A purchase decision that requires thorough research such as a new product

● System selling
➔ Involves the purchase of a packaged solution from a single seller

● Two-step process of selling:

○ Interlocking products
○ System of production, inventory control, distribution and other services to meet the
buyer’s need for a smooth-running operation

Participants in the business buying process

The buying center
➔ All of the individuals and units that play a role in the purchase decision-making process:
 ◆ Users
◆ Influencers
◆ Buyers
◆ Deciders
◆ Gatekeepers

Users
➔ Those that will use the product or service
◆ “The bonding agent better be good, because I have
to put this product together”

Influencers
➔ Help define specifications and provide information for evaluatin alternatives
◆ “I specified this bonding agent on another job and it worked for them”

Buyers
➔ Have formal authority to select the supplier and arrange terms of purchase
◆ “I’ll place the order first thing tomorrow”

Deciders
➔ Have formal or informal power to select and approve final suppliers
◆ “Okay, it’s a deal - we’ll but it”

Gatekeepers
➔ Control the flow of information and concentrate on the process, compliance and policy
◆ “Without an appointment, no sales rep gets in to see Mr Johnson”

The buying center provides a major challenge:

● Who participates in the process
● Their relative authority
● What evaluation criteria each participant uses
● Informal participants

Major influences on business buyer

behaviour
● Economic factors
● Personal factors
● Environmental factors
● Organizational factors
● Interpersonal factors
3.1 Six Ps
Place Product Price Process

Physical evidence Promotion People

3.2 Business buyer behaviour
E-procurement and buying on the internet
75% of business buyers say that they use the internet to make at least some of their purchases.
Online purchasing
- Company buying sites
- Extranets

E-procurement
➔ The use of electronic methods in every stage of the buying process from identification of
requirement through to payment and contract management

E-procurement builds competitive advantage with

● Access to new suppliers
● Lowers prices through product standardization and consolidation of purchasing power
● Speed in order processing and delivery (reduction in purchase cycle time)
● Share information (better information management)
● Sales track
● Service and support
● Budget control
● Improvement in customer service and availability

E-procurement advantages
● Old workflow
● Paper requisition to buyer
● Telephone supplier
● Order number - enter details
● Print order - authorise
● Seperate order copies
● Copy order to goods in delivery
● Copy order to accounts
● Invoice match
● Cheque paid to supplier

New workflow
● Requisitioner
● http://www.com
● Delivery
● Consolidated monthly summary
● Payment

Disadvantages e-procurement
● Can erode relationships as buyers search for new suppliers
● Lack of security
Obstacles for conducting business online
❏ High costs of setup
❏ Lack of technical expertise
❏ Poor supplier relationships
❏ Perceived lack of real benefits
 ❏ security/safety/trust
❏ Low priority
❏ No legal framework
❏ Suppliers’ lack of expertise/interest
❏ Lack of standard data formats
❏ Lack of e-procurement competency

E-procurement
Much online purchasing takes place through online auctions and e-market-places:
Intranet
➔ An internal corporate computer network that uses internet technology to link company
departments, employees and databases
Extranet
➔ Allows outsiders to the organisation to access its intranet
A private exchange links invited groups of suppliers and partners over the web

Security
Authentication
➔ Making sure only authorized individuals are allowed to access a site
Firewalls
➔ Combination of hardware and software that ensures onlu authorized individuals gain entry
Encryption
➔ Scrambling a message that only another individual has the right ‘key’ for deciphering it

Criteria for successful e-auctions

❖ Suppliers agree to future auctions
❖ Lots of suppliers participate
❖ Easy to repeat
❖ Negotiations shorter
❖ Learnt from activity
❖ Suppliers are able to bid
❖ Enabling software works
❖ Obtain best market prices

Why buyers choose e-auction

❖ Improve cost
❖ As a trial or pilot
❖ Process improvement
❖ Auctions are long-term strategy
❖ Find out market conditions
❖ Told by management
❖ Competitors are using it
❖ Sourcing less peronal

3.3 Institutional and government markets

Institutional markets
➔ Consists of schools, hospitals, nursing homes, prisons and other institutions that provide
goods and services to people in their care
● Characteristics
○ Low budget
○ Captive audience

Government markets
 ➔ Tend to favor domestic suppliers and require suppliers to submit bids and normally award
to the lowest bidder
● Carefully monitored by outside publics - require considerable paperwork
● Affected by similar environmental factors
● Good credit
● Non-economic factors - tend to favor
○ Minority suppliers
○ Depressed suppliers
○ Small businesses

3.4 Supplier evaluation & selection

1. Recognize the need for supplier selection
2. Identify key sourcing requirements
3. Determine sourcing strategy
4. Identify potential supply sources
5. Limit suppliers in selection pool
6. Determine method of supplier evaluation and selection
7. Select supplier and research agreement

When do supplier evaluation and selection decisions arise?

- During new product development
- Due to poor internal or external supplier performance
- At the enc of a contract
- When buying new equipment
- When expanding into new markets or product lines
- When performing market tests
- When current suppliers have insufficient capacity
- When reducing the size of the supply base
- During outsource analyses
- When consolidating volumes across a business

Determine sourcing strategy:

● No single sourcing strategy approach will satisfy the requirements of all purchases
● Purchasing strategy adopted will influence the approach taken during evaluation and
selection process
● Key decisions include:
○ Single vs. multiple supply sources
○ Short term vs. long term purchase contracts
○ Selecting suppliers that provide design support vs those that lack design capability
○ Full service vs. non full-service suppliers
○ Domestic vs. foreign suppliers
○ Expectation of close working relationship to create value vs arms-length purchasing

Identify potential supply sources via:

● Current suppliers
● Sales representative
● Information database
● Experience
● Trade journals / directories / shows
● Second party / indirect information
● Internal sources
● Internet searches
Sourcing alternatives
● Manufacturer vs. distributor
● Local / national / international suppliers
● Large or small suppliers
● Multiple or single sourcing

Key supplier evaluation criteria:

● Management and employee capabilities
● Cost structure
● Total quality performance, systems and philosophy
● Process and technological capability
● Environmental regulation compliance
● Financial stability
● Production scheduling and control systems
● E-commerce capability
● Supplier’s sourcing strategies, policies and techniques
● Longer-term relationship potential

3.5 Supplier selection

Different types of sourcing
● Consumable supplies
● Production materials and components
● Capital purchases (e.g. machinery)
● Intellectual property (e.g. software)
● Subcontractors
● Services

3.6 Attributes of a good supplier

❏ Delivers on time
❏ Provides consistent quality
❏ Gives a good price
❏ Has a stable background
❏ Provides good service back-up
❏ Is responsive to buyer’s needs
❏ Keeps promises
❏ Provides technical support
❏ Keeps the buyer informed on progress
Research confirms that buyers are reluctant to change sources, i.e. they sometimes stay too long
with a source not as satisfactory as others on the market
4.1 Supplier appraisal model by carter (10Cs)
● Competency
● Capacity
● Consistency (reliability)
● Control of process (resources, inventory, costs, products)
● cost/price and total cost ownership
● Commitment to quality (emphasis on prevention
● Clean / CSR
● Culture and relationships
● Cash / finances
● Communications (ICT)

4.2 Supplier quality management

Ability to meet or exceed current and future customer expectations or requirement within critical
performance areas on a consistent basis

Importance of super quality

● Supplier impact on quality
○ Supplier responsible for 50% of firm’s product-related quality problem
○ Company focuses only its own internal quality issues will usually fail to recognize
and take action on quality-related problems

● Continuous-improvent requirements
○ Continuous quality improvements in all aspects; one way to do this is through
effective management of supplier quality

● Outsourcing of purchase requirement

○ No longer advantage in some industries to ame most of components of a product
○ So progressive buyers are relying on suppliers that demonstrate significant
capabilities

Factors affecting supply management’s role in mangaging supplier quantity

● The abiliti of a supplier to affect a buyer’s total quality
● The resources available to support supplier quality management and improvement
● The ability of a buying firm to practive world class quality
● A supplier’s willingness to work jointly to improve quality
● A supplier’s current quality levels

8 key principles of TQM

1 define quality in terms of customers and the requirements
2 pursue quality source
3 stress objective rather than subjective analysis
4 emphasize prevention rather than detection of defects
5 focus on process rather than output
6 strive for zero defects
7 establish continuous improvement as a way of life
8 make quality everyone’s responsibility

4.3 Supplier management & development

Important part of supplier management involves the continuous measurement, evaluation and
analysis of suppler performance
What to measure?
● Delivery performance
 ● Quality performance
● Cost reduction

Three types of supplier measurement techniques

1 categorical system
2 weighted-point system
3 cost-based system

Comparison of supplier measurement and evaluation systems

SYSTEM ADVANTAGES DISADVANTAGES USERS

Categorical Easy to implement Least reliable Smaller firms

system Requires minimal data Less frequent generation Firms in the
Different personnel contribute of evaluations process of
Good for firms with limited Most subjective developping an
resources Usually manual evaluation
Low-cost sytem system

Weighted-point Flexilble system Tends to focus on unit Most firms can

Supplier ranking allowed price use this
Moderate implementation costs Requires some computer approach
Quantitative & qualitative support
factors combined in single
system

Cost-based Total cost approach Cost accounting system Larger firms

Specific areas of supplier required Firms with a
nonperformance identified Most complex so large supply
Objective supplier ranking implementation costs high base
Greatest potential for Computer resources
long-range improvement required
4.4 Global sourcing
Globalization
➔ ‘Interdepencence’, ‘connectivity’ and ‘integration of economies’ in social, technical and
political spheres

International purchasing relates to a commercial purchase transaction between a buyer and a

supplier located in different countries.

Global (worldwide) sourcing involves proactively integrating and coordinating common items and
materials, processes, designs, technologies and suppliers across worldwide purchasing,
engineering and operating locations.

Why source worldwide?

● cost/price benefits
● Access to product and process technology
● Quality
● Access to the only source available
● Introduce competition to domestic suppliers
● React to buying patterns of competitors

Barriers to worldwide sourcing

● Lack og knowledge and skills concerning global sourcing
 ● Resistance to change
● Longer lead times
● Different business customs, language and culture
● Currency fluctuations

Benefits
● Lower purchase price or cost
● Greater supplier responsiveness
● Greater sourcing process consistency
● Improved supplier relationships
● Improved sharing of information with suppliers

4.5 Summary
❖ Suppliers evalution and selection will establish the foundation to develop & improve
supplier performance
❖ Improving supplier quality involves much more than providing clear specifications and
maintaing open communication
❖ An effective supplier management program helps maximize the contribution received from
suppliers, lowering costs, increasing quality and developing future capabilities
❖ Firms operating in competitive industries must purchase from best available sources
worldwide

4.6 The business buying process

● More complex than the consumer decision process
● Takes place within formal organization’s budget, cost and profit considerations

Influences on purchase decisions

● Environmental factors
○ Economic, political, regulatory, competitive and technological considerations
influence business buying decisions
● Organizational factors
○ Structures, policies and purchasing systems whihc may be centralized in one office
or delegated to units throughout the organization
● Interpersonal influences of all organizational members involved in the buying decisision
● Concers & procedures of professional buyers who implement systematic buying procedures

Classifiying business buying situations

● Business buying behaviour involves degree of effort involved in the decisision and the
levels within the organization in which these decsision are made
● Straight rebuying
○ Recurring purchase decision in which a customer reorders a product that has
satisfied needs in the past
● Modified rebuying
○ Purchaser willing to reevaluate available options
● New-task buying
○ First time or unique purchase situations that require considerable effort by the
decision makers
● Reciprocity
○ Practice of buying from suppliers that are also customers

Analysis tools
● Value analysis
 ○ Examines each component of a purchase in an attempt to either delete the item or
replace it with a more cost-effective subsitute
● Vendor analysis
○ Ongoing evaluation of a supplier’s performance in a variety of areas

4.7 The buying center concept

Buying center participants in an organizational buying action

Buying center roles

- Decider
- Buyer
- Users
- Gatekeeper
- Influencer

International buying centers

● Marketers may have difficulty identifying members of a foreign buying centers
● Marketers who can quickly identify decision makers have an advantage over competition

Team selling
● Combining several sales associates or other staff to help the lead account representative
reach all those who influence the purchase decision
● May include members of the seller firm’s own supply network in the sales situation

4.8 Developping effective B2B marketing strategies

Marketer must develop strategy based on particular organization’s buygin behaviour and on the
buying situation

Challenges of government markets

● Purchases typically involve dozens interested parties & may be influenced by social goals
● Most federal government purchases must go through a complex bidding process governed
by the federal acquisition regulation
● GSA advantage allows government buyers to make purchases online at preferred
government prices

Challenges to institutional markets

● Include schools, hospitals, libraries, foundations and others
● Multiple buying influences can affect buying decisions such as conflicts between
professional staff and purchasing departments

Challenges of international markets

● Marketers must consider buyer’s attitudes and cultural patterns
● Local industries, economic conditions, geographic characteristics and legal restrictions must
all be considered
● Foreign governments are also an important market
4.9 The purchasing function
Contractual clauses
Product Quantities & Merchandise Dispute Order cancellation
specifications weights description resolution date

Substitution Currency of sale Payment terms Applicable law Last ship date

Quality, grade, Incoterms 2010 Mode of transport Documentation Product warranties &
size & condition rule requirements returns

Price Lead-time Severability Charge backs

4.10 Key performance indicators (KPIs)

KPIs should be used to measure overall supply chain performance
● Buy-side, sell-side, finance, customer service, etc
KPIs should be evaluated in periodic business revieuws
KPIs can be used as part of a “supplier certification” program

4.11 KPIs for measuring supplier performance (period-specific)

Total dollar spend by vendor
Landed cost: budget vs actual
● Total
● By SKU or part number
Number of Numbers of SKUs Dollar value by Number of Number/value
purchase orders or part number by SKU or part incomplete P.O.’s of insurance
issued vendor number (missing items) claims

Over/under Defective Incorrect Damaged

quantities merchandise merchandise merchandise

4.12 Negotiation framework

1. Identify or anticipate a purchase requirement
2. Determine if negotiation is required
3. Plan for the negotioation
4. Conduct the negotiation
5. Execute the agreement

4.13 Identify or anticipate a need

Purchase requisitions
Inventory counts
Reorder point systems
New product development
New facilities

4.14 Is negotiation required?

Is bid process inadequate?
Are many non-price issues involved?
Is contract large?
Are technical requirement complex?
Does contract involve plant and equipment?
Does contract involve a partnership?
Will supplier perform value-adding activities?
Will there be high risk or uncertainty?

4.15 When to negotiate?

- Identification of allowable costs
- Delivery schedules and lead times
- Expected product and service quality levels
- Performance metrics
- Technological support needed
- Contract volumes
- Special packaging
- Loss and damage liability
- Payment terms and currency issues
- Progress payment schedules
- Transportation mode selection
- Carrier selection
- Filing freight claims
- Warranties and replacements

4.16 Reasons for negotiation

● Total contract value or volume is large
● Purchase involves complex technical
requirements, perhaps even product and
process requirement and specification still evolving
● Purchase involves capital-intensive plant and equipment
● Agreement involves a special or collaborative buyer-supplier relationship
● Supplier will perform important value-adding activities

4.17 Plan for negotiation

● Identify participants
● Develop objectives
● Analyse strengths and weaknesses
● Gather information
● Recognize other party’s needs
5.1 The purchasing process
The added value of the professional buyer lies in the ability to act as a facilitator for the supply
process
● Identifying new, potential suppliers and business partners for the company’s changing
business needs
● Being involved in new product development and investments projects
● Supporting internal customers in defining purchasing specifications
● Preparing and carrying out contract negotiations, setting up requisitioning and ordering
routines (e.g. through electronic buying catalogues, e-procurement) in such a way that
users can place orders themseleves
● Setting up recquisitioning and ordering routines in such a way that the users can place
orders themselves
● Place orders at suppliers and maintian and monitor orders, contract and supplier files
● Monitoring outstanding orders and financial obligations
● Follow up and evaluation of supplier performance and maintaining relevant supplier
documentation

5.2 Major bottlenecks and problems

● Too detailed specification
○ Specifications of user is sometimes written to the capabilities of specific suppliers
● Inadequate supplier selection
○ Failure to check the supplier’s (bank) references, can produce very unpleasant
surprises like bankruptcy
● Personal relationships
○ Purchase orders are placed with suppliers with whom the user has a frienldy
relationship. As a resut such suppliers may not be as competitive
● Contract are too general
○ Incomplete, drafted up by the supplier or not present at all
● Too much emphasis on price
○ Especially buying capital equipment buying decisions need to be based upon
total-cost-of-ownership (TCO) rather than on price only
● Poor adminsitrative processes
○ Over time or incomplete delivery, quality problems can put the continuity of the
business process in danger
● Suppliers are not systematically assessed
○ This results in unprofessional suppliers and repeating problems

5.3 How is the purchase price determined?

The price ultimately paid for materials and services is the result of environmental factors.
Internal factors
❖ Can bring about a change in the cost of materials before the finished product is placed on
the market (logistical, technical or organizational factors)
External factors
❖ Those factors that change the availability of a product in a given market (economic, socio
political or technological factors)

Corey (1978) considers prices to be based on three models:

1 cost based pricing
➔ The supplier’s offering price is directly derived from his cost price
2 market-based pricing
➔ The price of the product is determined on the market and is generated by market
circumstances (demand, supply, stock postitions, economic factors, etc..)
3 competitive bidding
 ➔ The price is influencd by market factors as well as cost factors. This is the most
common situation

5.4 Pricing methods

Factors suppliers have to take into account to set selling price:
● Expected demand
● Number of competitors
● Expected development of the cost price per product unit
● Customer’s order volume
● Importance of the customer to the supplier
● Value of the product to the consumer

5.5 Cost saving potential in purchasing

Companywide programs focused on cost reduction seem to be successful
Reason for slack in materials cost and prices:
● Traditional purchasin
○ Buyers are involved late, if at all, in the purchasing decision-making process; the
company deals with a fixed group of familiar suppliers
● Continuous competitive bidding amongst a fixed group of suppliers
○ Purchasers regularly sound out competition amongst a limited number of suppliers
by playing them off against each other

Price increases automatically passed on to the next line

● Over-specification
○ Technical requirement (defined by R&D departments) whihc are not necessary for
the functioning of the product are imposed on suppliers
● Supplier cartels in (international) supply markets
○ In spite of the agreements made on EC level, cartels in most European economies
are common. In many industries, there are only a limited number of players, which
enables agreements
● Suppliers’ cutomers relationship programs
○ Relationship programs include offering fringe benefits to customers in order to
create preferred postition at members oof Decision Making Unit

5.6 Identify cost saving potentials

Starts with analysis of the company’s purchasing spend by means of a spen cube
Category tree based on direct and indirect spend categories
Spend categories
➔ A group of coherent products or services, brought from the supply market that are used in
our company to satisfy internal or external customer demands

Cost saving can depend on:

● Customize vs standard specifications
● Modular vs component buying
● Buyer-supplier dependence
● Number of suppliers involved in last tender
● Scope of last tender
● Type and age of contrat
● Market price vs cost price differential
● Level of purchasing involvement
5.7 Developing a sourcing strategy
Supplier relationship
Sourcing strategy issues
● Global vs local sourcing
○ International supplier orientation necessary or is local, national orientation
sufficient?
● Single vs multiple sourcing
○ Purchase the product at one or more suppliers?
● Partnership or competitive bidding
○ Buy from supplier with whom a partnership relation is preferred or keep the
supplier at distance?

Contract strategy issues

● Buying on contract or buying on spot basis
○ Is the total volume of purchased products to be covered by a contract or is part of
the volume brought on a spot basis?
● Price agreement vs performance agreement
○ Just a price agreement or is a detailed servive level agreement (SLA) necessary
with arrangements on time, tests, maintenance etc..

5.8 Category source planning

The category source planning provides a strategy for every important purchasing category
Content:
- Business strategy and business issues
- Anaysis of historical data
- Customer requirements and purchasing process
- Objectives sourcing strategy
- Commodity sourcing strategy
- Planning activities
- Organization and team compostition

5.9 Getting better results from suppliers

Towards performance based relationships. A stepwise approach:
● Set up the best legal contract
○ A thorough analysis of current contract arrangement with existing suppliers.
○ Objective:
Agree on a performance based contract
● Select the best suppliers
○ Analysis of (ineternational) supply market, souding out international competition
○ Objective:
Select best-in-class supplier
● Get the best solution from the best supplier
○ Focus is on continuous improvement with the supplier based upon total cost of
ownership

5.10 The myth of partnership

Philips, one of first European companies focusing on partnership, introduced the ‘co-makership’
Objectives of this type co-operation is to achieve improvements in:
❏ Cost
❏ Logisitics
❏ Quality
❏ Product development
Ellram and Hendrick (1993):
“A ‘partner’ is defined as a firm with whom your company has an ongoing buyer-seller
relationship, involving a commitment over an extended time-period, a mutual sharing of
information and a sharing of risks and rewards resulting from the relationship”

A DTI (1994) study concludes that ‘in developing new working agreements with their suppliers
most vehicle manufacturers still appear to deal more in rhetoric than in reality’

This comes a no surprise. Cooperation with suppliers requires internal teamwork between all
disciplines and companies still operate in a functional manner.
Developing a partnership with suppliers takes time. The road is long and difficult. There are no
easy ways or short cuts to success here.

“Partnership is the result of the contractors’ continuous effort to improve results in the relationship
with suppliers, rather than a technique which can be adapted and applied in a short time”

5.11 Conclusions
● Effective supplier management is another cornerstone for a successful business strategy
● The international competitive arena forces manufacturers to look continuously for ways to
improve their value propostitions to customers
● The foundation of any category sourcing plan is a sound spend analysis. The purchasing
spend is categorized in homogeneous product categories though a category tree.
● The road to partnership is long & difficult. There’s no easy way or short cut to success

5.12 Trust, integrity and ethics

As companies become more dependent on each other, trust becomes more important.
Purchasing is sensitive for ethical issues through contacts with suppliers.
Code of conduct
● Increasing importance because of e-auctions
● NEVI’s code of conduct

5.13 Ethics in purchasing

Principles and standards for ethical supply management conduct
1. Avoid the intent and appearance of unethical or compromising practice in relationships,
actions and communications
2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the
employer, using reasonable care and granted authority
3. Avoid any personal business or professional activity that would create a conflict between
personal interests and the interests of the employer
4. Avoid soliciting or accepting money, loans, credits or preferential discounts and the
acceptance of gifts, entertainment, favors or services from present or potential suppliers
that might influence or appear to influence supplier managmenet decisions
5. Handle confidential or proprietary information with due care and proper consideration of
ethical and legal ramifications and government regulations
6. Promote positive supplier relationships through courtesy and impartiality
7. Avoid improper reciprocal agreements
8. Know and obey the letter and spirit of laws applicable to supply management
9. Encourage support for small, disadvantaged and minority-owned businesses
10. Acquire and maintain professional competence
11. Conduct supply management activities in accordance with national and international laws,
customs and practices your organization’s policies and these ethical principles and
standards of conduct
12. Enchance the stature of the supply management profession
5.14 Query - do your internal customers consider you ethical
1. A purchasing team member accepted a gift - perhaps even a low-value item like a pen
from a supplier
2. A purchasing team member has a personal or financial relationship with a supplier on an
employee of a supplier
3. A purchasing team member owns a supplier’s stock
4. A purchasing team member mixes business and entertainment with a supplier, for example
discussing business over a meal or a round of golf
5. In a competitive bidding situation, the purchasing team provided certain information to one
supplier that was not provided to other suppliers
6. The purchasing team did not provide transparency for a supplier selection, including failing
to internally share selection criteria, proposal details and the rationale for the decision
7. The supplier selection criteria used was differenct than the criteria noted in the RFP/tender
6.1 Why ethics is so important
Ethical supply management is becoming a mainstream business issue as questions about business
practice arise and media and charity campagins highlight poor working conditions in developing
countries.

6.2 Two of the main issues

Transparency, confidentiality and fairness
● All suppliers should be treated fairly at all stages of the procurement process. This means
being open with all those involved so that everyone, mostly suppliers, undertands the
elements of the process.
○ Elements of the process:
Procedures
Timescales
Expectations
Requirements
Criteria for selection
● Supplier confidientiality should be safe-guarded and unseccessful suppliers should be
debriefed with as much transparency about the procurement process as can be provided.
Example: the weaker aspects of their tender

Use of power
● Buyers should discourage the arbitrary or unfair use of purchasing power or influence.
● Power is a key element in supply relationships
● The exertion of undue influence or the abuses of power, as well as being unprofessional
may contravene relevant legislation and are unlikely to achieve long-term best value for
money

6.3 Execution of ethics code

Code of practice = statement of intent
● Implementation program internally and externally
○ monitoring / verifying
■ Internal
■ Audit independent organization
■ External NGOs, unions etc..
○ Corrective actions when conditions fall short

6.4 Difficult in reality

Reputation management: activities performed by individual or organisation which attempt to
maintain or create a certain frame of mind regarding themselves in the public eye
● Constant struggle: commercial reality of global business

6.5 Introduction to logistics

What is logistics and its role in organizations
Logistics sytems can be vieuwed orr approached in several different ways for analytical purposes,
including: materials management vs physical distribution, cost center, nodes vs links and
channels. All four approaches are viable for different purposes.

Logistics systems are frequently analysed from a systems aproach, which emphasizes total cost
and tradeoffs when changes are propsed. Either a short- or long-run perspective can be used.

The cost of logistics systems can be affected by a number of major factors, including competition
in the market, the spatial relationship of nodes and product characteristics.
Four subdivisions of logistics
1. Business logistics
That part of the supply chain process that plans, implements and controls the efficient
effective flow and storage of goods, service and related information from point of use or
consumption in order to meet customer rquirements
2. Military logistics
The design and integration of all aspects of support for the operational capability of the
military forces (deployed or in garisson) and their equiment to ensure readiness, reliability
and efficiency
3. Event logistics
The network of activities, facilities and personnel required to organize, schedule & deploy
the resources for an event to take place and to efficiently withdraw after the event
4. Service logistics
This acquisition, scheduling and management of the facilities/assets, personnel and
materials to support and sustain a service operation or business

Value-added roles of logisitcs

The five principal types of economic utility, which add value to a product or service are:
- Form
- Time
- Place
- Quantity
- Possession

6.6 Logistics adds value by creating utility

Form utility
➔ The process of creating the good and service or putting it in the proper form for the
customer to use (from raw materials to finished goods)
Possession utility
➔ The value added to a product or service because the customer is able to take actual
possession (by credit arrangements, loans)
Time utility
➔ The value added by having an item when it is needed
Place utility
➔ Means having the item or service available where it is needed

6.7 Logistics activities

Customer service Warehousing Reverse logistics Parts and service Inventory
and storage support control

Demand Traffic and Plans & warehouse Distribution

forecasting transportation site selection communications

Order processing Packaging Procurement Material handling

6.8 Logistics is relevant to all types of organizations

The definition of logistics includes the flow of materials and services in both the manufacturing
and service sector
Service sector includes entities such as government, hospitals, banks, retailers and wholesalers

6.9 Definition of logistics management

Logistics has been called by many names including the following:
 - Materials management
- Physical distribution
- Business logistics
- Channel management
- Distribution
- Industrial logistics
- Logistical management

6.10 System approach / integration

Logistics is a system: it is a network of related activities with the purpose of managing of the
orderly flow of goods, information and service with the logistics channel.
The systems approach simply states that all functions or activities need to be understood in terms
of how they affect & are affected by other elements & activities with which they interact.

6.11 Marketing/logistics mangement concept

6.12 Components of logistics management

6.13 The outputs of the logistics system

The outputs of the logistics system are
● Competitive advantage
● Time
● Place utility
● Efficient movement to the customer
● Providing a logistics service mix such that logistics becomes a proprietary asset of the
organization

6.14 Customer service

● Good customer service supports customer satisfaction
● Customer service is the ouput of the logistics system
● It involves getting the right product, to the right customer at the right place, in the right
condition, at the right time and at the lowest total cost possible
● The key trade off of customer service: cost of lost sales
● Dissatisfied customer tells to average of nine other potential (lost) customers
6.15 Demand forecasting
There are many types of demand forecasting such as;
● Marketing forecasts
○ Customer demand based on promotions, pricing, competition etc..
● Manufacturing forecasts
○ Production requirement based on marketing sales demand forecasts and current
inventory levels

Logistics usually becomes involved in forecasting in terms of how much should be ordered from its
suppliers and how much of finished product should be transported or held in each market that the
organization serves

6.16 Inventory management

Inventory management involves: trading off the level of inventory held to achieve high customer
service levels with the cost of holding inventory, including capital tied up in inventory, variable
storage costs and obsolesence

6.17 Materials handling

Materials handling
➔ A broad are that encompasses virtually all aspects of all movements of raw materials, work
in process, or finished goods within a plant or warehouse

Primary objective of materials management

➔ Eliminate handling wherever possible minimum travel distance, bottlenecks, inventory
levels and loss

6.18 Order processing

Order-processing
➔ Entails the systems getting orders from customers, checking on the status of orders,
communicating orders to customers, filling orders, making orders available to customers

Advanced order-processing methods (EDI - electronic data interchange, EFT - electronic funds
transfer, bar-coding)

6.19 Packaging
For protection and storage from a logistical perspective
Important for protection during storagee and transportation
Important to be designed for the warehouse configuration and materials handling equipment

6.20 Parts and service support

Logistics is responsible for providing after-sale service support
This may include:
- Delivery of repair parts to dealers
- Stocking adequate spares
- Responding quickly to demand for repairs

6.21 Plant and warehouse site selection

Determining the location of the company’s plants and warehouses is a strategic decision
Affects the costs of transporting raw materials inbound and finished goods outbound, but also
customer service levels and speed of response
6.22 Procurement
Procurement
➔ The purchase of materials and service from outside organizations to support the firm’s
operations from production to marketing, sales and logistics
Supplier selection, negotiation of price, supplier quality assessment,...

6.23 Reverse logistics

Reverse flow of goods, services and related information because of recycling, reusing and disposal
activities.
Return may take place because of a problem with the performance of the item or simply because
the customer changed his or her mind
Return goods handling is complex and costly
The cost of moving a product backward nearly as much as nine times as high as moving the same
product forward

6.24 Traffic and transportation

This is the key logistics activity actually provide for the movement of materials and goods from
point of origin to point of consumption and disposal
Selection of mode, routing the shipment, assuring of compliance with regulations in the region of
the country where shipment is occuring selection of the carrier…
Largest logistics cost

6.25 Warehousing and storage

Warehousing supports time and place utility by allowing an item to be produced and helps for
later consumption
Warehouse: layout, design, ownership, automation,...

6.26 Future challenges in logistics

● Strategic planning participation
● Total quality management (TQM)
● Just-in-time (JIT)
● Quick response (QR)
● Efficient consumer response (ECR)
● Logistics as a competitive weapon
● Accounting for logistics cost
● Logistics as a boundary-spanning activity
● Global logistics
● Increasing skill requirements
● Logistics information systems
● Outsourcing, partnering and strategic alliances
● Green marketing
7.1 Manufacturing process decisions
● Consider the impact of people, facilities and physical layouts and information systems
working together
● Consider the effect of the manufacturing processes on the overall business strategy
● Consider the impact many different types of manufacturing processes working together

7.2 Selecting a manufacturing process

- What are the physical requirements of the company’s product?
- How similar to one another are the products the company makes?
- What are the company’s production volumes?
- Where in the value chain does customisation take place?

7.3 Six types of manufacturing process

1. Continuous process flow
2. Batch porcess
3. Production line
4. Job shop
5. Fixed position layout
6. Hybrid manufacturing process

Continuous flow process

● Large production volumes (24/7)
● High level of automation
● Production materials are gases, liquids or powders
● Basic material passed along, converted as it moves
● Usually cannot be broken into discrete units
● Usually very high fixed costs and inflexible

Batch process
● Items are moved through the different manufacturing steps in group or batches
● Moderate volumes, multiple produts
● Sequence of steps is not as thightly linkes as a production line
● Strikes a balance between the flexibility of job shop and the efficiency of production line

Production line
● High-volume production of standard items with identical or highly similar designs
● Processes arranged by product flow
● Often “paced”
● Highly efficient but not too flexible
● Resources are arranged sequentially

Job shops
● General-purpose equipment and broadly skilled workers
● Functional layout: work areas are arranged by function
● Requirements can change dramatically from one job to the next
● Highly flexible but not very different

Fixed-position layout
● Position of the product is fixed
● Materials, equipment and workers are transported to and from the product
● Used in industries where the products are very bulky, massive or heavy and movement is
problematic
Hybrid manufacturing processes
➔ Manufacturing process that seeks to combine characteristics and advantages of more than
one classic process
● Matchining centers
● Group technology
● Flexible manufacturing systems

7.4 Four levels of customization

1 Make-to-stock (MTS)
● Products that require no customization
● Products are made on demand forecasts
● Since accuracy of the forecasts prevent excess inventory and opportunity loss due
to stock-out, the issue is how to forecast demand accurately
❖ Like a train schedule for which number of passengers can be prospected from past
data
❖ Books, television, spec homes, standard vacation package

2 Assemble-to-order (ATO)
● Products that are customized only at the
very end of the manufacturing process
❖ Computer systems, corporate training

3 Make-to-order (MTO)
● Products that use standard componenet but have customer-specific final
configuration of those components
● Assembly process starts when demand actually occurs or with development
planning
❖ Like an elevator whihc starts when you push the button
❖ Wedding invitations, custom-built homes

4 Engineer-to-order (ETO)
● Products that are designed and produced from the start to meet unusual customer
needs or requirements
❖ End-product tends to be complex and based on specific customer requirements
❖ Power plan boilers, electrical switch gear, industrial cranes

7.5 Law of variability

Law of variability
➔ The greater the random variability, either demanded of the process or inherent in the
process itself or in the items processed, the less productive the process is

7.6 Customization in the supply chain

When customization occurs early in the suppy chain:
● Flexibility in response to unique customer needs will be greater
● Lead times to the customer will tend to be longer
● Products will tend to be more costly

When customization occurs late in the supply chain:

● Flexibility in response to unique customer needs will be limited
● Lead times to the customer will tend to be shorter
● Products will tend to be less costly
 7.7 How different services are organized and damaged
- The service package
- The degree of customization
- The level of customer contract

The service package

● Includes all value-added physical and intangbile activities that a service organization
provides to the customer
● The greater the emphasis on physical activities, the more attention will be directed to
capital expenditures, material costs and other tangible assets
○ Example: airline, trucking
● The greater the emphasis on intangible activities, the more critical are the training and
retention of skilled employees and the development of the firm’s knowledge assets
○ Example: law firm, software developer

Service customization
● Ranges from hihgly customized to standardized
● Hihg: greater flexibility and higly responsive to customer’s needs
● Low: more emphasis on controlling process and improving productivoty
● As the degree of customization increase, the service package become less predictable and
more variable
○ Low customization example: quick change oil-shop
○ Hihg customization example: full service car repair

Customer contract
● Differs from customization - related to the importance of front-room or back-room
operations
● Front room
➔ The physical or virtual point where the customer interfaces direclty with the service
organization
◆ What the customer can see
◆ Managed for flexibility and customer service
● Customer lobbies, back teller, receptionist

● Back room
➔ The part of a service operation that is completed without direct customer contract
◆ What the customer does not see
◆ Managed for efficiency and productivity
● Package sorting, accounting department, car repair

7.8 Managerial challenges in service environment

Nature of the Primarily physical activities Primarily intangible activities
service Greater emphasis on managing physical greater emphasis on managing people
package assets (airline, trucking firm) and knowledge assets (law firm,
software developer)

Degree of Lower customization g ​ reater Higher customization​ greater

customization emphasis on closely controlling the emphasis on being felxible and
process and improving productivity responsive to customers’ needs
(quick-change oil shop) (full-service car repair shop)

Degree of Lower contract​ more of the service Higher contract​ more of the service
customer package can be performed in the back package must be performed in the front
contact room. Service layout, location and hours room. Service layout, location and hours
will be based more on cost and must be designed with customer
productivity concerns (mail sorting) convenience in mind (physical therapist)

7.9 Service blueprinting

Service blueprinting
➔ A specialized form of business process mapping that lays out the service process from the
viewpoint of the customer & parses out the organization’s service actions based on:
◆ The extent to which an action involves direct interaction with the customer
◆ Whether an action takes place as a direct response to a customer’s needs
Processes Separations

Customer actions Line of interaction

Onstage activities Line of visibility

Backstage activities Line of internal interaction

Support

7.10 Layout decisions

Product-based layout
➔ Arranges resources sequentially, according to the steps required to make a product or
provide a service

Functional layout
➔ Physically groups resources by function

Cellular layout
➔ Production resources are dedicated to a subset of products with similar requirements

Fixed position layout

➔ Productive resources are moved to where product is made or service is being provided

7.11 What is a supply chain?

Supply chain
➔ The system of organizations, people, activities, information and resources involved in
moving a product or service from supplier to customer

Supply chain activities transform raw materials and components into a finished product that is
delivered to the end customer
Supplier - manufacturer - distributor - retailer - customers

7.12 Supply chain management

Supply chain management
➔ The dessign and management of processes across organizational boundaries with th goals
of matching supply and demand in the most cost-effective way.
➔ Vary widely according to the end product

7.13 Why is it so difficult to match supply and demand?

● Uncertainty in demand and/or supply (forecasting)
 ● Changing customer requirement
● Decresing product life cycles
● Fragmentation of supply chain ownership
● Conflicting objectives in the supply chain

Conflicting objectives even within a single firm

● marketing/sales
○ Wants more FGI inventory, fast delivery, many package types, special
wishes/promo
● Production
○ Wants bigger batch size, depots at factory, latest ship date, decrease changeovers,
stable production plan
● Distribution
○ Wants full truckload, low depot costs, low distribution costs, small number of SKUs,
stable distribution plan

7.14 Supply chain performance measures

Cost
Total supply chain cost
➔ The sum of all supply chain costs for all products processed through a supply chain during
a given period
Inventory turnover
➔ The ratio of the cost of goods sold to the value of average inventory
◆ How often the company replenishes inventory
◆ High value of inventory turnover means that the inventory was not sitting around a
long time
Weeks of inventory
➔ The ratio of average inventory to the average weekly sales
◆ Means how many weeks worth of invntory does the company have on hand
◆ High value weeks of supply means that firm has a lot of inventory sitting around

Customer service
Average response time
➔ The sum of delays of ordering, processing and transportation between the time an order is
placed at a customer zone and the time the order arrives at the customer zone

7.15 Outsourcing
Outsourcing
➔ Moving some of the firms internal activities and decisions to outside providers
◆ Examples:
GM has outsourced its interior design to Delphi
Toshiba has outsourced manufacturing to Solectron
Advertising is often outsourced completely

Why do firms outsource?

Organizational reasons
● Focus on service
● Focus on core capabilities
● Transform the organization
● Increase flexibility

Operational reasons
● Improve performance (quality, productivity)
 ● Obtain expertise, skill and technology
● Risk managemenet

Financial reasons
● Transfer assets to the outsourcing partner
● Free up resources for investment in other purposes

Cost drivn reasons

● Transform fixed costs into variable costs
● Reduce costs through outsourcing partner efficiencies

Revenue driven reasons

● Expand and grow with the help of another organization
● Obtain access to outsourcing partner’s network
8.1 Inventory
Inventory
➔ A stock or store of goods

8.2 Inventory models

Independent demand
● Finished goods, items that are ready to be sold
● Uncertain
○ Example: a computer

Dependent demand
● Components of finished products
● Certain
○ Example: parts that make up the computer

8.3 Types of inventories

1. Raw materials & purchased parts
2. Partially completed goods called: work in progress
3. Finished-goods inventories (manufacturing firms, merchandise, retail stores)
4. Replacement parts, tools & supplies
5. Goods-in-transit to warehouses or customers

8.4 Eight functions of inventory

1. To meet anticipated demand
2. To smooth production requirement
3. To decouple operations
4. To protect against stock-outs
5. To take advantage of order cycles
6. To help hedge against price increases
7. To permmit operations
8. To take advantage of quanitiy discount

8.5 Objective of inventory control

To achieve satisfactory levels of customer service while keeping inventory costs within reasonable
bounds
● Level if customer service
● Costs of ordering and carrying inventory

Inventory turnover
➔ The ration of “average cost of goods sold” to average inventory investment

8.6 Cost of goods sold (COGS) = costs of sales

Cost of goods sold
➔ Direct costs attributable to the production of good sold by a company.
➔ Includes:
◆ Cost of materials used in creating the good
◆ Direct labor costs used to produce the good
Calculation
1. Beginning inventory costs (begin of the year)
2. + additional inventory costs (inventory purchased during the year)
3. - ending inventory (end of the year)
4. COGS
8.7 Effective inventory management
● System to keep track of inventory
● A reliable forecast of demand
● Knowlegde of lead times
● Reasonable estimates of:
○ Holding costs
○ Ordering costs
○ Shortage costs
● A classification system

8.8 Inventory counting system

Periodic system
➔ Physical count of items made at periodic intervals

Perpetual inventory system

➔ System that keeps track of removals from inventory continuously, thus monitoring current
levels of each item

Two-bin system
➔ Two containers of inventory; reorder when the first is empty

Universal bar code

➔ Bar code printed on a label that has information about the item to which it is attached

8.9 Key inventory terms

Lead time
➔ Time interval between ordering and receiving the order

Holding (carrying) costs

➔ Costs to carry an intem in inventory for a length of time, usually a year

Ordering costs
➔ Costs of ordering and receiving inventory

Shortage costs
➔ Costs when demand exceeds supply

8.10 ABC classification system

ABC classification system
➔ Classifying inventory according to some measure of importance and allocating control
efforts accordingly
◆ A - very important
◆ B - moderate important
◆ C - least important

8.11 Economic order quantity (EOQ) models

Economic order quantity (EOQ) model
● The order size that minimizes total annual cost
● EOQ is an important tool for management to minimize inventory costs and the cash tied up
in inventory (cash savings can be used for business purposes)

Quantity discount model

Assumption of EOQ model
● Only one product is involved
● Annual demand requirements known
● Demand is even throughout the year
● Lead time does not vary
● Each order is received in a single delivery (completely) and immmediately after ordering
● There are no quantity discounts

When to reorder with EOQ ordering

Re-order point
- When the quantity on hand of an item drops to this amount, the item is reordered
Safety stock
- Stock held in excess of expected demand due to variable demand rate and/or lead time
Service level
- Probability that demand will not exceed supply during lead time

Determinants of the reorder point (ROP)

● Rate of demand
● Lead time
● Demand and/or lead time variability
● Stock-out risk (safety stock)

8.12 Economic production quantity (EPQ) model

Assumptions Economic production quantity (EPQ) model
● Only one item is involved
● Annual demand is known
● Usage rate is constant
● Usage occurs continually
● Production rate is constant
● Lead time does not vary
● No quantity discount

8.13 Fixed-order-interval model

Fixed order interval model
➔ Stock levels are reviewed regularly at fixed intervals and when it falls below a certain level,
an order to replenish it to required level is placed
● Orders are placed at fixed time intervals
● Suppliers might encourage fixed intervals
● May require only periodic checks of inventory levels
● Risk of stockout
● Fill rate
➔ The percentage of demand filles by the stock on hand
Benefits
● Tight control of inventory items
● Items from same supplier may yield savings in:
○ Ordering
○ Packing
○ Shipping costs
● May be practical when inventories cannot be closely monitored
Disadvantages
● Requires a larger safety stock
● Increases carrying cost
● Costs of periodic reviews
8.14 Single period model
Single period model
➔ Model for ordering of perishables and other items with limited useful lives
● There’s only 1 selling season & only 1 purchase opportunity
● Purchase must be done in advance of selling season; ‘how much to order’ is the question
○ Examples: overbooking for airlines, beverages for birthday party

Shortage costs
➔ The unrealized profits per unit

Excess costs
➔ Difference between purchase cost and salvage value of items left over at the end of a
period

Continuous stocking levels

● Identifies optimal stocking levels
● Optimal stocking level balances unit shortage and excess cost

Discrete stocking levels

● Service levels are discrete rather than continuous
● Desires service level is equaled or exceeded

8.15 Operations strategy

Too much inventory
● Tends to hide problems
● Easier to live with problems than to eliminate them
● Costly to maintain

Wise strategy
● Reduce lot sizes
● Reduce safety stock

8.16 Inventory types

Cycle stock
➔ Components or products that are received in bulk by a downstream partner, gradually used
up and then replenished again in bulk by an upstream partner

Safety stock
➔ Extra inventory that a company holds to protect itself against uncertainties in either
demand or replenishment time

Anticipation inventory
➔ Inventory that is held in anticipation of customer demand

Hedge inventory
➔ A form of inventory buildup to buffer against some event that may not happen

Transportation inventory
➔ Inventory that is moving from one link in the supply chain to another

Smoothing inventory
➔ Inventory that is used to smooth out differences between uprstream production levels and
downstream demand
Inventory drivers
Inventory drivers
➔ Business conditions that force companies to hold inventory
Inventory driver Impact

Uncertainty in supply or demand Safety stock, hedge

inventory

Mismatch between downstream partner’s demand and the most efficient Cycle stock
production or shipment volumes for an upstream partner

Mismatch between downstream demand levels and upstreal production Smoothing inventory
capacity

Mismatch between timing of customer demand and supply chain lead Anticipation inventory,
times transportation inventory

8.17 Independent vs dependant demand inventory

Independent demand inventory
➔ Inventory items whose demand levels are beyond a company’s complete control
◆ Example: kitchen table - need 500 tables five weeks from now

Dependent demand inventory

➔ Inventory items whose demand levels are tied directly to a company’s planned production
of another item
◆ Example: kitchen table legs - need 4 per table or 2000 legs, calculation of
dependant demand

8.18 Inventory control systems

Periodic review system
➔ An inventory system that is used to manage independent demand inventory where the
inventory level for an item is checked at regular intervals and restocked to some
predetermined level

Continuous review system

➔ An inventory system that is used to manage independent demand inventory where the
inventory level for an item is constantly monitored and when the reorder point is reached,
an order is released

8.19 Continuous review system

Key features
● Inventory levels are monitored constantly and a replenishment order is issued only when
the reorder point is reached
● The size of a replenishment order is typically based on the trade-off between holding costs
and ordering costs
● The reorder point is based on both demand and supply considerations, as well on how
much safety stock managers want to hold

Assumptions
● Constant demand and lead time
● Holding and ordering costs known and fixed
● Price of each unit is fixed
8.20 Inventory in the supply chain
Bullwhip effect (or whiplash effect)
● The phenomenon of amplification and distortion of demand in a supply chain. Extreme
change in supply position upstream in supply chain generated by small change of its
“downstream” customer (demand in supply chain. Prediciting demand is a significant tool

Inventory positioning
● Cost and value increases and flexibility decreases down the supply chain

Transportation, packaging, material handling

● Physical size and qauntity of lot, how it is packaged, material handling equipment needed
and disposal of packaging are all factors in choosing appropriate supplier and distribution
process

What contributes to the Bullwhip effect?

● Disorganization between each supply chain link
● Lack of communication
● Free returns policies
● Order batching (companies may order weekly/monthly)
● Price variations (upsetting regular buying patterns)
● Demand information (relying on past demand does not take into account
demand-fluctuations)

How to minimize bullwhip effect

● Improve your SC-processes
○ Reduction of delivery lead times and pipeline inventory
● The re-order point & desired inventory levels are direct function of our delivery lead time
Conclusion: a reduction of lead time => a reduction of total amount of inventory in your process
9 Why logistics is critical
9.1 Transportation
Highway
● Dominates the logistics infrastructure due to:
○ Geographic extension of supply chains
○ Greater emphasis on delivery speed and flexibility
● Has become more cost effective over time due to:
○ Better scheduling and use of vehicle capacity
○ More efficient and reliable vehicles
○ Increased cost competition due to deregulation
● Involves different types of shipment
○ Direct truck - shipment made with no stops
○ Less than truckload (LTL) - smaller shipment combined with other loads

Water
● Ideal for materials with high wieght-to-value ratio, more if delivery speed is not critical
○ Example: farm produce, timer, petroleum-based products

Air
● Ideal for customers with a low weight-to-value ratio, especially if delivery speed or delivery
reliability is critical
● Higher shipping costs and improvement in other modes have reversed the rise in air
growth over the past decade

Rail
● Characteristics similar to water but more flexible
● To accommodate growth, rail carriers have doubled the number of lines along busy
corridors, changed the physical conifguration of the trains & utilized multimodel solutions
Transportation Strenghts Weaknesses
mode

Highway Flexibility to deliver where and when Neither the fastest or cheapest
needed option
Often the best balance among cost,
flexibility and reliability/speed of
delivery

Water Highyl cost-effective for bulky items Limited locations

Most effective when linked to a Relatively poor delivery
multimodal system reliability/speed

Rail Highly cost-effective for bulky items Limited locations, less than water
Can be most effective when linked to a Better reliabilit/speed of delivery
multimodal system than water

Air Quicked mode of delivery Often most expensive mode on a

Flexible, especially when linked to per-pound basis
highway mode

Multimodal solutions
Multimodal solution
➔ Transportation solution that seeks to exploit the strengths of multiple transportation modes
through physical, information & monetary flows that are as seamless as possible
 ◆ Roadrailer
➔ Specialized rail car the size of a standard truck that can be quickly switched
from rail to ground transportation without changing the wheels

9.2 Warehousing
Warehousing
➔ Any operations that stores, repackages, stages, sorts or centralizes goods or materials
Warehousing can be used to:
● Reduce transportation costs
● Improve operational flexibility
● Shorten customer lead times
● Lower inventory-related costs

Consolidation warehousing
Consolidation warehousing
➔ Form of warehousing that pulls together shipments for a number of sources in the same
geographic area and combines them into larger and more economical loads
◆ Example: cross-docking, break-bulk, hub-and-spoke system

Postponement warehousing
Postponement warehousing
➔ Form of warehousing that combines classic warehouse operations with light manufacturing
and packaging duties to allow firms to put off final assembly or packaging of goods unitil
the last possible moment

Types of warehouses
Assortment warehouses
➔ Form of warehouses in which a wide array og goods is held close to the source of demand
in order to assure short customer lead times

Spot stock warehouses

➔ Form of warehouses that attempts to position seasonal goods close to the marketplace
Performance dimension Transportation Warehousing system
mode

Delivery reliability - delivery on time consistently Highway, Air None (direct ship),
Assortment ,Spot stock

Delivery speed - minimal time from order to Air, Highway None (direct ship),
delivery Assortment, Spot stock

Mix flexibility - support a wide range of different Highway, Air, Rail Assortment ,Spot stock
products/delivery needs

Design flexibility - support design changes/unique Highway, Air Postponement

customer needs

Volume flexibility - provide products/delivery Highway, air None (direct ship),

services in whatever volume the customer needs Assortment, Spot stock

Cost - minimize the cost of transportation Rail, Water, Consolidation,

Pipeline, highway Cross-docking,
hub-and-spoke
9.3 Logistics information systems
Decision support tools
● Real-time simulation and optimization
● Cost estimations
Planning systems
● Carrier selection
● Scheduling deliveries
Execution systems
● RFID
Material handling system
➔ System that includes the equipment and procedures needed to move goods within a
facility, between a facility and a trasnportation mode and between different transportation
modes
Packaging
➔ The way goods and materials are packing in order to facilitate physical, informational and
monetary flows through the supply chain

9.4 Marketing channels act as exchange facilitators

Marketing channel
➔ Exchange relationships that create customer value in the acquisition, consumption and
disposition of products and services

The economic rationales for marketing channels

● The efficiency rationale for intermediaries
● The discrepancy of assortment and sorting
● Routinzaion
● Searching

Functions and flows in marketing channels

Functions in marketing channels
● Carrying of inventory
● Demand generation
● Physical distribution
● After-sale service
● Extending credit to customers

Flows in marketing channels

- Physicall possession - Ownership

- Promotion - Negotiation

- Financing - Risking

- Ordering - Payment
Analyzing marketing channel structures
Channel as a network of systems
● Interdependent and interrelated systems
● Open systems

Service outputs as determinants of channel structure

● Spatial convenience
● Lot size
● Waiting or delivery time
 ● Product variety and assortiment
● Customer service

9.5 Distribution objectives and related marketing strategies

Account development
● Increase availability relative to competitors
● Gain access to new segment
● Increase ability to buy

Distributor support
● Increase inventory
● Increase consumption rate
● Reduce competitive opportunities
● Increase promotional support

Account maintenance
● Assure user satisfaction
● Reduce competitive opportunities
● Simplification

Acount penetration
● Increase consumption rate and purchase volume
● Head-to-head competition
● Complementary product sales

9.6 Power bases in distribution

Reward
➔ Ability to offer product with low prices, quantity discounts
Coercive
➔ Ability to withdraw product
Expert
➔ Ability to offer superior or needed technical assistance
Referent
➔ Ability to offer prestige brand name
Legitimate
➔ Contractual provision that requires distributor to carry full line

9.7 Results-oriented measures of evaluating distributors

● Sales volume
● Sales volume as a percentage of quota
● Sales profitability
● Number of new accounts
● Number of stock-outs
● Percentage volume increase in key accounts
● Number of customer complaints
● Number of lost accounts

9.8 Effort-oriented measures of evaluating distributors

● Number of sales calls made
● Number of checks on reseller stocks
● Number of inquires followed up
● Number of demonstrations completed
10.1 What is lean manufacturing?
Lean manufacturing
➔ A systematic approach to identifying and elimanitng waste (non-value-added activies)
through continuous improvement by flowing the product at the pull of the customer in
pursuit of perfection
➔ Reducing or getting rid of waste and/ or non-value added from the begging to the end of
the manufacturing process
➔ Implementing systematic approach to improve productivity and quality while possible
lowering costs

Lean and green

The environmental impacts due to production and waste generation have made its way into every
day society. Consumers are becoming more environmentally conscious.
With the Earth’s limited resources, companies are more conscious of their carbon footprint, and
there has been a movement to create more environmentally friendly decisions.

Green engineering
➔ The systems-level approach to product & process design where environmental attributes
are treated as primary objectives or opportunities rather than simple constraints

Features of lean production

What is lean production
● Management philosophy
● “Pull” system through the plant

What does lean production

● Attacks waste
● Exposes problems and bottlenecks
● Achieves streamlined production

What does lean production requires

● Employee participation
● Industrial engineering/basics
● Continuing improvement
● Total quality control (TQC)
● Small lot sizes

What does lean production assume

● Stable environment

History of lean manufacturing

● The concept of lean is adopted from Henry Ford from the US
● Toyota production engineer Taiichi Ohno implemented the kanban or just-in-time work
principles
● Ohno believed that a happy worker is the sole key to a healthy production

Toyota production system (TPS)

A system that continually searches for an eliminated waste throughout the value chain

View every enterprise activity as an operation and applies its waste production concepts to each
activity from customer to the board of directors to support staff to production plants to suppliers
10.2 Key concepts lean manufacturing
Just-in-time (JIT)
Just-in-time (JIT)
➔ Production strategy based on eliminating all forms of corporate waste and variance and
raising productivity

Benefits of JIT
● Zero idle inventory
● Lowest total cost
● Perfect quality

Minimzing waste
● Only produce what’s needed
● The opposite of just in case philosophy
● Ideal lot size is one
● Minimize transit time
● Frequent small deliveries
Advantage Disadvantage

Minimal inventory Requires discipline

Less space Requires good problem solving

More visual Suppliers or warehouses must be close

Easier to spot quality issues Requires high quality

Kanban
Kanban
➔ A signal that provides an instruction to regulate the sequence and timing of production
● A method to achieve JIT

Benefits of kanban
● Visual production
● Improved inventory control
● Reduce wasted time looking for material/floor space
● No over production

Minimizing waste
● Signaling device to control flow of material
● Cards
● Empty containers
● Lights
● Colored golf balls

5S (6S) system
➔ Sort, Straighten, Shine, Standardize and Sustain
➔ Seiri, Seiton, Seiso, Seiketsu, Shitsuke
➔ Proper arangement, orderliness, cleanliness, cleanup, discipline
● Mid 60’s, japanase Hiroyuki Hirano developed the 5S system through his JIT philosophy
● Becuase of US national safety organization occupational safety and health administration
(OSHA) safety has been added to 5S making it a 6S system

Minimizing waste
A place for everything and everything in its place, not just a housekeeping issue
Critical foundation for:
● Setup reduction
● Pull systems
● Maintenance
● Inventory management

6S
● Sort - identify and eliminate what is not needed
● Straighten - having a place for everything
● Shine - an effective, organized environment
● Standardize - develop standards and stick to them
● Sustain - make 6S a way of life
● Safety - be visually aware of your surroundings

Kaizen improvement
Continuous improvement
● Eliminate waste by improving standardized activities and processes
● Involves the entire workforce
● Incremental small changes in groups creates significant compound improvement in quality
for company
● Initiated by small groups

Main elements of kaizen

- Management teamwork
- Increased labor responsibilities
- Increased managment morale
- Quality circles
- Management suggestions for labor improvements
When these elements are applied continuously in a business & at all levels within a organization,
they result in improvements for the process or activity by increasing its productivity

Cycle of kaizen activity

● Standardizing an operation and activities
● Measuring the standardized operation (cycle times, inventory)
● Gauging measurments against requirements
● Innovating to meet requirements and increase productivity
● Standardizing the new and improved operations
● Continuously repeating this cycle of kaizen activity

Kaikaku improvement
➔ Fundamental and radical change of production production process in order to see
improvement
● Used when kaizen activities stagnate
● Four different types of kaikaku projects
○ Locally innovative and capital intensive
○ Locally innovative and operation close
○ Radically innovative and capital intensive
○ Radically innovative and operation close

Jidoka
Jidoka
➔ The use of automation as a feature of machine design (‘interlligent automation’)
 ● Quality control process that applies four principles
○ Detect the abnormality
○ Stop
○ Fix or correct the immediate condition
○ Investigate the root cause and install a countermeasure
● Machines and workers are separated through mechanisms that detect product
abnormalities

Muda
Muda
➔ Improvement program which aims to reduce waste from a production process
● Japanese word which means ‘futility, uselessness, idleness, superfluity, waste, wastage,..
● Seven types of waste
○ Transportation
○ Inventory
○ Motion
○ Waiting
○ Over-processing
○ Over-producing
○ Defects

Elimination of waste
Acronym - CLOSED MITT
Complexity Materials

Labor Inventory

Overproduction Time

Space Transportation

Energy

Defects
Value stream mapping (VSM)
Value stream mapping
➔ A lean manufacturing technique which has originated from the Toyota production system;
it is also known as “material and information flow mapping”
● Used primarily to identify, demonstrate and decrease waste by creaing a visual flow in the
supply chain and manufacturing process
● The key to VSM is to see the “big picture” as a sum of the parts

Five basic steps in VSM

● Identifying the product - indicating which specific product the VSM will focus on
● Create a current VSM - initial VSM of the current process is created
● Evaluate the current map, identify problem areas - team evaluates the processes and the
steps involved to identify non-value added
● Create a future state VSM - future state of VSM is created with the change in the process
● Implement the final plan - implement the new ideas, which will create a more efficient lean
manufacturing processes

Poka yoke
Poka yoke
 ➔ Any method in a lean manufacturing process that helps in avoiding mistakes
● Japanese for ‘fail-safing’ or ‘mistake-proofing’
● Eliminated human-related errors
○ Example: a mobile phone SIM card

Six sigma
Six sigma
➔ Provides continuous efforts to have a reliable and consisten manufacturing process that is
benefivial to a company’s success
● Statistical model for modeling processes
● Attains low defect rates
● Enchances managment support
History of six sigma
● Developed in 1986 by Motorola
● Created by Bob Galvin (CEO) and John Mitchell
● Jack Welch of General Electric (GE) made it a central business strategy in 1995
Two key concepts of six sigma
DMAIC - define, measure, analyze, improve and control
● Used for innovating current designs of manufacturing processes
DMADV - define, measure, analyze, design and verify
● Used for creating new processes and designs for manufacturing processes

Push system
Push system
➔ Every worker maximizes own output, making as many products as possible
Advantages
● Focuses on keeping individual operators and workstations busy, rather than efficient use of
materials
● Volumes of defective work may be produced
● Throughput time will increase as work-in-process increases (little’s law)
Disadvantages
● Line bottlenecks and inventories of unfinished products will occur
● Hard to respond to special orders and order changes due to long throuhput time

Pull system
Pull system
● Production line is controlled by the last operation, kanban cards control WIP
Advantages
● Controls maximum WIP and elimantes WIP accumulating at bottlenecks
● Keeps materials busy, not operators, operators work only where there is a signal to
produce
Disadvantages
● If a problem arises, there is no slack in the system
● Throughput time and WIP are decreased, faster reaction to defects and less opportunity to
create defects

10.3 Summary and conclusions

Lean production is the set of activities that achieves quality production at minimum cost and
inventory. The flow of material is pulled through the process by downstream operations.
Lean manufacturing concept:
- Originated with the toyota production system
- Has 2 key philiosophies: elimination of waste and respect for people
- Tries to reduce various forms of waste
11.1 Supply chain management
Supply chain management
➔ Strategic coordination of business functions within a business organization & throughout its
supply chain for the purpose of integrating supply and demand management

Supply
● From the beginning of the chain to the internam operations of the organization
Demand
● From the organization’s output delivery to its immediate customer to the final customer in
the chain

Supply chain strategy alignement

● Aligning supply and distribution strategies with organizational strategy
● Deciding on the degree to which outsourcing will be employed

Network configuration
● Determining the number and location of suppliers, warehouses, production/operations
facilities, distribution centers

Why so much interest in SCM?

As manufacturing becomes more efficient (or is outsources), companies look for ways to reduce
costs. Several significant success stories. Efficient SCM gives walmart & other important edge
Web-based models for supply chains
- Online retailers
- B2B business models

Key SCM issues

The goal of SCM is to mathc supply to demand as effectvely and efficiently as possible
Key issues:
● Determining appropriate levels of outsourcing
● Managing procurement
● Managing suppliers
● Managing customer relationships
● Being able to quickly identify problems and respond to them
● Managing risk

Supply chain risks

● Supply chain disruption
○ Natural disasters
○ Supplier problems
● Quality issues
○ Another form of disruption that may disrupt supplies and lead to product recalls,
liability, claims and negative publicity
● Loss of control of sensitive information
○ If suppliers divulge sensitive information to competitors, it can weaken a firm’s
competitive postition

Supply chain performance measures

Financial Inventory Suppliers Operations Order Customers
fulfillment

Return on Average value Quality Productivity Order accuracy Customer

assets satisfaction
 Cost Turnover On-time Quality Time to fill orders % customer
delivery complaints

Cash flow Weeks of Cooperation % orders

supply delivered on time

Profits flexibility

11.2 Flow management

Three types of flow management
Product and service flow
● Involves movement of goods and services from suppliers to customers as well as handling
customer service needs and product returns
Information flow
● Involves sharing forecasts and sales data, transmitting orders, tracking shipments and
updating order status
Financial flow
● Involves credit terms, payments and consignment and title ownership arrangements

11.3 Make-or-buy decision

Make-or-buy decision
➔ The act of choosing between manufacturing a product or purchasing it from a supplier.
● Factors to consider
○ Part of quantitative analysis
○ Associated costs of production
○ Capacity to produce at required levels

Make versus buy

● The use of outsourcing has quickly become a competitive weapon for an increasing
number of businesses
● It is no easy task for management to decide to make lease or buy component parts and
services
● The decision to outsource has led to a need for strategic partnerships

11.4 Outsourcing
Outsourcing
➔ Transfer or contracting internal activities to outside vendors
● Insourcing your own employees do the work (functions-in-house)
○ Example: employees help customers, lawyer files your legal papers

Benefits
● Lower prices may result from lower labor costs
● The ability of the organization to focues on its core strengths
● Permits the conversion of some fixed costs to variable costs
● It can free up capital to address other needs
● Some risks can be shifted to the supplier
● The ability to take advantage of a supplier’s expertise
● Makes it easier to expand outside of the home coutnry

Risks
● Inflexibility due to longer lead times
● Increased transportation costs
 ● Language and cultural differences
● Loss of jobs
● Loss of control
● Lower productivity
● Loss of business knowledge
● Knowledge transfer and intelectual property concerns
● Increased effort required to manage the supply chain

11.5 Risk management

Risk management
➔ Involves identifying risks, assessing their likelihood of occuring and their potential impact
and then developing strategies for addressing those risks
◆ Strategies for addressing risk include:
● Risk avoidance
● Risk reduction
● Risk sharing
● Key elements of succesful risk management include
○ Know your suppliers
○ Provide supply chain visibility
○ Develop event-response capability

11.6 Global supply chains

Global supply chains
● Product design often uses inputs from around the world
● Some manufacturing and service activities are outsourced to countries where labor and/or
materials costs are lower
● Products are sold globally
Complexities
● Language and cultural differences
● Currency fluctuations
● Political instability
● Increasing transportation costs and lead times
● Increased need for trust amongst supply chain partners

11.7 Managment responsibility

Tactical and operational
Tactical Operational

Forecasting Scheduling

Sourcing Receiving

Operations planning Transforming

Manging inventory Order fulfilling

Transportation planning Managing inventory

Collaborating Shipping

Information sharing

Controlling
11.8 Supplier management
Vendor analysis
● Evaluating the sources of supply in terms of price, quality, reputation and service
Supplier audit
● A means of keeping current on suppliers’ production (or service) capabilities, quality and
delivery problems and resolutions and performance on other criteria
Supplier certification
● Involves a detailed examination of a supplier’s policies and capabilities
● The process verifies the supplier meets or exceeds the requirements of a buyer

11.9 Supplier relationship management

Type of relationship if often governed by the duration of the trading relationship
● Short-term
○ Oftentimes involves competitiv bidding
○ Minimal interaction
● Medium-term
○ Often involves an ongoing relationship
● Long-term
○ Often involves greater cooperation that evolves into a partnership

11.10 Choosing suppliers

Quality and quality assurance
● Procedures for quality assurance and quality control
Flexibility
● For changes in delivery schedules, quantity, product or service changes
Location
● Nearby?
Price
● Competitiveness, willingness to negotiate, cooperate to reduce prices
Reputation and financial stability
● Supplier reputation, its financial stability
Lead times and on-time delivery
● Procedures to assure on-time delivery and problem correction
Other accounts
● Dependance on other customers and their priority

11.11 Inventory management

Inventory issues in SCM
Inventory location
● Centrlized inventories
○ Lower overall inventory, lower cost, lower stock-out risk
● Decentralized inventories
○ Faster delivery, lower shipping cost

Inventory velocity
● The speed at which goods move through supply chain
● The greater the velocity the lower the holding cost and the faster order are fulfilled and
goods are turned into cash

The bullwhip effect

● Inventory oscillations that become increasingly larger looking backward through the supply
chain
11.12 Creating an effective supply chain
It begins with strategic sourcing
● Analyzing the procurement process to lower costs by reducing waste and non-value-added
activities, increase profits, reduce risks & improve supplier performance

There must be
● Trust
● Effective communication
● Information velocity
● Supply chain visibility
● Event management capability
● Performance metrics

11.13 Trade-offs
Lot-size inventory trade-off
● Large lot sizes yield benefits in terms of quantity discounts and lower annual setup costs,
but it increases the amount of safety stock carried by suppliers

Inventory-transportation cost trade-off

● Suppliers prefer to ship full truckloads instead of partial loads to spread shipping costs over
as many units as possible. This leads to greater holding costs for customers
● Cross-docking
○ Technique wherby goods arriving at a warehouse from a supplier are unloaded
from, the suppliers truck and loaded onto outbound truck, thereby avoiding
warehouse storage

Lead time-transportation costs trade-off

● Suppliers like to ship in full loads, but waiting for sufficient orders and/or production to
achieve a full load may increase lead time

Production variety-inventory trade-off

● Greater product variety usually means smaller lot sizes and higer setup costs, as well as
higher transportation and inventory management costs
● Delayed differentiation
○ Production of standard components and subassemblies, which are held until late in
the process to add differntiating features

Cost-customer service trade-off

● Producing and shipping in large lots reduces costs, but increases lead time
● Disintermedation
○ Reducing one or more steps in a supply chain by cutting out one or more
intermediaries

11.14 Bullwhip effect

Problems
High demand fluctuations
● Variation in demand along the supply chain requires:
○ Shipment capacity
○ Production capacity to cope with peaks
○ Inventory capacity
● Most of the time this capacity will idle
● There’s significant cost and investments attached
High costs
Low service level (backorders)
In the end: hihg overall cost in the supply chain

Causes
Information (lack of)
● Game simulates SC with low levels of trust, where little information is shared among the
parties
● Only order amounts are perpetuated up the supply chain; information about customer
demand is lost upstream
● Without actual customer demand data, all forecasts rely solely on the incoming order at
each stage of the SC

SC structure
● The longer the lead time, the stronger the bullwhip effect

Local optimization
● Local individual cost optimization and a lack of cooperation
● Ordering involves fix cost. There is an inventive for individual players to hold back and only
place aggregate/batch orders. This aggravates the problem of demand forecasting as little
information about actual demand is conveyed

Mitigating the bullwhip effect

Good supply chain management can overcome the bullwhip effect
Information sharing
● Replenishment based on need
○ Vendor-managed inventory
○ Vendors monitor goods and replenish retail inventories when suppliers are low
● Lower ordering costs
Short lead times
Cooperation

Competition is now supply chain against supply chain and network against network

11.15 Order fulfillment

Order fulfillment
● Refers to the processes involved in responding to customer orders

Engineer-to-Order (ETO)
● Products are designed and built according to customer specifications. This approach is
frequently used for large-scale construction projects, custom homebuilding, home
remodeling, and for products made in job shops.
Make-to-Order (MTO)
● A standard product design is used, but production of the final product is linked to the final
customer's specifications. This approach is used by aircraft manufacturers such as Boeing.
Fulfillment time is generally less than with ETO fulfillment, but still fairly long.
Assemble-to-Order (ATO)
● Products are assembled to customer specifications from a stock of standard and modular
components. Computer manufacturers such as Dell operate using this approach. Fulfillment
times are fairly short, often a week or less.
Make-to-Stock (MTS)
● Production is based on a forecast, and products are sold to the customer from finished
goods stock. This approach is used in department stores and supermarkets. The order
fulfillment time is immediate.
11.16 Small businesses
Small businesses do not always give adequate attention to their supply chains.
Three asepects of supply chain management that are often of concern to small businesses are:
1. Inventory management
2. Reducing risks
3. International trade

11.17 Managing returns

Products are returned to companies or third-party handlers for a variety of reasons & conditions:
● Defective products
● Recalled products
● Obsolete products
● Unsold products returned from retailers
● Parts replaced in the field
● Items for recycling
● Waste

Reverse logistics
➔ The process of physically transporting returned items.
◆ involves either retrieving items from the field or moving items from the point of
return to a facility where they’ll be inspected & sorted & then transporting to their
final destination.

Two key elements of managing returns

Gatekeeping
● oversees the acceptance of returned goods with the intent of reducing the cost of returns
by screening returns at the point of entry into the system and refusing to accept goods that
should not be returned or goods that are returned to the wrong destination.

Avoidance
➔ refers to finding ways to minimize the number of items that are returned.

11.18 Trends in SCM

Trends affecting supply chain design & management:
Measuring supply chain performance
● Incorporating economic metrics into decisions (e.g., inventory velocity, inventory turnover)

“Greening” the supply chain

● Redesigning products and services to reduce pollution from transportation, choosing
“green” suppliers, managing returns, end-of-life programs (e.g., appliances)

Re-evaluating outsourcing
● Reconsidering outsourcing due to long lead time, increased transportation costs, language,
culture, job loss, control loss, lower productivity, loss of ability to perform work internally,
loss of business knowledge, management efforts.

Integrating IT
● Real time data to enhance strategic planning, control costs, measure quality and
productivity, respond quickly to problems, improve SC operations

Managing risks
● Identifying risks, assessing likelihood of occurrence, potential impacts, prioritizing,
developing management strategies (avoidance, reduction, transference).
Adopting lean principles
● Eliminating non value-added processes, using “pull” systems to improve product flow, using
fewer suppliers, continuous improvement.

11.19 Key points

Supply chains are a vital part of every business organization and need to be managed effectively to
achieve a balance of supply and demand.

There are a number of trade-offs to be made by supply chain managers.

Effective supply chains involve trust, communication, a rapid, two-way flow of information,
visibility, and event-response capability.

Among important trends in supply chain management are measuring ROI, “greening” the supply
chain, reevaluating outsourcing, integrating IT, managing risks, and adopting lean principles.