Lecture Principle of inventory and material management - Lecture 16

Lecture 16 - Purchasing and Supply Chain (continued). The contents of this chapter include all of the following: Supply chain strategies, suppliers, vertical integration, managing supply chain, issues in integrated supply chain, opportunities in integrated supply chain, keiretsu networks, E-Procurement, distribution, managing supply chain performance.

Purchasing and Supply Chain (continued)

Books

• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming  College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M.  Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005,  N.Y.: McGraw­Hill/Irwin.

• Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of  Business, Rollins College, Prentice Hall

Supply Chain Strategies

products

expertise, forecasting, cost, quality, and delivery

with fewer suppliers

scale and learning curve

improvements

JIT programs and contribute design and technological expertise

transformation Automobiles Integrated circuits Flour milling

Forward integration Distribution systems Circuit boards

Finished goods

Calculators Baked goods

Vertical Integration Examples of Vertical Integration

þ Developing the ability to produce goods or

service previously purchased

þ Integration may be forward, towards the

customer, or backward, towards suppliers

þ Can improve cost, quality, and inventory but

requires capital, managerial skills, and demand

þ Risky in industries with rapid technological

change

þ Often provide financial support for suppliers

through ownership or loans

þ Members expect long-term relationships and

provide technical expertise and stable

deliveries

þ May extend through several levels of the

supply chain

þ Rely on a variety of supplier relationships to

provide services on demand

þ Fluid organizational boundaries that allow the

creation of unique enterprises to meet

changing market demands

þ Exceptionally lean performance, low capital

investment, flexibility, and speed

þ Local optimization - focusing on local profit or

cost minimization based on limited

knowledge

þ Incentives (sales incentives, quantity

discounts, quotas, and promotions) - push merchandise prior to sale

þ Large lots - low unit cost but do not reflect

sales

orders through the supply chain

replenishment

Radio Frequency TagsRadio Frequency Tags: Keeping the Shelves Stocked

Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves Here’s how the system works for Proctor & Gamble’s Pampers.

þ Electronic data interchange (EDI)

þ Advanced shipping notice

þ Health care products – ghx.com

þ Retail goods – gnx.com

þ Defense and aerospace products –

þ RFQs

þ Can make requests for quotes

(RFQs) less costly

þ Improves supplier selection

þ Critical decision

þ Find potential vendors

þ Determine the likelihood of them

becoming good suppliers

þ Training

þ Engineering and production help

þ Establish policies and procedures

þ Cost-Based Price Model - supplier opens

books to purchaser

þ Market-Based Price Model - price based

on published, auction, or indexed price

þ Competitive Bidding - used for infrequent

purchases but may make establishing long-term relationships difficult

Financial and managerial strength

Information systems capability

Integrity (environmental compliance/

operations through the integration

of all material acquisition,

movement, and storage activities

gained through reduced costs and improved customer service

þ Capable of carrying large loads

þ Little flexibility though containers

and piggybacking have helped with this

þ Airfreight

þ Fast and flexible for light loads

þ May be expensive

þ Used for transporting oil, gas, and

other chemical products

inventory and has a carrying cost

expensive than slower shipping

better understand the trade-off

Value of connectors = $1,750.00

Holding cost = 40% per year

Second carrier is 1 day faster and $20 more

expensive

Daily cost of holding

Annual holding cost Product

value

= (.40 x $1,750)/ 365 = $1.92 Since it costs less to hold the product one day longer than it does for the faster 

shipping ($1.92 < $20), we should use the cheaper, slower shipper

þ Borders are becoming more open in the U.S

and around the world

þ Monitoring and controlling stock moving

through supply chains is more important than ever

þ New technologies are

Typical Firms Benchmark Firms

Investment in inventory = $11.4 billion Total assets = $44.4 billion

Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

Inventory turnover =

Cost of goods sold Inventory investment

Examples of Annual Inventory Turnover

Food, Beverage, RetailManufacturing

Inventory turnover =

Cost of goods sold Inventory investment

= 14.2 / 1.69 = 8.4

Inventory turnover =

Cost of goods sold Inventory investment

= 14.2 / 1.69 = 8.4 Weeks of supply = Average weekly cost of goods soldInventory investment

= 1.69 / .273 = 6.19 weeks Average weekly cost of

goods sold = $14.2 / 52 = $.273

End of Lecture 16