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SUPPLY CHAIN MANAGEMENT SECTION 2 Supplier Relationships 1 - UNDERSTANDING AND DESIGNING THE SUPPLY CHAIN ALAN L. WHITEBREAD

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Title: SUPPLY CHAIN MANAGEMENT SECTION 2 Supplier Relationships 1 - UNDERSTANDING AND DESIGNING THE SUPPLY CHAIN ALAN L. WHITEBREAD


1
SUPPLY CHAIN MANAGEMENTSECTION 2Supplier
Relationships1 - UNDERSTANDING AND DESIGNING
THE SUPPLY CHAINALAN L. WHITEBREAD
2
FORCES SHAPING SCM TODAY
  • Competitive pressures
  • Rising customer expectations
  • Stakeholder financial performance pressure
  • Globalization
  • Capacity / inventory and its locations
  • Mergers and acquisitions
  • Rapid technology change
  • Need for ever-increasing speed to market

3
SCM SETTING TODAY
  • Rapid change in product life cycle stages /
    international product life cycles
  • Forecasting difficulties individually
    understanding the elements of total demand
  • Critical lead times / commitments
  • Increasing storage costs
  • Highly variable transportation costs

4
FROM JIT TO SCM
COLLABORATIVE synchronize all aspects
Collaborative Supply Chains
Supply ChainOptimization
Increasing benefits, capabilities, and flexibility
OPTIMIZED improve collaboration and control
with suppliers and customers
Supplier StrategicAlliances
Supplier ManagedReplenishment
SupplierPartnerships
INTEGRATED integrate functions of the existing
supply chain
Quick Response
FUNDAMENTAL the beginning
Just In Time
1980
2008
1990
2000
5
JUST-IN-TIME JIT CONCEPT
  • Producing exactly what is needed, transferring it
    to where it is needed, in the required sequence,
    exactly when it is required.
  • Characteristics
  • Focuses on having little or no inventory
    throughout the supply chain
  • Most items are make-to-order with short lead
    times and specific delivery times windows
  • Reduces variability from all sources
  • The supply chain is synchronized
  • There are numerous tightly scheduled events
  • Risks
  • Failure to deliver on time has serious
    consequences.
  • Large changes in demand or unexpected events can
    become difficult to handle.
  • A basic premise is that excess capacity or
    inventory are forms of waste that must be
    minimized.

6
SUPPLY CHAIN MANAGEMENT SCM
  • A network of facilities and distribution options
    that perform the functions of
  • Procurement purchasing, expediting,
  • Transformation of materials through intermediate
    stages WIP and assemblies into finished
    components and products
  • Storage and management of inventories asset
    management
  • Distribution of finished products to customers at
    all levels DCs, logistics
  • Support systems administration, IT

7
SCM GENERAL FUNCTIONS
MANAGING FLOWS Information, Materials, and Money
Information, materials, and money flow freely
back-and-forth between the supply chain entities.
This ever-present need for information,
materials, and money is what drives the need for
cooperation in supply chains. The best supply
chains typically have the best flows.
8
SCM GENERAL FUNCTIONS
  • Managing relationships
  • Suppliers
  • Employees
  • Customers Resellers
  • Customers End-users
  • Managing functions and processes
  • Benchmarking and best practices
  • Translates user needs into production systems
    that make quality products.
  • A management philosophy for the continuous
    improvement of processes and products.

9
SCM GENERAL FUNCTIONS Managing The Value Chain
Organization of discrete yet interrelated
activities that deliver more value at each and
every step of the supply chain and enable
excellent entity performance.
10
SCM SPECIFIC FUNCTIONS
Transportation Purchasing Packaging Standards Ware
housing Return Goods Handling Salvage and scrap
disposal
Facility Location Customer Service Order
Processing Demand forecasting Production
Scheduling Facility Management Material
Handling Inventory Control
11
A TOYS TRIPS TO MARKET
Plastic eyes transistors China
Speakers for voice wiring China
Plastic body Malaysia
Motor for legs China
Manufacturer
Outbound Port
Inbound Port
Warehouses and Distribution Centers
Plastic legs IC chips Taiwan
Microfiber fabric coat Korea
Voice recognition USA
Thousands of Retail Stores
Voice recognition programming Taiwan
There are many steps / paths from the beginning
of a supply chain to having a satisfied customer.
Every red arrow indicates one or more
transportation vehicles.
Packaging China
SATISFIED CUSTOMER
12
THE SUPPLY CHAIN AT WORKAUTOMOTIVE INDUSTRY
To build more than hundreds of thousands of cars
per year, an auto manufacturer is likely to
utilize approximately 200 1ST TIER suppliers with
hundreds of factories. The number of suppliers
grows exponentially as add the 2ND and 3RD TIER
suppliers.
UPSTREAM
DOWNSTREAM
CONSUMERS
UPSTREAM SUPPLIER 2ND TIER FASTENERS
DIRECT SUPPLIER 1ST TIER Manage all other
tiers. RADIATORS
AUTO MANU-FACTURER OEM VEHICLES
DEALERS
STEEL COMPANY 3RD TIER STEEL
RENTAL AGENCIES
BUSINESS CONSUMERS
FLEETS
SPECIAL VEHICLES
13
DESIGNING THE SUPPLY CHAIN
  • Seamless supply chains have
  • excellent coordination among members
  • compatible information systems
  • outstanding communication
  • little waste and few environmental issues
  • minimal inventories
  • exceeded customer and supplier expectations and,
  • meet or exceed profit expectations.

14
TYPES OF SUPPLY CHAINS7 DECISIONS The two
extremes
15
TYPES OF SUPPLY CHAINS 7 DECISIONS The two
extremes
16
SCOR MODELFor complete details go to
www.supply-chain.org
  • The SCOR Supply-Chain Operations
    Reference-model by the Supply-Chain Council
    provides a supply chain process framework of
  • plan source make deliver return
  • These elements are the key to SCOR success.

17
SCOR SPANS
  • All customer interactions
  • From order entry through final payment
  • All product and service transactions
  • From your suppliers supplier to your customers
    customer
  • All market interactions
  • From understanding all of the elements

18
SCOR THE CONFIGURATION OF A SUPPLY CHAIN
  • PLAN levels of aggregation and information
  • SOURCE locations and products
  • MAKE production sites and methods
  • DELIVER channels, inventory deployment and
    products
  • RETURN locations and methods

19
SCOR MEASURE PERFORMANCE INTERNAL EXTERNAL
  • RELIABILITY achievement of customer demand
    fulfillment complete and on-time
  • RESPONSIVENESS the time it takes to react to
    and fulfill customer demand
  • AGILITY - the ability of supply chain to
    increase/decrease demand
  • COST objective assessment of all supply chain
    cost elements
  • ASSETS the assessment of all resources

20
SCOR REALIGN SUPPLY CHAIN PROCESSES BEST
PRACTICES
  • Classic process re-engineering from "As-Is" to
    "To-Be"
  • Lean Manufacturing analysis and process change
  • Six-Sigma analysis of defective processes
  • ISO-9000 style process capture and control
  • Balanced SCORcards and benchmarking
  • Many more industrial engineering based
    best-practice techniques

21
SUPPLY CHAIN MANAGEMENT Functional components
Master production schedule
Customer order management
Materials planning
Factory planning
Years ? Quarters ? Quarters ?
Months ? Weeks ? Weeks ? Days ? Minutes
22
NETWORK DESIGN
  • You need to thoroughly understand all the complex
    systems, how they are related, and integrated to
    make an intelligent network design decision.
  • That requires an understanding of these four
    phases of SCM.
  • Supply chain strategy
  • Facility configuration
  • Desirable sites
  • Location decisions

23
NETWORK DESIGN
  • Supply chain strategy is based on
  • competitive strategy,
  • domestic and international competition, and
  • Facility configuration is a function of
  • production technologies, methods, and scope,
  • aggregating and minimizing logistics costs,
  • regional demand, and
  • international affects.

24
NETWORK DESIGN
  • Desirable sites have good
  • production methods,
  • an adequate and available labor force.
  • Location decisions are determined by
  • factor costs
  • Labor, materials, site operations

25
SUPPLY CHAIN CYCLES
26
MANUFACTURING PROCESSESBATCH
  • The equipment can make a variety of products in a
    class based on its capability.
  • An optimal batch size is determined.
  • Products are run in a sequence to optimize the
    process as much as possible.
  • Capacity can generally be added in a reasonable
    time frame.

27
MANUFACTURING PROCESSESFLOW
  • The equipment runs at a fast steady rate.
  • The lead time is short with continuous
    production.

28
MANUFACTURING PROCESSESLEAN PRODUCTION
  • The Production System Design Laboratory PSD at
    MIT http//lean2.mit.edu/
  • Lean production is aimed at the elimination of
    waste in every area of production including
    customer relations, product design, supplier
    networks and factory management. Its goal is to
    incorporate less human effort, less inventory,
    less time to develop products, and less space to
    become highly responsive to customer demand while
    producing top quality products in the most
    efficient and economical manner possible.
  • Toyota was a pioneer and realized enormous cost
    savings.

29
MANUFACTURING PROCESSESLEAN PRODUCTION THE 5
Ss
30
MANUFACTURING PROCESSESLEAN PRODUCTION
PRINCIPLES
  • Managerial Responsibility
  • Managers must be teachers, team facilitators, and
    motivators.
  • Process Development
  • Line workers are trained to
  • Improve processes, and
  • Solve problems
  • Network Orientation
  • Lean should be practiced by

31
MANUFACTURING PROCESSESLEAN PRODUCTION
PRINCIPLES
  • Synchronization
  • Coordination of material movement is accomplished
  • developed by Toyota Corporation to
    signal when parts needed to be withdrawn from
    inventory or a feeding operation like a supply
    bin and leave a visible record of its
    withdrawal.
  • Continuous Improvement
  • continuous improvement comes through
    productivity gains and innovation

32
SUPPLY CHAIN RISKS
  • Disruptions of any kind
  • Disasters, labor disputes, supplier problems,
  • Delays in the systems
  • Inflexibility of supply sources, poor yield,
    capacity or bottlenecks,
  • Systems issues
  • Lack of systems integration, system breakdowns,
  • Forecasting problems
  • Excessive inaccuracy due to seasonality, SKU
    variety, short life cycles, small customer base,

33
SUPPLY CHAIN MANAGEMENTPROBLEMS SOLUTIONS
34
SUPPLY CHAIN MANAGEMENTSECTION 2Supplier
Management and Supplier Relationships2
OUTSOURCING AND SUPPLIER SELECTIONALAN L.
WHITEBREAD
35
OUTSOURCING
  • Outsourcing is the process of moving an aspect of
    production, service, or other business function
    from within an organization to an outside
    supplier.
  • By outsourcing non-strategic processes an
    organization can focus its attention on its
    primary businesses and maximize customer
    satisfaction.

36
TYPES OF OUTSOURCING
  • a third-party makes an assembly, component, or
    finished product for another company.
  • a supplier that provides some or all logistics
    activities.
  • Offshoring
  • outsourcing a function to a different country.
  • Business Process Outsourcing BPO
  • outsourcing support functions such as
    housekeeping, payroll, uniforms, This is
    frequently included in with 3PLs.

37
BENEFITS OF OUTSOURCING
  • Frequently cited benefits include
  • Reduce operating expenses
  • Focus on the core business
  • Create a variable cost structure
  • Improve skills due to business focus
  • Concentrate on increasing revenue
  • Conserve or more effectively utilize capital
  • Increase innovation
  • Improve quality

38
OUTSOURCING RISKS
  • Outsourcing the wrong core or strategic
    functions may interfere with the operation of an
    entity and may cause a long-term loss of
    competitive position.
  • Outsourcing risks
  • Strategic risk is long-term risk based on a
  • Tactical risk is short-term risk based on the use
    of a supplier for capacity.
  • BE CAREFUL!

39
OUTSOURCING RISKS
40
OUTSOURCING POSSIBILITIES
41
MITIGATING OUTSOURCING RISKS
42
OUTSOURCING BY TYPECONTRACT MANUFACTURING
  • Contract manufacturing uses one or more selected
    suppliers to provide a product and/or service for
    the customers specific needs.
  • It involves
  • a contract,
  • extensive coordination,
  • specifications product, packaging, and quality,
    and
  • possibly new product development activities.

43
OUTSOURCING BY TYPE3PL EXAMPLES
44
OUTSOURCING BY TYPE 3PL
  • PRIMARY REASONS FOR SELECTING A 3PL
  • REDUCE COST
  • Reduce operating costs
  • Reduce capital investment
  • INCREASE COMPETENCY FOCUS
  • Focus on core business
  • Gain access to technology not in firm
  • INCREASE REVENUE
  • Increase flexibility and responsiveness
  • Increase speed to market

45
OUTSOURCING BY TYPE 3PL
  • HOW SHOULD I SELECT A 3PL? Some general items to
    evaluate
  • Price competitiveness
  • Evaluate on a total system cost basis not a
    piece price basis
  • Financial stability
  • Experience in the same industry or with similar
    companies or products
  • ?

46
OUTSOURCING BY TYPE 3PL
  • HOW SHOULD I SELECT A 3PL?
  • Quality
  • Service quality and performance Six Sigma, ISO
    9000, Malcom Baldridge NIST,
  • Six Sigma defects per million
  • Six Sigma Defects
  • 2 308,537 ?
  • 3 66,807 25-40
  • 4 6,210 15-25
  • 5 233 5-15
  • 6 3.4 lt1

47
OUTSOURCING BY TYPE 3PL
  • HOW SHOULD I SELECT A 3PL?
  • Quality continued
  • Quality of the suppliers management team
  • Client Relationship
  • Availability of top management
  • Service cancellations, delays, and / or
    interruptions
  • General reputation
  • Human resource policies and availability of
    qualified talent

48
SCM ISSUES
  • SUPPLIER SELECTION
  • Capability and quality of supplier
  • Logistic compatibility
  • Systems compatibility
  • What form should it be?
  • Contract, partnership, or strategic alliance?
  • Setting requirements
  • Continuous improvement
  • Extensive corporate access
  • What are the key metrics that will be used to
    evaluate supplier performance?

49
SCM ISSUES
  • SUPPLIER CERTIFICATION
  • involves the process of selecting and qualifying
    suppliers through a series of tests.
  • It may require
  • initial interviews and tours,
  • initial samples,
  • a detailed facility review
  • production, systems, processes, quality, ,
  • and more.

50
SCM ISSUES
  • SUPPLIER LOGISTICS
  • How orders are placed and confirmed
  • Returns and rework

51
SCM ISSUES
  • SUPPLIER LOGISTICS SYSTEMS
  • EVENT The focal firm places 100 office items
    with Supplier A and 200 production supply items
    with Supplier B. Both suppliers are on two-year
    contracts. Requisitions are electronically sent
    to the supplier requiring at least once-a-week
    delivery, and suppliers are paid every ten days.
  • MINIMUM SUPPLIER REQUIREMENTS 1 local 2 own
    their warehouse, 3 own their transportation,
    and 4 have compatible IT for order placement
    and accounting purposes.
  • EXPECTED RESULTS reductions of 1 inventory,
    2 turnaround time, and 3 stockouts .

52
SCM ISSUES
  • SUPPLIER LOGISTICS SYSTEMS
  • EVENT A major company requires suppliers that
    can produce branded products to their
    specifications and provide verification of the
    quality of the product.
  • MINIMUM SUPPLIER REQUIREMENTS 1 world-class
    facilities 2 Six Sigma or similar quality
    system, and 3 significant flex capacity.
  • RESULTS supplier 1 ships directly to customer
    warehouses and distribution centers, 2
    eliminates customer quality verification delays
    and expense, and 3 provides a more predictable
    flow of product to inventory.

53
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Design
  • Standardization
  • Customization
  • Modularization interchangeability minimize the
    number of parts / components
  • Performance testing standards, specifications,
    and reporting results
  • Change management strategies
  • Flexibility

54
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Supplier-managed inventories
  • Excellent for changing customer demand when
  • Customers have trouble forecasting
  • Remember,
  • Dt ?Dn

55
Dt
Level loaded facility lowest long-term cost of
production
D1
D2
D3
To understand implications to the total system,
you must understand each demand schedule D1, D2,
and D3 as well as the total demand schedule Dt
- the produced line in this example.
56
SUPPLIER-MANAGED INVENTORY
  • This has many features including it
  • shortens the supply chain
  • improves and shortens communications
  • allows centralized forecasting and,

57
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Changing customer demand
  • A complex product offering
  • Economies of scale
  • Automation, purchase volume, production run size,
  • Requirements for new versus existing products

58
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Component / assembly management
  • Just-in-time JIT
  • Frequent, small and consistent deliveries
  • Co-location possible

59
DIRECT SHIPMENTS
SUPPLIER D
SUPPLIER A
FULL
EMPTY
PLANT
SUPPLIER B
SUPPLIER E
SUPPLIER C
SUPPLIER F
A direct shipment sends items from a supplier to
a customer facility. When dealing with
truckloads, the carrier needs to find a return
load or go deadhead and not get paid on the
return trip. Direct shipments can increase the
total cost of operation due to freight costs.
However, a firm may not have any alternative to
the direct shipment model.
60
MILK RUN SHIPMENTS
If suppliers are close together and the order
timing is acceptable, a firm may be able to use a
milk run model. A truck picks up from multiple
suppliers before returning to the plant. The
savings in freight costs should offset the
increased scheduling expense.
61
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Flexible Business Relationships
  • Purchase orders POs
  • Primary / secondary / tertiary sourcing
  • Purchasing agreements to contracts
  • Alliances

62
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Systems coordination and development
  • Integration
  • Coordination of efforts
  • Evaluation and feedback
  • System variation over time
  • Quality system compliance and reporting

63
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Infrastructure compatibility
  • IT systems
  • Logistics
  • Engineering
  • Operations
  • Multiple production aspects quality systems /
    standards
  • Packaging at all stages
  • Customer requirements and specifications

64
CLOSED / OPEN LOOP PACKAGING SYSTEMS
Packaging materials


PACKAGING SUPPLIER - Plastic containers
PACKAGING SUPPLIER - Corrugated
65
SCM ISSUES
  • SUPPLIER INVOLVEMENT
  • Target costing approach
  • Components
  • Products
  • Administrative efficiencies

66
TOTAL SYSTEM COST EXAMPLE
  • We need 12,000 units of item A each year. A new
    purchasing employee can buy it for 9.00 from a
    new unapproved supplier versus 9.75 from the
    current approved supplier. This could result in
    a savings of 9,000 per year. But it costs
    25,000 to qualify a new supplier a payback of
    2.8 years. Therefore, it is not worth qualifying
    a new supplier for this small savings.
  • However, if the supplier would price it at 8.95,
    it would just barely meet the minimum corporate
    payback rate of 2.5 years and be worth
    consideration.

67
SUPPLIER RELATIONSHIPS ARMS-LENGTH
  • Ideal for routine transactional purchases of
    goods or services that are not critical.
  • There is no long-term commitment or special
    value-added by this supplier.
  • It is a supply market with many undifferentiated,
    very competitive firms that primarily compete on
    price.

68
SUPPLIER RELATIONSHIPSNICHE
  • Providers are usually specialized, providing a
    very specific product, service, or technology.
  • Specialized process or product
  • They are more difficult to replace than
    arms-length suppliers due to their specialized
    capability.

69
SUPPLIER RELATIONSHIPSHYBRID
  • Provide an intermediate level of service and
    items that are integrated into the organizations
    operations.
  • Functional boundaries between the supplier and
    the firm often blur. There is a steady flow of
    communications at and between many functional
    levels of the two firms.
  • The integration of functions and obligations
    increase switching costs

70
SUPPLIER RELATIONSHIPEFULL-SERVICE
  • Provide strategic items and processes that are
    highly integrated with the focal firm with a very
    high level of responsibility and accountability.
  • Communication between the firms is extensive at
    all levels.
  • Typically, these are major suppliers, often
    world-class caliber, with very long-term
    relationships and / or strategic alliances.
    Very difficult and costly to replace.

71
SUPPLY CHAIN MANAGEMENTSECTION 2Understanding
the Market 3 RELATIONSHIPS, NEGOTIATION, AND
CONFLICT RESOLUTION ALAN L. WHITEBREAD
72
Supply Chain Relationships
  • Current and future success of an entity depends
    on its ability to identify outstanding supply
    chain partners and develop appropriate
    relationships.
  • Managers must learn how to define and manage many
    types of relationships throughout the supply
    chain in a ever-changing environment.

73
The Relationship Continuum
  • Not all relationships are created equal. They
    are within the continuum below.

SIMPLE AND DISTANT
COMPLEX AND CLOSE
Transactional Transitory Cost-driven Not close
Long-term Mutual benefits Shared risks
resources Open communication Organization-wide
74
RELATIONSHIPS
  • Supplier relationships
  • Customer direct relationships
  • Channel reseller relationships
  • What are some of the issues with these?

75
RELATIONSHIP MARKETING
  • is the development and maintenance of long-term
    mutually beneficial relationships with
  • customers,
  • suppliers,
  • employees, and
  • stakeholders.

76
RELATIONSHIP MARKETING
  • Three major items are your keys to success.
  • Identifying current and potential customers,
    their characteristics, and needs.
  • RESPONSIBLE AREAS product management and market
    research
  • Customizing messages and/or products and services
    for customers.
  • RESPONSIBLE AREAS product management, market
    research, Integrated Marketing Communications
    IMC advertising, promotion, and PR
  • Building the relationship over a long period of
    time.
  • RESPONSIBLE AREAS sales and sales management

77
DEVELOPING POSITIVE CHANNEL RELATIONSHIPS REQUIRES
  • Excellent 2-way communication
  • Commitment at many levels
  • Consistent behavior patterns
  • A long-term orientation
  • Results meeting or exceeding reasonable goals

78
CUSTOMER-CHANNEL MEMBER INTERACTION AND THE
EXCHANGE
Look at each type of exchange as a customer type.
Then write down the 1 traits of the sales
people you would hire to sell to that type of
account, 2 requirements for training the
manufacturers sales organization, and 3 sales
compensation?
79
Transactional Relationship
  • Minimize cost
  • Manage for efficiency
  • These relationships are not strategic and often
    transitory! They receive minimal

80
Strategic Alliances
  • The focus is coordinating complementary core
    competencies or organizational strengths.
  • Relationships are mutually evaluated and managed.
  • There is intensive open communication
  • Cross-organizational teams drive cooperative
    planning.
  • These are long-term relationships.

81
Strategic AllianceSuccess Factors one or more
  • The relationship has current or potential mutual
    benefits.
  • The supply chain member represents a significant
    amount of revenue or potential revenue.
  • The potential partner possesses skills,
    technology, or some other unique aspect.
  • A strategic component, service, or upstream /
    downstream relationship is affected.
  • Better quality, lower costs, shorter cycles,
    unique service, ...

82
Strategic AllianceExpected Benefits one or
more
  • The focus on individual strengths leverages them
    into core competencies or key success factors.
  • The SC is a value system. You can optimize
    resource usage across the supply chain!
  • Permits unique product/service packages and
    one-of-a-kind satisfaction opportunities.
  • Allows SC partners to learn from each other.

83
Strategic AllianceSupplier Outcomes one or
more
  • Increase production stability
  • Allows
  • Investment in new technologies
  • May result in
  • Access to buyers expertise
  • Access to buyer financing for materials or
    equipment

84
Supply Chain Relationship Practices
  • Personal contacts
  • generate goodwill and reduce miscommunication.
  • Clear specifications
  • for product, process, and contract fulfillment
    are clearly stated to reduce confusion and
    ambiguity.
  • Timely payment
  • that is as quick and easily as possible.

85
Supply Chain Relationship Practices
  • Equitable treatment
  • Policies are applied equally to all supply chain
    SC members.
  • Playing favorites creates suspicion, mistrust,
    and damages relations beyond those involved.
  • Support and Training
  • Appropriate levels are provided to customers and
    suppliers. People must have the tools to
    succeed!
  • Open communication
  • Timely information is shared via electronic
    linkages face-to-face communication is critical.

86
Supply Chain Relationship Practices
  • Feedback
  • Periodic SC surveys coupled with face-to-face
    feedback build trust and improve the process.
  • Confidentiality
  • Customer and/or Supplier information must remain
    strictly confidential.
  • Integrity
  • SC managers should always desire to fulfill all
    contract obligations without hassle or argument.

87
THE ROLE OF TRUST
  • Trust
  • promotes collaboration, risk taking, information
    sharing, and shared resources and

88
Principles of Trust in SCM
  • Trust is difficult to earn and takes time to
    establish.
  • Consistent patterns of behavior build trust.
  • Trust Requires Open Information Sharing
  • Open communication promotes strong and dynamic
    relationships.
  • Suppliers dont trust institutions, they trust
    people!
  • There is no trust without consistent and
    outstanding performance.

89
Trust Overcoming Different Views
90
Modern Negotiation
  • Negotiation is the formal communication process
    where two or more parties discuss important
    issues and come to a mutually satisfactory
    agreement.
  • Successful negotiations require careful
    management of information, personal
    relationships, time, and the appropriate use of
    power.

91
POWER and DIFFERENTIAL ADVANTAGE
  • POWER
  • the ability to get another to do something is
    obtained through differential advantage.
  • sometimes sustainable competitive advantage may
    be
  • Physical / experiential
  • Total cost including price and terms of sale
  • Post-purchase satisfaction

92
Commonly Negotiated Areas
  • Price
  • Quality
  • Service level
  • Confidentiality, especially key items like cost
    structure and proprietary technologies
  • Continuous improvement
  • quality, cost, and other relevant areas
  • Contract duration and volumes
  • Delivery schedules

93
Negotiation Philosophies
  • Win-Lose Philosophy Predatory strategy
  • Pits customer and supplier against each other
  • Conflict resolution is a hardball process.
  • Neither channel member is concerned with the
    other's needs. Each tries to win its maximum
    value.
  • Win-Win Philosophy Symbiotic strategy
  • Working together both parties can improve their
    long-term competitive position and profitability

94
Steps in Preparing for a Successful Negotiation
  • Understand the other team members
  • Strategy roles
  • Psychological
  • Type of room / equipment

95
Common Negotiation Tactics
  • Arguments that cannot be factually supported
    damage credibility.
  • Experienced negotiators know that the proper
    answer to a question is truthful, advances the
    negotiators tactical plan, and helps discern the
    suppliers objectives.
  • Be Wary of Deadlines.
  • An effective negotiator does not let deadlines
    force bad decisions. The use of arbitrary or
    meaningless deadlines diminishes credibility.

96
Common Negotiation Tactics
  • Best and Final Offer.
  • The take-it-or-leave-it approach signals the need
    for a decision on a specific point. If the
    negotiator is not prepared to end the negotiation
    and the bluff is called, credibility is lost.
  • It is better to say no than to agree to an
    unsatisfactory position. Being candid has merit.
  • Foot in the Door.
  • Whenever an exceptional quote is received a
    negotiator should examine both motivation and
    capabilities to determine whether the offer
    represents a real long-term benefit.
  • High Ball.
  • Win-lose negotiators sometimes begin a
    negotiation at an extreme position, expecting to
    make concessions.

97
Common Negotiation Tactics
  • Honesty and Openness.
  • Win-win negotiations emphasize the honest and
    open sharing of information.
  • Keep the Initiative.
  • Some negotiators believe that the best defense
    is a good offense. They establish initiative
    early and maintain it by probing the other sides
    position, asking for justifications and requiring
    supporting documentation.
  • Great listeners focus on not only the words but
    also the tone of voice and the pauses. Careful
    observation provides insight into the other
    sides position and real objectives.

98
Common Negotiation Tactics
  • Win-lose negotiators often believe that the other
    side should make more and larger concessions. For
    every concession made, equal or greater
    concessions are expected from the other side.
  • Deliberately attempting to mislead the other side
    into believing that a better quote (or offer) is
    waiting from another supplier (or buyer) is
    unethical, probably illegal, and risky.
  • Prioritize Issues.
  • Two basic philosophies / approaches exist.
  • Discuss the most difficult issues first.
  • Discuss the easy issues first to establish the
    trust that will help resolve more difficult
    issues.

99
Common Negotiation Tactics
  • Experienced negotiators divert attention away
    from the problematic issues using a joke, an
    anecdote, or a well-timed break.
  • Use Positive Statements.
  • Sometime it is important to respond with a
    simple, I see your point or Your point is well
    taken to temporarily defer the issue.
  • Use Questions Effectively.
  • The right question can undermine an unacceptable
    position or deflect criticism.
  • Silence can be effectively used to avoid
    difficult questions, make the other side nervous,
    seek concessions without specifically asking for
    them, and redirect the discussion tactfully.

100
METHODS OF RESOLVING CONFLICT
  • Problem-Solving
  • Persuasion
  • Bargaining
  • Politics

101
LEGAL REMEDIES TO CONFLICTS
  • Strict reliance on the contract law causes
    problems.
  • Legal options should be used only as a last
    resort! They can be a major problem with
  • Time
  • Expense
  • Business distraction

102
NEGOTIATIONS STRATEGIES AND ALTERNATIVES
  • Opening
  • Important issues or minor ones?
  • Countering
  • Quick response?
  • Quick response and defer?
  • Defer all minor points?
  • Short conferences
  • Buying time, or appearing to do so?

103
NEGOTIATIONS TACTICS
  • Develop a minimum and maximum position for every
    strategy and alternative.
  • Did you prepare a question map? Who asks each
    key question?
  • Change the roles of team players.
  • Always ask for something more? Only to a point.

104
NEGOTIATIONS PERSONAL SKILLS
  • Emotional maturity
  • Body Languageknow hidden signs
  • Meta-Talkhidden meanings
  • Hofstede's high context countries
  • Search http//www.geert-hofstede.com/ .

105
HOFSTEDES CULTURAL DIMENSIONS117,000 IBM
employees in 88 countries
  • 1 INDIVIDUALISM The degree to which the
    individual is more important than the group.
  • Low Collective
  • Ecuador, Guatemala, Japan
  • High Individual
  • U.S., Australia
  • 2 MASCULINITY The degree to which male
    dominance is accepted.
  • Low Feminine
  • Finland, Norway, Sweden
  • High Masculine
  • Austria, Italy, Japan, Mexico

106
HOFSTEDES CULTURAL DIMENSIONS
  • 3 UNCERTAINTY AVOIDANCE The degree to which
    people deal with uncertain situations.
  • Low Risk Accepting
  • Denmark, Great Britain, Jamaica, Singapore,
    Sweden, U.S.
  • High Risk Averse
  • Argentina, Greece, Israel, Italy, Japan, Portugal
  • 4 POWER DISTANCE The acceptance of an unequal
    distribution of power of entities.
  • Low Egalitarian boss gains trust of employees
  • Australia, Austria, Denmark, Israel, Canada, U.S.
  • High Hierarchical the boss must be obeyed
  • Brazil, China, India, Malaysia, Mexico, Panama,
    Turkey

107
CULTURAL BEHAVIORPERSONAL SPACE
In all societies there are accepted distances for
a conversation based on the relationship. Those
distances can go from inches to feet.
INTIMATE DISTANCE
PERSONAL DISTANCE
SOCIAL DISTANCE
PUBLIC DISTANCE
Close
Far
THE GREATER THE POWER DISTANCE SCORE, THE GREATER
THE SPACING. THIS WOULD BE TRUE FOR COLOMBIA,
PAKISTAN, THAILAND, AND SIMILAR SCORES.
108
NEGOTIATIONS PRINCIPLES
  • Work together to find solutions.
  • Ask for as much as possiblewithin reason.
  • Use your strengths, disguise your weaknesses.
  • Look for creative solutions.

109
NEGOTIATIONS OBJECTIVES
  • Determine a minimum acceptable solution. There
    may be many scenarios.
  • Know your true strengths. Understand what the
    other party really wants.
  • Find common interests.
  • Control and minimize conflicts.

110
MEASURING A NEGOTIATION
  • CRITIQUE THE NEGOTIATION(S)
  • Debrief.
  • What worked?
  • What did not work?
  • Roles, profiles, any changes required?

111
SOURCES OF TRUST AND DISTRUST
  • Integrity of the firms and their people.
  • the feeling
    that the other party may be going around you.
  • Not doing what you say when you say you will do
    it.

112
SUPPLIER AND CUSTOMER RELATIONSHIPS
  • Game theory
  • A general theory of strategic behavior
  • Finds the optimum solution for both players

113
GAME THEORY
What would you choose to do if you were either
Bonnie or Clyde? Why? Example If you confess
you and get either 1 year or 4 years in prison
based on what the other person does. But if
neither one of you confesses, you will get 3
years in prison. If you do not confess and the
other person does, you get 8 years in prison.
114
SUPPLY CHAIN MANAGEMENTSECTION 2Supplier
Management and Supplier Relationships4
OPERATIONS MANAGEMENT AND THE SUPPLY
CHAINASSESSING SUPPLIER PERFORMANCE ALAN L.
WHITEBREAD
115
OPERATIONS MANAGEMENT
  • Generally consists of the following disciplines
  • Outsourcing and Supplier Selection
  • Design, Standards, and Packaging
  • Purchasing and Transaction Management
  • Production Management
  • Inventory and Warehousing Management
  • Logistics

116
DESIGN, STANDARDS, AND PACKAGING
  • Some design engineering functions
  • Fulfill all needs
  • Consumers
  • Sleek
  • Ergonomic
  • Functional and easy to use
  • Marketing
  • Fit with the rest of the offering
  • Production
  • Easily handled and produced

117
STANDARDS
  • International
  • Metric not imperial measurements
  • Numerous electrical systems exist
  • DIN Germany, INMETRO Brazil JIS Japan, and
    more
  • US
  • The U. S. market is not government driven.
  • Commercial
  • Government
  • Numerous industry standards groups

118
INTERNATIONAL STANDARDS ORGANIZATION ISO
  • Nearly 150 countries working in partnership with
  • International standards organizations
  • Country standards organizations
  • Government entities and standards
  • Industry associations
  • including national standards organizations
  • Business and consumer representatives

119
U.S. COMMERCIAL STANDARDSLook for these on the
Internet.
  • ASTM International
  • UL Underwriters Laboratories
  • ANSI American National Standards Institute
  • Many industry and other level standards

120
U.S. GOVERNMENT STANDARDS
  • Numerous Federal Standards
  • MilSpec Federal military procurement
  • NIST National Institute of Standards Testing
  • Many more

121
PRODUCT RELIABILITY TESTING
  • How is the product likely to be used?
  • What can happen to the product?
  • How should we protect the product

122
SHOULD I MAKE A COMMON PRODUCT?
123
PACKAGING IS CRITICAL
  • Packaging provides a lot of marketing assistance!
  • Communication to the consumer benefits,
    pictures
  • Consumer security tamper-proofing
  • Differentiates the product features
  • Environmentally friendly materials listed
  • Contains labeling and identification information
    UPC
  • Opportunity for innovation multiple use
    package
  • Protection in-transit, use, and storage
  • Recognition of the company brand image image
  • Sales promotion special offers of most types
  • Storability long-term protection
  • Value perception additional utility reuse
  • Packaging may or may not be an expensive cost
    element.

124
PACKAGING ISSUESINTERMODAL STRESS POINTS
Package testing is an important element in
protecting the product during testing, shipment,
use, and storage. By making sure the package is
what you need to can keep returns low.
125
PACKAGING ISSUESPACKAGE TESTING
  • Distribution system testing
  • ISTA procedures
  • ASTM
  • D-4169, D-4728, D-999,
  • Mil specs
  • Company specified tests
  • Custom test protocols
  • UN, IATA, ICAO

126
PACKAGING ISSUESPACKAGE TESTING
  • Product testing inside the package
  • Temperature / Humidity testing
  • Corrugated box testing
  • Shock testing
  • Incline-impact testing
  • Compression testing
  • Drop testing
  • Vibration testing

127
PURCHASING AND TRANSACTION MANAGEMENT
  • PURCHASING FUNCTIONS
  • Supplier selection assistance
  • Procurement
  • EDI
  • Contract terms and pricing
  • Inventory

128
PURCHASING AND TRANSACTION MANAGEMENT OVERHEAD
PPV
  • UNDERABSORPTION OF OVERHEAD RATES
  • CAUSE Underestimate costs or overestimate volume
  • RESULT Company takes a loss
  • OVERABSORPTION OF OVERHEAD RATES
  • CAUSE Overestimate costs or underestimate volume
  • RESULT Products are priced abnormally high in
    the market volume may suffer.

129
PURCHASING AND TRANSACTION MANAGEMENT
  • ACTIVITY-BASED COSTING ABC Analysis
  • An accounting technique to measure the costs of
    individual activities and trade all those costs
    to the products, customers, and channels that
    consumed those activities.
  • Used in logistics to determine the appropriate
    level of customer service.
  • Allows a firm to get to more accurate level of
    individual product or customer profitability.

130
PURCHASING SKILLS
  • Traditional purchases by purchasing agents,
    buyers, or managers involve contractual
    relationships that are clearly defined, with
    clear expectations and performance measures.
  • Outsourcing and supplier management requires
    supply chain professionals to master creating,
    developing, and managing complex relationships.

131
PRODUCTION MANAGEMENT
  • Goal
  • The fastest rate of production, at the least
    expensive cost, with the desired quality product,
    for the defined product and/or service.

132
PRODUCTION MANAGEMENTSOLVING PROBLEMS
  • Calculus
  • Linear programming, matrix algebra, and Simplex
    solutions
  • Queing theory
  • Markov chains
  • Regression analysis
  • Box-Jenkins time series analysis
  • Inventory
  • Transportation, minimum / maximum problems
  • Wait times
  • Event, demand
  • Forecasting
  • Forecasting

133
PRODUCTION MANAGEMENTVARIABILITY MANAGING
SUPPLY
  • MANAGE WITH CAPACITY
  • Facility flexibility
  • Product flexibility
  • MANAGE WITH INVENTORY

134
PRODUCTION MANAGEMENTVARIABILITY MANAGING
DEMAND
  • MANAGEMENT OF
  • Market growth
  • Increasing / decreasing share
  • Customer purchase patterns
  • Move up purchases

135
PRODUCTION MANAGEMENT
136
PRODUCTION MANAGEMENT
137
PRODUCTION MANAGEMENTCYCLE TIME
Simple min-max system
1
2
Cycle frequency, time duration, and
magnitude stockout, minimum, maximum, average,
safety stock
138
LOGISTICS
  • Involves the processing and tacking of goods
    during warehousing, inventory control, transport,
    customs documentation, delivery and shipment of
    products.
  • Logistics is important! It can be
  • lt15 manufacturing cost, or
  • lt 26 wholesale, retail costs, and generally
  • 25 of the firms assets.
  • Total systems approach
  • Search YouTube for logistics videos.

139
LOGISTICS GOALS
  • Market coverage
  • Customer service level
  • Product fit
  • Cost minimization

140
LOGISTICS AS AN OPERATING CENTER
  • Firms face a decision for how to operate their
    logistics function. They have two basic choices.
  • The logistics function must make enough money to
    pay for itself.
  • Satisfy customer needs at a minimum cost.

141
WAREHOUSINGWHAT TYPE?
  • PRIVATE
  • Private Warehouses
  • Distribution Centers
  • Alternatives to private warehouse
  • 1
  • 2
  • PUBLIC
  • Bonded warehouse

142
WAREHOUSING FLOW
Bulk products
143
WAREHOUSING ISSUES
  • Material handling equipment
  • Building height / rack profiles
  • Dock size and configuration
  • Slot sizes and strategies
  • Handling methods
  • Ergonomics
  • Traffic flows
  • Layouts
  • rack and aisle, product oriented, repetitive for
    assembly,

144
WAREHOUSINGPRODUCT-ORIENTED LAYOUTS
  • Build components
  • Machine paced
  • Repetitive
  • Assemblies
  • Workstations
  • Repetitive
  • Paced by task times
  • RETURN, REWORK, AND REPAIR

145
WAREHOUSING ISSUES
  • Flow and layout
  • Break-bulk
  • Cross-docking
  • Stockpiling
  • Deterioration and rotation
  • Safety

146
WAREHOUSING MATERIAL HANDLING DEVICES
  • Conveyors
  • Palletizers
  • Pallet lifting
  • Trucks
  • Robots

147
INVENTORY Inventory pricing methods
  • FIRST IN, FIRST OUT (FIFO)
  • The oldest cost incurred is considered the first
    cost charged to production. The latest costs are
    shown in the inventory price.
  • LAST IN, FIRST OUT (LIFO)
  • The latest cost incurred is considered the first
    cost charged to production. The oldest costs are
    shown in the inventory price.

148
INVENTORYAND THE SUPPLY CHAIN
  • Demand
  • Forecasts and sources of variability
  • Production
  • Cycles and economies of scale
  • Inventory
  • Levels and safety stocks
  • Flow
  • Reduce lead times and material flow times
  • Forecasting
  • Improved methods
  • Improved availability, efficiency, and
    responsiveness

149
INVENTORYIT IS EVERYWHERE!
  • Finished goods
  • Work in progress WIP
  • Components
  • Raw materials

150
INVENTORYIT IS EVERYWHERE!
151
INVENTORY ISSUES
  • Seasonality
  • Fluctuating demand
  • Out-of-stock
  • Demand forecasts
  • Carrying costs

152
INVENTORY REDUCTION
  • REDUCING
  • To only what is necessary

153
INVENTORY MANAGEMENT
  • CONTROL ASPECT
  • A tangible asset in many forms
  • Finished goods, WIP, components, raw materials
  • Identify performance measures
  • Inventory turns
  • Average dollars in inventory by category
  • Evaluate and adjust goals as necessary

154
INVENTORYEFFICIENT CUSTOMER RESPONSE ECR
  • and promotions
  • Changes in product introductions
  • Changes in merchandising

155
RETURNED GOODS
  • INVENTORY
  • QUALITY by type of error
  • Frequency of damage
  • Dollar amount of damage
  • Number of credit claims
  • Number of customer returns
  • Cost of returned goods

156
RETURN GOODS INVENTORY
  • Discuss issues
  • Scrap and manufacturing improvement

157
LOGISTICS SCHEDULING, TRANSPORTATION, AND METRICS
  • The keys to good scheduling are
  • Close large customer contact
  • Understanding effects like seasonality

158
LOGISTICS DEMAND
  • It is critical one understands the all the
    components of the total demand schedule Dt!
  • Dt ? Dn
  • Where Dn are the individual demand schedules.
    For instance, the demand for manufacturing,
    wholesalers, and retailers.
  • The problem is at the channel level. So it is
    critical to understand backlog and the Bull-Whip
    Effect.

159
LOGISTICS BACKLOG
  • It is calculated as follows.
  • previous period backlog
  • current period demand
  • -
  • A problem occurs with rapidly changing orders and
    less rapidly changing supply.

160
LOGISTICSCAUSES OF THE BULL-WHIP EFFECT
  • There are numerous causes of this phenomena. Any
    combination of the following will have some
    impact.
  • An overreaction to backlogs
  • Material or system delays
  • Larger orders and/or production runs
  • Customers hoarding in times of shortage or
    increasing prices

161
LOGISTICS MINIMIZING THE BULL-WHIP EFFECT
  • Modify the supply chain infrastructure
  • Improve and update systems
  • Modify supply chain operations
  • Frequency of change notices
  • Real-time forecasting

162
LOGISTICSCOUNTERING THE BULL-WHIP EFFECT
  • Any combination of the following will have some
    offsetting impact.
  • Implement EDI and computer-aided ordering CAO
  • Employ rationing schemes in times of shortage or
    excessive demand
  • Implement the use of point-of-sales POS data in
    forecasting
  • Implement vendor managed inventories VMI

163
LOGISTICS TRANSPORTATION COST FACTORS
  • Understand dollar cost vs. total system cost
  • Distance
  • Density
  • Handling
  • refrigeration, cranes,
  • Liability
  • susceptibility to damage, perishability, theft,
    HAZMAT, value per pound
  • Market factors

164
LOGISTICS PERFORMANCE METRICS
  • REVENUE
  • Can you use differential service levels to
    command premiums and increase gross profit?
  • COST
  • Reduced expedited shipments
  • CUSTOMER SERVICE
  • Reduce the nu
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