Distribution Supply Chain Management Sourcing & Procurement

Instructor: Muhammad Naveed BBA-BAHRIA

Supply Chain Management

It is all about integration
It is primarily concerned with the efficient integration of:

Suppliers, factories, warehouses and stores

so that merchandise is:

Produced and Distributed

in the right quantities, to the right locations and at the right time,

so as to minimize total system cost subject to satisfying customer service requirements.

Role of Distribution in Business

Logistic or distribution provides the place in marketing mix

Effective logistic provides:

Time

& place utility

The right goods, in the right place at the right time

Applies to mainly to products, but can also apply to services

Impact on Profits
If purchasing is based on Price-Conscious

For example
Total sales Purchase services and materials Salaries Overheads Profit $100,000 $70,000 $20,000 $5,000

$95,000 $5,000

Profits could be doubled by any of the following:

Increase sales revenue Decrease salaries Decrease overheads Decrease purchase cost

Typical Supply Chain

End User Forward Consumer Retailer Distributor Back Manufacturer Component Supplier Raw Material Supplier

Supply Chain Policy

Consumer

Consumer Installer

Dealer Local Distributor

Area Distributor
Vehicle Assembler Component Manufacturer

Material Supplier

Decision Stages in S.C.

Strategy & Design Planning

Operations

Strategy & Design

Location & capacity of production and warehouses

Products Mode Types

to manufactured and in which locations

of transportation of information systems to be used sourcing decisions

Strategic

Planning

Markets to be supplied & from which location

Planned build-up of inventory Subcontracting of manufacturing Timing and size of market promotion Handling uncertainty
in

demand, foreign exchange fluctuations

Operations

Decisions over individual customer orders (daily, weekly)

Establish deliver dates

Establish order fill rate

Forecasting doesnt help!

Forecasts are never right

Very unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecast

A forecast for a year from now will never be as accurate as a forecast for 3 months from now

Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty

Methods for Improving Forecasts

Judgment Methods Market Research Analysis

Internal experts External experts Domain experts Delphi technique Accurate Forecasts

Market testing Market surveys Focus groups

Time-Series Methods

Causal Analysis

Moving average Exponential smoothing Trend analysis Seasonality analysis

Relies on data other than that being predicted Economic data, commodity data, etc.

Challenges

Achieving Global Optimization

Conflicting

Objectives Complex network of facilities System Variations over time

Managing Uncertainty
Matching

Supply and Demand Demand is not the only source of uncertainty

Key Issues in S.C.M

Distribution Network Configuration Inventory Control Supply Chain Integration & Strategic Partnering Outsourcing & Procurement Strategies Information Technology & Decision Support System Customer Value

Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them.

Boeing Aircraft, one of Americas leading capital goods producers, was forced to announce write downs of $2.6 billion in October 1997.
The reason? Raw material

shortages, internal and supplier parts shortages. (Wall Street Journal, Oct. 23, 1997)

Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake.

U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals

The Potential

Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 19881996, by over 3,000% (Anderson and Lee, 1999) using

Direct business model Build-to-order strategy.

Achieving Strategic Fit

Understanding the Customer

Lot

size Response time Service level Product variety Price Innovation

Lead Time

The time between placing an order and receiving the goods

Cumulative Lead time
The

total time through the whole process, or the whole supply chain

Supply Chain for Physical Goods

Suppliers Recycling/Remanufacturing

Process & Product Design

Manufacturing

Distribution

Retailing

Customer

Customer Service

Material transfer

Information Transfer

Supply Chain Time Compression Can Reduce Cost & Increase Revenues
Supply chain time compression Schedule changes impact market faster Forecasts made closer to demand time So improved forecasts So less need for safety stocks So reduced stockholding cost New products & services faster to market Defects are detected faster

So can respond to market changes

So easier to improve quality

So fewer lost sales from delayed launch

So reduced risk of obsolescence

So revenues are maximised

So reduce wastage cost

So revenues are maximised

So less discounted sales

Improved Profitability

Sourcing & Procurement

OM-BBA-BAHRIA

Sourcing and Procurement

Plan Purchasing Strategies

Role of Purchasing Departments

Develop Specifications Select Suppliers

Negotiate Price Negotiate Service Levels

Purchasing Process
Need Identification
Problem definition Do-versus-Buy Analysis Involve Interested Parties

Information Search
References Personal contact Recommendations

Vendor Selection
Experience Reputation References

Specification Development

Trade directory

Cost
Location Size

Performance Evaluation Identify evaluator Quality of work Communication Meet deadlines Flexibility Dependability

Integrated Logistical Components of the Supply Chain

Sourcing & Procurement Logistics Information System Production Scheduling Order Processing & Customer Service Inventory Control Warehouse & Materials Handling Transportation

Supply Chain Team

Production Scheduling
Traditional Focus Customer Focus
Push/Pull Strategy Start of Production Manufacturing

Push
Inventory-Based

Pull
Customer-Order Based

Mass Production Mass Customization

Warehouse and Materials-Handling

Receive goods into warehouse Identify, sort and label goods Dispatch the goods to temporary storage

Functions of Materials Handling

Recall, select, or pick the goods for shipment

Transportation
Cost

Transit Time
Reliability

Criteria for Transportation Mode Choice

Capability Accessibility Traceability

Criteria for Ranking Modes of Transportation

Highest Lowest

Relative Cost Transit time Reliability Capability Accessibility Traceability

Air Water Truck Water Truck Air

Truck Rail Rail Rail Rail Truck

Rail Truck Air Truck Air Rail

Water Air Water Air Water Water

Logistical Competencies

Devise logistics service strategies as a means of competitive differentiation Integrate members of supply chain to achieve operating excellence Respond quickly to changing logistical requirements

Constantly monitor all aspects of the supply chain

Single-and Multi-sourcing
Tough decision for a company

In some cases buying organizations restrict amount of business suppliers can do.

i.e. Robert Bosch, the German automotive components manufacturer, at one time required that sub-contractors do no more than 20% of their total business with

This was to prevent suppliers becoming too dependent on them

Factors for rating alternative suppliers

Short-term ability to supply 1. Range of products or services provided 2. Quality of products or services 3. Responsiveness 4. Dependability of supply 5. Delivery and volume flexibility Longer-term ability to supply 1. Potential for innovation 2. Ease of doing business 3. Willingness to share risk

4. Long-term commitment to supply

5. Ability to transfer knowledge as well as products and services

6. Total cost of being supplied

7. Ability to supply in the required quantity

6. Technical capability
7. Operations capability 8. Financial capability 9. Managerial capability

Exercise: Weighted supplier selection criteria

Weighted supplier selection criteria

A hotel chain has decided to change its supplier of cleaning supplies because its current supplier has become unreliable in its delivery performance. The two alternative suppliers that it is considering have been evaluated, on a 110 scale, against the criteria shown in Table. That also shows the relative importance of each criterion, also on a 110 scale.
Factor Weight Supplier A score Supplier B score

Advantages - Disadvantages
Single-sourcing Multi-sourcing

Single-sourcing

Multi-sourcing

Potentially better quality

Strong relationship which are more durable

Purchaser can drive price down by competitive tendering

Advantages

Greater dependency encourages more commitment and effort

Can switch sourcing in case of supply failure

Wide source of knowledge and expertise to tap

Better communication
Easier to cooperate on new product/service development More scale economies Higher confidentiality

Single-sourcing

Multi-sourcing

More vulnerable to disruption if a failure to supply occurs

Difficult to encourage commitment by supplier

Less easy to develop effective QA

Individual supplier more affected by volume fluctuations

Disadvantages

More effort needed to communicate

Supplier might exert

upward pressure on prices

Suppliers less likely to

if no alternative supplier is
available

invest in new processes

More difficult to obtain scale of economies.