EBU6609 Logistics and Supply Chain Management
Logistics and
Supply Chain
Management
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TOPIC 5: ORDER FULFILMENT – PURCHASING, OPERATIONS, AND LOGISTICS
MS BING HAN
Introduction to Logistics and Supply Chain Management
Supply Chain Organisation – Process thinking
Technology in Logistics and Supply Chain
Customer Fulfilment
Order Fulfilment Cycle – Purchasing, Production and Logistics
Supply Chain Mapping
Core Competencies and Outsourcing
Environmental Scanning and Global Supply Chain
Cost Management in SCM
Inventory Management
Managing Uncertainty in the Supply Chain
Operational issues in the Supply Chain
Performance Measurement in the Supply Chain
People Management
Law and Ethics in SCM
Relationship Management
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Learning Objectives
1. Describehowpurchasing,production, and logistics decisions work together to create customer value.
2. Identifyanddescribethestepsinthe purchasing process.
3. Identifyanddiscussdesignand
control decisions in production
operations management. Describe the
underlying principles and practices
lean manufacturing. Describe the
characteristics of service operations.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Learning Objectives
Identifythekeydecision-making elements of the logistics process. Discuss order fulfilment, transportation, and distribution strategies.
Describehowphysicalflow decisions affect the cost and service positions of the company as well as the design of the overall supply chain.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Order Fulfilment
Order fulfilment is the process that actually makes and delivers a product or service
Three functions are responsible:
Purchasing – acquires the inputs used to support production
Production – converts inputs into outputs that customers value
Logistics – transports and stores goods assuring access
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
SCOR Model
When purchasing, production, and logistics work in concert directed by overall strategy, they help deliver value to the customer.
The Supply-Chain Operations Reference 一
(SCOR) model helps to create a common vision for managing and coordinating five primary SC processes.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
一Elements of the SCOR Model Plan: Processes that balance demand and supply to develop a course of action to meet sourcing,
production, and delivery needs. This process aligns the supply chain plan with the financial plan.
Source: Processes that purchase goods and services to meet planned or actual demand. Emphasis is on selecting suppliers, establishing policies, scheduling deliveries, and assessing performance.
Make: Processes that transform product to a finished product to meet demand. Emphasis is on scheduling production, measuring performance, managing inventory, and configuring the network.
Deliver: Processes that provide finished goods and services to customers. Emphasis is on order management, warehouse management, and transportation management.
Return: Processes associated with the return of products for any reason, and includes post- delivery customer support. Emphasis is on reverse logistics and long-term customer support.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
SCOR Model
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Customer’s Customer
EBU6609 Logistics and Supply Chain Management
Purchasing
Purchasing, supply management, procurement, can be used interchangeably.
In the narrow sense: …the acquisition of goods or services in exchange for a consideration, usually money
…the integration of related functions to provide effective and efficient materials and services to the organisation. (Leenders, p4)
Successful purchasing can substantially leverage the profit of an organisation
Example of purchasing leverage:
◦ Sales Revenue-
◦ Materials-
◦ Overheads-
£ 108m £ 58m £ 27m
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
1. What is effect on profit of 1% material spend reduction?
2. If material costs remain unchanged, what would sales need to be to achieve the same effect?
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Actual profit was
£ [108 – (58 + 27 + 12)] = £ 11m
1% reduction in material costs reduces this from £58m to £58m x 0.99 = £57.42m
Profit changes to £ [108 – (57.42 + 27 + 12)] = £ 11.58m
% change in profit is £0.58/11 x 100% = 5.3%
A 1% reduction in material spend becomes a 5.3% increase in profit
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Solution (Cont’d)
To achieve the same result with material costs unchanged, sales revenue would have to rise to £108.58m, a 0.53% rise.
To get the same profit as in the “base case”, overheads would have to fall by £0.58m, or 4.8%.
Changes in purchasing spend have a significant leverage effect on a firm’s profits
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Purchasing Management
Four developments during the 80s and 90s increased the importance of purchasing:
1. Purchased inputs became a primary operating cost
2. Just-in-time emphasized cooperative, long-term
buyer-supplier relationships
3. Information technology provided information needed to strategically manage relationships
4. Better trained and more competent managers entered supply arena
Purchasing Costs
Manufacturers spend 55% of each pound on purchased goods and services
Approximately 60-80% of operating expense
Direct manufacturing costs have declined to between five and 15% of total operating costs
• As little as 2% for some high-tech industries
Service industries spend less on purchased materials than manufacturing
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Purchased Inputs as a Percent of Sales
Outsourcing – Purchasing Role
Focusing on core competencies has led many companies to outsource value added activities
Sourcing professionals take on the role of
acquiring and managing: { ◦ Inputs
◦ Supplier capacity
◦ Supplier capabilities
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
The Sourcing Process
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Recognition and Description of Need
Well-managed companies use a purchasing policy or procedure handbook to guide interactions between internal users and sourcing
Purchase requisition is used to clearly describe and communicate needs to sourcing
◦ Item description, requisitioning department, authorizing signature, purchase quantity, delivery day, and location are necessary information
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Supplier Selection
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
1. Identificationinvolvesmakingalistof all potential suppliers. A purchaser might look to the company’s purchasing database or directories such the of American Manufacturers, which lists over 150,000 companies.
2. Evaluationinvolvestheidentification of supplier selection criteria and the gathering of performance information that can be used to assess and compare possible suppliers.
Frequently used criteria include quality, price, delivery dependability, capacity (current and future), service responsiveness, technical expertise, managerial ability (attitude, skills, and talent), and financial stability.
Supplier Selection (cont’d)
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Approval identifies the suppliers that are eligible to receive an order. The number of suppliers on the approved list depends on the nature of the item being purchased.
q For commodity-type items, multiple suppliers are generally used; for unique items, a sole- sourcing arrangement may be preferable.
Monitoring assures high levels of performance. Scorecards are often used to provide an overall supplier rating.
uses categories to rate suppliers into one of four groups: partner, key approved supplier, approved supplier, or conditional supplier
EBU6609 Logistics and Supply Chain Management
Transaction Management – Price
Price is the most-frequently-used factor to evaluate the sourcing group’s performance
Best price is pursued using:
◦ List price – low-volume or low-value items
◦ Competitive bidding – relies on market forces to obtain a fair price
◦ Reverse auctions may achieve 10-30% reductions
◦ Negotiation – high dollar value high uncertainty items, or when a long-term relationship is desired
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Reverse Auctions
Reverse auctions are defined by suppliers bidding for a customer’s business.
Results in downward price pressure
Supplier participants in reverse auctions should be prequalified, and winning bidders should have their capabilities verified before contracts are issued.
Focus on price and competitiveness contrary to supply chain principles of total cost of ownership and collaborative relationships.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
When to use Reverse Auction
When there’s uncertainty as to the size of the market, and the willingness of the seller to supply a product.
When purchasing large quantities of an item for which clear specifications are possible.
When selling surplus assets
For some services, such as car rentals, freight
services, travel.
Advantages – buyers
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
…provides benefits for both buyers and sellers. The benefits for the buyers include:
◦ Savings over and above those obtained from normal negotiations as a result of competition.
◦ Reduction in acquisition lead times
◦ Access to a wider range of suppliers
◦ Sources of market information are enhanced
◦ More efficient if via internet and provide total anonymity so time is not wasted on seeing representatives.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Advantages – suppliers
The benefits for the suppliers include:
◦ An opportunity to enter previously closed markets, which is particularly important for smaller companies.
◦ Reduced negotiation timescales
◦ Access to a wider range of suppliers
◦ Provision of a good source of market pricing information
◦ Clear indications of what must be done to win the business.
Disadvantages
Some objections to reverse auction include:
◦ …based on a win-lose approach, the seller is trying to get the most money while the buyer is after the best deal. So the system cannot be sustained without burdensome watchdogs and regulators.
◦ Can cause ad adverse buyer-seller relationship as the supplier may feel exploited and become less trustful of buyers.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Disadvantages – cont’d
◦ Long-term adverse effects on economic performance of both buyers and suppliers:
◦ Some suppliers may not be able to sustain sharp price reduction in the long term
◦ In order to ensure the exact goods and services required are obtained, considerable time may be needed to complete detailed specification sheets
◦ Suppliers that cannot compete at the lower price levels may be removed from the approved suppliers’ list.
Transaction Management – Orders
Purchase orders specify the terms and conditions of the purchase agreement and initiate supplier action
Blanket orders specify the overall terms of agreement for a given time period and cover the entire quantity to be purchased
◦ Smaller quantities are periodically delivered under this agreement
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Transaction Management – Expediting
Regular follow-up allows identification of quality or delivery problems
Expediting refers to efforts to speed up 一
delivery of an order
Penalty clauses can be used in purchase agreements
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Transaction Management – Inspection
Receipt and inspection matches the invoice the contents via physical count and quality inspection
Primary reason for failure:
,The count is off (too much, too little)
Quality is inferior
Supplier certification programs focus on improving suppliers’ abilities to produce high quality products, eliminating the need for inspection
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Transaction Management – Payment
Efficient procedures for invoice clearance improve:
Supplier relationships Financial performance
◦ Discounts for prompt payment
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Performance Monitoring
Performance monitoring allows identification of candidates for increased collaboration and long-term supplier relationships
Four types of information should be tracked: 1. Current status of all purchase orders
2. Select evaluation criteria for all suppliers
3. Part or commodity information
4. Information regarding contracts of relationships
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Purchasing Manager Skills
Knowledge Management – commodity expertise and understanding of supplier capacity and capability
Relationship Management – alliance relationships with critical suppliers, fair relationships with all; design of efficient transaction mechanisms
Process Management – continuous improvement, collaborative processes, supplier education
Technology Management – employed new technology to reengineer the sourcing process
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Production Management
Also known as operations or manufacturing management – creates value by transforming capital, technology, Labour, and materials into more highly valued products and services
Operations drive product of the growth, innovation, and generates higher living standards
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Production Management
Operational excellence is a prerequisite for success
Operations managers must manage two groups of decision variables:
◦ Design Decisions ◦ Control Decisions
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
World Class Operations Management
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Design Decisions
Facility location – affect access to factor inputs and customer markets
Facility layout – determine the positioning of equipment, the flow and handling of materials
Product design – impact the ability to profitably capture future market share
Process design – involves technology selection and work design
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Control Decisions
Forecasting – estimate of what needs to be produced and when
Inventory control – determines how much and when to make specific products
Scheduling – two types:
◦ Aggregate planning determines what needs to be produced ◦ Process planning determines work done at each station
Quality control – designing, building, and inspecting quality into both the process and product
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Product/Service Continuum
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Labour Productivity – Manufacturing
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Labour Productivity- Services
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Operations Management Skills
Operational excellence is a prerequisite for success; however, competition is now between chains not just companies. Therefore, managers must understand and develop skills in dealing with:
{ ◦ Outsourcing
◦ Supplier Integrated Manufacturing ◦ Dissemination
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Lean Production
Lean production relies on a number of interrelated practices:
Waste Elimination
◦ Waste is defined as anything more than the absolute minimum necessary to add value
◦ Inventory covers up problems, Lean works to systematically reduced inventory to identify problems
Lean Production
Managerial Responsibility
◦ Managers take on the role of teacher, team facilitator, and motivator
Process Development
◦ Line workers are trained and empowered to solve problems and improve processes
Network Orientation
◦ Lean should be practiced by critical suppliers
Workforce Participation
◦ Jidoka – the authority to stop the line
◦ Requires training, personal responsibility, and integration
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Lean Production
Synchronization
◦ Synchronization of material movement is accomplished by a pull or “kanban” system
Continuous Improvement
◦ “Kaizen” – the quest for incremental productivity gains and consistent innovation
Lean Supply Chain
Lean supply chain management is not exclusively for those companies who manufacture products, but by businesses who want to streamline their processes by eliminating waste and non-value added activities. Companies have a number of areas in
their supply chain where waste can be identified as time, costs, or inventory.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Logistics Management
Logistics management is that part of SCM
that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.
– Council of Supply Chain Management Professionals
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
The Logistics Process
Materials management is concerned with the inbound movement and storage of raw materials, purchased components, and subassemblies entering and flowing through the conversion process.
Physical distribution focuses on the outbound transportation and storage of finished products from point of manufacture to where customers wish to acquire them.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 Logistics and Supply Chain Management
Basic Logistics Activities
Basic Roles and Responsibilities
Customer Service
Customer service focus on understanding what customers want and measuring logistics performance against these customer requirements.
Demand Forecasting
Forecasts—estimates of demand—must be developed to help plan other logistics activities, allocate resources, and provide high levels of service at low costs.
Documentatio n
Accurate documentation helps assure that the product gets to the customer on time. Documentation is particularly vital in international shipments.
Information Management
Data on carriers, customers, and inventories must be turned into
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