Supplier Selection and Rating

Supplier Selection and Rating

 One of the most important processes performed in
organizations today is the evaluation, selection and
continuous measurement of suppliers.

 Selecting a vendor is now as important a process as

developing new products.
 Supplier selection process is a multi-criteria problem, which
includes both qualitative and quantitative factors.
 Purchasing commands a significant position in most
organizations sincepurchased parts, components, and
supplies typically represent 40 to 60 percent of the sales of
its end products.
 Thus relatively small cost reductions gained in the acquisition
of materials can have a greater impact on profits.
 Suppliers have a large and direct impact on the cost,
quality,technology, and time-to-market of new products.
 Organization’s ability to produce a quality product at a
reasonable cost and in a timely manner is heavily
influenced by its suppliers’capabilities.

 Supplier selection is one of the key issues of SCM because

the cost of raw materials and component parts constitutes
the main cost of a product Management.

A sound supplier selection decision today can

reduce or prevent a host of problems tomorrow
Steps in Supplier Selection Process

◦ Evaluating Needs and Defining Objectives

◦ Gathering a Limited Pool of Vendors
◦ Interviewing with Vendors
◦ Selecting and Applying the Method
 What need you are looking to satisfy?
◦ Increase product quality
 Which evaluation categories you will use?
 What are your business, technical and usability requirements?
 What are the must requirements?
◦ Max price, min performance, etc
 How will you score the requirements?

OUTCOME: list of requirements, objective and criterias to

evaluate the vendors and the way to score different criterias
 Evaluating all potential vendors takes much
time
 Basic screening and elimination due to lack of
must requirements

OUTCOME: vendors pool

 One by one interview with vendors
 Gap analysis between your requirements,
objectives and vendor properties
 Scoring each criteria

OUTCOME: criteria-score list for each vendor

 Select one among various methods
◦ AHP, fuzzy logic method, etc
 Calculate overall vendor score using selected
method
 Select the vendor with best score
 The evaluation criterias are fundamental to choose
the best supplier. They are specific to each firm,
because they vary according to the needs.

 The criteria exposed in the following slides are the

most common ones.*

 Six categories of criteria selected

(*) We have analysed almost 30 texts in order to select the most

common criterias
The six classes for the suppliers’evaluation
measurement:

◦ FINANCIAL HEALTH
◦ EXPERTISE
◦ OPERATIONAL PERFORMANCE METRICS
◦ BUSINESS PROCESSES & PRACTICES
◦ ENABLING BEHAVIORS OR CULTURAL FACTORS
◦ RISK FACTORS
In order to evaluate if a potential supplier is in good
financial position, a buyer can use indicators such as:
◦ Sales
◦ Profitability
◦ Liquidity
◦ ROI
◦ Debt ratio
◦ Transparency of finances
The purchasing department of the firm should
choose
its suppliers according to its capabilities:

◦ Network capabilities
◦ Quality and production capabilities (dedicated
level?)
◦ Technical level compared to sector average
◦ Spread of technical creation
◦ Investment in R&D
There are a large number of criteria in this category, such
as:
◦ On-time delivery
◦ Lead time
◦ Responsiveness
◦ Inventory management and control: reorder management,
forecasting capabilities…
◦ Order acceptance, processing & fulfillement
◦ Customer service
◦ Preventive maintenance
◦ Hours of operators training in Total Quality Control (TQC)
or JIT
How does supplier provide a product or service at the
best value, on time and exactly as required from the
buyers?

 Best practice and quality based information.

 This evaluation business can help get at the root causes of
supplier problems.
For example: is the quality standard of the products met by
the production process (preventing defection) or by
inspecting the quality of the products after production?
The evaluation criteria of such a category focus on
the
long term sustainability of potential suppliers:

◦ What is the improvement culture of the supplier?

Are his information capabilities always up-to-date?
◦ What is his intention of coordination?
 A supplier’s risks are risks for the buyer.
Indeed, if a supplier takes too much risk, it
can have a great impact on his customer.
 Risk factors can be uncovered in the previous
criteria exposed, but also in criteria such as:
trade relations, currency exchange,
insurance, legislations.
 In reality, these mesures of supplier performance
are difficult to obtain (financial publications,
questionnaires, surveys, site visits).
 Whichever criteria chosen, the assessment system
must be optimal for good decision making.
 Markov chain concept: the decision environment is
dynamic, i.e. there must be interaction between the
cooperation patterns and the supplier evaluation
criteria.
 For Complex Decisions raher than Correct Decision
 Mathematics and Human Psychology
 Government, Business, Industry, Healthcare, and
Education.
 Decomposition of a problem into a hierarchy
 Evaluation of various elements comparing them to one
another in pairs
 A numerical weight or priority is derived for each element
of the hierarchy
 Thomas L. Saaty
 Deciding how best to reduce the impact of global climate
change
 Quantifying the overall quality of software systems
(Microsoft Corporation)
 Deciding where to locate offshore manufacturing
plants(University of Cambridge)
 Assessing risk in operating cross-country petroleum
pipelines (American Society of Civil Engineers)
 Deciding how best to manage U.S. Watersheds (U.S.
Department of Agriculture)
 Etc...
 State the Objectives
 Define the Criteria
 Pick the Alternatives
 Establish Hierarchy
 Pairwise Comparison
 Synthesize Judgments
 Check Consistency Index
 Comparison between Criteria and
Alternatives
 Calculate Final Rankings
 Objective is to open an ice cream shop for young children and families.
 Establish Criteria
◦ Neighborhood
◦ Visibility
◦ Competition
◦ Price
 Identify Alternatives
◦ Suburban Shopping Center
◦ Main Business District
◦ Suburban Mall Location
Example based on Decision By Objectives (How to convince others that you are
right)
By: Ernest Forman, DSc., George Washington University & Mary Ann Selly, Expert
Choice Inc.
 Hierarchical Arrangement
 Hierarchical Arrangement
 Pairwise Comparison Matrix
1- Equally preferred
2 - Equally to moderately preferred
3 - Moderately preferred
4 - Moderately to strongly preferred
5 - Strongly preferred
6 - Strongly to very strongly preferred
7 - Very Strongly preferred
9 - Extremely preferred
8 - Very Strongly to extremely preferred
◦ Synthesize Judgments
◦ Check Consistency Index
 Comparison between
Criteria and Alternatives
 Recall Ranking for the Criteria
 Calculate Final Rankings
First choice: Shopping Center (59%)
Second choice: The Mall (32%)
Third choice: Main Street (9%)
 Precise assessment of values through hierarchical
structuring and pair-wise comparison.
 Programmable on a computer.
 Value assessment, forecasting, alternative selection and
resource allocation.
 Widely accepted and applied by major business
corporations and government agencies world wide.
 Human perception can distort pair-wise
comparison.
 Hierarchy is one directional and it is difficult to
accommodate feedback.
 Values are highly aggregated and difficult to
reflect the degree of uncertainty.
The Categorical Plan
The Weighted-Point Plan
The Cost-Ratio Plan
 Buyers keep notes on supplier dealings as
events occur
 Buyers compare notes (usually at monthly
buyer meetings)
 Suppliers are categorized as being in the
good, neutral, or unsatisfactory category
 Highly subjective, but easy to use &
understand
 Disadvantage is it’s subjectivity:
relies on memory, personal judgment, and the
experience/ability of the buyers.
Vendor Cost Quality Speed Total
A Good(+) Unsatisf(-) Neutral(0) 0
B Neutral(0) Good(+) Good(+) ++
C Neutral(0) Unsatisf(-) Neutral(0) -
Assign weights (importance) to
quality, price, and service (or other
relevant criteria)
Should fit buying organization’s needs
Sellers are rated on each factor
Simple, but effective plan that can be
modified to suit specific conditions
Somewhat more objective than the
categorical plan
 Lots Lots Lots % Acc. * Quality
Vendor Received Accepted Rejected Factor Rating
A 60 54 6 90.0 * 40 36.0

B 60 56 4 93.3 * 40 37.3

C 20 16 4 80.0 * 40 32.0
 Unit - Tran / *
Vendor Price Dis + Chg Net Low Net % Factor Rate
A 1.00 10% 0.90 .03 .93 .93 0.93 100% 35 35.0

B 1.25 15% 1.06 .06 1.12 .93 1.12 83% 35 29.1

C 1.50 20% 1.20 .03 1.23 .93 1.23 76% 35 26.6

 Promises Service Service
Vendor Kept Factor Rating
A 90% 25 22.5

B 95% 25 23.8

C 100% 25 25.0
Rating Vendor A Vendor B Vendor C
Quality 36.0 37.3 32.0
Price 35.0 29.1 26.6
Service 22.5 23.8 25.0

Total 93.5 90.2 83.6

 All activities regarding a supplier’s performance
are valued in terms of dollars
 Total cost of buying is determined including:
letters, telephone calls, visits, etc
 Total (real) cost varies from vendor to vendor
based on vendors’ skills & dependability
 Future vendors selected on basis of lowest total
cost incurred
Initialcosts associated with Quality,
Delivery, and Service are determined
Each cost is then converted to a ratio
Ratio expresses cost as a percentage
of the total value of the purchase
Sum the three individual cost rates to
obtain overall cost ratio
Apply overall ratio to quoted unit
price
 Quality Delivery Service Total Quoted Net
Vendor Cost Cost Cost Penalty Price/ Adjusted
Ratio Ratio Ratio Unit Cost
A 1% 3% -1% 3% 86.25 88.84

B 2 2 3 7 83.25 89.08

C 3 1 6 10 85.10 93.61
1. Fixed-price contracts
•A price is agreed to before contract is
awarded and payment is made at
conclusion of work.
•Provides for the greatest profit potential.
•Poses greater risks.
2. Cost-reimbursement contracts
•Reimbursement for allowable costs may
be allowed and sometimes a number of
dollars above costs as profit is allowed.
© 2005 Wiley
 Outsourcing -
 “the strategic use of outside resources
to perform activities traditionally
handled by internal staff and
resources” Dave Griffiths

 Why Outsource?
 Provide services that are scalable,
secure, and efficient, while improving
overall service and reducing costs
 Outsourcing is the purchasing of part of the
company’s continuing operations, such as
manufacturing, rather than producing the
same function internally.

Quantity Discounts

Complementary Products Increases the

complexity of
business-to-business
Delivery Schedules
marketing

Outsourcing
48
 Traditional role - reaction to problem
 Reduction and control of costs
 Avoid large capital investment costs
 Insufficient resources available
 Modern role – business strategy
 Allows company to focus on their core
competencies
 Keeping up with cutting-edge
technology
 Creating value for the organization and
its customers
 Building partnerships
 system integration
 data network
 mainframe data center
 voice network, internet/intranet
 maintenance/repair
 applications development
 e-commerce
 end-user support system
PricewaterhouseCoopers Model

Strategic Non-Strategic

Competitive Not Grey

Outsourced Area

Non-Competitive In House
Outsource
if Possible
 Program initiation
 Opinions and ideas shared to form draft
contract

 Program implementation
 Transferring staff
 Service Level Agreement (SLA)
 Establish communications between
partners
 Actual transfer of the service
 Establish management procedures

 Contract agreement

 Contract fulfillment
 Loss of Control
 Increased cash outflow
 Confidentiality and security
 Selection of supplier
 Too dependent on service
provider
 Loss of staff or moral problems
 Time consuming
 Provider may not understand
business environment
 Provider slow to react to changes
in strategy
 The sum of all purchased goods and services
that are not a direct part of products or
services delivered to the customer
 May equal > 50% of an organization’s total
purchases
 Often not procured by supply management

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Management, 4e
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 That part of supply chain management 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

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 Customers
passed to create

Supply of Demand for

Products Products

arrange passed to
Operations

Other Outputs Other Inputs

External Operations within the External
Supplier Organization Customer

Internal Internal
Customer Customer

Inbound Outbound
Materials Management Logistics
Logistics

Logistics
 Materials – All the things that an organization
moves to create its products – tangible and
intangible.
 Inbound Logistics – Moving materials into the
organization; also known as inward logistics
 Outbound Logistics – Moving materials out to
customers; also known as outward logistics
 Materials Management – Moving materials
within the organization.
 Supply Network – complex pattern of
movements, also known as supply web.
 People use different names for chains of activities
and organizations. When they emphasize the
operations, they refer to the process; when they
emphasize marketing, they call it a logistics channel;
when they look at the value added, they call it a
value chain, when they see how customer demands
are satisfied, they call it a demand chain. Supply
chain consists of the series of activities and
organizations that materials move through on their
journey from initial suppliers to final customers.
 Upstream Activities – movement of materials
inwards
 Downstream Activities – movement of materials
outwards
 The flow of materials through an organization
is usually initiated when procurement sends a
purchase order to a supplier. This means that
procurement finds suitable suppliers,
negotiates terms and conditions, organizes
delivery, arranges insurance and payment, and
does everything needed to get materials into
the organization. In the past, this has been
seen as a largely clerical job centered on order
processing. Now it is recognized as an
important link with upstream activities, and is
being given more attention.
 Moves materials from suppliers to the
organization’s receiving area. This has to
choose the type of transport, find the best
transport operator, design a route, make sure
that all safety and legal requirements are met,
get deliveries on time and at reasonable cost,
and so on.
 Makes sure that materials delivered
correspond to the order, acknowledges
receipt, unloads delivery vehicles, inspects
materials for damage, and sorts them.
 Moves materials into storage, and takes care of
them until they are needed. Many materials
need special care, such as frozen food, drugs,
alcohol in bond, chemicals that emit fumes,
animals, and dangerous goods. As well as
making sure that materials can be available
quickly when needed, warehousing also makes
sure that they have the right conditions,
treatment and packaging to keep them in good
condition.
 Sets the policies for inventory. It considers the
materials to store, overall investment,
customer service, stock levels, order sizes,
order timing and so on.
 Finds and removes materials from stores.
Typically materials for a customer order are
located, identified, checked, removed from
racks, consolidated into a single load, wrapped
and moved to a departure area for loading
onto delivery vehicles.
 Moves materials through the operations within
an organization. It moves materials from one
operation to the next, and also moves
materials picked from stores to the point
where they are needed. The aim of materials
handling is to give efficient movements, with
short journeys, using appropriate equipment,
with little damage, and using special
packaging and handling where needed.
 Takes materials from the departure area and
delivers them to customers (with concerns that
are similar to inward transport)
 General term for the activities that deliver
finished goods to customers, including
outward transport. It is often aligned with
marketing and forms an important link with
downstream activities.
 Even when products have been delivered to
customers, the work of logistics may not be
finished. There might, for example, be
problems with delivered materials – perhaps
they were faulty, or too many were delivered,
or they were the wrong type – and they have to
be collected and brought back. Sometimes
there are associated materials like boxes and
containers which are returned to suppliers for
reuse or recycling. There are also those
brought back for safe disposal like dangerous
chemicals. This is another way of looking at
reverse logistics.
 Some of the logistics activities can be done in
different locations. Stocks of finished goods,
for example, can be held at the end of
production, moved to nearby warehouses, put
into stores, nearer to customers, passed on to
be managed by other organizations, or a range
of alternatives. Logistics has to find the best
locations for these activities – or at least play a
significant role in the decisions. It also
considers related questions about the site and
number of facilities. These are important
decisions that affect the overall design of the
supply chain.
 This links all parts of the supply chain, passing
information about products, customer
demand, materials to be moved, timing, stock
levels, availability, problems, costs, service
level, etc. Coordinating the flow of
information can be very difficult, and logistics
managers often describe themselves as
processing information rather than moving
goods.
 Inbound logistics
 Intra-organizational movements
 Outbound logistics
 Recovery and recycling (or reverse logistics)

Purchasing & Supply Chain

Management, 4e
75
 Inbound Outbound
Logistics Logistics

Intra-
Suppliers organizational Customers
Movement

Reverse
Logistics

76
 All inbound shipments moving from supplier
to buyer facilities
 Often included in sourcing negotiations
 Can be a substantial part of contractual terms

Purchasing & Supply Chain

Management, 4e
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 Movement of materials between production
facilities
 Movement in and out of intermediary storage
facilities
 May be moved via private fleet
 Increasingly reduced using JIT and lean
production techniques

Purchasing & Supply Chain

Management, 4e
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 Link between a organization and its
customers
 Historically called physical distribution
 Since deregulation, increasing involvement by
supply management

Purchasing & Supply Chain

Management, 4e
79
 Need to find innovative ways of recovering
and recycling of products to minimize
environmental impact
 May also include shipment of repairable items
for refurbishment
 Often not a priority

Purchasing & Supply Chain

Management, 4e
80
 More active in sourcing most, if not all,
transportation services, not just inbound
logistics
 Carrier selection
 3PL provider selection
 Negotiate long-term freight agreements
 Evaluate carrier performance

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Management, 4e
81
 Arrange pickups and deliveries
 Processing damage and loss claims
 Tracing and expediting shipments
 Coordinating interplant and outbound
movements
 Auditing freight bills for accuracy
 Determining plant and warehouse locations

Purchasing & Supply Chain

Management, 4e
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 Determine point of control

Evaluate Identify relevant performance variables Evaluate

intermediary externally
performance controlled
Select mode delivery

Select carrier

Private
Negotiate rates and service levels
carrier

Evaluate carrier performance

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Management, 4e
83
 FOB Origin
 FOB destination
 Preapproved or otherwise acceptable carrier
list
 Third party broker or intermediary
◦ Consolidation with other small shipments
◦ Value-added services

Purchasing & Supply Chain

Management, 4e
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 FOB Origin
◦ Buyer controls or directs shipment
◦ Buyer assumes title and risk of loss at seller’s
shipping point
◦ Seller has following UCC responsibilities
 Put goods in possession of carrier
 Make a proper contract for transportation
 Obtain and deliver documents to buyer
 Promptly notify shipper of shipment

Purchasing & Supply Chain

Management, 4e
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 FOB Destination
◦ Seller is required at own risk and expense to
transport goods
◦ Seller assumes title to goods and risk of loss until
satisfactory delivery to buyer’s facility

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Management, 4e
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Performance
Description
Measure
In addition to fees charged, includes extra inventory,
Total cost warehousing, buffer stock, and international fees (broker’s
fees, customs,, etc.)
Measured as time from when the shipment is released at the
Speed supplier’s facility to the time of receipt at buyer’s receiving
dock
Also know as fill rate; refers to ability to deliver on time; i.e.,
Reliability percentage of deliveries made within the specified time
window
Refers to the ability of the carrier to move the material,
Capability
including special materials, hazardous materials, etc.
Refers to whether the carrier is capable of picking up the
Accessibility
shipment and delivering it door-to-door

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Management, 4e
87
 Does the carrier or mode have the physical
ability to transport an item?
 Does the carrier have the proper equipment
in the right location?
 Does the carrier have the equipment and
resources to transport multiple, frequent
shipments for a specified traffic lane?

Purchasing & Supply Chain

Management, 4e
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 Motor carrier
 Rail carrier
 Air carrier
 Water carrier
 Pipeline carrier

Purchasing & Supply Chain

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Distribution Management

90
 What Role Does
What is the Nature Physical Distribution
Of Distribution Play in Attracting
Channels? and Satisfying
Customers?

How do Channel What Problems do

Firms Interact and Companies Face in
Organize to do the Designing and
Work of the Managing Their
Channel? Channels?
91
 A set of interdependent organizations
(intermediaries) involved in the process of
making a product or service available for
use or consumption by the consumer or
business user.
 Marketing Channel decisions are among the
most important decisions that management
faces and will directly affect every other
marketing decision.

92
 The use of intermediaries results from their
greater efficiency in making goods available
to target markets.
 Offer the firm more than it can achieve on
it’s own through the intermediaries:
◦ Contacts,
◦ Experience,
◦ Specialization,
◦ Scale of operation.
 Purpose: match supply from producers to
demand from consumers.
93
94
 In th is vid eo clip, a Dupont executive speaks about managing
the supply chain and the logistics p rocess f or two well-known
brand s: Nomex and Kevlar.

Click to play
Click to retur

These Functions Should be Assigned to the Channel Member Who

Can Perform Them Most Efficiently and Effectively to Provide
Satisfactory Assortments of Goods and Services to Target Customers.
Risk Taking Information

Financing Promotion

Physical
Contact
Distribution

Negotiation Matching
95
Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in
Bringing the Product and its Ownership Closer to the Final Buyer.

Channel 1 Direct Channel

M C

Channel 2 Indirect Channel

M R C

Channel 3
M W R C

Channel 4
M W J R C
96
 The channel will be most effective when:
◦ each member is assigned tasks it can do best.
◦ all members cooperate to attain overall channel
goals and satisfy the target market.
 When this doesn’t happen, conflict occurs:
◦ Horizontal Conflict occurs among firms at the
same level of the channel, i.e retailer to retailer.
◦ Vertical Conflict occurs between different levels of
the same channel, i.e. wholesaler to retailer.
 For the channel to perform well, each
channel member’s role must be specified
and conflict must be managed.
97
Conventional Vertical
Marketing Marketing
Channel System

Manufacturer
Manufacturer

Wholesaler
Wholesaler

Retailer
Retailer

Consumer Consumer
98
 Corporate
Common Ownership at Different
Levels of the Channel i.e. Sears

Contractual
Degree of
Direct Control Contractual Agreements Among
Channel Members

Administered
Leadership is Assumed by One or
a Few Dominant Members i.e. Kraft
99
 Vertical Marketing
Systems (VMS)

Corporate Contractual Administered

VMS VMS VMS

Wholesaler Sponsored Retailer Franchise

Voluntary Chain Cooperatives Organizations

Manufacturer- Manufacturer- Service-Firm-

Sponsored Retailer Sponsored Wholesaler Sponsored
Franchise System Franchise System Franchise System
10
0
 Horizontal Hybrid Marketing
Marketing System System
Two or More A Single Firm Sets
Companies at One Up Two or More
Channel Level Join Marketing Channels
Together to Follow a to Reach One or
New Marketing More Customer
Opportunity. Segments.
Example: Example:
Banks in Grocery Retailers, Catalogs,
Stores and Sales Force
10
1
 Describe the kinds of horizontal and vertical
channel conflict that might occur in one of the
following:
◦ Personal computer industry,
◦ Automobile industry,
◦ Music industry,
◦ Clothing industry.
 How would you remedy the problems you have
just described?

10
2
 A Major Trend is Toward
Disintermediation Which Means that
Product and Service Producers are
Bypassing Intermediaries and Going
Directly to Final Buyers or That New
Types of Channel Intermediaries are
Emerging to Displace Traditional
Ones.
10
3
 Analyzing Consumer Service Needs

Setting Channel Objectives & Constraints

Identifying Major Alternatives

Intensive Selective Exclusive

Distribution Distribution Distribution

Evaluating the Major Alternatives

Designing International Distribution Channels

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Selecting Channel Members

FEEDBACK
Motivating Channel Members

Evaluating Channel Members

10
5
 Involves getting the right product to the right
customers in the right place at the right time.
 Companies today place greater emphasis on
logistics because:
◦ customer service and satisfaction have become the
cornerstone of marketing strategy.
◦ logistics is a major cost element for most
companies.
◦ the explosion in product variety has created a need
for improved logistics management.
◦ Improvements in information technology has
created opportunities for major gains in
distribution efficiency.
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6
 Higher Distribution Costs;
Higher Customer Service Levels

Goal:
To Provide a Targeted Level of Customer Service
at the Least Cost.

Lower Distribution Costs;

Lower Customer Service Levels
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 Costs Order Processing
Minimize Costs of Received
Attaining Logistics Processed
Objectives Shipped

Logistics
Transportation Warehousing
Rail, Truck, Water, Functions Storage
Pipeline, Air, Distribution
Intermodal Automated
Inventory
When to order
How much to order
Just-in-time
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 Rail
Nation’s largest carrier, cost-effective
for shipping bulk products, piggyback
Truck
Flexible in routing & time schedules, efficient
for short-hauls of high value goods
Water
Low cost for shipping bulky, low-value,
non perishable goods, slowest form
Pipeline
Ship petroleum, natural gas, and chemicals
from sources to markets
Air
High cost, ideal when speed is needed or
distance markets have to be reached
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Checklist for Choosing
Transportation Modes
1. Speed
2. Dependability
3. Availability
4. Costs
5. Others

11
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 Third party logistics

Many companies are

now outsourcing
logistics tasks to
companies like
Ryder Integrated
Logistics.

Click or press space bar to return.

Concept Recognizes that Providing Better Customer

Service and Trimming Distribution Costs Requires
Teamwork, Both Inside the Company and Among All the
Marketing Channel Organizations.

Cross-Functional Teamwork inside the Company

Building Channel Partnerships

Third-Party Logistics

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 Strategic warehousing
 Warehouse operations
 Warehouse ownership
arrangements
 Warehouse decisions
 Traditionally viewed
as a place to hold
or store inventory
 Contemporary view
is the warehouse
functions to mix
inventory
arrangements to
meet customer
requirements
◦ Storage of products
is held to a minimum
 Warehouses were once
viewed as a necessary
evil, used to coordinate
product supply with
customer demand
 The explosion of the
consumer economy
after WWII saw the rise
of distribution
networks for consumer
goods
 Warehousing shifted
from passive storage
to strategic assortment
 Distribution centers
 Consolidation
terminals
 Break-Bulk facilities
 Cross-docks
 Warehousing is integral
to just-in-time (JIT)
and stockless
production strategies
◦ Requires strategically
located warehouses
across the globe
 An important goal in
warehousing is to
maximize flexibility
◦ Respond to ever-
changing customer
demand
 Economic benefits of
warehousing occur when overall
logistics costs are reduced
◦ Consolidation and break-bulk
◦ Sorting
◦ Seasonal storage
◦ Reverse logistics
 Service benefits are justified by
sales improvements that more
than offset added cost
◦ Spot-stocking
◦ Full line stocking
◦ Value-added services
 Consolidation occurs when a
warehouse receives materials
from a number of sources
and combines them into
exact quantities for a specific
destination
 Break-bulk occurs when a
warehouse receives a single
large shipment and arranges
for delivery to multiple
destinations
Figure 10.1 Consolidation and Break-Bulk Arrangements
 Cross-docking combines inventory from
multiple origins into a prespecified
assortment for a specific customer
 Products are
received,
selected,
repackaged,
and loaded for
shipment w/o WalMart Distribution
storage Center
 Mixing combines inventory from multiple
origins (like cross-docking) but also adds
items that are regularly stocked at the
mixing warehouse

Stock
Inventory
 Assembly occurs when
products or
components from
second-tier suppliers
are assembled by a
warehouse located
near manufacturing
plant
 Common assembly
processes are
packaging and color
customizing
 Seasonal
production include
agricultural
products
 Seasonal demand
includes lawn
furniture and toys
 Seasonal storage
allows production
efficiencies within
the constraints of
seasonality
 Reverse logistics
include activities
supporting
◦ Returns management
 Recalls or product that did
not sell
◦ Remanufacturing and
repair
 Repairing/refurbishing
equipment
◦ Remarketing
 Selling used equipment
◦ Recycling
 Spot-stocking is the
positioning of
inventory for seasonal
or promotional
demand
 Full line stocking
provides one-stop
shopping capability for
goods from multiple Full Line Stocking at
United Electric’s
suppliers Distribution Center
 Value-added services
include any work that
creates a greater value
for customers
◦ See Table 10.1 for
Table 10.1 Value-Added
Services
 Objective is to
◦ Efficiently receive
inventory
◦ Store it as required
◦ Assemble it into
complete orders
◦ Make a customer
shipment
 Operations will
therefore
emphasize product
flow
 Handling must
optimize movement
continuity and
efficiency
◦ Receiving—Unloading
the arriving vehicles
◦ In-Storage—moving
goods for storage
(transfer) or order
selection (picking)
◦ Shipping—verifying
the order and loading
the departing vehicles
 Slotting determines
specific locations
for the product
based on
◦ Velocity—how fast the
goods move
◦ Weight—how heavy is
the product
◦ Special
Characteristics—how
large or small, does it
require rack or bin
storage
 Active Storage—
storage for basic
inventory
replenishment
◦ Focuses on quick
movement
◦ Includes flow-through
or cross-dock
distribution
 Extended Storage—
storage for inventory
held in excess of
period for normal
replenishment
 Private—warehouse
operated by the firm
owning the product
◦ Building may be owned or
leased
 Public—service company
owns warehouse and
hires out space and
services
◦ Usually classed as
 General merchandise
 Refrigerated
 Special commodity
 Household goods and
furniture
 Usually a long-term
relationship or contract
between a firm and the
warehousing
owner/operator
◦ Long-term cost savings
compared with public
warehouse
◦ Often a firm’s employees
will work alongside the
contract warehouse’s
◦ Example is Kraft Foods
who has contracted with
 Site Selection
 Design
 Product-Mix Analysis
 Expansion
 Materials Handling
 Layout
 Sizing
 Warehouse management
system
 Accuracy and audit
 Security
 Safety and maintenance
 Warehouse management systems (WMS)
integrate procedures and software support
to standardize storage and handling work
procedures
 One main use of WMS is to coordinate order
selection
◦ Discrete selection is when a specific customer’s
order is selected and prepared for shipment as a
single work assignment
◦ Wave or batch selection is when orders are
processed through zones of the warehouse
assigned to specific employees
 Inventory accuracy is
typically maintained by
annual physical counts or
counting portions of
inventory on a planned
basis
◦ Cycle counting is the audit of
selected inventory on a cyclic
schedule
 Audits are common to
maintain safety, assure
compliance to regulations
and help improve
procedures
 Consider these two systems:
Warehouse One Market One
Supplier
Warehouse Two Market Two

Market One
Supplier Warehouse
Market Two

139
 For the same service level, which system will
require more inventory? Why?
 For the same total inventory level, which
system will have better service? Why?
 What are the factors that affect these
answers?

140
 Centralizing inventory control reduces both
safety stock and average inventory level for
the same service level.
 This works best for
◦ High coefficient of variation, which reduces
required safety stock.
◦ Negatively correlated demand. Why?
 What other kinds of risk pooling will we see?

141
 Risk Pooling Across Markets
 Risk Pooling Across Products
 Risk Pooling Across Time
◦ Daily order up to quantity is:
 LTAVG + z  AVG  L
Orders

10 11 12 13 14 15

Demands

142
 Safety stock
◦ Safety stock decreases as a firm moves from a
decentralized to a centralized system.
◦ Depend on CV and correlation
 Service level
◦ Given the same total safety stock, the service level
provided by the centralized system is higher.
 Overhead
◦ Typically, these costs are much greater in a
decentralized system.

143
 Lead time
◦ The response time for a decentralized
system is much shorter.
 Transportation Costs
◦ Outbound costs are higher for the
centralized system.
◦ Inbound costs are higher for the
decentralized system.

144
 Centralized Decision
Supplier

Warehouse

Retailers

145
 Question: How much inventory should
management keep at each location?
 A good strategy:
◦ The retailer raises inventory to level s each period
◦ The supplier raises the sum of inventory in the
retailer and supplier warehouses and in transit to S
◦ If there is not enough inventory in the warehouse to
meet all demands from retailers, it is allocated so
that the service level at each of the retailers will be
equal.

146
 Periodic inventory review policy
 Tight management of usage rates, lead times
and safety stock
 Reduced safety stock levels
 Introduce or enhance cycle counting practice
 ABC approach
 Shift more inventory, or inventory ownership,
to suppliers
 Quantitative approaches – inventory turnover
rate

147
Practical issues

148
 Key issue

What are the dimensions

1 of the agile supply chain?
 Market sensitive
◦ Supply chain is capable of
reading and responding to
real demand
 Virtual
◦ Information-based supply
chain, rather than
inventory-based.

Agile supply chain

 Network based
◦ EDI and internet enable
partners in the supply
chain to act upon the
real demand
 Process integration
◦ Collaborative working
between buyers and
suppliers, joint product
development, common
systems and shared
information Agile supply chain
  Demand characteristics and supply capabilities

end-customers Lean supply chain 1980’s Efficiency, cost

become more
Focus
knowledgeable
about product Agile supply chain 1990’s Responsiveness
 Demand characteristics and supply capabilities
Distinguishing Lean supply Agile supply
attributes
Typical products Commodities Fashion goods
Marketplace demand Predictable Volatile
Product variety Low High
Product life cycle Long Short
Customer drivers Cost Availability
Profit margin Low High
Dominant costs Physical costs Marketability costs
Stockout penalties Long-term contractual Immediate and volatile
Purchasing policy Buy materials Assign capacity
Information enrichment Highly desirable Obligatory
Forecasting mechanism Algorithmic(基于算法) Consultative(基于咨询)
 Comparison of characteristics of lean and agile supply
Characteristic Lean Agile
Logistics focus Eliminate waste Customers and markets
Partnerships Long-term, stable Fluid clusters
Measure capabilities,
Output measure such as
Key measure and focus on customer
productivity and cost
satisfaction
Work standardization, Focus on operator self-
Process focus conformance to management to
standards maximize autonomy
Logistics planning Stable, fixed period Instantaneous response
Source: Mason-Jones, Naylor and Towill (2000), Engineering the
leagile supply chain
 Supply
characteristics
Plan and Hold inventory:
Long lead time
control hedge and deploy

React and
JIT: pull execute: agile
Short lead time
scheduling capabilities Demand
Predictable Unpredictabl characteristics
market e markets
 Application of leagility: separation of ‘base’
and ‘surge’ demands
 Application of leagility: the Pareto curve
approach

Source: Martin, Christopher and Denis Towill, An integrated model

for the design of agile supply chains
 Application of leagility: the de-coupling point
approach
 Preconditions for successful agile practice
◦ Enterprise-level reality check
◦ Cost of complexity sanity check
◦ Lowering the cost of complexity: avoiding overly
expensive agility
◦ Forecasting: reduce the need for last minutes crises
 External: demand forecast
 Internal: financial forecast, asset forecast
 Agile manufacturing is a method for
manufacturing which combine our
organization, people and technology into an
integrated and coordinated whole.
 Global Competition is intensifying.
 Mass markets are fragmenting into niche
markets.
 Cooperation among companies is becoming
necessary, including companies who are in
direct competition with each other.
 Customers are expecting:
1. Low volume products
2. High quality products
3. Custom products
 Very short product life-cycles,
development time, and production lead
times are required.
 Customers want to treated and individuals
 To determine customer needs quickly and
continuously reposition the company against it’s
competitors.
 To design things quickly based on those individual
needs.
 To put them into full scale, quality , production
quickly.
 To respond to changing volumes and mix quickly.
 To respond to a crisis quickly.
 Three characteristics of supply chain
operations related to agile
◦ Mastering and benefiting from variation in demand;
◦ Very fast response to market opportunities;
◦ Unique or low volume response.
 Benefiting from variance
◦ Three sources of demand uncertainty
 Seasonality
Demand variance

 Product life cycles

Time
 End-customer demand
 Benefiting from variance
◦ Three sources of demand uncertainty
 Seasonality
 Product life cycles

Organize Adjust
Volume Agile capability
is needed

 End-customer
Startdemand
up Micro-markets
variety
 Benefiting from short time windows
◦ Decreased D-time requires different levels of agility
(VMI & QR)
 Speed of replenishment
 Upstream time sensitivity
 Information dissemination and alignment
 Benefiting from small volume
◦ Small volume is a result of micro-markets,
customization and rapid responsiveness.
◦ Three approaches of agile strategy related to small
volume
 Changeover flexibility
 Modularity at the network level
 Service-based and information-based solutions
 Benefiting from small volume
Variety
decrease Mass production

Flexibility

Modular supply network

Craft production
Volume
decrease
An integrated model for enabling the Agile supply chain