Chapter-6
Supply Chain Management
Supply Chain
• A supply chain is the sequence of organizations—their
facilities, functions, and activities— that are involved in
producing and delivering a product or service.
• The sequence begins with basic suppliers of raw materials
and extends all the way to the final customer.
• Facilities include warehouses, factories, processing centers,
distribution centers, retail outlets, and offices.
• Functions and activities include forecasting, purchasing,
inventory management, information management, quality
assurance, scheduling, production, distribution, delivery, and
customer service.
Supply Chain
Figure: A typical supply chain of Manufacturing
organization
Supply Chain
Supply Chain Management
• Supply chain management is the strategic coordination of
business functions within a business organization and
throughout its supply chain for the purpose of integrating
supply and demand management.
• Logistics is the part of a supply chain involved with the
forward and reverse flow of goods, services, cash, and
information. Logistics management includes management of
inbound and outbound transportation, material handling,
warehousing, inventory, order fulfillment and distribution, third-
party logistics, and reverse logistics.
Procurement
• The purchasing department of an organization is responsible for
obtaining the materials, parts, supplies, and services needed to
produce a product or provide a service.
• You can get some idea of the importance of purchasing when you
consider that, in manufacturing, upwards of 60 percent of the
cost of finished goods comes from purchased parts and materials.
• Furthermore, the percentages for purchased inventories are even
higher for retail and wholesale companies, sometimes exceeding
90 percent.
Purchasing interfaces
Purchasing has interfaces with a number of other functional
areas, as well as with outside suppliers. The interactions
between purchasing and these other areas are briefly
summarized here.
• Operations constitute the main source of requests for
purchased materials, and close cooperation between these units
and the purchasing department is vital if quality, quantity, and
delivery goals are to be met.
• Accounting is responsible for handling payments to suppliers
and must be notified promptly when goods are received in order
to take advantage of possible discounts.
• Design and engineering usually prepare material
specifications, which must be communicated to purchasing.
Purchasing interfaces
• Receiving checks incoming shipments of purchased items to
determine whether quality, quantity, and timing objectives
have been met, and it moves the goods to temporary storage.
• Suppliers or vendors work closely with purchasing to learn
what materials will be purchased and what kinds of
specifications will be required in terms of quality, quantity, and
deliveries.
Purchasing Cycle
Purchasing cycle consist with Series of steps that begin with a
request for purchase and end with notification of shipment
received in satisfactory condition. The main steps in the cycle
includes followings.
• Purchasing receives the requisition. The requisition
includes ( a ) a description of the item or material desired, ( b )
the quantity and quality necessary, ( c ) desired delivery dates,
and ( d ) who is requesting the purchase.
• Purchasing selects a supplier. The purchasing department
must identify suppliers who have the capability of supplying
the desired goods. If no suppliers are currently listed in the
files, new ones must be sought.
Purchasing Cycle
• Purchasing places the order with a vendor. If the order
involves a large expenditure, particularly for a one-time
purchase of equipment, for example, vendors will usually be
asked to bid on the job, and operating and design personnel
may be asked to assist in negotiations with a vendor.
• Monitoring orders. Routine follow-up on orders, especially
large orders or those with lengthy lead times, allows the
purchasing department to project potential delays and relay
that information to the operating units.
• Receiving orders. Receiving must check incoming shipments
for quality and quantity. It must notify purchasing, accounting,
and the operating unit that requested the goods. If the goods are
not satisfactory, they may have to be returned to the supplier or
subjected to further inspection.
Centralized vs Decentralized purchasing
• Centralized purchasing: Purchasing is handled by one special
department. Centralized purchasing may be able to obtain lower
prices than decentralized units if the higher volume created by
combining orders enables it to take advantage of quantity discounts
offered on large orders. Centralized purchasing may also be able to
obtain better service and closer attention from suppliers.
• Decentralized purchasing: Individual departments or separate locations
handle their own purchasing requirements. Decentralized purchasing has
the advantage of awareness of differing “local” needs and being better
able to respond to those needs. Decentralized purchasing usually can
offer quicker response than centralized purchasing.
Supplier Management
• Choosing supplier: A company considers price, quality, the supplier’s
reputation, past experience with the supplier, and service after the sale.
A comprehensive Vendor Analysis is required before selecting a specific
supplier. Vendor analysis refers to the Evaluating the sources of supply
in terms of price, quality, reputation, and service.
• Supplier Audit: Periodic audits of suppliers are a means of keeping
current on suppliers’ production (or service) capabilities, quality and
delivery problems and resolutions, and suppliers’ performance on other
criteria. If an audit reveals problem areas, a buyer can attempt to find a
solution before more serious problems develop. Among the factors
typically covered by a supplier audit are management style, quality
assurance, materials management, the design process used, process
improvement policies, and procedures for corrective action and follow-up.
Supplier Management
• Supplier certification: Supplier certification is a detailed examination of
the policies and capabilities of a supplier. The certification process verifies
that a supplier meets or exceeds the requirements of a buyer. This is
generally important in supplier relationships, but it is particularly important
when buyers are seeking to establish a long-term relationship with
suppliers.
• Supplier Relationship Management: Business organizations are
becoming increasingly aware of the importance of building good
relationships with their suppliers. In the past, too many firms regarded
their suppliers as adversaries and dealt with them on that basis. One
lesson learned from the Japanese is that numerous benefits derive from
good supplier relations, including supplier flexibility in terms of accepting
changes in delivery schedules, quality, and quantities. Moreover,
suppliers can often help identify problems and offer suggestions for
solving them.
Supplier Management
• Supplier Partnership: More and more business organizations are seeking
to establish partnerships with other organizations in their supply chains.
This implies fewer suppliers, longer-term relationships, sharing of
information (forecasts, sales data, problem alerts), and cooperation in
planning. Among the possible benefits are higher quality, increased
delivery speed and reliability, lower inventories, lower costs, higher profits,
and, in general, improved operations.
Supplier Management
• Supplier as adversary versus supplier as partner
Supplier Management
• Strategic partnering: Strategic partnering occurs when two or more
business organizations that have complementary products or services
that would strategically benefit the others agree to join so that each may
realize a strategic benefit.