Controlling the Supply Chain

Purchasing

Purchasing is the formal process of buying goods and services.

Learning Objectives

Explain the purchasing process

Key Takeaways

Key Points

  • Purchasing directors and procurement directors guide and define the organization’s acquisition procedures and standards.
  • Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process.
  • The purchasing process usually starts with a demand for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department.
  • Purchase orders can be of various types: standard, one-time buy, planned (agreement with a specific item at an approximate date), and blanket (an agreement with non-specific date, quantity, and amount).
  • Purchase orders are normally accompanied by terms and conditions, which form the contractual agreement of the transaction.

Key Terms

  • Purchasing: Purchasing refers to a business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise.

Purchasing is the formal process of buying goods and services. Purchasing managers /directors, and procurement managers/directors, guide the organization’s acquisition procedures and standards. The purchasing process can vary from one organization to another but usually involves certain key elements.

Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization, each of which completes a different part of the acquisition process. The three departments do not report to the same senior manager, which prevents unethical practices and lends credibility to the process. These departments may be designated as any of the following: purchasing, receiving, accounts payable or engineering, purchasing and accounts payable, or plant management. Combinations vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.

The purchasing process typically starts with a demand or specific requirements for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department. A Request for Proposal (RFP) or Request for Quotation (RFQ) is then produced. Suppliers respond to the RFQ with quotes, and a review is undertaken in order to determine the best offer (a judgment based on price, availability, and quality) and issue the purchase order.

Purchase orders (POs) can be of various types:

  • Standard: a one time buy
  • Planned: an agreement on a specific item at an approximate date
  • Blanket: an agreement on specific terms and conditions (date and quantity and amount are not specified)

POs are normally accompanied by terms and conditions, which represent the contractual agreement of the transaction. The supplier delivers the product and/or service and the customer records the delivery (in some cases, the delivery is accompanied by a goods inspection process). The supplier then issues an invoice that is cross-checked with the purchase order and the record of the product and/or service received. Finally, payment is made.

Successful supply chain management requires an effective shift from the management of individual functions to the integration of activities, such as purchasing, into key supply chain processes. For instance, a purchasing department will place orders as requirements become known.

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Acquisition Process: Model of the acquisition process for major systems in industry and defense: The process is defined by a series of phases, during which technology is defined and matured into viable concepts, which are subsequently developed and prepared for production.

Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage of stocked goods to reduce costs and improve sales.

Learning Objectives

Recognize the applications and benefits of inventory management

Key Takeaways

Key Points

  • Inventory refers to a list compiled for some formal purpose, such as the details of an estate or the contents of a rented house.
  • Inventory management is required at different locations within a facility or within many locations of a supply network in order to plan for the production and stock of materials.
  • Inventory management addresses issues including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; and future inventory price forecasting.
  • Supply chain activities can be grouped into strategic, tactical, and operational categories.
  • Supply chain activities can be grouped into strategic, tactical, and operational levels.

Key Terms

  • supply chain: A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.
  • tactical planning: an organization’s process of determining how to optimize current resources and operations

In the United Kingdom, inventory typically refers to a list compiled for some formal purpose, such as one that itemizes an estate going to probate or the contents of a furnished house to be rented. In the U.S. and Canada, inventory has become the equivalent of the British term stock; that is, it refers to material that is available from and stocked by a business. In the context of accounting, inventory or stock is considered an asset.

Inventory Management

Inventory management tracks the shape and percentage of stocked goods. At different locations within a facility, or within many locations of a supply network, inventory management must precede the regular and planned course of production and stocking of materials.

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Inventory Management: Inventory management is primarily concerned with specifying the shape and percentage of stocked goods.

Inventory management addresses a number of concerns, including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; future inventory price forecasting; physical inventory; available physical space for inventory; quality management; replenishment; returns and defective goods; and demand forecasting. By effectively managing these issues, a business can achieve optimal inventory levels. However, the management process is on-going as a business and its needs shift and respond to the wider environment.

Inventory management often involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It requires systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status, and handle all functions related to the tracking and management of material. These include the monitoring of material moved into and out of stockroom locations, as well as the reconciling of inventory balances. Processes may also include ABC analysis, lot tracking, and cycle counting support.

Management of inventories, aimed primarily at determining and controlling stock levels within the physical distribution system, serves to balance the need for product availability against the need for minimizing stock holding and handling costs. Reasons for keeping an inventory include:

  • Time: The time lag in the supply chain from supplier to user requires the availability of a certain amount of inventory for use during this lead time. In practice, inventory is maintained for consumption during variations in lead time, and lead time itself can be addressed by ordering a specified number of days in advance.
  • Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and movement of goods.
  • Economies of scale: To deliver one unit of product at a time, and in response to the specific need and location of a given user, would be costly and logistically difficult. In contrast, bulk buying, movement, and storage translate into economies of scale and inventory.

Inventory and the Supply Chain

Supply chain activities can be grouped into strategic, tactical, and operational levels. Inventory considerations present at each level include:

Strategic: Network optimization, including the number, location, and size of warehousing, distribution centers, and facilities.

Tactical: Inventory decisions, including quantity, location, and quality of inventory.

Operational: Sourcing planning, including current inventory and forecast demand, done in collaboration with all suppliers; inbound operations, including transportation from suppliers and receiving inventory; outbound operations, including all fulfillment activities, warehousing, and transportation to customers; management of non-moving, short-dated inventory and avoidance of short-dated products.

Scheduling

The purpose of scheduling is to minimize production time and costs.

Learning Objectives

Explain the benefits of using modern scheduling tools

Key Takeaways

Key Points

  • Production scheduling aims to maximize the efficiency of operations and reduce costs.
  • Benefits of production scheduling include process change-over reduction; inventory reduction; leveling; reduced scheduling effort; increased production efficiency; labor load leveling; accurate delivery date quotes; and real time information.
  • Minute-by-minute production scheduling for each manufacturing facility in the supply chain occurs at the operational level of supply chain activities.
  • Benefits of production scheduling include process change-over reduction, inventory reduction, leveling, reduced scheduling effort, increased production efficiency, labor load leveling, accurate delivery date quotes and real time information.
  • Production scheduling for each manufacturing facility in the supply chain (minute by minute) takes place at the operational level of supply chain activities.

Key Terms

  • Backward scheduling: Backward scheduling is planning the tasks from the due date or required-by date to determine the start date and/or any changes in capacity required.
  • Forward scheduling: Forward scheduling is planning the tasks from the date resources become available to determine the shipping date or the due date.
  • maturity date: the time of the final payment of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid

Scheduling is an important tool in the manufacturing and engineering industries, where it can significantly impact the productivity of a particular process. In manufacturing, the purpose of scheduling is to minimize production time and cost by telling a production facility when to make a product and with which staff and equipment.

Production scheduling aims to maximize the efficiency of an operation and reduce its costs. Modern scheduling tools greatly outperform older, manual scheduling methods. Today’s tools provide the production scheduler with powerful graphical interfaces, which can be used to visually optimize real time work loads in various stages of production. Further, pattern recognition software reveals scheduling opportunities that might not be apparent without this view into the data.

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Scheduling Visualization: This Gantt chart aids in scheduling by visualizing and relating phases of production.

For example, in order to reduce costs, an airline may want to minimize the number of airport gates required for its aircraft. Scheduling software allows planners to see how this might be done, enabling them to analyze time tables, aircraft usage, or the flow of passengers.

Companies use backward and forward scheduling to allocate plant and machinery resources, determine human resources and production processes, and purchase materials. Forward scheduling involves planning tasks from the date that resources become available in order to determine the shipping date or the due date. Backward scheduling involves planning tasks from the due date or required-by date in order to determine the start date and/or necessary changes in capacity.

Production scheduling has a number of benefits:

  • Process change-over reduction
  • Inventory reduction and leveling
  • Reduced scheduling effort
  • Increased production efficiency
  • Labor load leveling
  • Accurate delivery date quotes
  • Real time information

Finally, minute-by-minute production scheduling occurs for each manufacturing facility in the supply chain at the operational level of supply chain activities.

Routing

Routing is the process of selecting paths in a network along which to send network traffic.

Learning Objectives

Explain the process of routing

Key Takeaways

Key Points

  • Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the Internet), and transportation networks.
  • A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity.
  • Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it.
  • At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting.

Key Terms

  • routing: a method of finding paths from origins to destinations in a network such as the Internet, along which information can be passed
  • transport network: A transport network, or transportation network in American English, is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of somecommodity.

Routing is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the internet), and transportation networks. This chapter focuses on the role of routing in transportation networks.

Transport Networks

A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity. Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it. A transport network may combine different modes of transport.

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Anycast Routing: A visual display of Anycast routing.

Tactical Level

At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting of goods. A goal of a company when transporting goods is to ensure efficiency. Wear and tear of vehicles and the cost of gas can make some routes more expensive than others. In order to reduce costs, companies often look for ways to streamline routes and supply chain activities. GPS, or global positioning system, is a technological advancement that has helped companies determine which routes are the most expensive to maintain. These routes can be analyzed to determine if they can be eliminated, divided, and/or merged with other routes, or if finding a new route can help make the route more efficient. Sometimes transport is subcontracted to specialists or logistics partners.

Outsourcing

Outsourcing is the contracting of an existing business process to an external, independent organization.

Learning Objectives

Analyze the effects of outsourcing on the supply chain

Key Takeaways

Key Points

  • The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product.
  • Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house.
  • Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement.
  • Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

Key Terms

  • supply chain: A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

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Outsourcing: Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

The Rise of Outsourcing

In the 1990s, industries began to focus on “core competencies,” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships.

This transition also re-focused the fundamental perspectives of each respective organization. OEMs became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above instead of from within. Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work -in-process visibility and vendor-managed inventory (VMI).

Outsourcing and the Supply Chain

The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands.

Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage, and outsource everything else. This movement has been particularly evident in logistics, where the provision of transport, warehousing, and inventory control is increasingly subcontracted to specialists or logistics partners. Also, managing and controlling this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

Logistics

Logistics plans, implements, and controls the forward and reverse flow and storage of goods between the point of origin and consumption.

Learning Objectives

Differentiate between supply chain and logistics

Key Takeaways

Key Points

  • Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing.
  • Logistics applies to activities within one company involving distribution of the product, whereas the term ” supply chain ” also encompasses manufacturing and procurement and, therefore, has a much broader focus.
  • Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts called “supply chain logisticians”.
  • In business, logistics may have either internal focus (inbound logistics) or external focus (outbound logistics), covering the flow and storage of materials from point of origin to point of consumption (see supply chain management ).
  • There are two fundamentally different forms of logistics. One optimizes a steady flow of material through a network of transport links and storage nodes, and the other coordinates a sequence of resources to carry out some project.
  • There are two fundamentally different forms of logistics: one optimizes a steady flow of material through a network of transport links and storage nodes; the other coordinates a sequence of resources to carry out some project.

Key Terms

  • logistics: The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from their point of origin to point of consumption for the purpose of satisfying customer requirements.
  • supply chain: A system of organizations, people, technology, activities, information. and resources involved in moving a product or service from supplier to customer.
  • inventory: The stock of an item on hand at a particular location or business.

Logistics

The term Logistics Management or Supply Chain Management is the 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 customer’s requirements.

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Distribution chain: Example of how companies may be supplied by the same distributor.

Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing. This can involve anything from consumer goods, such as food to IT materials, and aerospace and defense equipment.

There is often confusion over the terms “supply chain” and “logistics. ” It is now generally accepted that the logistics applies to activities within one company/organization involving distribution of product, whereas supply chain also encompasses manufacturing and procurement and, therefore, has a much broader focus as it involves multiple enterprises, including suppliers, manufacturers, and retailers, working together to meet a customer’s need for a product or service.

The Evolution of Logistics

Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts or supply chain logisticians. Business logistics can be defined as “having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer,” and is the science of process and incorporates all industry sectors. The goal of logistics work is to manage the fruition of project life cycles, supply chains, and resultant efficiencies.

Starting in the 1990s, several companies chose to outsource the logistics aspect of supply chain management by partnering with a 3PL, third-party logistics provider. Companies also outsource production to contract manufacturers. Technology companies have risen to meet the demand to help manage these complex systems.

Logistic Focus

In business, logistics may have either an internal focus (inbound logistics) or external focus (outbound logistics).

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores.

Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user.

Quality Control

Quality control is a process that evaluates output against a standard and takes corrective action when output doesn’t meet that standard.

Learning Objectives

Discuss the role of quality control in business

Key Takeaways

Key Points

  • The purpose of quality control is to make sure that certain processes perform to a company’s set standards.
  • Quality control in relation to customers involves the continuous act of making sure products, designed and manufactured, are produced to meet and exceed customer needs.
  • Quality should be measured differently for products and services and judged by their own set of dimensions.
  • Controls include product inspection, where every product is visually examined, often with a stereo microscope to perceive fine detail before the product is sold into the external market.
  • Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers.

Key Terms

  • total quality management: A strategic approach to management aimed at embedding awareness of quality in all organizational processes.
  • organizational culture: Organizational culture is the collective behavior of humans who are part of an organization and the meanings that the people attach to their actions.
  • quality control: A control, such as inspection or testing, introduced into an industrial or business process to ensure quality.

Quality can be thought of as the degree to which performance of a product or service meets or exceeds expectations. Quality control is a process that evaluates output against a standard and takes corrective action when output doesn’t meet these predetermined standards. Therefore, quality control in relation to customers would be the continuous act of making sure products, designed and manufactured, are produced to meet and exceed the needs of customers. For contract work, particularly work awarded by government agencies, quality control issues are among the top reasons for not renewing a contract.

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quality control: The purpose of quality control is to make sure that certain processes are performing up to a company’s set standards.

This approach places an emphasis on three aspects:

  • Elements such as controls, job management, defined and well-managed processes, performance and integrity criteria, and identification of records
  • Competence, such as knowledge, skills, experience, and qualifications
  • Soft elements, such as personnel integrity, confidence, organizational culture, motivation, team spirit, and quality relationships

Controls include product inspection, where every product is examined visually, often using a stereo microscope for fine detail before the product is sold on the external market. Inspectors will be provided with lists and descriptions of unacceptable product defects such as cracks or surface blemishes.

An emphasis on quality control heightened during World War II. At that time quality control evolved to quality assurance and is now better known as a Strategic Approach, a tool for improving not only products but also processes and services. Quality should be measured differently for products and services, and judged by their own set of dimensions. Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers. Most of the time, managers aim to improve or maintain the quality of an organization as a whole; this is referred to as Total Quality Management (TQM). TQM involves a continual effort for quality improvement by everyone in an organization. The entire supply chain must be involved for an organization to meet and exceed goals of quality control.

Investment in Operations

Investment in information technology has made supply chains faster, cheaper, and more reliable.

Learning Objectives

Examine the effect of technological advances on supply chain optimization

Key Takeaways

Key Points

  • Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.
  • Supply chain managers try to maximize the profitable operation of their manufacturing and distribution supply chain.
  • Supply chain optimization may include refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways.
  • Optimization solutions are typically part of, or linked to, the company’s replenishment systems distribution requirements planning, so that orders can be automatically generated to maintain the model stock profile. The algorithms used are similar to those used in making financial investment decisions; the analogy is quite precise, as inventory can be considered to be an investment in prospective return on sales.
  • Supply chain optimization may include refinements at various stages of the product lifecycle, so that new, ongoing and obsolete items are optimized in different ways: and adaptations for different classes of products, for example seasonal merchandise.

Key Terms

  • supply chains: A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Supply chains have become faster, cheaper, and more reliable through investment in information technology, cost-analysis, and process-analysis.

Supply chain optimization applies processes and tools that ensure optimal operation of a manufacturing and distribution supply chain. These include the optimal placement of inventory within the supply chain and the minimizing of operating costs associated with manufacturing, transportation, and distribution. Optimization may also incorporate computer-based mathematical modelling techniques.

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Supply Chain: Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.

Ongoing investment in a company’s operations is necessary in order for supply chain optimization to be achieved. Supply chain managers may employ optimization such as maximizing gross margin return on inventory invested (GMROII); balancing the cost of inventory at all points in the supply chain with availability to the customer; minimizing total operating expenses (e.g., transportation, inventory, and manufacturing); and maximizing gross profit of products distributed through the supply chain.

Supply chain optimization addresses the general supply chain problem of delivering products to customers at low cost and high profit. This involves balancing the costs of inventory, transportation, distribution, and manufacturing, and supply chain optimization has applications in all industries that manufacture and/or distribute goods (retail, industrial, and/or consumer packaged goods [CPG]).

The classic supply chain approach has been to forecast future inventory demand using statistical trending and “best fit” techniques, which are based on historic demand and predicted future events. The advantage of this approach is that it can be applied to data aggregated at a fairly high level (e.g., category of merchandise; weekly, by customer category), thus requiring modest database sizes and small amounts of manipulation. Unpredictability in demand is subsequently managed by setting safety stock levels; for example, a distributor might hold two weeks of supply for a steadily in-demand article but twice that supply for an article whose demand is more erratic.

Using this forecast demand, a supply chain manufacturing and distribution plan is created to manufacture and distribute products to meet the demand at low cost and/or high profit. This plan typically addresses several questions:

  • How much of each product should be manufactured each day?
  • How much of each product should be made at each manufacturing plant?
  • Which manufacturing plants should re-stock which warehouses with which products?
  • What transportation modes should be used for warehouse replenishment and customer deliveries?

The technical ability to record and quickly manipulate large databases has allowed for the emergence of a new breed of supply chain optimization solutions, which are capable of forecasting at a granular level (for example, per article per customer per day). Some vendors are applying “best fit” models to this data, to which safety stock rules are applied, while other vendors have started to apply stochastic techniques to the optimization problem.

Supply chain optimization may include additional refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways. Finally, while most software vendors are offering supply chain optimization as a packaged solution and integrated in ERP software, some vendors are running the software on behalf of clients as application service providers.