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A Practical Application of Supply Chain Management Principles Thomas I. Schoenfeldt ASQ Quality Press Milwaukee, Wisconsin American Society for Quality, Quality Press, Milwaukee 53203 © 2008 by ASQ All rights reserved. Published 2008 Printed in the United States of America 14 13 12 11 10 09 08 5 4 3 2 1 Library of Congress Cataloging-in-Publication Data Schoenfeldt, Thomas I., 1946– A practical application of supply chain management principles / Thomas I. Schoenfeldt. p. cm. Includes bibliographical references and index. ISBN: 978-0-87389-736-5 (alk. paper) 1. Business logistics. I. Title. HD38.5.S35 2008 658.7—dc22 2008001858 ISBN: 978-0-87389-736-5 No part of this book may be reproduced in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Publisher: William A. Tony Acquisitions Editor: Matt T. Meinholz Project Editor: Paul O’Mara Production Administrator: Randall Benson ASQ Mission: The American Society for Quality advances individual, organizational, and community excellence worldwide through learning, quality improvement, and knowledge exchange. Attention Bookstores, Wholesalers, Schools, and Corporations: ASQ Quality Press books, videotapes, audiotapes, and software are available at quantity discounts with bulk purchases for business, educational, or instructional use. For information, please contact ASQ Quality Press at 800-248-1946, or write to ASQ Quality Press, P.O. Box 3005, Milwaukee, WI 53201-3005. To place orders or to request a free copy of the ASQ Quality Press Publications Catalog, including ASQ membership information, call 800-248-1946. Visit our Web site at www.asq.org or http://www.asq.org/quality-press. Printed in the United States of America Printed on acid-free paper Introduction I n years past, customers were able to drive the prices and deliveries of their materials. This was possible in a domestic economy. With global- ization increasing more and more each day, customers must begin to build relationships with their suppliers and practice effective supply chain management to maintain the supply of essential materials. With the signing of the NAFTA agreement in January 1, 1994, the United States saw its industry base change. Many companies created opera- tions in Mexico because it was cheaper and more profitable to operate there. Today we are seeing another business shift. This time it is from Mexico and the United States to China and India. As these shifts occur, the countries’ economies are changing as well. Countries that are securing new businesses are getting stronger while those that are losing businesses become weaker. These changes prompt significant questions: “If a company had been managing the supply chain, would the business be moving?” “If a company works to develop healthy suppliers, will the operations remain nearby?” These are very tough questions that seem to have been ignored by many U.S. companies over the years, when the focus was on price alone. Can the trend to keep moving operations offshore be reversed? I believe that it can, but it will require a change in the way many U.S. companies are currently doing business. As we look at the subject of making the needed quantum leap by managing the supply chain, we will see an opportunity to develop and maintain efficient and competitive businesses within the United States. This book is designed to share the principles of supply chain manage- ment. It is written based on the practical experiences of the author, relat- ing them to industry principles that are discussed in the various chapters. This book can be used as a textbook for business education or as a reference book for businesses that recognize the need to change the way that their supply chain processes are managed. xvii xviii Introduction Chapter 1 evaluates business developments over the years to demon- strate how the trends have gone almost full circle. Many companies have not learned from their experiences. We present examples of how businesses were driven a few years ago compared to how they are driven today. In Chapter 2 we will define the supply chain and the companies involved, and show several examples. In addition, we will discuss the devel- opment and effective use of process mapping. A complete supply chain and process map of a specific organization will be presented in order to introduce the supply chain concept. This will help identify who the players might be for your organization. Chapter 3 helps develop the supply chain management strategy within an organization. A supply chain maturity model has been created that can be used to determine where different organizations are in the process. In this chapter, forecasting and other areas dealing with the customer are dis- cussed. This will help you begin to think about your organization and what changes might be made. An evaluation will be presented to help a company assess themselves as a customer. Would you want to be your own customer? This evaluation will help visualize what a good customer looks like for your particular company. Chapter 4 discusses the decision of whether to make or buy. This is the first step in supply chain management. In Chapter 5 there is a supplier selection process to help identify the best supplier for the organization in its present situation. This detailed method works well regardless of volumes and prices by considering many variables that companies encounter when dealing with members of the sup- ply chain. Having selected a supplier, Chapter 6 introduces a procedure for their effective implementation. This is the beginning stage of the supplier certi- fication process. Chapter 7 describes international situations and how to effectively build international relationships. Culture is a very important aspect of interna- tional relationships that must be considered in supplier relationships. The issues of globalization and international relationships will be discussed, as well as the impact that different cultures and companies can have on supply chain management. In Chapter 8, we begin to consider relationship building. Initially, we will look at relationships from many perspectives. It is important to deter- mine who should be involved, how teams should be arranged, and the scope of the work that the teams can do. In Chapter 9 supplier quality system surveys are discussed, with exam- ples. Supplier visits are addressed, and we will explain both how to run a visit and the results that might be expected from the supplier. Introduction xix Chapter 10 discusses scorecards and measures of suppliers. The con- cept of the seven-part total perfect order is presented and how this can help both your organization and your supplier to improve. Chapter 11 focuses on customer satisfaction. This incorporates a dis- cussion of where different quality standards fit into supply chain manage- ment. Currently, there is a disconnect in this area in many organizations because quality subsists as a discrete department that is weakly related to other areas of the organization. Customer satisfaction is one area that is called out in the quality standards. Chapter 12 describes some quality tools and explains how they can be applied to supply chain management. The details of how to develop these tools can be found in other texts; we concentrate on their applications. Chapter 13 discusses two of the hot topics in supply chin management today: inventory and logistics. These areas can involve significant invest- ment and so they need to be managed as part of the supply chain. Chapter 14 covers information systems and some applications that can help in supply chain management. This is an overview of software pack- ages that does not promote specific vendors. The primary focus here is how information technology can help manage the supply chain. In a postscript (Chapter 15), taking the supply chain management to the consumer level is discussed with some personal examples. It is essen- tial to remember that each of us are both customer and supplier. In either circumstance we want to be treated well and so we should return the same behavior. As you read this book, think about the concepts presented in terms of how they might be implemented in your organization to make it better and improve the supply chain management process. I trust that this will be a learning journey for you as you read and apply what is in this book. Thomas Schoenfeldt Preface A fter years of teaching this type of material and reviewing many dif- ferent books, I was unable to locate one book that covered the topic in the manner that I was thinking. As a result you now have the consummation of my efforts from many years of work. The principles discussed in this book have been proven to work and create value-added results in many different industries. As these concepts were being screened and developed so that they work effectively, there was a learning curve involved and I had much to learn. As you read and study this book, I trust that some of the content will also be challenging to you, but that you will be able to apply some of these principles in your profession and make the world a better place as a result. The principles that are described in this book are the ones that I have been using in my consulting business for more than 10 years. This is not an all-encompassing consolidation of all the possible tools and principles. There are other authors that have taken the specific concept approach and have done a very good job. This book is designed to give you a good appli- cable understanding of the topic of supply chain management. As you read this book your mind will be challenged to try new ideas and even refine some of the concepts described. Enjoy the book and use the new knowledge that you have obtained. xiii Table of Contents List of Figures and Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Chapter 1 The Way Things Were (Are) . . . . . . . . . . . . . . . . . . . 1 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Chapter 2 Understanding Your Supply Chain . . . . . . . . . . . . . 9 Process Mapping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Possession Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Application Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Inspection Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Internal/External Failure Costs . . . . . . . . . . . . . . . . . . . . . . . . . 28 Things That Are Beyond Our Control in the Supply Chain. . . . 31 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Chapter 3 Developing a Supply Chain Management Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Where Does Supply Chain Management Fit into the Mission and Vision of an Organization?. . . . . . . . . . . . . . . . 35 Supply Chain Management Maturity Model . . . . . . . . . . . . . . . 35 How Are Needs Forecasted? . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 How Much and What Types of Risks Can Be Accepted? . . . . . 43 How Will Competitive Advantage Be Developed? . . . . . . . . . . 44 What Kind of a Customer Are You? . . . . . . . . . . . . . . . . . . . . . 47 Integrating Processes Using Aggregate Planning . . . . . . . . . . . 49 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 vii viii Table of Contents Chapter 4 Make or Buy: The First Step in Supply Chain Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Capacity Decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Make Decision Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Buy Decision Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Chapter 5 Supplier Identification and Evaluation . . . . . . . . . . 61 Step 1: Upper Management Support. . . . . . . . . . . . . . . . . . . . . . 61 Step 2: Product Group Selection . . . . . . . . . . . . . . . . . . . . . . . . 64 Step 3: Team Member Selection. . . . . . . . . . . . . . . . . . . . . . . . . 66 Step 4: Current and Possible Suppliers List. . . . . . . . . . . . . . . . 68 Step 5: First Cut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Step 6: Necessary Attributes List. . . . . . . . . . . . . . . . . . . . . . . . 70 Step 7: Major Question Preparation. . . . . . . . . . . . . . . . . . . . . . 72 Step 8: Supplier Package Preparation. . . . . . . . . . . . . . . . . . . . . 73 Step 9: Information Provided to Suppliers. . . . . . . . . . . . . . . . . 74 Step 10: Rank and Weight Attribute Questions . . . . . . . . . . . . . 75 Step 11: Attribute Grouping . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Step 12: Do Your Homework . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Step 13: Interviews. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Step 14: Evaluation of Interviews. . . . . . . . . . . . . . . . . . . . . . . . 82 Step 15: Preferred Supplier Selection. . . . . . . . . . . . . . . . . . . . . 84 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Chapter 6 Selection of a Preferred Supplier . . . . . . . . . . . . . . . 87 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Management of Preferred Supplier. . . . . . . . . . . . . . . . . . . . . . . 88 Transferring Work to Preferred Supplier . . . . . . . . . . . . . . . . . . 89 Tolling Arrangements and Cost Effects. . . . . . . . . . . . . . . . . . . 90 Building a Positive Relationship. . . . . . . . . . . . . . . . . . . . . . . . . 91 Building Awareness of the Relationship. . . . . . . . . . . . . . . . . . . 92 The Purchasing Department. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Driving Supplier Product Improvement. . . . . . . . . . . . . . . . . . . 94 Managing the Supplier Relationship . . . . . . . . . . . . . . . . . . . . . 95 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Chapter 7 International Considerations . . . . . . . . . . . . . . . . . . 99 Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Family. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Criticism and Shame. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Interpersonal Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Table of Contents ix Appearance and Buying Habits . . . . . . . . . . . . . . . . . . . . . . . . . 103 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Supplier Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Monetary or Other Considerations. . . . . . . . . . . . . . . . . . . . . . . 107 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Chapter 8 Building Relationships. . . . . . . . . . . . . . . . . . . . . . . . 111 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Building a Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Measurement of Success. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Questions for Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Overcoming Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 The Ideal Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Two Real Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Chapter 9 Supplier Quality System Surveys, Visits, and Continuous Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Supplier Quality System Surveys. . . . . . . . . . . . . . . . . . . . . . . . 121 Supplier Visits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Continuous Improvement Methods . . . . . . . . . . . . . . . . . . . . . . 131 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Chapter 10 Supplier Scorecards and Measures. . . . . . . . . . . . . 135 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Chapter 11 Customer Satisfaction . . . . . . . . . . . . . . . . . . . . . . . 143 Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Question Development and Survey Implementation . . . . . . . . . 147 Customer Needs Identification. . . . . . . . . . . . . . . . . . . . . . . . . . 151 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Chapter 12 How to Apply Basic Quality Tools to Customers and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Scatter Diagrams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Histogram. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Tally Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Pareto Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 Cause-and-Effect Diagram. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Control Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Why–Why Diagrams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Brainstorming. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Process Maps (Flowcharts). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 5W2H . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 x Table of Contents Affinity Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Chapter 13 Materials Management . . . . . . . . . . . . . . . . . . . . . . 169 Inventory Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Logistics Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Chapter 14 Information Technology Applications . . . . . . . . . . 179 MRP Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 ERP Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 CRM Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 CPFR Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Chapter 15 Supplier Relationships at the Consumer Level . . . 187 Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 Restaurant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Taxi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Airline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Automobile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Another Hotel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

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