W HAT IS LOGISTICS ? Logistics is the design and administration of - - PowerPoint PPT Presentation

LOGİSTİCS & EOQ MODEL

PROFESSOR DAVID GILLEN (UNIVERSITY OF BRITISH COLUMBIA) & PROFESSOR BENNY MANTIN (UNIVERSITY OF WATERLOO)

Logistic Management in Air Transport Module 11-12 19 December 2015 Istanbul Technical University Air Transportation Management M.Sc. Program

LOGISTICS

Learning Objectives

– Key components of logistics

• Order Processing, Inventory, Transportation, Sourcing,

Warehousing, Materials Handling, and Packaging, integrated through a network of facilities (warehouses and distribution centers)

– Logistics is integral to a firm’s strategy – Keys to managing logistics costs

• Inventory management
• Transportation management

– Sourcing – strategic vs operational approaches

2

WHAT IS LOGISTICS?

• Logistics is the design and administration of systems

to control movement and spatial positioning of factor inputs (raw materials, labor, capital, energy) work- in-process, and finished inventories at the lowest total cost.

• Our focus will be on inventory management and transportation

management

THE FIVE FUNCTIONS OF LOGISTICAL WORK ARE

INTERRELATED

GROWTH IN LOGISTICS ACTIVITIES

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THE COST OF LOGISTICS

LOGISTICS WILL CONTINUE ITS RENAISSANCE IN THE FUTURE

• Information technologies will automate many of the

traditionally manual logistical functions: – Automated port and rail operations – RFID tagging of materials – Advanced technologies for warehousing and inventory

• perations
• Removal of trade barriers will continue to expand global trade

and logistics

• Outsourcing versus near-shoring

– Implications for airlines?

COST MINIMIZATION USING THE

TOTAL COST LOGISTICS MODEL

• Focused on achieving the lowest

possible cost for each individual function of logistics

– For example, Transport the material the cheapest way possible

• Expected lowest cost based on

decisions that were cheapest for individual functions

• Ignored the impact of cost

decisions across logistics functions

• Focused on achieving the lowest

total cost across each function of logistics

• A cost decision in one function

should consider impact to costs of all other logistics functions

– For example, Transporting material the cheapest way is slower than other choices. This requires an increase in storage cost to hold the material longer – Would it still be a lower cost to use the cheapest mode of transport?

Traditional Cost Logistics Model Total Cost Logistics Model

DIFFERENT PERSPECTIVES ON COST MINIMIZATION

Minimize order processing cost + Minimize inventory cost + Minimize transportation cost + Minimize warehousing, materials handling and packaging cost + Minimize facility cost __________________________ Lowest logistics cost Minimize (order processing + inventory + transportation + warehousing, materials handling and packaging + facility) cost _________________________ Lowest total logistics cost Traditional Cost Logistics Model Total Cost Logistics Model

FRAMEWORK: TOTAL LOGISTICS COST FUNCTION

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COMPONENTS OF TLC

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TLC (Q, r: T, ST) = RDi + (UCTDi/365) + (SDi/Q) + (QCI/2) + rIC + K(Di/Q) N(Z)S1 where: TLC = total logistics cost R = Transportation Rate per Unit between Origin and Destination D = Annual Demand for some good ‘i’ U = Carrying Cost of In-transit Inventory C = Value per Unit T = Transit Time of Transportation Alternative S = Fixed Ordering Cost per Order Q = Order Quantity I = Carrying Cost of Warehoused Inventory r = Safety Stock K = Stockout Cost per Unit N(Z) = Unit Loss Integral S1 = Standard Deviation of Demand During Transit Time ST = Standard Deviation of Demand During Lead Time

HOW THESE COSTS ARE DISTRIBUTED

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Cost Conflicts: Speed versus Service Reliability

13 Cost of transportation service Inventory cost (includes storage and intransit Total cost Rail Truck Air Cost, in dollars Transportation service (greater speed and dependability)

OTHER COST CONFLICTS/TRADEOFFS

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Improved customer service 100% (a) Setting the customer service level Cost Lost sales cost Transportation,

• rder processing,

and inventory costs Total costs Increasing number of stocking points (b) Determining the number of warehouses in a logistics system Cost Transportation costs Total costs Inventory costs Revenue Revenue Average inventory level (c) Setting safety stock levels Lost sales cost Total costs Inventory carrying costs Cost Product run length and product sequencing altenatives (d) Setting the sequence of production runs for multiple products Production costs Total costs Cost Inventory carryng cost

MEASURING COSTS

Cost Structure

• Costs vary with factor prices,

productivity & output

• Scale economies
• Scope economies
• Utilization economies
• Density economies
• Agglomeration economies
• Value of time/reliability

Accounting Costs

• Variable costs

– Material – Manufacturing/production – shipping

• Fixed costs

– Contracts – Capital – Manufacturing/production

• Ownership

– Purchase – Acquisition – Usage – salvage

• Opportunity cost-forgone sales

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THE SCOPE OF INTEGRATED LOGISTICAL OPERATIONS

INVENTORY MANAGEMENT

THE ECONOMIC ORDER QUANTITY MODEL

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Knowing what you've got, Knowing what you need, Knowing what you can live without – That’s inventory control.

18

Frank Wheeler, Revolutionary

INVENTORY

• Definition: The stock of any item or resource used in an
• rganization

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Work-In-Process Raw Materials & Component Parts Finished Products Replacement parts, tools & supplies Goods in transit to warehouses or customers

IMPORTANCE OF INVENTORY:2013 FISCAL YEAR

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Wall Mart Boeing General Motors Airbus

Toyota

(Million $) (Million $) (Million $) (Million $) (Million $) Cash & Short- Term Investments 25,591 15,258 20,021 7,765

18,270

Account Receivable 6,768 6,546 8,535 7,239

54,514

Inventories 43,803 73.10% 42,912 65.90% 14,039 17.20% 25,060 53.30%

18,243 12.40%

Other Current Assets 5,987 1,500 1,662 1,653

6,059

Total Current Assets 59,940 100% 65,074 100% 81,501 100% 47,098 100%

146,570 100%

Other Assets 5,987 505 2,352 5.4 Total Assets 203,105 92,663 166,344 93,311

377,281

IMPORTANCE OF INVENTORY MANAGEMENT

• ... by 1990 Wal-Mart was already winning an important

technological war that other discounters did not seem to know was on. “Wal-Mart has the most advanced inventory technology in the business and they have invested billions in it”. (New York Times, Nov. 95)

• Kmart increased its inventories to $8.3 billions in the third

quarter of 2001 with an expectation of more shoppers. “But higher sales never materialized, leading to a disastrous holiday selling season.” Kmart filed for bankruptcy on Jan. 22. (Business Week, Mar. 02)

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Why do you have these inventories? What are some of the inventories that you have? WHY SHOULD YOU HOLD INVENTORY?

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Predictable Variability

Seasonal Inventories

Unpredictable Variability

Safety Stock

Economies of Scale

Cycle Stock

Transportation times / Flow times

Pipeline Inventories

Other: Strategic / Speculative / etc.

WHY SHOULD YOU NOT HOLD INVENTORY?

• Inventory increases certain costs such as

– Carrying cost – Cost of customer responsiveness – Cost of diluted return on investment – Large-lot quality cost – Cost of production problems, etc.

• The Sea of Inventory

Inventory hides problems …

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REDUCING WASTE THE SEA OF INVENTORY

HOW MUCH INVENTORY SHOULD YOU HOLD?

• Trade-off #1

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Inventory ordering costs (Economies of scale) Inventory holding costs

• Trade-off #2

Cost of running out Cost of having excess inventory

INVENTORY COSTS

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• Fixed transportation Cost
• Order Processing Cost

Ordering/Setup Costs (Fixed Costs)

• Costs for storage, handling, insurance,

working capital tied-up, etc

Holding Cost (Carrying Cost)

• Lost sales, etc

Shortage Cost (Opportunity Cost)

INVENTORY CLASSIFICATION

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Type A Items

• Small group of high volume items
• Accounts for 15% by the number of parts, and 70-80% of

the total sales of all parts

Type B Items

• Accounts for 35% of the number of parts, and 10-15% of

the total value

Type C Items

• Accounts for 50% of the total number of parts, and for 5-10% of the

total value

(The above percentages are approximate)

A classification to help manage inventories better

MOTIVATION: ATM

• How much cash do you take out from ATM?
• Why not more or less?

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ECONOMIC ORDER QUANTITY (EOQ)

• The Economic Order Quantity (EOQ) balances

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• Assumptions

– Known annual demand, constant demand rate – No uncertainty

Inventory ordering costs (Economies of scale) Inventory holding costs

NOTATION

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D Annual Demand Rate Q Lot or batch size S Set-up cost per lot/batch, or average cost of processing/placing an order C Unit cost H Annual holding and storage cost per unit of average inventory i Percent carrying cost (e.g., “interest” rate)

Usually, H = iC.

CYCLE STOCKS: TRADEOFF BETWEEN FIXED COSTS

AND HOLDING COSTS

Profile of Inventory Level over Time

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Quantity

• n hand

Q

Receive

• rder

Receive

• rder

Receive

• rder

Demand rate

Time

Example: “The South Face”

• Some facts about The South Face retail shop

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• What order size (Q) would you recommend for

The South Face?

D

Annual Demand Rate

1200 jackets/year S

Set-up cost per lot/batch, or average cost of processing/placing an order

$2,000 C

Unit cost

$200 per jacket i

Percent carrying cost (e.g., interest rate)

25%

Warehouse Retailer Customers

Thus, H = iC = (0.25)*($200) = $50 per unit-year

THE SOUTH FACE

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Q

Time t

Inventory Profile:

# of jackets in inventory over time. D = Demand rate Inventory

D Annual Demand Q Lot or batch size (Number of jackets per replenishment order)

Number of orders per year D/Q Average inventory Q/2

Annual Setup Cost (D/Q) * S Annual Holding Cost (Q/2) * H Annual Total Cost Annual Setup Cost + Holding Cost

S

Order or setup cost

H

Annual Holding cost

??? ??? Q/2

5000 10000 15000 20000 25000 30000 110 130 150 170 190 210 230 250 270 290 310 330 350 370 390 410 430 450 470 490 510 530 550 570 590 610 630 650 670 690 710 730 750 770 790 810 830 850 870 890 910 930 950 970 990

EOQ Model: Cost

Setup Cost Holding Cost Total Cost

THE SOUTH FACE: COST

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Per Order/Batch Q Batches per Year D/Q Annual Setup Cost Annual Holding Cost Annual Total Cost 50 24.0 48000 1250 49250 100 12.0 24000 2500 26500 150 8.0 16000 3750 19750 200 6.0 12000 5000 17000 250 4.8 9600 6250 15850 260 4.6 9231 6500 15731 270 4.4 8889 6750 15639 280 4.3 8571 7000 15571 290 4.1 8276 7250 15526 300 4.0 8000 7500 15500 310 3.9 7742 7750 15492 320 3.8 7500 8000 15500 330 3.6 7273 8250 15523 340 3.5 7059 8500 15559 350 3.4 6857 8750 15607 400 3.0 6000 10000 16000 500 2.4 4800 12500 17300 600 2.0 4000 15000 19000 700 1.7 3429 17500 20929

COST MINIMIZATION GOAL

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S Q D H Q TC   2

Ordering Costs

S Q D

Inventory holding cost

H Q 2

Order Quantity (Q) Annual Cost QO (optimal order quantity) Lowest Annual Cost

Total Cost

ECONOMIC ORDER QUANTITY

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S Q D H Q Q TC   2 ) ( TotalCost

D Annual Demand Rate S Order or Setup Cost H Annual Holding Cost

H SD QOPT 2 

ECONOMIC ORDER QUANTITY:THE SOUTH FACE

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D 1200 jackets/year S $2,000 H $50 per unit-year

H SD QOPT 2 

• What is the optimal order quantity?
• How many times would you place orders per year, i.e.,

frequency of ordering?

• What is the time duration between successive orders (this is

also called the cycle time or reorder interval)?

8 . 309 50 ) 1200 )( 2000 ( 2 2    H SD QOPT

8 . 3 8 . 309 1200  

OPT

Q D 258 . 1200 8 . 309   D QOPT

EOQ AND SENSITIVITY ANALYSIS

• What happens to the cost and optimal

quantity as the parameters change?

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H SD QOPT 2 

As …. “Cost” EOQ Frequency S ↑ ↑ ↑ ↓ H↑ ↑ ↓ ↑ D↑ ↑ ↑ ↑

MANAGERIAL IMPLICATIONS OF EOQ

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5000 10000 15000 20000 25000 30000 110 130 150 170 190 210 230 250 270 290 310 330 350 370 390 410 430 450 470 490 510 530 550 570 590 610 630 650 670 690 710 730 750 770 790 810 830 850 870 890 910 930 950 970 990

EOQ Model: Cost

Setup Cost Holding Cost Total Cost

• Cost curve is almost “flat” near the optimal point

– Use the EOQ formula, but do not worry about making minor adjustment to get a number that is “more realistic” for your

• rganization
• The flatness of the cost curve implies that the EOQ figure is

“robust”

– Estimating holding cost is usually difficult – The EOQ formula guarantees that the “optimal” order quantity is not very sensitive to errors in estimation

MANAGERIAL CHALLENGES HOW TO ESTIMATE COSTS?

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Ordering/Setup Costs (Fixed Costs): S

• Estimate costs incurred during the start of each new order
• Do not count “sunk” costs and fixed overhead

Unit Cost: C

• Estimate variable cost incurred in the production of each additional unit

Holding or Carrying Costs (as % of unit cost): i

• Estimate opportunity cost of working capital
• Estimate cost of storage, handling, etc

MANAGERIAL CHALLENGES HOW TO REDUCE THE EOQ INVENTORY?

• Reduce the set-up cost
• Re-evaluate sources of fixed costs, and

find ways to reduce, spread-out, or eliminate these costs

• Next a practice question

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H SD QOPT 2 

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• 1. A mail-order firm has four regional warehouses. Weekly

demand at each warehouse is normally distributed with a mean of 10,000 units and a standard deviation of 2,000 units. The company purchases each unit of product at $10. Annual holding cost of one unit of product is 25% of its value. Each

• rder incurs an ordering cost of $1,000 (primarily from fixed

transportation costs), and lead time is 1 week. The company wants the probability of stocking out during the lead time at each warehouse to be no more than 5%. Assume 50 working weeks in a year.

QUESTIONS

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(a) Assuming that each warehouse operates independently, how much safety stock does each warehouse hold? How much average inventory is held (at all four warehouses combined), and at what annual cost? On average, how long does a unit of product spend in the warehouse before being sold (Hint: Littles Law)? BONUS (b) Assume that the firm has centralized all inventories in a single warehouse and that the probability of stocking out during the lead time is still no more than 5%. Ideally, how much average inventory can the company now expect to hold, and at what cost? In this case, how long will a unit spend in the warehouse before being sold?

Answer will be provided once you have tried for a solution.

SOURCING: AN INTRODUCTION

46

WHY SOURCING?

• Airlines, like many other firms, buy a lot of things

– Aircrafts (buying and leasing) – Fuel – Services (airport services, training etc.) – Labour – Spare parts – Insurance – Maintenance – IT – Office suppliers, etc.

• Understanding your spend can reveal opportunities for savings
• Align with strategic objectives
• Airlines operate in multiple locations (THY: 226 intl APs in 110

countries)

• Streamline processes

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PROCUREMENT SAVINGS: PROFESSIONALIZATION

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Proposal 1

WE WILL OBSERVE THREE MEETINGS AS THEY OCCUR EVERY DAY

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“I am Ronda the head

• f sales”

“I am Mike the operations manager”

1mn investment to boost production efficency by 10% €1mn annual investment to increase sales by 5% Proposal 2 €1mn annual investment to lower production cost by 5%

“I am Frank the head of sourcing”

Proposal 3 €1mn annual investment to reduce sourcing spend by 5%

BOTTOM-LINE IMPACT OF 1MN EURO INVESTMENT

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Proposal 1 Increase sales by 5%

Average unit revenue: 0.50€ Manufacturing cost per unit: 0.18€ Average material cost per unit: 0.20€ Units sold: 200 mn units Indirect material cost: 10 €mn Fixed overhead cost: 13 €mn

Proposal 2 Reduce manufacturing cost by 5% Proposal 3 Reduce material cost by 5%

10m extra units 10mn x 0.12€ = 1.2 mn Euro Simplified Cost Structure 200m units x 0.18€ = 36 mn Euro manufacturing cost 0.05 x 36 €mn = 1.8 mn Euro Bottom line impact 0.2 mn Euro 200m units x 0.20€ = 40 mn Euro direct material spend 0.05 x (40mn Euro + 10 mn Euro) = 2.5 mn Euro 0.8 mn Euro 1.5 mn Euro ROI 20% 80% 150% Total Revenue 100 mn Euro GM 24% Total Cost 99mn Euro Profit 1mn Euro 10m extra units 200m units x 0.18€ = 36 mn Euro manufacturing cost 200m units x 0.20€ = 40 mn Euro direct material spend Total Revenue GM Total Cost Profit

AIRLINE PROCUREMENT

• Mature industry
• Bulk ordering: Ryanair’s and Norwegian’s Boeing 737
• Fleet uniformity
• Outsourcing services: keep specialized, outsource

standardized such as passenger handling, other ground services

• Negotiate marketing (when competing airports)
• Partnerships:

– Alliance: leverage virtual network – LCCs: forgo alliance costs (IT, marketing, airport services etc.) – Carefully evaluate ad-hoc (WestJet)

• Standardization of the procurement process (e.g., BA)

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THRE ARE 9 KEY ACTIVTIES IN THE SOURCING PROCESS

2 3 4 5 6 7 8 9 Identification of procurement need Description of procurement need Analysis of supply market Supplier selection Issue purchase order Follow-up on orders Reception and inspection of goods Clear invoice and payment Track supplier performance 1 Overview Key Activities in Sourcing Processy

• Understand which goods and services are required
• Identify quantities required and understand when required
• Align specifications with internal customer
• Work with customer to ensure sufficient width of supply base
• Identify suitable regions / countries for suppliers
• Prepare, issue and analyze RFI1)

(1) RFx .. Request for Information, Proposal, Quotation, Bid Source: Leenders et al. (2006)

• Prepare, issue and analyze RFP, RFQ, RFB1)
• Define sourcing strategy
• Conduct negotiations or auctions and close contracts
• Order goods or services via PO (purchase order) form
• Follow-up on order progress
• Request expedited shipments for urgent demand
• Supervise reception of goods and documentation
• Supervise quality and quantity of goods delivered
• Check and audit invoice
• Ensure discounts and manage claims
• Complete records
• Update supplier performance data

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STRATEGIC AND OPERATIONAL FOCUS IN SOURCING PROCESS

2 3 4 5 6 7 8 9 1 Operational Focus Strategic Focus

Identification of procurement need Description of procurement need Analysis of supply market Supplier selection Issue purchase order Follow-up on orders Reception and inspection of goods Clear invoice and payment Track supplier performance Focus in

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Source: Adapted from Perrotin, Soulet de Brugière, Pasero: « Le Manuel des Achats » (2007)

EXAMPLES OF OPERATIONAL AND STRATEGIC TASKS IN PURCHASING

Strategic Operational

• Develop sourcing guidelines
• Segment purchasing portfolio
• Define category sourcing

strategy, incl. risk mitigation and sourcing footprint

• Select suppliers (along quality,

price, delivery time)

• Assess and monitor supplier

performance

• Negotiate contracts
• Define sourcing IT architecture
• …
• Prepare purchase order
• Follow-up on order progress
• Ensure receipt and inspection
• f delivered goods
• Clear invoices and trigger

payment

• Solve problems
• Manage inventory
• …

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If you accept a job in purchasing, make sure that it has a strategic component

KEY DECISIONS IN A SOURCING STRATEGY

How many suppliers do I need for a good? Single Multiple Local Global Where do I buy the goods? Partnering Competitive Which relationship do I have with my supplier? High effort Low effort How much effort do I spend on sourcing?

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Insourcing Outsourcing

Source # Suppliers Regional Relation- ship Effort

Where do I source from?

High risk, low cost due to bundled volume Distributed risk, less efficient e.g. e-procurement Visiting suppliers, complex specifications, … Long-term relationships, often integrated Tough negotiation between several players More easy to control, no profit margin to externals More flexible, sometimes lower cost Larger scale for optimization

COMMODITY SOURCING STRATEGY EXAMPLE – AGENDA

57

Market C Supplier base D Business strategy A Implementation F Input Output

▪ Segmentation

2

▪ Maturity

3

▪ Cost and quality drivers

4

▪ Market analysis

1

▪ Value chain analysis

3

▪ Supplier market

1

▪ Supplier performance

2

▪ Overall procurement guidelines

1 Product/ technology B

▪ Adaptions to previous strategy

2

▪ Action plan incl. timeline

1 Strategy E

▪ Alignment with other functions

2

▪ Make vs. Buy and commodity guidelines

1

▪ Supplier prioritization (prefer, keep, watch,

phase out, etc.) 2

▪ Supplier management

3

▪ Trends and discontinuities

2

▪ Introduction and spend breakdown

1

▪ Supplier strategy/profiles

3

…

INDUSTRY EXAMPLE

COMMODITY SOURCING STRATEGY EXAMPLE – KEY QUESTIONS

58

• A. Business strategy
• What are requirements for this commodity from the overall business strategy?
• Does the commodity meet current guidelines concerning compliance, sustainability,…?
• Why do we make/purchase this commodity? How many suppliers do we want for this commodity?
• B. Product / Technology
• What products / product lines / business units require it? What is the annual volume? Will it grow or decline?
• What is the price history?
• How critical is the part? What type of item is it (bottleneck, leverage, …)?
• Is a special technology needed for it? What are quality requirements for this part?
• Do substitute products exist or will become available soon?
• C. Market
• What is the supply chain of the product? Who adds value in what step? Who controls the supply chain?
• Is capacity in the market limited, just right, or excessive?
• What other parties purchase this product? Who of our competitors is active in this market?
• Is there a regional focus in part availability (e.g. only available in Japan, …)?
• What are current market trends? How will prices evolve? Are new technologies likely to emerge?
• D. Supplier base
• What suppliers are available? What are our current suppliers?
• What is the current spend breakdown by supplier?
• What is the financial, quality, and delivery performance of our main suppliers?
• What is our main supplier’s current market strategy? What relationship do we have with them?
• E. / F. Strategy & Implementation
• What are the targets for this commodity regarding spend, supplier base, quality, …?
• What are the main risks in the commodity regarding product, market, and supplier base?
• What measures should be taken when one of the specified risks occurs? Who is responsible?
• What are the main steps, the time line, and the responsibilities to reach targets?

INDUSTRY EXAMPLE

PURCHASING AND KPIS

59

Define KPI Set objectives Evaluate performance Take action

Performance Management Cycle

Key Performance Indicators

• Change in purchasing spend
• Price variance
• Change in TCO
• Cost avoidance
• Managed spend vs. total spend
• Contract compliance
• Number of suppliers that make x%
• f spend
• Product quality of supplier base
• Delivery quality of supply base
• Procurement ROI (cost

savings/budget)

• Procurement cycle time
• Responsiveness of purchasing

function

Purchasing Costs Purchasing Effectiveness Purchasing Time

To manage the purchasing function, it is important to define and measure the right KPIs

DMAIC

PURCHASING SPEND IS A KEY COST FACTOR IN MOST INDUSTRIES

Reasons for high procurement spend

Purchasing Spend by Industry

• In Percent of Sales -

62% 48% Electronics 48% Automotive Steel Construction Semiconductor 66% Chemicals Banking 45% 42% 15%

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• Focus on core competencies, e.g. Apple

designs products and user interfaces

• Cost advantages, e.g. Toy suppliers in

Asia can leverage lower labor cost, logistics: trucks can drive loaded both ways

• Increased commoditization e.g. Dell

can buy standard components rather than building their own hard drives

• Suppliers offer value add services that

cannot be performed in-house, e.g. DHL

• ffers last mile delivery to final customer

Source: Seminar for Supply Chain Management, University of Cologne

61

OTHER INDUSTRIES: PURCHASING EXAMPLES

Source: Company websites [2010]

Renault-Nissan Purchasing Organization (RNPO)

• Renault and Nissan have established a joint purchasing organization,

employing ~1,800 purchasers (60% in France, 40% abroad)

• How much of a car’s materials costs are purchased at Renault Nissan?
• What is the annual purchasing volume of RNPO?
• In 2009, RNPO provided >EUR 1.5 billion to support suppliers in

unstable financial conditions

80% EUR ~60 billion

Nestlé Procurement

• Nestlé buys food raw materials, packaging, and other

material/services for EUR 50 billion/year (65% of revenues)

• Purchasing director reports directly to Chief Operating Officer

(COO), member of the Nestlé executive board

• Nestlé has invested heavily into direct sourcing: Farmer Connect

program (>1,200 purchasers) that allows buying food raw materials from farmers

Directly works with 700k farmers, has already trained 300k farmers

LET’S LOOK AT NESTLÉ

Why breakdown?

S&IM = Services & Indirect Materials

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Source: Krajlic:« Purchasing Must Become Supply Management » Harvard Business Review (1983)

SOURCING STRATEGY MUST BE ADAPTED TO TYPE

OF ITEM TO BE SOURCED

Criticality (Financial) Performance Impact Low High Low High Non-critical items Strategic items Leverage items Bottleneck items Leverage buying power and source globally Simplify purchase and ensure efficient procurement Cooperate with suppliers and close long-term contracts Avoid situation by changing suppliers, specification

• r cooperative sourcing

e.g. technology, MRO e.g. manufacturing e.g. Logistics, chemicals e.g. office material

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Mainly spend, also reduction potential (Strategic) Importance to business and #supplier

T

65

ICT EXAMPLE: IS

66

Source: HBR (1983) Critically depend

• n IS and IS is

vital to the competitive advantage Depend heavily on IS for smooth

• perations, but IS

not critical for ability to compete Operations do not depend on smooth IS functionality and IS is not critical to the competitive advantage IS support necessary but not critical; applications are developed to achieve strategic goals

?

“Offensive” IT “Defensive” IT

ICT EXAMPLE: IS

Source: HBR (1983) 67

• Access to

leading-edge technology application and industry skills

• Access to higher IT

professionalism

• Problematic low

priority addressed

• Access to current IT

technologies

• Reduces risks of

inappropriate IT architectures

• Economies of scale

(for smaller firms)

• Higher quality of

service and backup

• IT solutions with

global reach

• Access to

leading-edge technology applications and industry skills

• Assure bullet-

proof reliability

• Rescue an out-
• f-control

internal IT unit Outsourcing Presumption: YES, unless huge and well managed Outsourcing Presumption: MIXED Outsourcing Presumption: YES Outsourcing Presumption: MIXED

“Offensive” IT “Defensive” IT

KEY QUESTION IN ORGANIZING THE PURCHASING FUNCTION IS THE

LEVEL OF CENTRALIZATION

• Understanding local

needs

• Speed and efficiency in

changing configurations

• r solving problems
• Ownership in local
• rganization
• Better integration in local
• perations, e.g., product

development, manufacturing

• Consolidation of purchase

volumes across the whole

• rganization (cost

reduction)

• Efficiency with dedicated

buyers for each commodity

• One responsible person

managing the supplier relationship

• Deep technical expertise in

purchasing

• Easy standardization and

alignment with purchasing strategy

+ +

Balance Between Centralisation and Decentralisation

68

Centralized Decentralized

DIFFERENT MODELS FOR PURCHASING ORGANIZATIONS

Leverage of spend across boundaries through central coordination and expertise Project/local knowledge and integration Conflicts between central and local purchasing staff Duplication of resources Needs clear decision rights and process Leverage of spend across boundaries Sharing of expertise Efficiency Tension between BU and Purchasing goals Needs strong mandate from top Central team remote from “real business” Lead buyers may go “native” in BUs Enforcement by lead buyers in

• ther BUs difficult,

central team often “toothless” Autonomous “Local”/BU Purchasing – No Joint Approach Complete flexibility for BUs/ Sites Internal customer responsiveness Decision speed Lack of bundling leaves value on the table Inefficient Compliance tough to manage “Lead” buyers local sites/BUs – coordinated by a central team Global purchasing

• rganisation

responsible for entire spend across BUs/Sites Dedicated, central buyers for each commodity + project /local buyers for integration

Decentralized Lead Buyer Matrix (e.g. project/ commodity) Centralized

Leverage of spend through lead buyers and central coordination BUs in the lead for “their” main categories Centralized Decentralized Benefits Challenges Characteristics

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2 3 4 1

MANY USE MATRIX ORGANIZATION TYPES FOR THEIR PURCHASING

BU Airbus ... A320 A380 BU Boeing ... 777 787 Steel Aluminium Plastics Energy Temp Labour Logistics Facilities Mgt Sourcing Category 70

AIRCRAFT SUPPLIER

Commodity buyer Project buyer Buyer

For Airbus complete procurement organization and major suppliers see http://www.airbus.com/fileadmin/media_gallery/files/supply___world/Airbus-Procurement-Organisation-Major-Suppliers- April2014.pdf

WHAT IS TURKISH AIRLINE’S APPROACH TO SOURCING?

71

THE AIRLINE PROCUREMENT TEAM

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WHAT DO AIRLINE OUTSOURCE?

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Rieple, A., & Helm, C. (2008). Outsourcing for competitive advantage: An examination of seven legacy

• airlines. Journal of Air Transport Management,14(5), 280-285.

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SOME SOURCING TRENDS

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MANY MAKE-OR-BUY MODELS

Low High

Demand Uncertainty Asset Specificity Firm Scale

Factors

Source: Chopra, Meindl: “Supply Chain Management”, Pearson Prentice-Hall (2007)

The Chopra/Meindl Framework: Asset specificity, demand uncertainty, and scale affect

SPEND ANALYTICS

• General framework

– Data sources: ERP systems, PLM/PDM, e-Procurement, partner systems,… – Analysis cycle:

• Extract
• Validate
• Clean
• Classify/segment
• Enhance/enrich
• analyze

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A SIMPLIFIED EXAMPLE

SKU code Supplier Price (Euro) per unit Annual purchase amount (in units) Spend New spend 54148-9414-10 Theirry LTD 28 12280 343840 270160 54148-9414-10 Frankolup inc. 22 12600 277200 277200 54148-9414-10 All Boxes 22 11950 262900 262900 54148-9414-10 OnTime 26 12330 320580 271260 54148-9414-20 Theirry LTD 37 11330 419210 419210 54148-9414-20 All Boxes 37 11800 436600 436600 54148-9414-20 Frankolup inc. 39 11680 455520 432160 54148-9414-20 ABC 42 11640 488880 430680 54148-9414-20 OnTime 39 11520 449280 426240 3454010 3226410

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You have extracted the following spend data. Your goal is to find potential savings. That is, how much would you be able to save if you were to consolidate suppliers?

That is, about 0.2m euro or about 7%