Chapter 8

Supply Chain Management

and E-Business

Materials Management Systemin Manufacturing

Inventory Items in Annual-Dollar-Volume Order – Universal Motor Supply Company

Stock Number Annual Demand Unit Cost Annual Dollar Volume Percent

407 40,000 $35.50 $1,420,000 59.53%

210 1,000 700.00 700,000 29.35

021 2,000 55.00 110,000 4.61

388 20,000 4.00 80,000 3.35

413 4,400 10.00 44,000 1.84

195 500 36.00 18,000 0.76

330 40 214.00 8,560 0.36

114 100 43.00 4,300 0.18

274 280 1.00 280 0.01

359 600 0.25 150 0.00

Totals $2,385,290 ~100.0%

ABC Classification – Universal Motor Supply Company

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Items (percent)

Dol

lar-

Vol

ume

(per

cent

)

88.9%

A Items(407 and210)

9.8%

1.3%B Items(021, 388 and 413)

C Items(195, 330, 114, 274 and 359)

Item Unit Cost Annual Demand Annual Cost

A 1.35 6,200

B 53.00 900

C 5.20 50

D 92.00 120

E 800.00 2

F .25 5,000

G 9,000.00 5

H 15.00 18,000

ABC Analysis Example

Annual Cost Class % Annual Value

How ABC Analysis is Used

Decisions A B C

Purchasing ExecutiveDepartment

HeadBuyer

Physical Inv.Counting

Daily Monthly Annually

ForecastingSeveralModels

1 SimpleModel

Guess

Safety Stock None 1 Week 1 Month

Cycle Counting

250 working days per year

On average, a full time worker can count 22 part types per day.

How many part types per day should be counted?

How many cycle counting workers are needed?

# part types

Counted# countsper year

# part typecounts/year

%

A 100 weekly

B 500 monthly

C 3000 quarterly

Supply Chain Management

Vendor’s vendor

Your vendor

Your company

Your customer

Customer’s customer

Mat

eria

l flo

w

Info

rmat

ion

flow

What Information Should be Shared?

• Forecasts and sales data– Vendor You Customer

• Capacity and output changes– Vendor You Customer

• Sales promotion plans– Vendor You Customer

• Current inventory levels– Vendor You Customer

• Ideas for improvement– Vendor You Customer

Risk of Sharing Information

Vendors or customers might share your information with your competitors

Try to Avoid Risk

• Establish long-term contracts with vendors and customers that requires confidentiality

• Relationships based on mutual trust

Examples of Supply Chain ManagementPartners and Innovations

Wal-Mart• Requires that all vendors communicate with

them electronically (EDI)• Shares forecasts and sales data with large

vendors, such as Proctor & Gamble• Results: shorter lead times and lower

inventory costs

Examples of Supply Chain ManagementPartners and Innovations

• Ryder (trucking)• Distributes vendor parts to Ford Motor Co.• Installed Global Positioning Systems and

computer chips on all their trucks• Now they know exactly where trucks are• Faster customer status response• Early diagnosis of engine problems –

reduced maintenance costs

Examples of Supply Chain ManagementPartners and Innovations

• UPS and Fedex• Deliver antibiotics from Europe

manufacturers to U.S. farmers• Mfgs. postponed packaging of drugs and let

UPS or Fedex package it on plane• Faster lead time