Chapter 16 Managing suppliers, customers and quality Copyright ª 2006 McGraw­Hill Australia Pty Ltd 16­ 1 Supply chain management (SCM) • SCM is the management of key business processes that extend across the supply chain, from the original suppliers to final customers • The supply chain – Interlinked customers and suppliers that work together to convert, distribute and sell goods and services among themselves, leading to a specific end product • SCM can involve managing costs, accelerating time-to-market of new products, creating close relationships with customers and suppliers continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-2 Supply chain management (SCM) • E-commerce—use of electronic transmission media to engage in the buying and selling of goods and services – Links suppliers and customers • B2B—ecommerce activities between two businesses • Electronic data interchange (EDI) links a firm’s computer system to suppliers/customers to allow electronic purchasing and buying • Enterprise resource planning (ERP) systems support different functional areas of a business and enable SCM Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-3 Managing suppliers • Improved supplier relationships can reduce supplier and inventory-related costs • Analysing supplier costs – Activity-based costing can be used to estimate supplier costs • Costs of dealing with a supplier, other than the cost of purchased material – Costs of purchasing—ordering, receiving and inspection – Costs of holding inventory – Costs of poor quality – Costs of delivery failure continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-4 Managing suppliers • Evaluating supplier performance – Supplier performance index: the ratio of supplier costs to total purchase price – Measures include ability to supply at the contract price, material quality, supplier delivery performance, quality of relationships between employees, union and management – Measures may also focus on the purchasing firm’s performance within the relationship Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-5 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-6 Managing inventory • Why hold inventory? – Cope with uncertainties in customer demand and in production processes – Qualify for quantity discounts – Avoid future price increases in raw materials – Avoid the costs of placing numerous small orders • Focused on balancing – Ordering costs: incremental costs of placing an order – Carrying costs: the costs of carrying inventory in stock – Shortage costs (or out-of-stock costs) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-7 Economic order quantity (EOQ) • The optimum order size for individual inventory items, to minimise the total ordering and carrying costs EOQ = 2 annualrequirement costper order annualcarryingcostper unit Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-8 Timing of orders under EOQ • Inventory re-order point (ROP) – The level of inventory on hand that triggers the placement of a new order (or setup) – Lead time—the length of time between placing an order and receiving the order • Safety stock – The extra inventory kept on hand to cover any above-average usage or demand – May be costly to maintain extra inventory Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-9 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-10 Assumptions underlying EOQ • Demand is known and constant • Incremental ordering costs are known, constant per order • Acquisition cost per unit is constant • Entire order is delivered at one time • Carrying costs are known, constant per unit • On average, one-half of order is in stock at any time Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 16-11 Just-in-time (JIT) systems • JIT inventory and production system – A comprehensive system for controlling the flow of manufacturing in a multi-stage production environment • The underlying philosophy is the simplifying of the production process by removing non-value-added activities • JIT can cover all aspects of the production process – Inventory management is crucial – Inventory is a major cause of non-value-added activities and cost