Effective supply chain management involves managing material flow to support manufacturing operations, including procurement, shipping, and receiving goods. Just-in-time purchasing can reduce inventory costs but may cause production delays if there are delivery issues. Total landed cost considers all costs associated with importing parts, including freight. Vendor managed inventory can improve inventory turns and cash flow.
Supply chain execution is the process of managing the flow of materials to ensure supplies are received when needed to support manufacturing operations. Effective supply chain management allows organizations to increase inventory turns and revenue while reducing cash flow strains. Running the supply chain involves purchasing, transporting, and receiving goods.
Supply chain procurement is the process of purchasing the parts needed to build the final product. During supply chain planning, marketing determines the quantity of products expected to be sold in a given time period. The master scheduling group will upload demand into an ERP (Enterprise Resource Planning) system which results in purchase requisitions. A purchase requisition documents the number of components a buyer needs to purchase and also when the components are needed.
The buyer orders parts from upstream suppliers. Many organizations employ a just-in-time (JIT) purchasing method, which plans to have material in place only when needed. This may require daily or weekly deliveries, depending on the manufacturing process. The benefits of a JIT method include less warehouse space needed and less money involved in inventory. The downside of a JIT method is that if there is an unforeseen delivery issue such as weather delays, production will be shut down due to a lack of available materials.
Shipping is another process in supply chain execution. Logistics professionals work with the supply chain network to ensure lean supply chain methods are used. Contracts are normally signed between the company and its suppliers, so there are agreements on shipping methods and charges. The total import cost is considered instead of just the unit price of the component. This ensures that deliveries are made to minimize freight costs.
Total cost of import is a term used to describe the actual costs of getting the part from the supplier to its destination. In addition to the actual unit price of the part, the total landed cost includes taxes and fees such as customs or import duties. The total landing cost also includes freight. When determining the best supply chain execution method, freight is often a big deciding factor. For example, air shipping may be the fastest way to receive parts, but the cost is often several times higher than sea or land freight.
Receiving goods is another step in supply chain execution. When components arrive at the facility, it is critical to determine where the parts should be stored. To maximize inventory turns, many companies have adopted a vendor managed inventory (VMI) strategy. With VMI components, the parts are actually managed by the vendor but are physically on site.
The supplier typically has one person or group located on site and only receives material from stock when it is planned to be used. This method is especially beneficial for inventory turns and cash flow when expensive material is being used, as with car manufacturers. For example, when engines are delivered to an automobile manufacturer using the VMI method, the company does not need to claim inventory on its books until the engine is actually delivered to the production line.
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