Purchasing &

Supply Chain
Management
7th edition

Chapter 12
Purchasing and Supply Chain
Analysis: Tools and Techniques

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 Learning Objectives
By the end of this chapter, you should be able to:
• Understand fundamentals of project management tools
• Understand how to calculate the effect of learning curves on supplier
costs
• Develop a basic understanding of the value analysis process
• Develop basic skills in process analysis and value stream mapping in a
supply chain

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 Chapter Overview
• Project management
• Learning-curve analysis
• Value analysis/Value engineering
• Quantity discount analysis
• Process mapping
• Value stream mapping

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 What Is a Project?
• Project is defined as a series of tasks that …
− Requires completion of specific objectives within a certain timeframe
− Has defined start and stop dates
− Consumes resources
 Particularly time, personnel, and budget
− Operates with limited resources

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 Sample Projects in Supply Management
• Working with research personnel or engineers to develop new products
• Working with information technology to procure new software and
hardware
• Lowering costs through value analysis team programs
• Developing sourcing strategies
• Initiating performance improvement plans at a supplier

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 Dimensions of a Project
• Defined scope
− Project overview
− Agreed-upon tasks, responsibilities, and deliverables
• Time frame
− Starting and ending points
• Cost

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 Considerations of a Project (1 of 2)
• Make sure the objectives and outcomes are championed by senior
executives
• Place the project under the leadership of people with skill, credentials,
and credibility
• Establish an effective governance process with a cross-functional team

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 Considerations of a Project (2 of 2)
• Maintain active participation from team members
− Use their talents
• Break down project into phased deliverables
• Manage expectations continuously and consistently
• Measure objectively
• Ensure rapid problem escalation and resolution

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 Six Phases of a Project
Concept

Post- Project
completion definition

Performance Planning

Preliminary
studies
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 Concept Phase
• Develop broad concept or definition of project
• Identify broad constraints
• Create initial budget estimates
• If project is feasible, move to next phase

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 Project Definition Phase
• Develop project description in greater detail
− How to accomplish work
− How to organize for the project
− Support personnel required
− Tentative timing schedules
− Tentative budget, personnel, resource requirements

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 Planning Phase
• Develop detailed plans that identify …
− Tasks
− Timing milestones
− Budgets and resources
• Create organization to effectively manage project
− Often through project teams

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 Preliminary Studies Phase
• Validate the assumptions made in the project plan through …
− Literature searches
− Field interviews
− Data collection

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 Performance Phase
• Execute the project plan
• Control via periodic monitoring
• Report the work results on continuous basis
• May be the longest phase of a project in terms of time and resources
consumed

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 Post-Completion Phase
• Confirm the final project meets expectations of management or customers
• Conduct a post-implementation meeting to discuss strengths and
weaknesses
− Lessons learned
• Reassign project personnel
• Restore any used equipment and facilities to their original status
• Document project files for future reference

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 Project Planning and Control Techniques
• Gantt charts
• Critical path method (CPM)
− Use when there is single known time for each activity with no variance
• Program evaluation and review technique (PERT)
− Use where time estimates are variable or uncertain
− Most likely vs. pessimistic vs. optimistic estimates

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 Gantt Charts
• Visually displays tasks and times associated with a project
• Advantages
− Relatively inexpensive to develop and use
− Can convey great deal of information
• Disadvantage
− Difficult to use and keep up-to-date for larger projects

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 Gantt Chart Example

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 Rules for Constructing a
Project Management Network (1 of 5)
1. Identify each unique activity by capital letter that corresponds
only to that activity
2. Unique branch or arrow represents each activity in project –
circles or nodes represent events

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 Rules for Constructing a
Project Management Network (2 of 5)
3. This diagram means only that B cannot start until A is
complete

4. Branch direction indicates general progression in time from

left to right

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 Rules for Constructing a
Project Management Network (3 of 5)
5. When a number of activities end at one event, no activity
starting at that event may begin until all activities ending at
that event are complete

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 Rules for Constructing a
Project Management Network (4 of 5)
6. Two or more activities cannot share graphically same
beginning and ending events

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 Rules for Constructing a
Project Management Network (5 of 5)
7. Networks start and finish at only single event

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 Network Example (1 of 2)
Preceding
Activity Designation
Activity
Assemble project team A
Identify potential commodity suppliers B A
Develop supplier evaluation criteria C A
Develop supplier audit form D C
Perform preliminary supplier financial analysis E B
Conduct supplier site visits F E, D
Compile results from site visits G F
Identify requirements for supplier performance system H A
Perform detailed systems analysis and programming I H
Test computerized system J I
Select final suppliers K G
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 Network Example (2 of 2)

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 PERT Network Steps (1 of 2)
• Identify each activity requiring completion and relationship between those
activities
• Construct network reflecting proper precedence relationships
• Determine three time estimates
− Optimistic (a)
− Pessimistic (b)
− Most likely (m)

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 PERT Network Steps (2 of 2)
• Calculate expected activity time for each activity

Expected activity time = (a + 4m + b) ÷ 6

• Place activity times on network and identify critical path
• Identify early start (ES), late start (LS), early finish (EF), and late finish (LF)
times

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 Definitions (1 of 2)
• Early start (ES)
− Earliest point in time an activity can begin
• Late start (LS)
− Latest point in time an activity can begin without delaying entire
project
• Early finish (EF)
− Earliest time project can finish given expected activity time
− ES + expected activity time

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 Definitions (2 of 2)
• Late finish (LF)
− Latest time activity can finish without delaying entire project
− LS + expected activity time
• Critical path
− Longest time through network
• Slack
− Maximum amount of leeway in activity that will not delay the project
− Calculated as LF – EF
− Activities not on critical path will have slack
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 Learning Curves
• Establish rate of improvement due to direct-labor cost improvement as
production volumes increase
• Learning rate represents cumulative improvement as production doubles
• 85% learning rate indicates that direct labor declines by 15% each time
production doubles in volume
• Use to lower purchase price over time

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 Learning Curve Components
• Ability of the work force to learn and improve through repetitive effort and
increased efficiency
• Effort by management to pursue productivity gains
• Modifications to process
− New production methods
− Substitution of automation for labor
− Vertical integration  cost control

Purchasing & Supply Chain Management, 6e

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 When to Use the Learning Curve
• Not all processes or items benefit from learning curve effects
• When supplier uses new production process for first time
• When supplier produces technically complex item for first time
• When item has high direct labor content

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 A Learning Curve Illustrated
Cumulative Total Average Labor
Learning Rate
Units Produced Labor Hours Hours/Unit
1 20 20.0
2 34 17.0 15.0%
4 58 14.5 14.7%
8 100 12.5 14.8%
16 168 10.5 16.0%
32 288 9.0 14.3%
64 493 7.7 14.4%

Note: Average improvement rate is approximately 15% each time cumulative volume
doubles, yielding a 85% learning curve

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 Value Analysis/Value Engineering
• VA involves examining all elements of a component, assembly, end
product, or service to make sure that it fulfills its intended function at the
lowest total cost

Value = Function ÷ Cost

• VE is the application of value analysis techniques during product or
service design

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 Who Is Involved in VA/VE?

• Executive management • Marketing

• Suppliers • Production
• Purchasing • Industrial/process
engineering
• Design engineering
• Quality control

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 The Value Analysis Process

Recommend Summarize
Gather
Speculate Analyze and and
information
execute follow up

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 Gather Information Stage
• What does this product do for the customer?
• Why does a customer buy this product?
• Understand the product’s primary vs. secondary functions
• Name each function with a noun and a verb
• Collect detailed product information

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 Speculate Stage
• Wide-open, creative team thinking
• Use brainstorming or other idea generating techniques to generate a
broad list of alternatives
• Develop as many improvement ideas as possible
− Withholding judgment on any of the proposed alternatives
• Evaluate ideas later

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 Analyze Stage
• Perform critical evaluation of ideas created in speculate stage
• Cost/benefit calculations
• Feasibility assessment
• Do ideas address original goals and objectives?
• General  specific

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 Recommend and Execute Stage (1 of 2)
• Determine priorities
• Make proposal to management for approval
• Requires:
− Motivation
− Creativity
− Good communication skills
− Analytical thinking
− Product knowledge, commitment, and salesmanship

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 Recommend and Execute Stage (2 of 2)
• Implement
− Timing
− Budget requirements
− Responsibilities
• Develop project plan
• Generate support from outside the team

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 Summarize and Follow Up Stage
• Ensure that implementation progress is being made
− VA team may follow up
• Separate implementation team may have this responsibility

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 Process Mapping (1 of 2)
• Reduces processes to component parts or activities
• Helps identify and then eliminate non-value-added activities (waste) or
delays
• Process
− Is outcome composed of a set of tasks, activities, or steps
− Crosses multiple functional boundaries
• Groups may have conflicting goals

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 Process Mapping (2 of 2)
• Types:
− Sequential processes
− Concurrent processes
• Often conducted by cross-functional teams
• Generates buy-in from affected groups

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 Typical Supply Chain Processes
• Supplier evaluation and • Customer service support
selection
• Training and education
• Supply-base management
• Inbound logistics
• New-product design and
• Outbound logistics and
development
physical distribution
• Accounts receivable and
• Research and development
accounts payable
• Customer order fulfillment
• Inventory control and
management

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 Steps in Process Mapping
• Search for better ways and methods to perform process tasks
• Replace sequential activities with concurrent activities wherever possible
• Identify those activities that contribute to waste or add minimal value and
target for elimination
• Identify time associated with each part of a process and identify how
much time is waste
• Involve the functional groups that impact a process
• Represent process graphically for clearer understanding

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 A Process Mapping Example (1 of 2)
Step # Activity Average Time Required
1 Employee 1 physically places trailer at receiving dock 15 minutes
2 Employee 2 unloads the trailer with material handling equipment 30 minutes

3 Employee 3 checks load quantity from the trailer against shipping documents for 30 minutes
accuracy

Employee 4 acknowledges receipt of the material on the computer and prints

4 control tickets to move material to required warehouse locations 60 minutes

5 Employee 5 attaches control tickets to individual loads 20 minutes

6 Employee 6 inspects inbound material 30 minutes
Employee 7 moves material to required warehouse location, freeing up the receipt
7 line for another trailer 30 minutes

Employee 4 files copy of shipping documents and forwards copies to Accounts

8 Payable at the end of the day (no physical movement required) 15 minutes

Total Average Time to Unload Trailer (excludes Step # 8) 215 minutes

Non-value-adding Value-adding

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A Process Mapping Example (2 of 2)

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 Value Stream Mapping
• A process of visually presenting the flow of materials and information to
identify wasted time and actions in a manufacturing or service process
• By identifying unnecessary steps and resources, it streamlines processes
for greater efficiency

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 Categories of Waste (1 of 2)
• Overproduction
− Producing items for which there are no orders
• Waiting time
− Employees standing around or inventory at a standstill
• Unnecessary transport
− Moving material unnecessarily or long distances
• Over-processing
− Using more steps than necessary to produce a product

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 Categories of Waste (2 of 2)
• Excess inventory
− Retaining unnecessary inventory between process steps
• Unnecessary movement
− Any wasted motion by man or machine
• Defect
− Making incorrect product

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 Value-adding vs. Non-value-adding
• Value is from customer’s perspective
• Value-adding (keep)
− Create value for the customer
• Non-value-adding (remove)
− No value for customer but forced to pay for
• Necessary non-value-adding (minimize)
− No value for customer but required

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 Statistical Tools Used in
Value Stream Mapping
• Scatter plots
• Pareto charts
• Pie diagrams
• Cause-and-effect diagrams

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