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© 2007 Pearson Education 1-1

Objectives of Chapters1, 2, 3

Building a Strategic Framework to Analyze a SC:

(Ch1,2,3)– Ch1Define SC, expresses correlation betweenSC decisions and a firms performance.

– Ch2 Relationship between SC strategy and

Competitive strategy, and the concept of strategicfit,

– Ch3SC drivers and performance metrics

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Supply Chain Management(3rd Edition)

Chapter 1

Understanding the Supply Chain

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Logistics: Definition

Logistics is the art and science of managing and

controlling the flow of goods, energy, information andother resources like products, services, and people,

from the source of production to the marketplace.

Source: http://en.wikipedia.org/wiki/Logistical

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Traditional View: Logistics in the

Economy (1990, 1996)

Freight Transportation $352, $455 Billion

Inventory Expense $221, $311 Billion

Administrative Expense $27, $31 Billion

Logistics Related Activity 11%, 10.5% of GNP

Source: Cass Logistics

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Supply Chain Management: The

Magnitude in the Traditional View

Estimated that the grocery industry could save $30

billion (10% of operating cost) by using effectivelogistics and supply chain strategies

– A typical box of cereal spends 104 days from factory to sale

– A typical car spends 15 days from factory to dealership

Laura Ashley turns its inventory 10 times a year, five

times faster than 3 years ago

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Supply Chain Management:

The True Magnitude

Compaq estimates it lost $.5 billion to $1 billion in

sales in 1995 because laptops were not available whenand where needed

When the 1 gig processor was introduced by AMD,

the price of the 800 mb processor dropped by 30%P&G estimates it saved retail customers $65 million

by collaboration resulting in a better match of supply

and demand

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Outline

What is a Supply Chain?

Decision Phases in a Supply Chain

Process View of a Supply Chain

The Importance of Supply Chain Flows

Examples of Supply Chains

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Introduction

The objective of a supply chain

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All stages involved, directly or indirectly, in fulfilling

a customer requestIncludes manufacturers, suppliers, transporters,

warehouses, retailers, and customers

Within each company, the supply chain includes allfunctions involved in fulfilling a customer request

(product development, marketing, operations,

distribution, finance, customer service)

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See Mentzer at al. (2001) for a more precise

definition: SC management is defined as thesystematic, strategic coordination of the traditional

business functions and the tactics across these

business functions within a particular company oracross businesses within the SC, for the purpose of

improving the long-term performance of the

individual companies and the SC as a whole.Examples: Fig. 1.1 Detergent supply chain (Wal-

Mart)

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Customer wants

detergent and goesto Walmart

Walmart

Store

Walmart or 3rd

party DC

P&G or other

manufacturer

PlasticProducer

Chemical

manufacturer

(e.g. Oil Company)

TennecoPackaging

Paper

Manufacturer

Timber

Industry

Chemicalmanufacturer

(e.g. Oil Company)

•Key flows in the supply chain are - information, product, and cash.

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Customer is an integral part of the supply chain

Includes movement of products from suppliers tomanufacturers to distributors, but also includesmovement of information, funds, and products in bothdirections

Probably more accurate to use the term “supplynetwork” or “supply web”

Typical supply chain stages: customers, retailers,distributors, manufacturers, suppliers (Fig. 1.2)

All stages may not be present in all supply chains(e.g., no retailer or distributor for Dell)

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Flows in a Supply Chain

Customer

Information

Product

Funds

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The Objective of a Supply Chain

Maximize overall value created

Supply chain value: difference between what the finalproduct is worth to the customer and the effort the

supply chain expends in filling the customer’s request

Value is correlated to supply chain profitability(difference between revenue generated from the

customer and the overall cost across the supply chain)

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Example: Dell receives $2000 from a customer for a

computer (revenue)Supply chain incurs costs (information, storage,

transportation, components, assembly, etc.)

Difference between $2000 and the sum of all of thesecosts is the supply chain profit

Supply chain profitability is total profit to be sharedacross all stages of the supply chain

Supply chain success should be measured by totalsupply chain profitability, not profits at an individualstage

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Sources of supply chain revenue: the customer

Sources of supply chain cost: flows of information,products, or funds between stages of the supply

chain

Supply chain management is the management of flows between and among supply chain stages to

maximize total supply chain profitability

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The Importance of SC Decisions

Walmart, has been a leader in sharing information and

collaborating with suppliers to bring down costs and improveproduct availability. In 2004, the company reported a net

income of more than 9 billion on revenues of about 250 billion.

Vs. $1 billion in 1980.

Dell has become the world’s largest personal computermanufacturer. In 2004, Dell had a net income of over $2.6

billion on revenues of just over $41 billion .

Supply chain design, planning, and operations play asignificant role in the success or failure of companies.

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Decision Phases of a Supply Chain

Supply chain strategy or design

Supply chain planning

Supply chain operation

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Supply Chain Strategy or Design

Decisions about the structure of the supply chain and what

processes each stage will performStrategic supply chain decisions

– Locations and capacities of facilities

– Products to be made or stored at various locations

– Modes of transportation

– Information systems

– Outsourcing or in-house

Supply chain design must support strategic objectivesSupply chain design decisions are long-term (several years) and

expensive to reverse – must take into account marketuncertainty

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Supply Chain Planning

Definition of a set of policies that govern

short-term operationsFixed by the supply configuration from

previous phase-Establishes constraints for

planning

Starts with a forecast of demand in the coming

year Planning decisions

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Supply Chain Planning

Planning decisions:

– Which markets will be supplied from which locations– Planned buildup of inventories

– Subcontracting, backup locations

– Inventory policies– Timing and size of market promotions

Must consider in planning decisions demand

uncertainty, exchange rates, competition over the timehorizon

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Supply Chain OperationTime horizon is weekly or daily

Decisions regarding individual customer orders

Supply chain configuration is fixed and operating policies aredetermined

Goal is to implement the operating policies as effectively as

possible– Allocate orders to inventory or production,

– set order due dates,

– generate pick lists at a warehouse,

– allocate an order to a particular shipment,– set delivery schedules,

– place replenishment orders

Much less uncertainty (short time horizon)

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Process Views of a Supply Chain

Two different ways to view the processes performed

in a SC:– Cycle view

– Push/pull view

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Cycle View of a Supply ChainProcesses in a supply chain are divided into a series of

cycles, each performed at the interfaces between twosuccessive supply chain stages

At most four cycles: Customer order cycle,Replenishment cycle, Manufacturing cycle,

Procurement cycle.Each Cycle consists of six subprocesses

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Cycle View of Supply Chains

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Cycle View of a Supply ChainSupply chain seen as a series of cycles of

communication occurring between each two

consecutive stages.

The cycles share the same type of communication,since there will always be a buyer and a supplier.

The further we go from the customer, the bigger thescale of the transactions.

Cycle view clearly defines processes involved and

the owners of each process. Specifies the roles andresponsibilities of each member and the desiredoutcome of each process.

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Cycle View of a Supply Chain

The cycle that surely presents uncertainty to the

supply chain is the customer cycle, since it contains anexternal buyer agent (the customer).

Other risks are present when the supply chain includes

several organizations, and are strictly related with thesupplier strategies.

– For example, in the case of bottleneck products, the risk of

not being able to fulfill a demand must be countered by

securing supply sources.

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Push/Pull View of

Supply Chain Processes

The customer cycle is the only cycle that involves externaldemand. The rest of the supply chain should react to that

customer demand and fulfill it.The problem is, that the process of bringing a product from the

"raw material" stage to the "all wrapped up and ready to beserved" one, takes time, enough maybe to make the demand

disappear together with your organization.Across all other stages, speculations of the possible future

demand are made.

The reactive processes are also called pull processes, and thespeculative - push processes.

Pull processes are constrained by the decisions made in thepush phase

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Push/Pull View of


Supply chain processes fall into one of two categories

depending on the timing of their execution relative tocustomer demand

Pull: execution is initiated in response to a customer

order (reactive)Push: execution is initiated in anticipation of customer

orders (speculative)

Push/pull boundary separates push processes frompull processes

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Push/Pull View of Supply Chains

Procurement,

Manufacturing andReplenishment cycles

Customer Order

Cycle

Customer

Order Arrives

PUSH PROCESSES PULL PROCESSES

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Push/Pull View of


Useful in considering strategic decisions relating to

supply chain design – more global view of howsupply chain processes relate to customer orders

Can combine the push/pull and cycle views

– L.L. Bean (Figure 1.6)– Dell (Figure 1.7)

The relative proportion of push and pull processes can

have an impact on supply chain performance

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Supply Chain Macro Processes in a

Firm

From a Business Intelligence solution perspective,

SCM means the partial management of all supplychains that cross the boundaries of the targeted

organization, meaning:

– the internal supply chains(ISCM),– the relationships with the suppliers(SRM)

– and the relationships with the customers CRM),

– but alternatively also other integrated parts of the supply

chain that occur at partner stages.

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Supply Chain Macro Processes in

a Firm

Supply chain processes discussed in the two views can

be classified into (Figure 1.8):– Customer Relationship Management (CRM)

– Internal Supply Chain Management (ISCM)

– Supplier Relationship Management (SRM)Integration among the above three macro processes is

critical for effective and successful supply chain

management

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Examples of Supply Chains

Gateway

ZaraMcMaster Carr / W.W. Grainger

Toyota

Amazon / Borders / Barnes and Noble

Webvan / Peapod / Jewel

What are some key issues in these supply chains?

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Gateway: A Direct Sales ManufacturerWhy did Gateway have multiple production facilities in the

US? What advantages or disadvantages does this strategy offer

relative to Dell, which has one facility?What factors did Gateway consider when deciding which plants

to close?

Why does Gateway not carry any finished goods inventory atits retail stores?

Should a firm with an investment in retail stores carry anyfinished goods inventory?

Is the Dell model of selling directly without any retail storesalways less expensive than a supply chain with retail stores?

What are the supply chain implications of Gateway’s decisionto offer fewer configurations?

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Toyota

Where should plants be located, what degree of

flexibility should each have, and what capacity shouldeach have?

Should plants be able to produce for all markets?

How should markets be allocated to plants?

What kind of flexibility should be built into thedistribution system?

How should this flexible investment be valued?

What actions may be taken during product design tofacilitate this flexibility?

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Amazon.comWhy is Amazon building more warehouses as it grows? How

many warehouses should it have and where should they be

located?What advantages does selling books via the Internet provide? Are

there disadvantages?

Why does Amazon stock bestsellers while buying other titles

from distributors?

Does an Internet channel provide greater value to a bookseller like

Borders or to an Internet-only company like Amazon?

Should traditional booksellers like Borders integrate e-commerceinto their current supply?

For what products does the e-commerce channel offer the greatest

benefits? What characterizes these products?

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W.W. Grainger and McMaster CarrHow many DCs should there be and where should they be

located?

How should product stocking be managed at the DCs? Shouldall DCs carry all products?

What products should be carried in inventory and whatproducts should be left at the supplier?

What products should Grainger carry at a store?

How should markets be allocated to DCs?

How should replenishment of inventory be managed at various

stocking locations?How should Web orders be handled?

What transportation modes should be used?

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7-ElevenWhat factors influence decisions of opening and closing stores?

Location of stores?

Why has 7-Eleven chosen off-site preparation of fresh food?

Why does 7-Eleven discourage direct store delivery from vendors?

Where are distribution centers located and how many stores does

each center serve? How are stores assigned to distribution centers?Why does 7-Eleven combine fresh food shipments by temperature?

What point of sale data does 7-Eleven gather and what information

is made available to store managers? How should informationsystems be structured?

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Summary of Learning Objectives

What are the cycle and push/pull views of a supply

chain?How can supply chain macro processes be classified?

What are the three key supply chain decision phases

and what is the significance of each?What is the goal of a supply chain and what is the

impact of supply chain decisions on the success of the

firm?

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