BUS 644 Week 3 Discussion 1 & 2

5

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Supply Chain Management: A Strategic Perspective

Learning Objec�ves A�er comple�ng this chapter, you should be able to:

Define supply chain management. Explain the consequences that occur when informa�on is not shared, and describe some of the informa�on that can be shared in a supply chain. Discuss various op�ons in supply chain structure. Compare insourcing, outsourcing, and ver�cal integra�on. Compare agile supply chains to lean supply chains. Discuss the impact of e-commerce on supply chain management. Explain how ERP facilitates e-commerce. Describe some supply chain performance measures. Discuss global issues in supply chain management.

Apple is the focal firm in its supply chain. A focal firm is the most important organiza�on in the supply chain and the firm that o�en interfaces with the final consumer.

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5.1 Foundations of Supply Chains

The term supply chain is commonly used to refer to the network of organiza�ons that par�cipate in producing goods or providing services. A supply chain encompasses all ac�vi�es associated with the flow and transfer of goods and services, from raw material extrac�on through use by the final consumer. The ac�ons of the par�cipants in the supply chain are coordinated by the focal firm, which directs the flow of informa�on much like a conductor coordinates the ac�vi�es of an orchestra. The be�er the focal firm is at moving informa�on among par�cipants, the be�er the supply chain will perform. The focal firm is o�en, but not always, the firm that interfaces with the final consumer. The focal firm designs and manages the supply chain by selec�ng suppliers. For example, Apple is the focal firm in its supply chain. Apple is primarily a product design and marke�ng focused firm with no manufacturing ac�vi�es, yet it is the focal firm because its brand dominates the market. There are also cases where the most important firm does not sell directly to the consumer. For example, the oil industry is shi�ing from a model in which one firm owns the oil fields, pipelines, refineries, and retail gasoline sta�ons to a model in which independent companies operate the retail opera�ons. Bri�sh Petroleum, commonly known as BP, has been reducing the number of retail outlets in the United States for several years. In this example, the company that owns the refinery and the oil fields is the focal firm because it controls the key resource in the supply chain.

A supply chain may be contained within a single organiza�on as shown in Figure 5.1. Exxon Mobil owns oil fields, refineries, distribu�on networks, and retail gasoline sta�ons that deliver fuel to the consumer. Owning mul�ple assets in a supply chain is called ver�cal integra�on. The more assets a company owns, the greater the degree of ver�cal integra�on.

Figure 5.1: Example of a ver�cally integrated internal supply chain

Traditional Supply Chains

In most cases, different companies own the assets in a supply chain as shown in Figure 5.2. For example, suppose a consumer purchases a DVD player from a retailer. The retailer obtained that DVD player through a distributor, which originally purchased the player from the manufacturer. All of those different companies, as well as the consumer, are part of the supply chain. However, the supply chain does not end there. The manufacturer purchased component parts from various �er 1 suppliers, who have purchased materials from �er 2 suppliers, such as companies that produce the chemicals for making plas�c. Finally, those �er 2 suppliers could have also purchased the raw materials to make those chemicals from �er 3 suppliers who extract petroleum from the earth. The supply chain also includes companies that move these items, such as trucking companies, railroads, and shipping companies, as well as warehouses or distribu�on centers where items may be temporarily stored during movements within the supply chain. Logis�cs involves managing the movement of materials and components from point to point in the supply chain.

Figure 5.2: Example of an external supply chain

In addi�on to materials, informa�on flows through a supply chain. If a DVD player model is selling extremely well and the retailer wants to stock more of them, then that retailer provides informa�on to the distributor to ship more of that model. The distributor informs the manufacturer to make more, and the manufacturer no�fies its suppliers to provide more of the component parts. Ideally, the informa�on would be shared with the en�re supply chain simultaneously, not only those companies with which each member deals directly. Taking ac�ons to have all members of the supply chain work together, coordinate their ac�vi�es, and share informa�on is known as supply chain management.

When it is necessary to return defec�ve products to the manufacturer for repair or replacement, the process is known as reverse logis�cs. Reverse logis�cs includes efforts to reuse and recycle materials. In Europe, the role of reverse logis�cs is being expanded beyond tradi�onal recycling. The no�on is that manufacturers who create a good are responsible for

it at the end of the product's useful life. This requires that producers of goods have a vested interest in crea�ng designs, selec�ng materials, and using manufacturing processes that facilitate recycling. Because firms are responsible for the end-of-life recycling cost, they will make decisions that lower the cost of recycling. There is no legal requirement for companies to do this in the United States, but the idea of designing to facilitate recycling is sound.

Walmart, Dell, Toyota, and The Home Depot have fine-tuned their supply chains to provide a strong compe��ve advantage in terms of service and price. This chapter discusses how these companies and others have used supply chain management to their advantage.

Globaliza�on allows products and services to reach all corners of the world and results in increased compe��on. Few companies have been as successful at globalizing their brands as Coca-Cola.

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Wal-Mart Manages Logis�cs; The Age of Wal-Mart: Inside America's Most Powerful Company

5.2 Overview of Supply Chain Management

Tradi�onally, each company in a supply chain acted in its own best interests, not those of the en�re supply chain. Informa�on was not adequately shared among members of the supply chain. Only limited informa�on was shared between a company and its immediate suppliers and between that company and its customers. As a result, important decisions including how much to produce, store, and move along the supply chain were based on local condi�ons rather than what was best for the supply chain. Several factors have emerged that encourage companies to adopt supply chain management as part of their compe��ve strategy. Those factors are:

Increasing globaliza�on More intense compe��on Shorter product life cycles Developments in informa�on technology and data communica�on

Globaliza�on has led to new markets, but also to more companies producing and selling compe�ng products—Toyota sells cars in the United States, Intel sells computer chips worldwide, Goldman Sachs provides financial services in the United Kingdom, and Caterpillar sells construc�on equipment in China. These are but a few examples of the increase in global compe��on and global trade since the 1960s. Established markets have become more compe��ve as companies iden�fy new ways of winning market share through process improvements that lower cost, improve product performance, and increase product quality. Some firms have opted to increase market share by introducing new products. As firms introduce new products and their compe�tors respond, market change accelerates and product life cycles become shorter. This means that new products must be profitable quickly and pay the needed return on investment in less �me than prior products. Be�er supply chain management is one way to do this. Informa�on and communica�on technologies have opened up new ways of buying and selling through the Internet and mobile devices. This has also allowed

companies to obtain and disseminate informa�on much more rapidly than before, thereby providing the consumer with more informa�on—not just price and features, but availability, delivery op�ons and �ming, service a�er the sale, repair services, and more.

Because of these changes, companies have been forced to be more compe��ve. Supply chain management can make a company more compe��ve by coordina�ng all supply chain ac�vi�es to ensure that the customer obtains the desired product at the desired �me for a compe��ve price. Companies should work together to minimize costs over the en�re supply chain, thus benefi�ng all the members. Supply chain management is the integrated coordina�on of all components of the supply chain—from raw materials to the final customer—so that informa�on and materials flow smoothly.

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5.3 The Role of Information Sharing

Tradi�onally, limited informa�on has been shared between adjacent supply chain pairs. For example, a retailer may order a certain number of units from a distributor, informing the distributor only of the number of units wanted at that �me and when those units should be delivered. Very li�le informa�on, such as expected future changes in demand, would be shared between the retailer and the distributor. The small amount of informa�on that was shared would be shared only by those two members of the supply chain. This limited approach to informa�on sharing does not op�mize the performance of the supply chain, and can even lead to detrimental results such as the "bullwhip effect."

The Bullwhip Effect

The bullwhip effect is an example of what can happen when informa�on is not fully shared in a supply chain or when forecasts are updated, causing an unan�cipated shi� in expected demand. This effect is further complicated by batching orders that concentrate demand at one point in �me, price fluctua�ons that change demand, and a�empts to ra�on product or otherwise game the system. The bullwhip effect is caused when a retailer experiences a slight increase in demand and increases its order quan�ty to avoid running out of a product. The distributor also no�ces the increased order from its customer (the retailer) and, also to avoid running out, increases its order to the factory by a larger amount. The factory, in turn, will further increase its orders to suppliers of raw materials. The end result is that a slight increase in demand at the retail level increases nearly exponen�ally, crea�ng a huge demand increase at the supplier level, as shown in Figure 5.3. This increase in demand may cause the supplier to work over�me, thereby increasing costs. When the retailer places the next order, which is the same size as the prior order (more or less), each par�cipant in the supply chain will have too much inventory, so a cut back is required. The supplier, who overes�mated the most (see Figure 5.3), will dras�cally reduce produc�on. As a result, the supplier may lay off staff because much of the demand can be met from inventory. In this system that uses sequen�al communica�on, the supplier at the end of the chain is "whipped" from one extreme to the other, from high demand requiring over�me costs to low demand leading to layoffs or excess inventory. Both of these op�ons increase the supplier's costs.

Figure 5.3: The bullwhip effect

To avoid problems such as the bullwhip effect, informa�on must be shared via real-�me communica�on methods rather than �me delayed, sequen�al communica�on. The hub and spoke approach is one way to do this. Each spoke represents a connec�on to a member of the supply chain. All members of the supply chain transmit informa�on to a central hub, and each member has access to the informa�on. The focal firm o�en determines the informa�on that must be shared in this manner. For example, if a company wants to supply components to a Chrysler assembly plant, it must provide the informa�on determined by Chrysler, or the supplier will not be accepted. By sharing this informa�on, all supply chain partners see changes occurring anywhere in the supply chain, and respond to those changes accordingly. The following sec�ons indicate some ways for data to be shared. Electronic data interchange (EDI) is a method of exchanging relevant informa�on between suppliers and customers in real �me. Collabora�ve planning, forecas�ng, and replenishment (CPFR) goes beyond the exchange of data to include joint planning efforts.

Electronic Data Interchange

Electronic data interchange (EDI) connects the databases of different companies. In one early use, EDI allowed companies u�lizing material requirements planning (MRP) to inform suppliers of upcoming orders by providing them with access to the database of planned orders. Although this approach was innova�ve at the �me, it s�ll represented only limited sharing of informa�on between adjacent links in the supply chain. In supply chain management, EDI is a way to share informa�on among all members of a supply chain. Shared databases can ensure that all supply chain members have access to the same informa�on, providing visibility to everyone and avoiding problems such as the bullwhip effect.

Collabora�ve Planning, Forecas�ng, and Replenishment (CPFR)

Theore�cally, informa�on is shared easily among all partners in a supply chain. In prac�ce, however, the process o�en does not work very smoothly. As a result, members of the supply chain may make assump�ons about future ac�ons of other supply chain members. For example, each supplier must forecast the demand of its customers. Collabora�ve planning, forecas�ng, and replenishment (CPFR) is a process that accomplishes more than data exchange. It seeks to minimize the lack of informa�on through enabling collabora�on among supply chain partners that jointly develop a plan specifying what is to be sold and how, where, and during what �me period it will be marketed and promoted. Sharing of informa�on is facilitated by using a common set of communica�on standards. All partners are involved in the development of plans and forecasts for the en�re group. Because these plans and forecasts have been jointly agreed upon, considerable uncertainty is removed from the process.

Real World Scenarios: Eroski Supermarkets

Eroski operates supermarkets and hypermarkets in Spain and France. Henkel, a German company, is one of the suppliers for Eroski stores. Although Henkel had u�lized EDI with its customers to improve inventory reordering, Eroski stores con�nued to run out of Henkel products on a regular basis. The two companies decided to pursue CPFR, beginning with joint demand forecas�ng, which requires them to work together to es�mate demand. Before implemen�ng CPFR, about one-half of Henkel's forecasts of demand had been miscalculated by 50% or more. As a result, Eroski's supermarkets ran out of Henkel's products. A�er implementa�on of CPFR, 75% of forecasts were within 20% of actual demand, and Henkel products were in stock at Eroski stores 98% of the �me.

Like long-range forecasts offered in the annual Old Farmer's Almanac, companies also predict forecasts for the future. The condi�ons predicted can be drama�cally different from what actually happens.

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CPFR (pronounced C-P-Far) requires that all supply chain par�es be commi�ed to the plans developed jointly and that they be commi�ed to upda�ng the plan on a regular basis. A retailer will share informa�on about demand forecasts and planned product promo�ons with its suppliers. Likewise, the suppliers share informa�on about possible limita�ons on supply or periods during which produc�on facili�es may be shut down. Once a plan is developed, suppliers can begin produc�on knowing that their customers in the supply chain have commi�ed to those orders. Plans must be revisited regularly to ensure that adjustments are made when appropriate.

Forecast Accuracy

One problem with sharing informa�on is that some of that informa�on may not be accurate, especially forecasts. For example, a retailer may forecast future sales of a par�cular clothing line. When demand actually occurs, it may differ significantly. If the forecast was too high, then the retailer may be le� with excess inventory that must eventually be sold at a loss. On the other hand, a forecast that is too low can mean unmet demand and lost sales.

Simply realizing that forecasts are likely to be inaccurate can lead to improving supply chain management. For instance, quick response is one technique that the fashion industry has developed to address uncertainty in demand. In general, any �me a firm can reduce the lead �me between a customer order and its delivery, responsiveness is improved and forecas�ng errors become less relevant.

Historical informa�on about forecast accuracy can be used to develop a confidence interval for demand. The supplier may be able to predict that there is a certain

probability that demand will not vary from the forecast by more than a specific amount. This informa�on can help the supplier to plan for a certain range of possible demand values.

Real World Scenarios: Walmart

Walmart is one company that has used EDI to improve forecast accuracy. Vendors who provide products to Walmart can use Walmart's satellite network system to directly access real-�me, point-of-sale (POS) data coming in from the cash registers at Walmart stores. Vendors can use this up-to-the-minute informa�on to improve forecasts by spo�ng trends the moment they occur.

Also, most forecasters know that it is easier to forecast demand as the �me horizon is shorter. If the supplier has Walmart's up-to-the-minute demand for Sauder television stands, it can respond quickly to any demand change. There is no �me delay in ge�ng an order because Sauder has the most recent sales data. If Sauder can combine this with a shorter lead �me—that is, they can be more responsive—errors in forecas�ng will be less important. If Sauder takes two weeks from the �me it receives an order un�l it delivers the product, a forecas�ng error is more likely to cause a supply disrup�on than if Sauder can respond in three days. With a two-week response �me, Sauder's customer may be out of stock for several days to as much as two weeks. With a three-day response �me, Walmart is far less likely to be out of stock, and if an inventory shortage occurs, it is likely to be only a day or two before more inventory arrives at the retail outlet.

Due to low labor costs in developing na�ons, global outsourcing has dras�cally increased in the past decade as firms seek to find low-cost suppliers.

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Striking a Regulatory Balance

5.4 Structure of Supply Chains

As shown in Figure 5.2, the upstream supply chain includes suppliers, which may be �er 1, �er 2, or �er 3. Each �er of the upstream supply chain may include mul�ple suppliers for the same good or service. The upstream side of the supply chain also includes produc�on planning and purchasing as well as logis�cs, which is responsible for moving materials between supply chain members. On the downstream side, supply chain partners are divided into echelons. For example, echelon 1 includes organiza�ons, such as distributors, importers, or exporters that receive the product directly from the organiza�on that produces it. Echelon 2 organiza�ons would receive the product from those at echelon 1. Echelon 2 may include retailers, dealers, or final consumers.

It is important to realize that Figure 5.2 is a greatly simplified diagram of a supply chain. There are many more organiza�ons that provide required goods and services and move materials and informa�on than can be shown in Figure 5.2. How these numerous organiza�ons are arranged and relate to one another is what determines supply chain structure. The next sec�on will briefly discuss how supply chains can be structured.

Number of Suppliers

At each �er of the upstream supply chain, companies can decide whether to use many suppliers for a par�cular good or service or few suppliers. Using many suppliers o�en allows a company to take advantage of compe��on among those suppliers to meet the company's demands for cost, quality, and delivery. If one supplier goes out of business or is unable to provide the good or service as requested, it is a simple ma�er to use another supplier.

On the other hand, there are some advantages to having only a few suppliers, or even one supplier for a good or service. Chief among these is the long-term partnership arrangements that can be developed. Such rela�onships enable both par�es to work together for greater integra�on of the supply chain and for development of methods that can improve quality and lower costs. These close partnerships o�en lead to high levels of dependency between the customer and the supplier.

Highlight: TMD and Chrysler Toledo Assembly Complex

TMD's Toledo facility is the sole source of instrument panels for the Jeep Wrangler, which is produced at Chrysler's Toledo Assembly Complex (CTAC). All of the output from TMD's Toledo opera�ons is delivered to CTAC, which is located less than three miles from the assembly facility, thereby keeping shipping costs low. Because of close interac�on and very short travel �me, the inventory of instrument panels is enough to sa�sfy demand at CTAC for only a couple of hours. These two organiza�ons have developed such a close rela�onship that there have been very few supply disrup�ons, administra�ve and accoun�ng costs are low, and quality is high. The rela�onship has worked well for both. Because these companies are highly dependent, they have worked hard to develop con�ngency plans to deal with unexpected problems.

Insourcing Versus Outsourcing

Organiza�ons use a wide range of goods and services when making and delivering products. If those goods and services are provided by the organiza�on itself, they are insourced. Goods and services obtained from outside suppliers are outsourced. One reason companies decide to outsource is that the goods or services can o�en be obtained less expensively from outside suppliers. Outside suppliers may specialize in producing that good or service, enabling them to maintain high quality while keeping costs low. Suppliers may have proprietary technology that provides them a compe��ve advantage.

In the past decade or more, global outsourcing has grown drama�cally as firms seek to find low- cost suppliers. This push, driven primarily by low labor costs in developing economies such as Mexico, China, India, and

Vietnam, has lengthened the supply chain, which increases transporta�on and inventory costs. With longer supply chains as well as poli�cal uncertainty and cultural differences, there is also an increased risk of supply chain disrup�on. Yet, the allure of lower costs is a powerful force. As some of the disadvantages of global sourcing are being examined, including concerns about quality and rising labor costs in some developing countries, there are signs of produc�on returning to the United States. It is too early to tell if these instances are the beginning of a growing trend. It should be clear that global outsourcing is not just a manufacturing phenomenon. Engineering work, informa�on systems development, and examina�on of medical images are being outsourced to developing countries.

Vertical Integration

Supply chain management requires close coordina�on with suppliers, but if those suppliers are separate organiza�ons, there may be difficulty coordina�ng among one another. One way to promote coordina�on is for a company to own its suppliers. This is called backward ver�cal integra�on.

Highlight: Henry Ford and Backward Ver�cal Integra�on

The early Ford Motor Company provides a classic example of backward ver�cal integra�on. Henry Ford believed that owning his sources of supply was the best way to guarantee an uninterrupted supply of compe��vely priced component parts and raw materials to build his Model T. He purchased iron mines, rubber planta�ons, and shipping companies. In order for this complex system to be efficient without the informa�on and communica�on technology that is present today, it required centralized planning with long lead �mes to move product from raw materials to create the finished automobile. As a result, Ford's massive system eventually became unwieldy and inflexible, resul�ng in severe problems when compe�tors began offering product variety that Ford was unable to provide. Could Ford's approach work today given that informa�on and communica�on technologies give real-�me access to data that supports decision making? There are s�ll significant issues to overcome including the level of exper�se required to manage diverse holdings such as iron mines and rubber planta�ons. Demand must be large enough to generate economies of scale when producing each component or raw material. It is challenging to build an efficient and responsive organiza�onal structure that can manage such a large organiza�on, so in some cases it is be�er to let market forces drive compe��on between suppliers.

At the other end of the supply chain, a company can own the distribu�on systems and retail outlets that sell their products; this is forward ver�cal integra�on. Many large grocery chains, such as Kroger, Publix, and Safeway, own their distribu�on networks as well as the retail stores. These companies may own all aspects of the distribu�on system, including transporta�on.

Highlight: La-Z-Boy Furniture and Forward Ver�cal Integra�on

La-Z-Boy Furniture has used its worldwide brand appeal to build a chain of retail outlets in approximately 50 countries including Jakarta, Indonesia and Bogotá, Colombia. Its strong brand recogni�on draws customers into these retail outlets to buy La-Z-Boy products as well as products from other companies. Its high level of demand is the founda�on for genera�ng a high level of sales in each store. These two factors, high brand recogni�on and sales volume, provide La-Z-Boy with the opportunity for forward ver�cal integra�on.

Virtual Organizations

Today, outsourcing is gaining popularity because of cost advantages and the opportuni�es for greater coordina�on that have been provided by the improved communica�on technologies of e-commerce. The applica�on of this technology has led to virtual corpora�ons, that is, companies that exist only as an administra�ve shell, with all other func�ons outsourced. Outsourcing provides a great deal of flexibility because the company can change sources as the requirements of its products or markets change. Apple is not a virtual corpora�on because it has product design capabili�es, marke�ng, accoun�ng, and other func�ons. Apple does have virtual manufacturing opera�ons through suppliers from around the globe.

Real World Scenarios: Amazon.com as a Virtual Retailer

Amazon.com is a large online retailer that buys and sells books and hundreds of other items. Amazon.com acts like a virtual organiza�on when it opens its website to other companies who want to list their products. Amazon.com holds the informa�on about the loca�on and the cost of books or other items, but it never takes possession or owns the items. When a customer locates an item on Amazon.com's website, the order is placed with Amazon.com and payment is collected by Amazon.com. The informa�on about the order, including the item iden�fier, the ship to address, and the payment (less Amazon.com's commission), is sent to the firm that owns and possesses the merchandise. The firm then sends the item to the customer. In this example, Amazon.com took no risk, owned no property, and incurred no cost except those related to lis�ng the item on its site. It has used the power of its brand to drive both buyers and sellers to its site, thereby ac�ng as an intermediary.

Disintermediation

An intermediary is a business en�ty that exists between a customer and a supplier. For example, travel agents are an intermediary between the travelers who buy airline �ckets and the airlines that sell those �ckets. A growing trend today is to achieve efficiencies in the supply chain by elimina�ng some intermediaries. This process is known as disintermedia�on. Airlines now have their own websites through which travelers can purchase �ckets directly from the airline, without using a travel agent's services. For the traveler, this process may be advantageous because the traveler can readily compare all different flight �mes and rou�ng op�ons, browse special promo�ons that are currently being offered by the airline, and even compare prices among different airlines by visi�ng other websites. Ge�ng flight informa�on and pricing from a travel agent may be more difficult. Some companies have made the search process more efficient by pu�ng nearly all airline prices on one website.

Real World Scenarios: Travelocity

Travelocity has created a successful business by using the Internet to provide travelers with easily accessible informa�on from airlines, hotels, and car rental companies. The advantage of Travelocity is that it enables a customer to compare prices offered by many different travel service suppliers on one single website. In response, a group of major airlines began compe�ng directly with Travelocity through its own website, Orbitz. Orbitz was started by American Airlines, United Airlines, and Delta Air Lines and promised to provide airfares that are lower than those through Travelocity, thus seeking to eliminate Travelocity as an intermediary. Kayak, Expedia, and Cheapflights have also begun to compete in this market. With limited barriers to entry, this space has become crowded.

The fashion industry is con�nuously evolving; therefore, an agile supply chain is u�lized because it is able to rapidly respond to new products and changes in demand.

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5.5 Supply Chain Strategies

As top managers have begun to understand the value of effec�ve supply chain management, it has gained recogni�on as a strategically important issue. Becoming successful when managing supply chains requires the support and involvement of top management. Various approaches to managing supply chains have been developed. Many of these strategies can be used together, although some may be more relevant to certain types of supply chains or certain structures.

Agile Supply Chains

Markets such as fashion and technology are characterized by frequent innova�on, making product demand unpredictable and, therefore, requiring the en�re supply chain to respond quickly as new products are introduced and demand changes. The supply chain must be able to transmit customer responses to new products and informa�on about what customers would like to see in future products.

A par�cular type of supply chain, known as an agile supply chain, is needed to meet these requirements. Members of such a supply chain are selected based upon their speed and flexibility, and their capacity to transit informa�on reliably, accurately, and quickly from the marketplace to supply chain members. An agile supply chain a�empts to assess in great detail the needs of its customers so it can provide customized products that be�er meet the customers' expecta�ons. An agile supply chain is more than transferring data between companies (EDI) or replenishing inventory more effec�vely and efficiently (CPFR). An agile supply chain is a coopera�ve rela�onship; supplies help to design and develop new products that can meet individual customer needs be�er. It creates a flexible and responsive produc�on process that allows the supply chain to deliver differen�ated products. It also allows companies to work on quality improvement projects that affect the company and its suppliers, and allows all members of the supply chain to work together to keep costs aligned with customer expecta�ons. Agile supply chains are frequently used in the fashion industry.

Real World Scenarios: Sport Obermeyer

Sport Obermeyer is a maker of fashion skiwear. When designs are created, suppliers help Sport Obermeyer to iden�fy new material that can be used in its innova�ve and fashionable designs, and to create produc�on systems that can respond to changing customer demands. Product mix flexibility is the agility to shi� produc�on from one product to another with very limited lost �me or very small cost increases. Product volume flexibility is the agility to increase produc�on levels if demand is greater than expected or to reduce produc�on volume if demand is less than expected. This agility in the supply chain allows Sport Obermeyer to respond quickly and efficiently once customers vote with their money and decide that they like one style and color of ski equipment over another. Agility allows Sport Obermeyer to keep inventory at op�mum levels. When produc�on begins, the company can only es�mate how many units of each product will actually be sold. If the supply chain cannot adjust, Sport Obermeyer will have too many units of products that are not selling well and not enough of high-demand items, resul�ng in excessive inventory, high inventory carrying costs, and lost sales.

Vendor Managed Inventory (VMI)

Instead of a retailer following the tradi�onal approach of placing inventory replenishment orders with its suppliers, the suppliers can use informa�on from the retailer regarding product sales to determine when they should replenish the supplier's inventory. Walmart and other larger retailers, in conjunc�on with suppliers such as Procter & Gamble, have implemented vendor managed inventory (VMI). Under VMI, the vendor, or supplier, can be�er coordinate its own produc�on with the replenishment of supplier inventory, thus reducing costs and improving delivery performance between the supplier and the retailer. To make this work, the suppliers receive daily point-of-sale (POS) data from the retail stores, and they also have access to retailer's inventory files. In this way, the supplier (Procter & Gamble) has sales data and on-hand inventory at the retailer (Walmart). The supplier can plan produc�on to keep the retailer stocked with its product and effec�vely manage its produc�on to keep costs low. Customers benefit because the product they want is in stock, the retailer benefits because it has product to sell and inventory cost is low, and the supplier benefits because it sells more product while keeping produc�on costs low.

Some companies such as Bose, which manufactures audio components, have further u�lized vendor managed inventory by having personnel from their suppliers work within Bose's purchasing department. Bose has called this approach Just-in-Time II (JIT II). In the past, Bose's purchasing personnel handled all purchasing from outside suppliers. But, because the Bose personnel worked with many different suppliers, they were not fully knowledgeable about the full range of products offered by each supplier, nor were they aware of the inventory levels and produc�on plans of those suppliers. Under JIT II, employees of major suppliers work in the Bose purchasing department and handle all purchases from their companies. These employees are aware of all products offered by their companies. Thus, they are o�en able to suggest be�er alterna�ves. Furthermore, because these personnel are employees of the suppliers, they are aware of all supplier informa�on, such as current inventory levels of products and plans for future produc�on. This knowledge enables personnel to foresee possible shortages and avoid problems before they occur.

Lean Supply Chains

Products such as can openers that have a long product life cycle, stable demand, and a low profit margin use lean supply chains because they keep costs down.

©BananaStock/Thinkstock

A very different approach is needed for products that are standard func�onal items, such as power drills or can openers. These products have long product life cycles, stable and predictable demand, and minimal innova�on. They are also o�en characterized by low profit margins. For these products, the supply chain must focus on opera�ng efficiently to minimize costs. Such supply chains are known as lean supply chains, and the members are chosen based upon their ability to keep costs down and minimize inventory in the system.

Real World Scenarios: Black & Decker's Lean Supply Chain

Black & Decker produces a variety of small appliances and hand tools for use in the home. Success in that market is predicated on manufacturing standard products that have high quality and low cost and a modest amount of variety. Designs for these appliances and tools change slowly and demand for these products can be characterized as steady. A lean supply chain focuses on opera�ng issues as it a�empts to eliminate non-value-added opera�ons. A lean supply chain supports the reduc�on of setup �mes to enable the economic produc�on of small quan��es. This enables the supply chain to keep inventory costs low and achieve manufacturing cost reduc�ons, in part, by enabling opera�ons to switch quickly among products.

Consider Black & Decker's 3/8-inch variable speed reversing drill, which is one of its most popular products. This tool is sold primarily to homeowners who use it infrequently to hang a shelf or repair a table. Each major component in the drill is a standard product. To create a successful supply chain, component suppliers must adopt lean manufacturing and its con�nuous improvement philosophy. These suppliers must achieve an efficient combina�on of flexibility and cost reduc�on. Flexibility is needed because there are several different models of drills as well as other hand tools and appliances that require similar components. Cost reduc�on is also essen�al because products, such as drills, are produced by many compe�tors, and customers are price sensi�ve. Cost reduc�ons can be achieved when suppliers purchase large volumes of basic materials, such as steel for the gear manufacturer, or copper for the electric motor producer. Streamlining the flow of materials and informa�on through the supply chain to drive out inventory and non-value-added steps can also reduce cost. Because drills have low profit margins maintaining high sales and produc�on volumes is cri�cal for profitability for all members in the supply chain. Black & Decker can switch from one supplier of electric motors to another with rela�ve ease, which is significant mo�va�on for suppliers to seek con�nuous improvements in both component part cost and quality.

Postponement

In an a�empt to meet customers' requests as closely as possible, firms and their supply chains may offer a product with many different op�ons. For example, a par�cular model of automobile may be able to be built in two million or more combina�ons of paint color, trim package, engine, transmission, interior colors, and other op�ons. Because of this large number of possibili�es, manufacturers find it extremely difficult to accurately forecast demand for each possible combina�on of op�ons. Inaccurate forecasts mean that the company may end up with a large inventory of unsold products consumers do not want, and a small inventory of the products consumers do want. Building sufficient inventory in each of the many op�ons results in excessive inventory levels and costs. Conversely, wai�ng to produce a product un�l the customer actually wants it may disrupt the efficiency of the produc�on process and entail very long lead �mes.

To overcome these problems, companies may use either product or process postponement. Electronics manufacturers such as Hewle�-Packard (HP) use product postponement, also known as delayed differen�a�on, by producing a generic product at the central manufacturing facility, then adding specific components needed to customize the product for the final consumer at the latest possible point in the distribu�on system. Thus, product postponement delays the final configura�on of a product un�l the last possible step in the supply chain.

The elements of a printer, which are common to all configura�ons of the printer, are produced and assembled at a central loca�on. These undifferen�ated units are shipped to distribu�on centers around the world as needed. At the distribu�on centers, the electric module with the correct voltage, amperage, plug, so�ware, and instruc�ons are added to the unit. In this example, differen�a�on takes place just prior to a product's arrival at retail opera�ons rather than at the factory that assembles the printers. In this way, the produc�on process is very efficient and inventories are kept very low. If demand is unexpectedly high in China and low in Europe, HP can adjust shipments at its factory because the product is s�ll undifferen�ated.

Product postponement is also u�lized to some extent by automobile manufacturers. Certain op�ons are added to automobiles, customizing them for the U.S. market a�er the cars are received in the United States. Carmakers in the United States offer detail packages that add special trim or increase performance. These upgrades can take place a�er the vehicle exits the assembly line and before it reaches the dealer, or they may happen a�er purchase from the dealership and before the customer takes delivery.

In process postponement, certain steps in the produc�on process are delayed un�l the last possible moment. Instead of maintaining an inventory of finished products, a company will maintain inventory of component parts and then process the products when orders are received. Ideally, the finished product will be produced only a�er customer orders have been received. This is commonly used in "sit-down" restaurants rather than in fast-food restaurants. For example, if the menu lists a perch dinner, the customer may be able to choose whether the fish is fried, baked, broiled, or blackened, and whether the accompanying potatoes are deep fried, baked, or home fried. Restaurants can offer these op�ons because the �me that a customer expects to be in the restaurant is long enough to fix the food using a different process.

When process postponement is implemented there are many op�ons for finished products with few components so less diverse inventory is held. A restaurant can offer four different fish op�ons and three different potato op�ons, or 12 different meal choices, and it only needs to inventory perch and potatoes. For this approach to work effec�vely, the lead �mes for making finished products must be short enough that they will be acceptable to customers. That is why process postponement does not work in fast-food restaurants.

Cross Docking

One objec�ve of supply chain management is to reduce inventory throughout the supply chain. Distribu�on centers, which receive shipments from a factory, break down those shipments into smaller quan��es that are shipped to retailers, who are the customers of distribu�on centers. This represents a major investment in inventory because receipt of shipments from the factory is not coordinated with shipments to retailers. Thus, a large shipment of a product may be received from the factory. Next, it is placed into inventory un�l orders are received from retailers that gradually decrease the inventory.

Cross docking seeks to coordinate inbound and outbound shipments so that li�le inventory is kept at the distribu�on center. As a shipment is received from the factory and broken down, each unit of the inbound shipment is moved to a loca�on awai�ng outbound shipment to a retailer. A�er each outbound shipment is fully assembled, it is sent on to the retailer. Consequently, the distribu�on center primarily serves as a loca�on for breaking down incoming shipments and redistribu�ng the items into outgoing shipments. Unlike the tradi�onal approach, the distribu�on center used for cross docking does not serve as a site for storing inventory. Target is one of dozens of retailers that have used cross docking effec�vely to decrease costs and reduce inventory. Distribu�on centers that use cross docking will have many items that never leave the conveyor system. A pallet of Gatorade may go from the delivery truck onto a high-speed automated conveyor system to the truck taking the product to the retail store. Scanners, cameras, and bar code readers sort and direct the pallet through the distribu�on center. As a result, more than 50% of products fed into the system spend a few minutes to a couple of hours in the distribu�on center, and never leave the conveyor. Much of the product, 70–80%, leaves the distribu�on center in 24 hours or less.

Third Party Logistics (3PL)

To improve the efficiency of supply chains, some companies have developed partnerships with third party logis�cs (3PL). An outside supplier, also known as a third party, handles all of the logis�cs ac�vi�es between supplier and customer. Third party logis�cs (3PL) is, therefore, the outsourcing of logis�c services. These logis�cs ac�vi�es can include inventory control, material handling, and transporta�on. United Parcel Service (UPS) is a 3PL provider for health care, retail, and automo�ve opera�ons. It o�en makes good financial sense to allow specialists who know the best ways to move goods from place to place to handle logis�cs.

Real World Scenarios: Penske and Navistar Strike up a Partnership

Penske Logis�cs and Navistar truck producers have formed a 3PL partnership under which Penske Logis�cs is responsible for reducing supply chain costs and improving performance. The new approach has included centralizing shipping opera�ons, improving supplier training, establishing new bidding requirements for carriers, and implemen�ng a proprietary logis�cs management system. Navistar chose 3PL because Penske Logis�cs has exper�se and experience that Navistar does not have. Navistar could develop this exper�se, but the cost of doing so would be higher than using Penske Logis�cs and the results may not be as good. The advantage of 3PL is that companies such as Penske Logis�cs have specialized knowledge regarding the best methods and techniques to move parts from one place to another. Furthermore, Penske Logis�cs is able to combine shipments from many different suppliers and many different customers, taking advantage of opportuni�es for cross docking and reduced transporta�on costs.

Radio Frequency Identification (RFID)

Radio frequency iden�fica�on (RFID) is a wireless system that uses radio frequencies to transmit data from a small device that is a�ached to an item to a receiver that tracks the item. The small device contains informa�on that can be read from a distance of a few inches to 100 feet or more, depending upon the power output. Hospitals use this to track medical equipment, pa�ents, and medica�on. While data transmission systems like bar codes require a scanner and a line of sight, RFID does not need to be within a line of sight.

RFID is used on automated toll lanes such as E-ZPass and to pay for gasoline at the gas pump using Speedpass. It is also used to secure items so they cannot be moved without the owner's knowledge, such as when securing expensive clothing in a shopping mall, moving cri�cal parts within a chemical supply chain, or storing laptop computers at an office. The use of RFID in supply chains is growing rapidly.

Enterprise Resource Planning (ERP)

Supply chain management aims to achieve be�er integra�on, coordina�on, and communica�on among members of the supply chain. These efforts, however, are o�en stymied by the separate databases used by the individual members of the supply chain. Enterprise resource planning (ERP) can eliminate delays caused by separate databases either by allowing companies to access one another's databases or, ideally, through the use of one common database.

Radio frequency iden�fica�on (RFID) is used on automated toll lanes like E-ZPass and to pay for gas using Speedpass.

Daniel Hulshizer/ASSOCIATED PRESS/AP Images

To understand the problems that can be experienced when separate databases are used, consider a company that directly sells to the final customer. Suppose a customer calls the company's marke�ng department to inquire about the status of an order. The marke�ng database will probably show only informa�on specific to marke�ng, such as the date the order was entered. If that order is in produc�on, then either someone from marke�ng or the customer will need to contact the produc�on department to find out the status of the order. Suppose the order has been completed and shipped. The produc�on database would probably show only comple�on of the order, but no shipping informa�on. To obtain the shipping informa�on someone would need to contact distribu�on or logis�cs. Because the company uses separate databases, no one in any area of the company has access to all company informa�on. Thus, the customer is bounced from one department to another to get the answer to a simple ques�on about order status.

A second problem with separate databases is that they may contain conflic�ng informa�on. For example, suppose the customer order described above has been shipped, and the logis�cs database indicates this, but the produc�on database has not yet been updated, so it shows the order is s�ll at the last processing opera�on. Produc�on may tell the customer that the order is s�ll in processing when, in reality, it was already shipped.

The purpose of ERP is to avoid the problems described in this example by combining databases into one common database for the en�re organiza�on—and possibly for the en�re supply chain. The advantage of a common database is that all personnel within the organiza�on have access to all informa�on. For example, someone in marke�ng could see if an order was delayed in produc�on awai�ng a component part from a supplier. Furthermore, if the ERP system integrates the en�re supply chain, then personnel in marke�ng could determine the loca�on of the part within the supplier's produc�on system. Using one common database can effec�vely eliminate problems caused by conflic�ng informa�on among separate databases.

Figure 5.4 shows part of a typical ERP system configura�on. Informa�on is stored centrally in the database servers, which are accessed by individual servers. Users access informa�on on their personal computers. Newer configura�ons of ERP are Internet-based. The database servers shown in Figure 5.4 can be accessed and updated by members of the supply chain via the Internet over secure connec�ons. For example, the German company SAP now offers mySAP.com as its e-business pla�orm.

Figure 5.4: Part of a typical ERP system

ERP can be expensive in terms of purchase cost or in terms of the disrup�on that such a major change can have on an organiza�on. For example, it took Owens Corning two years to install an ERP system at a cost of $100 million. A recent survey found that the average cost of an ERP system was $15 million, although companies in that survey spent a minimum of $400,000 and a maximum of $300 million. There have also been some high-profile ERP failures. The Hershey's Company spent $112 million only to find that the ERP system they had installed delayed shipments to customers. Allied Waste Industries stopped implementa�on of its $130 million ERP system a�er the company decided the system was too expensive and too complicated to operate.

One complica�on from ERP implementa�on results from using a common database, which o�en requires that procedures be completed differently than they previously were. For example, in the past, personnel in the marke�ng department may have been responsible for selling a product and then entering orders into the computer system. It was the produc�on department's responsibility to meet the promised delivery data, and finance's responsibility to decide whether to offer the customer credit. With an ERP system, marke�ng personnel may find that they now are responsible for not only entering orders but also for determining whether a delivery date can be met and whether a customer's credit ra�ng is sufficient to jus�fy offering credit. Such changes may require extensive retraining and a long break-in period un�l people can perform their tasks efficiently in the new way.

While ERP systems are o�en difficult to implement, the advantages of having an integrated, real-�me system to assist customers and to work with suppliers is very appealing. When success is achieved, the benefits are substan�al.

Service Operations

Because many people think about supply chain management as moving goods from point to point in the produc�on process, these topics are o�en associated with manufacturing. However, supply chain, logis�cs, inventory, and purchasing are important topics in service opera�ons. Retail and wholesale opera�ons, which are classified as services, move goods from producers to customers via systems of distribu�on centers, warehouses, brick-and-mortar retail stores, and Internet-based retailers.

Because food has a rela�vely short shelf life, it is essen�al to keep delivery and inventory aligned with consump�on pa�erns.

iStockphoto/Thinkstock

Supply chain management is cri�cal in restaurants. A restaurant is like a factory that transforms raw materials into finished goods. It cuts, dices, chops, cooks, and serves food to customers. Some restaurants focus on specialized high-end food, while other focus on fast food. In either case, the restaurant faces the same challenges with supplier quality, delivery reliability, and costs that are found in manufacturing. Food has a very short shelf life so delivering in a �mely manner and aligning inventory with consump�on are essen�al tasks.

Health care is also becoming a service business where supply chains and supply chain management are important. From a tradi�onal perspec�ve, a hospital has suppliers who provide food, linens, medicine, equipment, and maintenance services for facili�es. Health care organiza�ons have suppliers, including doctors, who act as service providers to the hospitals. In this environment, pa�ents, doctors, and hospital clinical staff exchange informa�on and work together to understand problems and to develop solu�ons or treatments. This is a highly interac�ve process where value is created by all of the par�cipants. It is based on trust, commitment, and a shared vision among the par�cipants. These same elements are vital in a tradi�onal manufacturing supply chain.

Chapter Summary

Supply chain management is an approach in which all members of the supply chain work together, coordinate their ac�vi�es, and share informa�on. The bullwhip effect, in which disrup�ons in demand are magnified through the supply chain, is one of the consequences of not sharing informa�on. Some of the informa�on that can be shared in a supply chain includes demand informa�on, forecasts, planned orders, and sales. Ver�cal integra�on allows a company to own various components of the supply chain. Under outsourcing, those components of the supply chain are provided by independent companies. Supply chain structure includes having many versus fewer suppliers, insourcing versus outsourcing products and services, ver�cal integra�on of the supply chain, and the use of virtual organiza�ons and disintermedia�on. Supply chain strategies include agile versus lean supply chains, vendor-managed inventory, postponement, cross docking, 3PL, and radio frequency iden�fica�on. Agile supply chains focus on quickly ge�ng innova�ve products to market. Efficient supply chains emphasize reducing supply chain costs for func�onal products. Lean supply chains focus on opera�ng efficiently to minimize costs and keep inventory low. They o�en produce products that have long product life cycles, stable and predictable demand, and minimal innova�on. Enterprise resource planning (ERP) is an a�empt to provide integrated, real-�me access to informa�on about the firm and possibly the supply chain. In this way, customers contac�ng the supply chain can find the answers to ques�ons with one e-mail or phone call. Supply chains and supply chain management are applicable in service businesses. Retail and wholesale business, restaurants, and health care establishments are three examples.

Case Study

Medical Equipment Devices LLC

Medical Equipment Devices LLC (MED) currently makes a few dozen different sophis�cated, high-quality medical devices that are used in surgical, tes�ng, and treatment procedures. These items can be customized to the needs of the doctor or hospital and are o�en purchased in small quan��es. MED will some�mes keep a small quan�ty of finished products on hand, but most sales are made to order. The products are high cost, high profit-margin items that require substan�al follow-up and field support. MED's suppliers must respond rapidly to MED's needs for products because MED's customers want delivery as fast as possible. In addi�on to speed, high quality, flexibility, and innova�on are essen�al characteris�cs of MED's suppliers. Keeping costs low is always an issue, but it is less important than these factors. MED is doing well and has generated substan�al profits, which it is using to seek addi�onal investment opportuni�es.

Basil Diode, the chief financial officer of MED, has requested proposals for opportuni�es to start a new business or acquire a business in the medical field. He does not want to go outside of the company's area of exper�se, so he has asked for proposals in the broad area of health care. He has received a proposal to purchase and operate a company called MedSurgItems Corp. (MSI) that produces several hundred different standard medical and surgical items such as syringes, gowns, gloves, and tongue depressors. These items are typically made to stock, profit margins are small, and company profits are driven by sales volumes. MSI suppliers must be able to meet these needs.

To evaluate this and other proposals received, Basil has assembled a cross-func�onal team of experts from various disciplines including marke�ng, accoun�ng, finance, and opera�ons and supply chain management. You are the representa�ve of the opera�ons and supply chain management func�on. Basil has asked you to provide detailed responses with appropriate jus�fica�on to the following ques�ons. Keep in mind he does not want yes or no answers.

1. Iden�fy the important performance characteris�cs in MED's current business, and iden�fy them for the MSI business to be acquired. 2. Are these compa�ble? Are there economies of scale in produc�on? Will there be synergy in product design? 3. What, if any, problems do you see in managing the supply chains that support MED's current business and the MSI business to be acquired? 4. Provide a recommenda�on to Basil with support for that recommenda�on.

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. List the factors that now require companies to emphasize supply chain management. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

The factors that now require companies to emphasize supply chain management are: – Increasing globaliza�on – More intense compe��on – Shorter product life cycles – Developments in informa�on technology and data communica�on

2. Explain how the bullwhip effect may occur for a fashion retailer. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

In general, the bullwhip effect is caused by batching of orders and delays in transmi�ng this informa�on up the supply chain. This is certainly true in retail fashion industries, but there are other reasons. For a fashion retailer, the bullwhip effect could occur as follows. Suppose the retailer decides to hold a special promo�on of a par�cular item and places a larger order than usual for that item. The distributor, seeing the larger order may think that demand for this item is suddenly taking off. Because that distributor probably serves several different retailers, the distributor will increase its order from the manufacturer by enough to cover increased demand from all the retailers it supplies. The manufacturer, seeing this sudden jump in demand from one of its distributors may also incorrectly assume that increased orders will be coming from all the distributors it supplies, and thus decide to increase produc�on drama�cally. Because the manufacturer will probably decide to produce this item in a very large quan�ty, it will order enough materials from its suppliers to meet this an�cipated large increase in demand over an extended period of �me. Consequently, the amount being ordered from suppliers will suddenly jump by much more than is jus�fied by the one retailer that decided to hold a special promo�on.

3. What ac�ons can firms take to prevent the bullwhip effect from occurring? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

To minimize the bullwhip effect, informa�on must be shared via real �me communica�on rather than �me delayed, sequen�al communica�on. The hub and spoke approach is one way to do this. Each spoke represents a connec�on to a member of the supply chain. All members of the supply chain transmit informa�on to a central hub, and each member has access to the informa�on. The informa�on that must be shared in this manner is o�en determined by the focal firm. Electronic Data Interchange (EDI) connects

the databases of different companies. In supply chain management, EDI is a means of sharing informa�on among all members of a supply chain. Shared databases can ensure that all supply chain members have access to the same informa�on, providing visibility to everyone and avoiding problems such as the bullwhip effect. Collabora�ve Planning, Forecas�ng, and Replenishment (CPFR) is more than exchanging data. It seeks to minimize this guessing game through collabora�on among supply chain partners to jointly develop a plan that specifies what is to be sold, how it will be marketed and promoted, where, and during what �me period. Because these plans and forecasts have been jointly agreed upon, considerable uncertainty is removed from the process.

4. O�en forecasts of future demand are not accurate. How can firms address this problem in its supply chains? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Keys to coping with forecas�ng uncertainty are to move informa�on about actual demand to the suppliers as quickly as possible and to ask the suppliers to reduce lead �me by building flexible produc�on systems that can produce what is in demand. Flexibility allows the supplier to switch produc�on cheaply and quickly to high demand items. The Walmart feature in this chapter illustrates these points.

5. Describe the supply chain that might exist for an automobile manufacturer and discuss some informa�on that might flow through the supply chain. Do the same for a fast-food restaurant. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

An automobile manufacturer's supply chain would involve the following. Consumers buy the product from dealers, who receive it from the manufacturer's factories. Depending upon the loca�on of those factories, the logis�cs used for distribu�on could include trucks, railroads, and ships. Manufacturing facili�es would include assembly plants that assemble the final product. In addi�on, the manufacturer might operate its own plants to fabricate parts, such as engines or body panels. Other parts are obtained from suppliers. Tier 1 suppliers provide components such as electronics, interiors, and �res. These �er 1 suppliers obtain their component parts from �er 2 suppliers, which could include steel companies or chemical companies. Tier 3 suppliers, which serve the �er 2 suppliers, could include companies that mine the iron ore for making steel.

A fast-food restaurant works with raw materials like an automobile manufacturer. It sells its products directly to the final consumer, so there is no distribu�on system for the product. However, there can s�ll be several �ers of suppliers. For example, hamburger buns are probably purchased from a bakery, which would be a �er 1 supplier. That bakery buys its flour from a milling company, which is a �er 2 supplier. The wheat for the flour comes from farmers who would be �er 3 suppliers. The logis�cs in this system could include railways and barges that move the grain and flour, and trucks that transport the hamburger buns to the fast-food restaurant.

6. Iden�fy some organiza�ons that are ver�cally integrated and some that use extensive outsourcing. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

An example of a ver�cally integrated company would be an oil company such as ChevronTexaco. ChevronTexaco sells its products directly to consumers through its gasoline sta�ons. The company also operates its own refineries, which process crude oil into finished products. Furthermore, ChevronTexaco operates its own wells, which extract oil from the earth, and even has its own drilling and explora�on teams to find more oil.

Apple is an example of a company that uses outsourcing extensively. It outsources the produc�on of most of its components on worldwide basis. Apple and others are reexamining global outsourcing because of the rising cost of transporta�on and the nega�ve impacts on the environment.

7. Should a firm a�empt to have fewer or more suppliers? What are the advantages and disadvantages of each approach? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

By using many suppliers, a company can take advantage of compe��on among those suppliers to meet the company's demands for cost, quality, and delivery. If one supplier goes out of business or is unable to provide the good or service as requested, it is a simple ma�er to use another supplier. On the other hand, there are some advantages to having only a few suppliers or even one supplier for a good or service. Chief among these is the long-term partnership arrangements that can be developed. Such rela�onships enable both par�es to work together for greater integra�on of the supply chain and for development of methods that can improve quality and lower costs. These close partnerships o�en lead to high levels of dependency between the customer and the supplier.

8. Describe agile supply chains, including the characteris�cs of the products they produce. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Markets like fashion and technology are characterized by frequent innova�on, making product demand unpredictable and requiring the en�re supply chain to respond quickly as new products are introduced and demand changes. The supply chain must be able to transmit customer responses to new products and informa�on about what customers would like to see in future products. An agile supply chain, can respond to these requirements. Members of such a supply chain are selected based on their speed and flexibility and their capacity to transit informa�on reliably, accurately, and quickly from the marketplace to supply chain members. An agile supply chain a�empts to assess in great detail the needs of its customers so it can provide customized products that be�er meet the customers' expecta�ons. An agile supply chain is a coopera�ve rela�onships where supplies help to design and develop new products that can meet individual customer needs be�er, create a flexible and responsive produc�on process that allow the supply chain to deliver differen�ated products, work on quality improvement projects that affect the company and its suppliers, and work together to keep costs in line with customer expecta�ons.

9. Describe lean supply chains, including the characteris�cs of the products they produce. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Products with long life cycles, stable and predictable demand, and minimal innova�on o�en require a lean supply chain. They are also o�en characterized by low profit margins. For these products, the supply chain must focus on opera�ng efficiently to minimize costs. Supply chain members are chosen based on their ability to keep costs down and to minimize inventory in the system. Black and Decker produces a variety of small appliances and hand tools. Success depends on manufacturing standard products that have high quality and low cost and a modest amount of variety. Designs for these appliances and tools change slowly and demand for these products can be characterized as slow and steady. A lean supply chain focuses on opera�ng issues as it a�empts to eliminate non-value added opera�ons. A lean supply chain supports the reduc�on of setup �mes to enable the economic produc�on of small quan��es. This enables the supply chain to keep inventory costs low and achieve manufacturing cost reduc�ons, in part, by enabling opera�ons to switch quickly among products.

10. Outsourcing, especially to low labor-cost countries, has grown substan�ally. What are the advantages and disadvantages of outsourcing? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

One important reason companies decide to outsource is that the goods or services can o�en be obtained less expensively from outside suppliers. Outside suppliers may specialize in producing that good or service, enabling them to maintain high quality while keeping costs low. Suppliers may have proprietary technology that gives them a compe��ve advantage. In the past decade or more, global outsourcing has grown drama�cally as firms seek to find low cost suppliers. This push, driven primarily by low labor costs in developing economies such as Mexico, China, India, and Vietnam, has lengthened the supply chain, which increases transporta�on and inventory holding costs. With longer supply chains as well as poli�cal uncertainty and cultural differences there is also an increased risk of supply chain disrup�on. Yet, the allure of lower costs is a powerful force. As some of the disadvantages of global sourcing are being examined, including concerns about quality and rising labor costs in some developing countries, there are signs of produc�on returning to the U.S.

11. Is Amazon.com a virtual organiza�on? Find as much informa�on as you can about the company, and then use that informa�on to support your argument. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Some aspects of Amazon.com certainly are very close to being a virtual organiza�on. The company uses technology to handle fulfillment, distribu�on and other logis�c ac�vi�es, and it does not manufacture its own products. However, it does maintain its own distribu�on centers. In some ways Amazon is very similar to a standard retailer, except that all customer transac�ons take place over the Internet. Amazon is also offering marke�ng services for many small companies that cannot afford the sophis�cate web site to display its products and collect the payment. Amazon provides access to millions of customers worldwide. Amazon will sell the product, no�fy the company who arranges shipment, collects the money, takes a por�on for its services, and send the balance to the small company.

12. List some products that would be most appropriate for an agile supply chain. Do the same for a lean efficient supply chain. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Products appropriate for an agile supply chain include any items with short product lives and vola�le demand. These could include many electronics items, including computers, as well as fashion goods. Lean supply chains deal with products that have fairly constant demand and for which price is an important considera�on. Such products can include grocery items, building materials, or gasoline.

13. Explain how companies that make the materials used in the apparel industry (e.g., denim) may use postponement. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Several approaches can be used in the fashion industry. For example, the popularity of different colors can o�en change quickly. In the past, fabric makers o�en dyed cloth ahead of �me, then stored the dyed cloth in inventory. However, as fashions changed, some colors could go out of style, leaving the fabric maker with a large supply of material with li�le demand. Today, many companies store undyed cloth in inventory, then wait un�l orders are received to dye the material.

14. How do supply chains and supply chain management impact service opera�ons? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Supply chain, logis�cs, inventory, and purchasing are important topics in services opera�ons. Retail and wholesale opera�ons, which are classified as services, move goods from producers to the customers via systems of distribu�on centers, warehouses, brick and mortar retail stores, and Internet based retailers. Supply chain management is cri�cal in restaurants, which is like a factory that transforms raw materials into finished goods. It cuts, dices, chops, cooks, and serves food to customers. Some restaurants focus on specialized high-end food while other focus on fast food. In either case, the restaurant has the same issues with supplier quality, delivery reliability, and costs that are found in manufacturing. Healthcare is also becoming a service business where supply chains and supply chain management are important. From a tradi�onal perspec�ve, a hospital has suppliers who provide food, linen, medicine, equipment, and maintenance service for facili�es. Healthcare organiza�ons have suppliers, including doctors who act as service providers to the hospitals. In this environment, pa�ents, doctors, and hospital clinical staff exchange informa�on and work together to understand the problem and to develop solu�ons or treatments.

Key Terms

Click on each key term to see the defini�on.

agile supply chain (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A type of supply chain that focuses on quickly responding to changes in demand for various products.

backward ver�cal integra�on (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When a company owns the organiza�ons that perform ac�vi�es in the upstream supply chain.

bullwhip effect (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

An example of what can happen when informa�on is not shared in a supply chain. It occurs when a slight increase in demand at the retailer level increases nearly exponen�ally, resul�ng in a huge increase in demand at the raw material supplier level.

collabora�ve planning, forecas�ng, and replenishment (CPFR) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Facilitates coordina�on among supply chain partners by jointly developing plans and schedules for what is to be sold, produced, and delivered.

cross docking (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Coordina�on between inbound and outbound shipments so that li�le, if any, inventory must be kept at a distribu�on center.

disintermedia�on (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The process of elimina�ng some func�ons in a supply chain to improve its efficiency, such as when a manufacturer sells directly to the final consumer.

downstream (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A designa�on for the part of the supply chain through which a company's products are sold, such as distributors, retailers, dealers, or final consumers.

electronic data interchange (EDI) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The use of electronic transmissions, such as telephone lines or the Internet, to share data among members of a supply chain.

enterprise resource planning (ERP) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The use of one common database for all func�ons of an organiza�on, or all members of a supply chain.

focal firm (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The most important organiza�on in the supply chain, and o�en the firm that interfaces with the final consumer. The focal firm designs and manages the supply chain.

forward ver�cal integra�on (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When a company owns the organiza�ons that cons�tute the downstream side of the supply chain.

insourced (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When a company internally produces the goods or services that it uses in its own opera�ons.

lean supply chain (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A type of supply chain that emphasizes cost minimiza�on and efficiency.

logis�cs (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The management of the movement of materials and components from point to point in the supply chain.

outsourced (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Contrac�ng with another company to do work that was once done by the organiza�on itself.

point-of-sale (POS) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Data collected directly from the cash registers in a store.

process postponement (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When certain steps in the produc�on process are delayed un�l the last possible moment such that the finished product will be produced only a�er customer orders have been received.

product postponement (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Producing a generic product at the central manufacturing facility, then producing specific components needed to customize the product for the final consumer, which are added at the latest possible point in the distribu�on system.

radio frequency iden�fica�on (RFID) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A wireless, contact-less system that uses radio frequencies to transfer data from a tag a�ached to an object to a system that tracks the item.

reverse logis�cs (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The ability to return a product to the manufacturer for repair or replacement. It is also being employed to recycle products at the end of their useful life.

supply chain (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

All ac�vi�es associated with the flow and transfer of goods and services from raw material extrac�on through use by the organiza�on that sells to the final consumer.

supply chain management (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The integra�on of supply chain ac�vi�es through improved supplier rela�onships to achieve sustainable compe��ve advantage for all members in the supply chain.

third party logis�cs (3PL) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

An outside supplier that handles all the logis�cs ac�vi�es between supplier and customer; the outsourcing of logis�cs services.

�er 1 suppliers (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Companies in a supply chain that sell component parts to the company that makes the finished product.

�er 2 suppliers (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Companies in a supply chain that sell component parts or raw materials to a �er 1 supplier.

�er 3 suppliers (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Companies in a supply chain that usually sell raw materials to a �er 2 supplier.

upstream (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A designa�on for the part of the supply chain that includes suppliers, produc�on planning, and purchasing.

vendor managed inventory (VMI) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

An inventory replenishment approach in which a supplier makes inventory management decisions about the products it sells for the company that buys those products.

ver�cal integra�on (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

When a firm owns the producing assets up and down the supply chain. The more assets owned, the greater the degree of ver�cal integra�on.

virtual corpora�ons (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Companies that provide only coordina�on ac�vi�es and outsource all other ac�vi�es involved in producing and distribu�ng a product.