understanding the supply chain

rrNrD E R qTArTD rN c TlrE SIJPPL CF{AtrV cl Learning Objeetives After reading this chapter, you will be able to 1 Discuss the goal of a suppty chaia and explain the impacr of supply chain decisi.rrNrD E R qTArTD rN c TlrE SIJPPL CF{AtrV cl Learning Objeetives After reading this chapter, you will be able to 1 Discuss the goal of a suppty chaia and explain the impacr of supply chain decisi.

! ,:; C]JAPTE,R rrNrD E R.qTAr\TD rN c TlrE SIJPPL] CF{Atr]V c$l- Learning Objeetives After readingthis chapter,you will be ableto: 1" Discussthe goal of a supptychaia and explain the impacr of supply chain decisionson the successof a firm 2' rdentify the three key supply chain decision phases aud explaiu Describe the cycle and pusb/pull views of a supply chain the siguificance of eachone Classifythe supply chain macro processesin a firm this chapter, we provide a conceptual understanding of what a supply chail is and {n l-the various issues that need to be ionsidergd when plunning, or operating {iisoi"g, a supply chain.'we discuss the significance of supply chai; de;isions ano supply chain performance for the successof a firm.We utso pr-ovioe several examples to*'aitt"r"ot industries to emphasize the variety of supply ciain issues that companies need to consider at the strategic, planning, ana operationgl levels 1.1 WHAT IS A SUPPLY CHAIN? A supply chain cansistsof all parties involved, directly or indirectly,in futfiiling a customer request.The supply chain includesnot only the manufacturer and suppli-ers, but also transporters.warehouses,retailers, and even customersthemselves.Within each organizslien, such as a manufacturer, the supply chain includes all fuactions involved in receiving aud filling a customerrequest.Th,isefunctioos include,but are not limited to, new product development, marketing, operations, distribution, finance, and cus_ tomer service Consider a customer walking into a Wal-Mart store to purchase detergent.l[he supply chain begins with the customer and his or her need for letergent The iext stage of this supply chain is the Wal-Mart retail sitorethat the customer visits Wal-MJrt stocksits shelvesusing inventory that may have been supplied from a finishe&goods warehouseor a distributor using trucks supplied by a thirA party.The distributor in turn is stocked by the manufacturer (say,proptor & Gamble tpabt in this case).Ttie P&G manufacturing plant receives raw material from a varieiy of zuppliers, who may themselveshave been suppliedby lorver-tier suppliers.For example,pa"tagiog material may come from Tennecopackaging,while Tennecoreceivesraw materialsto manufutu" the packaging from other suppliers.This suppiy chain is illustrated in Figure L-L, with the arrows correspondingto the direction of physical product flow 20 PART r I Buirding a strategic FIGUFIE.I-1 Framework to Anaryze supply SIages of a Detergent suppty Cfiain chains l,.j;:r.li-li.j A supply chain is dynamic and involves the co$tant flow of information,product, and funds between different stages.Inour example,Wal-Martprovides tle pioAuct, as well as pricing and availability informatiqn, to the customer.ihe customer transfers funds to Wal-Mart- Wal-Mart conveys point-of-sales data as well as replenishment orders to the warehouse or distributor, rfho transfers the replenishment order via trucks back to the store Wal-Mart transfeSsfunds to the distriiutor after the replenishment.The distributor also provides priqing information and sendsdelivery r"n"aules to'Wal-Mart Wal-Mart may send back packagingmaterial to be recycle6.5t-;tar information, material, and fund flows take place acrossthe entire supplytlain In another example, when a customer makes a purchase ontine from Dell computer, the supply chain includes,among others,.thecustomer,Dell's web site,the Dell assemblyplant, and all of Dell's suppliers and their suppliers.The Web site provides the customer with information regarding pricing, product variety, and proluct availability Having made a product choice, the customer enters the order information and pays for the product The customermay later return to the'Web site to check the statusof the order Stagesfarther up the supply chain use customerorder information to fill the request.That processinvolvesan additional flow of information, product,and funds between various stagesof the supply chainTheseexamplesillustrate that the customeris an integral part of the supply chain In fact, the primary purposeof any supply obainis to satisfycustomerneedsand,in the process,generate profit for itself The term s,upply chaitz conjtres up imagesof product or supply moving from suppliers to manufacturersto distributors to retailers to customers along a chain.This is certainly part of the supply chain,but it is also important to visualize information, funds, and produgt flows along both directions of this chain The term supply cltain may also imply that only one player is involved at eachstage.In reality, a manufacturer may receive mater[al from several suppliers and then supply several distributors.Thus, most supply chains are actually networks It may be more accurate to use the term supply network or supply web to describe the structmreof most supply chains,as shown in Figure 1.-2 A typical supply chain may involve a variety of stages.These supply chain stages include: Customets c Retailers CHAPTER C Understanding the Supply Chain 21 ';if r.:-,i;:l;11rl::'|,ii,;ii.il-.11:I;.'{li Wholesalersidistributors c Manufacturers o Component/raw material suppliers Each stagein a supply chain is connectedthrough the flow of products,inforrnation, and funds.Theseflows often occur in both directions and may 6e managedby one oi the stagesor an intermedlary.EachstagelmFigure 1-2 need not be pt"r"ot in a supply chain The appropriate design of the supply chain depends on both the customJris needsand the roles played by the stagesiivolved.In somecases,suchasDell, a manufacturer may fill customer orders directty Dell builds-to-order; that is, a customer order initiates manufacturing at Dell Dell doesnot have a retailer, wholesaler,or distributor in its supply chain In other cases,such as the mail-order company L.L.Bean, manufacturersdo not respondto customerorders directly.In this case,LL.Bean maintains an inventory of product from which it fills custornerorders.Comparedto the Dell il:il]';}ffi r:#:J,,""H:'"1'J,"#ffi #tr:XT:iy:::J1,1",i,T#ilf :* the supplychainmay 4lss ssafaina wholesaleror distributorbetweenthe storeand lhemanufacturer 1.2 THE OBJECTIVE OF A SUPPLY CHAIN The objective of every supply chain should be to maximize the overall value generated T}l:evnhte a supply sfoaingeneratesis the difference between what the final product is worth to the customer and the coststhe supply chain incurs in filling the customer's request-For most commercial supply ch4ins,value will be strongly correlated with snpply chainptofitability (also known assrypplychain surpltts),the differencebe.fween the revenue generated ftom the customer and the overall cost acrossthe supply chain For example,a customerpurchasinga wirelessrouter from Best Buy pays $60,which representsthe revenuethe supply cbain receives.Best Buy and other stagesof the supply chain incur costs to convey informatioq, produce components,store them, transport them, transfer funds,and so on.The differeincebetweenthe $60 that the customerpaid and the sum of all costs incurred by the supply chain to produce and distribute the router represents the supply chain profitability or surplus.Supply chain profitability or 22 PART I c Buirding a strategic Framework to Anaryze suppry chains the total profit to be sharedacrpssall supply chain s13*", and intermediaries lrplusis fhe higher the supply chain profitability, ft more successfulis the supply chain Supp$ chainsuccess shouldbeneasuredin ternp of supplychainprofitability andnotin d;; of the profits at anindividualstage.(In subsequent tUapterswe seethat a focus* prJ itability at individualstagesmayleadto a reductionin overailsupplychainproiits) Havingdefinedthe success of a suppfyclain in termsof supplychainprotitauility, the next logicalstepis to look for souriesof revenueana cost.por anysupply chain, thereis onlyonesourceof revelue:thecrllstomer.AtWal-Mart, a customerpurchasing detergentis the only one-providingpositivecashflow for the supplychain' All othei cashflowsaresimplyfund exchanges tha{occurwithinthe supplych"i',,giventhat diff:rent stqgeshavedifferent owners.wheq Wal-Martpaysits ffiuei, it iJtapng a portion of the fundsthe customerprovidesandpassingin"t -oo"y on to the *uppi"ial flowsof information,product,o,rfundsgeo"ratecoJtswithin thesupplychainThus, the appropriatemanagementof theseflowqis a key to supplychaii success Effective supply chainntanagenrent involvesthe 4anagementof J"ppfv chain assetsand product,information,andfund flows to maxi4ize iotal supplycnainprofitatitity In this book we will havea strongfoqls on *d#irg all suiply chaindecisionsin terms-oftheir impacton the supplyclain purplus.Thlse decisioisuita their impact can v-ar1for a wide variety of reasons.For ingtance,considerthe differencein the supply chainstructurefor fast-movingconsumergoodsobservedin theUnited StatesanrJIndia U.S.distributorsplay a muchsmallerrole in this supplychaincomparedto their Indian counterparts We arguethat the differencein supplyChainstrucnrd canbe explainedby the impacta distributorhason the supplyclainiurplus in the t'wocountries ,r Retailingin the United Statesis large$ consolidated, with largechainsbuying.consumergoodsfrom most manufacturers This consolidationgivesretailersiufficient scalethat theintroductionof an interrnedilary suchasa distributordoeslittlb to t"au"" costsandmayactuallyincreasecostsbecapse of an additionaltransaction In contrast, Indiahasmillionsof smallretailoutlets.T$e smallsizeof Indianretailoutletslimitsthe amoxntof inventorythey canhold,thus4equiringfrequentreplenishmeat-anorder canbe comparedwith the weekly$ocery shoppingfoi a famiiy in the United States The only way for a manufacturerto keep trinsportation ort lo* is to bring ful truckloadsof productcloseto the marketandthendistributelocallyssing.,milkluas" with smallervehicles.The presenceof an intermediarywho canreceivea full truckloadshipment,breakbulk,andthenmakqsmallerdeliveriesto the retailersis crucial if transportationcostsareto be kept low.IVIost Indian distributorsareone-stopshops, stockingeverythingfrom cookingoil to Eoapsand detergentsmadeby a n"tiuty oi manufacturers Besidesthe convenience pqovidedby one-stopshopping,distributorsin India are alsoableto reducetransportatiopcostsfor outbounddeliveryto theretailer by aggregatingproductsacrossmultiplq manufacturersduring tha deliveryruns Distributorsin India alsohandlecollectioFs, becausetheir costof colectionis signin_ cantlylower than eachmanufacturercolJectingfrom retailerson its own.Thut the important role of distributorsin India canbe exptaioeaby the growthin supplyclain surplusthat resultsfrom their presence The supplychainsurplusargumeotimplies that asrgfailingin India beginsto consolidpte, thtlole of distributorswill dimiaish 1.3 THE IMPORTANCE OF SUPPLY GHAIN DEGTSIONS There is a closeconnectionbetweenthe designand managementof supplychain flows (product,information,andfunds)a+dthJ success of aiupply chain.-Wal-Mart, Dell Computer,and Seven-Eleven Japanpre examplesof companiesthat havebuilt CHAPTER c Understanding the Supply Chain eS their successon superior design,_prannipg,and operation of their suppry crrain.In contrast, the failure of many e-busine$sessuch as Webvan can be attrib*ted to weaknessesin rheir suppry chain design and pranning simitarty, q""tri o;J acquisition ojlnapple inL994is-au exafrple of how tlelnauitity ro design and mandge supply chain flows effectiveiy led to failure we discuss these exampleslater in this section wal-Mart has been a.readerat using supply chain design,planning, and operation to achievesuccess From its beginning,the companyiooestJoneavily;i'transpo.tutioo and information infrastructure to facilitate tue Jffective flow otlooos and information Wal-Mart designed its supply chain with cilustersof stores urou"oAdistribution centers to facilitate frequent replenishment at i[s retail stores in a cost-effective manner Frequent replenishment anows stores to p-rt"! supply aad demand more effectivery than the.competition.wai-Mart has been E leader #ri"ti* irf;rmation and collaborating with suppliers to bring down costs 4nd.improve prodi"t uuuilability The results are impressive.In their 2004 annual report,'th6 o*puoy reported a net income of more than $9 billion on revenuesof about $250billion Th"r" ui" Oru*atic resultsfor a company that reachedannual salesof only $t billion in 1"980 The growth ia salesrepresentsan annual compoundedgrowth ratB of26percent Dell has,over a relatively short period of time, becomethe world,s largestpersonal computer (PC) manufag!9rer.In20A4 De[ had a ner income of over $2.6 billion on revenuesof just over $4L billign The coqpany has attributed a signific*, p*i of it, successto the way it managesflows-product, information, and fuoar_1,yitlio ir:ssup_ ply chain Dell bypassesdistributors and retailerp and sellsdirecfly to customers Closecontact with its customersand an understandinigof customers'nleds allowDell to a*u"lop better forecasts.To further improve the ftatch between ,rppry and demand,Dell makes an active effort to steer customersirr yssl 1ime,on the pione or via the Internet, toward PC configuratio-nsthat can be built given the compooents available on the operational side, Dell centraliziesmanufacturing and inventories in a few locations and postpones-fin-alassemblyuntil orders arrive i.s a result, Dell is able to provide a large variety of PC configurationg whileteeping very lowlevels of inventory In'2004,De1i carried less.thaqfive days'wpfh of inventiry; in contrast,the competi_ tion, selling through retailers, carriesieveral weeks' worth of inventory If Intel intro_ duces a new chip, the low lever of inventgry allows Delt to go to market with a pc containing the chip faster than the competltion If prices drof,suddeniy, as they often do' Dell has lessinventory that losesvaiue relativ"-to itr For somi products,such as monitors manufactured by Sony,Dell maintains "o*p"iitorr io inventory The iranspofiation company sim.plypicks uq the appropriate number of computers ftom Den,s Austin,Texas,plantand monitors ft'o.msony'siactoryin Mexico,maiches them by cus_ tomer order, and delivers them to the customers.TLis procedure allows Dell to save time and money associatedwith the extra hanc{lingof monitors ft'e successof the Dell supply chain is facilitated by sophisticatedinformation exchange.Dell provides real-time data to puppliers on the current state of demand Suppliersare able to access-theircomponelrG'inventory levels at the factories along with daily production requirements.Dell lias created Customized.Web pagestor iti major suppliers to view demand forecastspnd other customer-sensitive-infirmation, thus-helping suppliers to get a better idea of customer demand and better match their production schedulesto that of Dell Dell's low levels of inventory also help gnsurethat defectsare not introducedinto u.l1lg" products.When a newproduct is launched,supplier engineers lo$lity of are stationed right in the plant ff a customeriptts in with u proui"l1, production can be 24 PART I + Building a Strategic Framework to Analyze Supply Chains stopped and flaws fixed in real time As there is.no finished product in inventory,the amount of defectivemerchandiseproducbd minimized ' is Dell also matragesits cashflows very erectivety-y managmg inventories, receivables'and payablesvery closely,it managed a cashcouversioncycteof negative36 days -2004'In other words,Delr ran its busilqss on other people,smoney! clearly, Dell's supply chain design and its **uj"-ioi of product, inforrnation, and cashflows pray a key rore in the-company's succJss.In the changrngmarketplace, however, the company'ssupply chain de{ign presents ,o-" o"* challengesfor Dell whereas it has a supply cniin ilat is very weli suiteo to piooia" a high degree of customization at a low cost,it is not clear that hardware customizationwill staysignificant for PCs aud other products that Dell sellg.In the future, tA;"y have ro rethink its supply chain designto maintain.success The failure of many e-businesses suchaswebvan and Kozmo can be attributed to their inability to design appropriate supply chains o, orurr"g" suppty chain flows effectively' webvan a iupply chpin with r"tg";;"h"uses in severarmajor cities in the united {esigne^d statis, t-om *nicn grpceries*"r! a"ro"r"d to customer homes This supply chain designcould not co.pJte *ith traditional sof".*urt"t supplychains in terms of cost'Tiaditional supermarketqlains bring produciro u ,op"r.arket close to the consumer using ful truCkloadg resqlting i" o"iy io* transportation costs.They furn their inventory relarively fast and iet thJcustomer;"rf;; mosr of the picking activity in the store rn contrast,webvan turned itr i"u""toiv marginally faster than supermarketsbut incurred much higher transportation cost; for h"ome;"li""ry ;;; high.labor costsro pick customerorders.Th","lurt *u, u;;;;;"y' that forded io 2001 within two years of a very successfulinitial public offering Quaker oats, with its acquisition of s$'appte,providEs another example in which failure-to design and manage supply chain flows led to financiut tuilrrr" rn Dece,mber 1"994,Quaker Oats purchased,snapple,a producer of bottled natural drinks such as teas,at a cost of $lJ billion Gatorade,thL top+elling brand in the sports dri"k;";ment, was Quaker oats's most successfulbeverage datorade was very strong in the south and southwest of the united st4tes, *f,"."u snapple war'stroog"ioth; Northeast and on the West Coast Quaker oats qnrouncedthat a major tnotivation of the merger was the potential synergiesbetween the two distribution sy$temsof Snapple andbatorad" fh" o*pany,however' was unable to take advantpgeof these synergies.problems stemmed from causessuch as disparate manufacturiig facilities uoo aTtr"r"ot customer types Gatorade was manufacturedin plants owngd by euaker Oats, whereasSnapplewas produced under contract by outsideprants.Gatorade sord significantnmountstbr.ough s'permarkets and grocery stores,whereasSnapplesold priiarily through restaurraJts independent retailers Over the two y"uir following its acquisitio-n 1nd of Snapple, Quaker oats wasunable to gain much syne4gybetweenttie rwo distribution ryrt"-i io its attempts1o merge them Just 28 monthslater, Quaker Oats sold Snapple"to Triarc Companiesfor about $300-ittion, about 20 percent of the purchaseprice.The inabil_ ity to achieve synergiesbetween the two suppty chains was a significant reason for the failure of-Sn+de for Quaker Oats KEYPOINT Supplychaindesign,planning, andoperationdecisionsplaya significant role in the successor failureof a firm In the next section,we categorizesuppfy chain decisionphasesbased on the frequencywith which they are made and the tipe frame they take into account CHAPTER 1-4 DECISION PI{ASES IN A SIJPPLY