Supply Chain Management

1
C H A P T E R

DISCUSSION QUESTIONS 9. The three versions of online catalogs are:

 Those provided by vendors such as Grainger and Office
1. Supply chain management is the management of the activities
Depot provide an opportunity for firms to save money,
that procure raw materials, transform them into intermediate
particularly on frequent low-dollar purchases, and have an
goods and final products, and deliver the products to customers
electronic audit trail.
through a distribution system.
 Those developed by intermediaries qualify buyers and
2. The supply chain function’s role is to help identify the sellers for efficient transactions.
products and services that can best be obtained externally;  Those provided by buyers combine purchasing power of
develop, evaluate, and determine the best supplier, price, and buyers to put downward pressure on sellers and add
delivery for them. transaction efficiency.
3. The objective of logistics is to obtain efficiency of operations 10. Online auctions lower entry barriers for buyers and seller,
through the integration of all material acquisition, movement, and increasing the number of people in the market, typically reducing
storage activities in the firm. cost.
4. Supply chain management implies that the firm is working 11. FedEx, UPS, and DHL use the Internet to track and coordinate
to build a supply system that includes many aspects of supplier pickup and delivery. This can facilitate delivery of combined orders
relationships at all levels (second- and third-tier suppliers as well as at opportune times, improving efficiency for both supplier and
first-tier suppliers). Purchasing is the procurement function that can customer.
be performed with little concern for long-term relationships with 12. Wal-Mart uses drop shipping to remove itself completely
suppliers. Logistics management is the integration of all material from the distribution process so that orders from various stores are
acquisition, movement, and storage activities in the firm. received by the manufacturer and shipped directly to the store.
5. Vertical integration implies that a manufacturer moves 13. Blanket orders are orders that cover an extended order
backward into purchasing raw materials for components and period, say a year, and against which releases are issued against
forward into packaging and distribution. An example would be a that purchase order. Invoiceless purchasing merely implies that
coffee blender moving backwards by buying coffee plantations some other information flow has been developed besides a formal
and moving forward to develop retail coffee shops. invoice. Blanket orders can be invoiceless and invoiceless
6. The three basic approaches to negotiation are: purchasing can be part of the blanket order, but they can also be
 The cost-based model done separately.
 The market-based model 14. An organization moving to JIT deliveries must ensure that
 Competitive bidding the supplier is capable of delivering quality products on time,
provide production schedules for their suppliers, examine its
7. The adversarial relationship must be changed dramatically to layout to ensure that deliveries can move quickly to where they
one of trust and the establishment of long-term relationships. To im- are needed, and train and empower employees to evaluate quality
plement long-term relationships, purchasers must move to com- as the product is produced.
municating the broad objective of the firm and the end customer.
15. E-procurement is electronic purchasing—i.e., the use of the
This usually requires sharing product information and schedules.
Internet to buy or sell goods.
8. There are differences between postponement and channel
16. Darden finds competitive advantage in the supply chain
assembly. Postponement implies that the final product is not
through a very proactive evaluation, development, and auditing of
assembled until it is shipped, usually with some modular features
suppliers. Darden has adequate volume to find and develop
such as the power system for a printer. However, channel
suppliers on a worldwide basis and work with those suppliers
assembly actually moves assembly of a PC to the wholesale level
to provide the quality and timing of deliveries necessary for
where parts are received and assembly takes place. They are
its customers. Additionally, Darden is large enough that it has
related but different.

138
 CHAPTER 11  S U P P L Y C H A I N M A N A G E M E N T 139

developed four different supply chains: one for seafood; one for 1.8
dairy/produce/other refrigerated foods; one for other food items,
such as baked goods; and one for restaurant supplies. Products
17. Keiretsu networks are highly dependent upon both culture and 4 4
laws. The keiretsu networks in Japan are still unique. Neither the 2 2
U.S. antitrust division nor the EC could be expected to be happy with 2 2
such arrangements. Ford Motor Company has established some 8  .4 8  .4
“profit centers” that function almost as stand-alone companies. So 3.2 3.2
we see some indications that the concept is being tested in America. Sales
But these tentative steps are a long way from the true keiretsu 2 1
networks of Japan. 1 2
2 3
5  .2 6  .2
ETHICAL DILEMMA 1.0 1.2
Sears’s position was certainly fair and equitable, and most of us Total 8.2 9.8 higher
would say ethical—as long as Sears was a growing company. rating
However, once the growth stopped and the employee and investor
investments were at risk, the fairness of that position—which 11.3
might be seen as favoring suppliers and the communities where Company Donna Inc. Kay Inc.
the suppliers are located—could be questioned. Does this suggest
2 2
a change in what is ethical over time? 2 2
This may be another opportunity for a heated class discussion. 2 4
Certainly, Wal-Mart’s position as an aggressive cost cutter 2 3
can be seen as ethical by employees with career opportunities, by 2 3
investors who see their investment grow, by customers who take 2 2
advantage of low prices, and suppliers that are resourceful enough 2 2
to cope with Wal-Mart’s negotiation skills. 14  .2 18  .2
Wal-Mart’s position is the utilitarian view that actions are 2.8 3.6
right and acceptable if they maximize total utility or the greatest Service
good for the greatest number of people. We also suggest that 3 3
ethical decision-making requires consideration of all of the 3 3
organization’s stakeholders. Wal-Mart may be doing a better job 2 3
at this. 8  .2 9  .2
1.6 1.8
Products
END-OF-CHAPTER PROBLEMS
4 4
11.1 This problem provides a good way to (1) get students 2 2
involved with the Internet, (2) have them interact with members 2 2
of the existing workforce, and (3) get them to take a relatively 8  .4 8  .4
detailed look at supply chains and their relation to corporate 3.2 3.2
strategy. You might consider having students study different Sales
stores (Sears, Pizza Hut, and Benetton, for example) in different 2 2
industries and then compare the results in a class session. 2 2
11.2 2 3
6  .2 7  .2
Company Donna Inc. Kay Inc. 1.2 1.4
1 2 Total: 8.8 10.0
2 2
2 4 Kay Corp. maintains a higher rating.
2 3
2 3 11.4 This exercise can be used to illustrate the difficulty of
1 2 selecting criteria, and of “objectively” ranking similar companies and
2 2
products. This is an especially good exercise when the university
12 .2 18  .2
ranked highest by the student is not the one he or she actually
2.4 3.6
attends. You can discuss the impact of “hidden,” or unknown,
Service criteria (i.e., criteria which significantly impact our choices, but are
3 3 not considered sufficiently important for their inclusion in the rating
3 3 form).
2 3
8 2 1.6 9  .2
140 CHAPTER 11 S U P P L Y C H A I N M A N A G E M E N T

Students can be expected to arrive at different “solutions”

to this problem—both in choice of criteria and with respect to
ranking, and in the universities reviewed.
One set of sample criteria follows. These may or may not be
relevant at any particular school.
 CHAPTER 11  S U P P L Y C H A I N M A N A G E M E N T 141

University University University University University

1 2 3 4 5
Criteria 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1
Academics
  Reputation
  Breadth of offerings
  Depth of offerings
  Variety of offerings
  Graduation rate
  Length of program
  Laboratory facilities
  Teaching facilities
  % honor graduates
  Teaching
methodologies
  Use of IT in teaching
Financial
  Tuition
  Room & board
  Books, supplies, etc.
  Additional expenses
Location
  Desirability
  Local transportation
  Weather
Size
  Undergraduate class
  Total enrollment
Campus
  Size
  Adequacy
  Appearance
  Architecture
Sports
  Availability
  Variety
  Reputation
  Role of sports on
11.5 Students should identify a number of problems from simple (b) Implications of added in-transit time to the customer:
communication, through product valuation, to the selection of delivery of this product or of a major product of which
virtual partners. In most cases, similar problems existed in the this is a component may have repercussions well
single-site operation, but operating in a virtual world has at least beyond the cost savings and a very unhappy customer.
modified the characteristics of the problem and the environment
within which one must work to develop a solution. 11.9 Daily holding cost = (Annual holding cost  Cost)/Days in
year = (.3  $100,000)/365 = $82.20.
11.6 Using Table 11.3:
Difference in cost per day between shipping options =
(a) Net profit of 4%, spends 40% of its revenue on purchases. ($4,000 – $3,800)/10 days = $20.
It will take $3.13 in sales to equal $1 saved through
purchasing. Since the daily holding cost ($82.20) is more than the daily cost of
faster shipping ($20), use the faster shipping, option a.
(b) Net profit of 6%, spends 80% of its revenue on purchases.
It will take $7.69 in sales to equal $1 saved through 11.10 (a) Daily holding cost = (Annual holding cost  Cost)/
purchasing. Days in year = (.35  $250,000)/365 = $239.73.

11.7 (a) $4.35 Difference in cost per day between shipping options =

$175.
(b) $7.14
Since the daily holding cost ($239.73) is more than
11.8 (a) Daily holding cost = (Annual holding cost  Cost)/ the cost of faster shipping ($175), use the faster
Days in year = (.3  $100,000)/365 = $82.20. subcontractor.
Difference in cost per day between shipping options = (b) Implications of added in-transit time to the production
($4,800 – $3,800)/10 days = $100. process: potential delay in activity for which the
Since the daily holding cost ($82.20) is less than the component is destined (new product development,
daily cost of faster shipping with option b ($100), use quality test, the production process, etc.).
the slower shipping, option a.
 Inventory
Weeks of supply this year 
Cost of goods sold
$1,600,000

 $8,600,000/52
142 CHAPTER 11 S U P P L Y C H A I N M A N A G E M E N T
$1,600,000
  9.67
$165,385
(b) 
11.11 Baker Mfg. Inc.
Net revenue $27,500
Cost of sales 21,500
Merchandise inventory 1,250
Total assets 16,600

Cost of sales $21,500 (c)  Yes, Mattress Wholesalers is making progress. It has
(a)  Turnover    17.2
Inventory $1,250 reduced inventory from over 10 weeks to less than 10
Inventory weeks.
(b)  Inventory investment 
Total assets
$1,250
  0.0753  7.53% CASE STUDY
$16,600
Baker is doing better than the industry. It has a turnover of 17.2 DELL’S VALUE CHAIN
versus 13 for the industry and only 7.5% of its assets invested in 1. Dell has used direct sales and build-to-order to:
inventory versus 8% for the industry.
 Sell new products and customized PC configurations
11.12 Arrow Distributing Corp. whose demand is hard to forecast.
Net revenue $16,500  Increase forecasting accuracy and volume while driving
Cost of sales 13,500 down cost through the use of component standard modules.
Merchandise inventory 1,000 2. Dell has exploited direct sales to speed customer orders,
Total assets 8,600 which allows Dell to postpone assembly until the customer has
placed the order (build-to-order). Several strategic advantages are
(a)  Weeks of supply  Inventory
noted below:
Sales per week
1,000 $1,000 Factor Impact Causes
   3.85
 13,500/52 $259.6 Revenue Increase  Direct sales to
Inventory customer
(b)  Inventory investment 
Total assets  Flexible pricing
1,000  Large variety
  0.1163  11.63% and
8,600
customization
Cost of sales 13,500 Faster new
(c)  Turnover    13.5 
Inventory 1,000 product
(d) Arrow’s Inventory investment at 11.6% is not as good introduction
as Baker’s, 7.5%. Arrow’s inventory turnover is only  Fast delivery of
13.5 times versus Baker’s 17.2 times. Note, however, customer order
that they are two different industries, and this may be a Inventory Decrease  Aggregation
good place to discuss different performance/standards using
in different industries. postponement and
component
11.13 Organic Grocers, Inc.
commonality
Cost of sales $10,500
Turnover    10.5  Aggregation at
Inventory $1,000 manufacturing
Not as good as industry average of 14. centers
11.14 Mattress Wholesalers, Inc.  Information
sharing
Inventory
(a)  Weeks of supply last year  Facility costs Decrease  No retail outlets
Cost of goods sold  Customer
$1,500,000 participation in order

 $7,500,000/52 Transportation costs Increase  Higher
$1,500,000 outbound
  10.40 transportation cost
$144,231
Forecasting Faster and  Tight
more communication
with suppliers
 CHAPTER 11  S U P P L Y C H A I N M A N A G E M E N T 143

accurate  Forecasts for

1st and
2nd tier suppliers
based on very current
(daily updates)
actual sales
 Reduced
“bullwhip”
144 CHAPTER 11 S U P P L Y C H A I N M A N A G E M E N T

3. The main disadvantages of the direct sales model are: 3. Title changes:
 Dell loses customers who are unwilling to wait 5 to 10  In the smallware supply chain, ownership changes at
days to receive a PC. delivery to the Darden warehouse in Orlando.
 Dell does not attract customers who need a lot of education  The second chain is mixed: For some specialty items,
or help. (Dell may be better off letting these “high mainte- Darden owns them even when stored at the distributor and
nance” customers go elsewhere.) Darden pays a management fee. For more standard items,
4. Dell does not successfully compete with the retailer who has title changes at delivery to the restaurant.
the desired PC in stock. But the customer has to go to the store,  For fresh food, title typically changes at delivery to the
while Dell customers can order from home via phone or Internet. restaurant.
For customized PCs, Dell is the leader in response time. Many of  In the fresh food supply chain, title typically changes at
Dell’s sales are to corporate accounts, where a 5- to 10-day delay delivery at the U.S. dock.
is not critical. 4. There are lots of opportunity for discussion here. For
5. E-commerce allows Dell to improve forecasting and reduce example, the automobile industry develops new and innovative
inventories by sharing information throughout the supply chain. supply chains such as vendor-managed inventory, with suppliers
This dampens the bullwhip effect. This information sharing holding title to major subcomponents (modules) until delivery to
reduces costs and improves performances in the Dell supply chain the assembly line, etc. The major distinction is that the diverse
by a significant amount. and often perishable nature of Darden's raw material makes four
very different and unique supply chains an economical approach.

2 ARNOLD PALMER HOSPITAL’S

VIDEO CASE STUDIES SUPPLY CHAIN
The 8-minute video available from Prentice Hall is designed to
1 DARDEN’S GLOBAL SUPPLY CHAIN’S supplement this case and was filmed specifically for this text. This
This 11-minute video available from Prentice Hall is designed to video also appears as a 2-minute video clip on the student DVD in
supplement this case and was filmed specifically for this text. the text.
1. Advantage of the four supply chains: 1. How does this supply chain differ from that in a manu-
 “Smallware” supply chain: Linens, dishes, table and facturing firm?
kitchenware, and silverware are purchased, with Darden At APH, most of the purchases are for supplies (MRO items:
taking title as they are received at the Darden Direct maintenance, repair, and operating supplies) rather than for items
Distribution (DDD) warehouse in Orlando, Florida. Darden for resale. Many decisions are made on criteria that put emphasis
buys in economical bulk quantities and manages the on factors other than economics—medical outcomes, nurse
warehouse as well as others might. From this single preference, doctor preference, etc. as they participate in the
warehouse, smallware items are shipped via common Medical Economic Outcome Committee.
carrier (trucking companies) to individual restaurants. 2. What are the constraints on making decisions based on
 The 11 distribution centers in North America are managed economics alone at APH?
by major professional U.S. food distributors, such as
APH’s Medical Economic Outcome Committee consists of users
MBM, Maines, and Sygma. Frozen, dry, and canned food
who evaluate purchases option. However, internal specifications
products are handled economically by these strategically
are in part dependent upon nurse and doctor preference that may
located professional distributors.
be hard to quantify in specifications. APH is also a member of the
 Darden has sought out and found professional independent
Health Care Purchasing Alliance (HPA), buying at the prices set
suppliers with expertise in the fresh food supply chain (not
by the alliance.
frozen and not canned), where life is measured in days, not
weeks. This includes dairy products, produce, and meat. 3. What role do doctors and nurses play in supply chain
This supply chain is B2B. The local restaurant manager decisions in a hospital? How is this handled at APH?
directly places orders with these preselected and constantly Doctors can be viewed as the customer or as a member of the
evaluates suppliers. decision making Medical Economic Outcome Committee, with a
 Darden has developed independent suppliers of salmon, disproportionate voice in the decision.
shrimp, tilapia, scallops, and other fresh fish. These suppliers 4. Doctor Smith just returned from the Annual Physicians’
are source inspected by Darden’s overseas representatives to Orthopedic Conference, where she saw a new hip joint replace-
ensure quality. These fresh products are flown to the U.S. ment demonstrated. She decides she wants to start using the
and shipped to 16 distributors, with 22 locations, for quick replacement joint at APH. What process will Dr. Smith have to go
delivery to the restaurants. This supply chain is critical to through at the hospital to introduce this new product into the
Darden’s core competence of economical fresh seafood. supply chain for future surgical use?
2. Managing four distinct supply chains is a demanding manage- All such requests go through the Medical Economic Outcome
ment task that requires specialized talents, organization, budget- Committee for evaluation of options.
ing, and career paths. Darden has proven that it is up to the task.
 CHAPTER 11  S U P P L Y C H A I N M A N A G E M E N T 145

3 SUPPLY CHAIN MANAGEMENT Increase  Each customer

AT REGAL MARINE order is
The 7-minute video available from Prentice Hall is designed to picked and packed
supplement this case and was filmed specifically for this text. This
video also appears as a 2-minute video clip on the student DVD in
the text. * Solution to this case study found at our Companion Web site, www.
prenhall.com/heizer.
1. An additional technique that might use Regal Marine to
improve supply chain management is to work with personnel
Factor Impact Causes
agencies as part of the outsourcing, recruiting, and screening
process for employees. Additionally, Regal can begin to incorpo- Transportation cost Increase  Higher
rate suppliers into its schedule to reduce on-hand inventory and outbound
related costs. transportation costs
Forecasting Added  Instant
2. The typical response by members of the supply chain through
knowledge of
partnering is to further the understanding of end users’ needs as
customer preferences
the suppliers become increasingly integrated through the pur-
and tastes
chaser’s (in this case Regal’s) customer base. As they learn more
CustomerImproved  Track customer
about the end user, suppliers improve the products in accordance  Understanding history (purchases)
with the needs of those end users. Regal can be expected to
and make
develop long-term contracts and integrate suppliers into their
recommendations to
strategy, aggregate scheduling, and detail scheduling so they
the customer
understand Regal Marine’s requirements.
3. Supply chain management is as important to Regal as it is to 2. The benefits of using the Internet for book sales would be
virtually all manufacturers because a huge amount of Regal significantly larger if (perhaps we should say when) they could be
Marine’s dollars are spent on purchases. Additionally, the quality downloaded online. If books become downloadable, Amazon will
of those purchases has significant impact on the quality of Regal’s be able to ship the product over the Internet, saving the final
end product. Consequently, enhancements in terms of quality, shipping cost but changing the nature of its business. Amazon will
delivery, and price have substantial impact on Regal Marine’s be software intensive rather than book and warehouse intensive.
market and bottom line. Regal selects suppliers whose strategy of 3. Other potentially downloadable products are software and
innovation and quality matches its own. music. In both instances, Amazon could increase the benefits of
e-commerce if it either creates CDs or DVDs in response to
INTERNET CASE STUDY* customer orders or allows customers to download these products.
For other products, like toys and hand tools, limited possibilities
AMAZON.COM
exist for postponement. The advantages of the Internet for Amazon
1. Some of the opportunities and disadvantages of selling books in those product categories will continue to be smaller compared to
over the Internet are summarized here: physical retail outlets.
Factor Impact Causes  4. The Internet can bring several advantages to traditional
Revenue Increase  Convenience bookstore chains:
 Large variety of  Going online allows a bookstore chain to offer the same
books convenience and variety as its existing operation and at
 Customer- the same time exploit the advantages of e-commerce.
specific  Chains can structure themselves so retail outlets carry
recommendations many copies of best sellers for customers and few copies
Decrease  Distributor of low-volume books to encourage customers to browse
margins and make impulse purchases.
 Downward price  Terminals or Internet kiosks can be available so
pressure customers can order any low-volume book online. This
 Inability to allows the aggregation of low-volume books at the
browse warehouse.
Inventory cost Decrease  Aggregation  Bookstore chains may also reduce inventory costs by
(major using technology that allows a book to be printed in a few
benefit is for minutes on demand.
low-volume books)  Traditional bookstores can offer more delivery options:
Facility costs Decrease  No retail cash and carry, order and pick up at the store, mail from
outlets, only the store, or drop ship from the warehouse or publisher.
warehouses  For those books that the store does not have, but the
 No cashiers customer wants to pick up at the store, the chain can ship
required
146 CHAPTER 11 S U P P L Y C H A I N M A N A G E M E N T

economically to the store with normal store replenishment

shipments.
Sources: Adapted from S. Chopra and P. Meindl, Supply
Chain Management, Upper Saddle River, NJ: Prentice Hall, 2001;
403–406; New York Times (January 21, 2002): C-3; and APICS—
The Performance Advantage (May 2001): 34–38.