Chapter 1

Understanding the Supply Chain

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 What is a Supply Chain?

• Flow of products and services from

• Suppliers
• Raw materials manufacturers
• Intermediate goods manufacturers
• Finished goods manufacturers
• Distributors and wholesalers
• Retailers
• Customers
• Connected through transportation, information, and
exchanges of funds
Supplier Manufacturer Distributor Retailer Customer
What is a Supply Chain?

• All stages involved, directly or indirectly, in fulfilling a customer

request
• Includes manufacturers, suppliers, transporters, warehouses,
retailers, and customers
• Within each company, the supply chain includes all functions
involved in fulfilling a customer request (product development,
marketing, operations, distribution, finance, customer service)
• Examples: Fig. Detergent supply chain (Wal-Mart), Dell

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What is a Supply Chain?

• Customer is an integral part of the supply chain

• Includes movement of products from suppliers to manufacturers to
distributors, but also includes movement of information, funds, and
products in both directions
• Probably more accurate to use the term “supply network” or “supply
web”
• Typical supply chain stages: customers, retailers, distributors,
manufacturers, suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

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 What is a Supply Chain?

Customer wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)

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Flows in a Supply Chain

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Flows in a Supply Chain

Information

Product
Customer
Funds

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What is Supply Chain Management?

Supply chain management involves the

management of supply chain assets
and products, information, and fund
flows to maximize total supply chain
surplus
What is Supply Chain Management?

• “Managing supply and demand, sourcing raw materials and parts,

manufacturing and assembly, warehousing and inventory tracking,
order entry and order management, distribution across all channels,
and delivery to the customer”
• The Supply Chain Council
• “The design and management of seamless, value-added process
across organizational boundaries to meet the real needs of the end
customer”
• Institute for Supply Management
What is Supply Chain Management?

Getting the right things

to the right places
at the right times
for profit
 Managing a Supply Chain is Not Easy

• Conflicting objectives across the supply chain

Manufacturer Distributor Retailer Customer

• Large production • Low inventory • Few stores • Convenience

batches • Few DCs • Low inventory • Short lead time
• Little variety • Large variety of
• Close to DCs products

• Large shipments
Managing a Supply Chain is Not Easy

• Uncertainty and risk factors

• 2005 Hurricane Katrina
• P&G coffee supplies from sites around New Orleans
• Six month impact
• 2002 West Coast port strike
• Losses of $1B/day
• Store stock-outs, factory shutdowns
• 2001 India earthquake
• Supply interruptions for apparel manufacturers
• 1999 Taiwan earthquake
• Supply interruptions for HP and Dell
 Managing a Supply Chain is Not Easy

• Information distortion

Supplier Manufacturer Distributor Retailer Customer

Bullwhip effect
Managing a Supply Chain is Not Easy

• What is Information Distortion. The tendency of information

communicated within and between individuals and organizations to
be altered, omitted, or re-organized as it is communicated. It
includes a range of alterations from error in transmission to
deliberate prevarication.
• The bullwhip effect is a distribution channel phenomenon in which
forecasts yield supply chain inefficiencies. It refers to increasing
swings in inventory in response to shifts in customer demand as one
moves further up the supply chain.

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The Objective of a Supply Chain

• Maximize overall value created

• Supply chain value: difference between what the final product is
worth to the customer and the effort the supply chain expends in
filling the customer’s request
• Value is correlated to supply chain profitability (difference between
revenue generated from the customer and the overall cost across the
supply chain)

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The Objective of a Supply Chain

• Example: Dell receives $2000 from a customer for a computer

(revenue)
• Supply chain incurs costs (information, storage, transportation,
components, assembly, etc.)
• Difference between $2000 and the sum of all of these costs is the
supply chain profit
• Supply chain profitability is total profit to be shared across all stages
of the supply chain
• Supply chain success should be measured by total supply chain
profitability, not profits at an individual stage

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The Objective of a Supply Chain

• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information, products, or funds
between stages of the supply chain
• Supply chain management is the management of flows between
and among supply chain stages to maximize total supply chain
profitability

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Supply Chain Management–Advantages

Develops better customer relationship and service.

Creates better delivery mechanisms for products and services in demand

with minimum delay.
Improvises productivity and business functions.
Minimizes warehouse and transportation costs.

Assists in achieving shipping of right products to the right place at the

right time.

Enhances inventory management, supporting the successful execution of

just-in-time stock models.

Assists companies in adapting to the challenges of globalization, economic

upheaval, expanding consumer expectations, and related differences.

Assists companies in minimizing waste, driving out costs, and achieving

efficiencies throughout the supply chain process.

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 Decision Phases

Three categories - Depending on the

frequency of each decision and the time
frame over
which a decision has an impact,
Supply chain strategy or design
Supply chain planning
Supply chain operation

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 Supply Chain Strategy or Design
• Decides how to structure the supply chain over the next several years
• chain configuration,
• resource allocated and
• process at each stage should perform
• Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and expensive to reverse –
must take into account market uncertainty

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Supply Chain Planning

• Under the given configuration decisions are made which has impact
on a time frame of quarter to a year
• Starts with a forecast the coming year or a comparable time frame
• Planning decisions include
– which market will be supplied from which locations,
– the subcontracting for manufacturing,
– the inventory policies to be followed, and
– the timing and size of marketing promotions
• Companies in the planning phase try to incorporate any flexibility
built into the supply chain in the design phase and exploit it to
optimise performance
• Companies define a set of operating policies that govern short-term
operations

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 Supply Chain Operation
• Decisions are taken regarding individual customer order and the time
frame is week or days
• Configuration is fixed and policies are defined
• Objective is to handle incoming customer orders in the best possible
manner
• · Decisions related with
– allocation of inventory or production to individual orders,
– set a date that an order is to be filled,
– generate pick lists at a warehouse,
– allocate an order to a particular shipping mode and shipment,
– set delivery schedules of trucks, and
– place replenishment order
• Exploit the reduction in uncertainty and optimize performance
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Process View of Supply Chain

• A supply chain is a sequence of processes and flows that

take place within and between different stages and combine
to fill a customer need for a product
• · Two ways to view the processes performed in a supply
chain
 Cycles view and
Push/pull view

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Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided into a

series of cycles, each performed at the interfaces between
two successive supply chain stages
• Push/pull view: processes in a supply chain are divided into
two categories depending on whether they are executed in
response to a customer order (pull) or in anticipation of a
customer order (push)

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Cycle view

• Defines the processes involved and the owners of each process

• Process in a supply chain are divided into a series of cycles
• Cycles are performed at the interface between two successive stages of a supply chain
• Supply chain process can be broken down into four process cycles such as
– Customer order cycle
– Replenishment cycle
– Manufacturing cycle
– Procurement cycle
• Each cycles occurs at the interface between two successive stages of the supply chain
• A cycle view of the supply chain is very useful when considering operational decisions
• It clearly specifies the roles and responsibilities of each member of the supply chain
• It helps the designer to consider the infrastructure required to support the processes

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Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Cycle View of Supply Chain Processes

stomer Order Process

Customer Arrival
Customer Order Entry Customer Order Cycle
Customer Order Fullfillment
Customer Order Receiving Replenishment Process
1. Retail Order Trigger
Replenishment Cycle 2. Retail Order Entry
3. Retail Order Fullfillment
nufacturing Process 4. Retail Order Receiving
Order Arrival
roduction Scheduling Manufacturing Cycle
Manufacturing/Shipping
Receiving Procurement Process
1. Component Order Arrival
Procurement Cycle 2. Production Scheduling
3. Manufacturing/Shipping
4. Receiving
 Push/Pull View
Categorises processes in a supply chain based on whether they are initiated in
response to a customer order (pull) or in anticipation of a customer order (push)
Categorisation is based on the timing of process execution relative to end
customer demand
At the time of execution of a pull process customer demand is known with
certainty
In case of push process at the time of execution of a process demand is not
known and must be forecasted
Pull process – reactive process
Push process – speculative process
Push/pull boundary in a supply chain separates push process from pull process
Very useful when considering strategic decisions relating to supply chain
Forces more global consideration of supply chain processes as they relate to a
customer order
More the pull process better the supply chain

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Push/Pull View of Supply Chain Processes

PULL Execution is initiated in

PROCESSES response to customer orders
(reactive)
Customer order arrives

PUSH Execution is initiated in

PROCESSES anticipation of customer orders
(speculative)

Processes are divided based on the timing of

their execution relative to a customer order
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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Push/Pull Processes for the Supply chain of
Dell

PULL

Customer
Customer Order Cycle and
Manufacturing Cycle
Manufacturer
Procurement Cycle
PUSH
Supplier
Push/Pull Processes for the Supply chain of
Detergent

Customer
PULL Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle
PUSH
Manufacturer
Procurement Cycle
Supplier
Supply Chain Macro Processes in a Firm

• Supply chain processes discussed in the two views can be classified

into
• Customer Relationship Management (CRM)
• Internal Supply Chain Management (ISCM)
• Supplier Relationship Management (SRM)
• Integration among the above three macro processes is critical for
effective and successful supply chain management

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Supply Chain Macro Processes in a Firm

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Examples of Supply Chains

• Dell / Compaq, computer (assembly) industry

–Dell buys some components for a product from its suppliers after that
product is purchased by a customer. Extreme case of a pull process.
• Amazon / Barnes and Noble, bookstores
–Amazon is strictly an online store. Amazon uses more pull processes.
• Zara / Benetton, apparel (=clothing) industry
–Zara is a Spanish company selling apparel with a short design-to-sale
cycle to avoid markdowns. Zara uses relatively more pull.
• Toyota / GM / Volkswagen, car manufacturers
–Toyota provides reasonable quality at reasonable cost. Car
manufacturing is mostly done as push process.

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Gateway: A Direct Sales Manufacturer

• Why did Gateway have multiple production facilities in the US?

What advantages or disadvantages does this strategy offer
relative to Dell, which has one facility?
• What factors did Gateway consider when deciding which plants
to close?
• Why does Gateway not carry any finished goods inventory at its
retail stores?
• Should a firm with an investment in retail stores carry any
finished goods inventory?
• Is the Dell model of selling directly without any retail stores
always less expensive than a supply chain with retail stores?
• What are the supply chain implications of Gateway’s decision to
offer fewer configurations?
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 7-Eleven
• What factors influence decisions of opening and closing stores?
Location of stores?
• Why has 7-Eleven chosen off-site preparation of fresh food?
• Why does 7-Eleven discourage direct store delivery from vendors?
• Where are distribution centers located and how many stores does
each center serve? How are stores assigned to distribution
centers?
• Why does 7-Eleven combine fresh food shipments by temperature?
• What point of sale data does 7-Eleven gather and what information
is made available to store managers? How should information
systems be structured?

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W.W. Grainger and McMaster Carr

• How many DCs should there be and where should they be

located?
• How should product stocking be managed at the DCs?
Should all DCs carry all products?
• What products should be carried in inventory and what
products should be left at the supplier?
• What products should Grainger carry at a store?
• How should markets be allocated to DCs?
• How should replenishment of inventory be managed at
various stocking locations?
• How should Web orders be handled?
• What transportation modes should be used?

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Toyota

• Where should plants be located, what degree of flexibility should

each have, and what capacity should each have?
• Should plants be able to produce for all markets?
• How should markets be allocated to plants?
• What kind of flexibility should be built into the distribution system?
• How should this flexible investment be valued?
• What actions may be taken during product design to facilitate this
flexibility?

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Summary of Learning Objectives

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

• How can supply chain macro processes be classified?
• What are the three key supply chain decision phases and what is the
significance of each?
• What is the goal of a supply chain and what is the impact of supply
chain decisions on the success of the firm?

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 Amazon.com
• Why is Amazon building more warehouses as it grows? How many
warehouses should it have and where should they be located?
• What advantages does selling books via the Internet provide? Are
there disadvantages?
• Why does Amazon stock bestsellers while buying other titles from
distributors?
• Does an Internet channel provide greater value to a bookseller like
Borders or to an Internet-only company like Amazon?
• Should traditional booksellers like Borders integrate e-commerce
into their current supply?
• For what products does the e-commerce channel offer the
greatest benefits? What characterizes these products?

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