Supply Chain Management

Understanding the Supply Chain

© 2007 Pearson Education 1-1

 Outline
 What is a Supply Chain?
 Decision Phases in a Supply Chain
 Process View of a Supply Chain
 The Importance of Supply Chain Flows
 Examples of Supply Chains

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 What is a Supply Chain?
 Introduction
 The objective of a supply chain

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 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. 1.1 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

Information

Product
Customer
Funds

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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
At Wal-Mart, a customer purchasing detergent is the only one providing positive cash
flow for the supply chain. All other cash flows are simply fund exchanges that occur
within the supply chain, given that different stages have different owners

 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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 Types of Decisions in Supply Chain
Management
 In supply chain management, three important
decisions are usually made, namely:
1. Strategic Decisions (long term decisions)
2. Tactical Decisions (medium term decisions)
3. Operational Decisions (day-to-day decisions on
activities to perform)
 The hierarchy of Supply Chain Decisions is as
follows:

11
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 12
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 Decision Phases of a Supply Chain
Successful supply chain management requires many
decisions relating to the flow of information, product,
and funds
each category of decisions must consider uncertainty
over the decision horizon
 Supply chain strategy or design
 Supply chain planning
 Supply chain operation

.
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 Supply Chain Strategy or Design
 Decisions about the structure of the supply chain and
what processes each stage will 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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  how to structure the supply chain over the next several years.
 It decides what the chain's configuration will be,
 how resources will be allocated, and what processes each stage
will perform.

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  Strategic decisions made by companies include:
 the location and capacities of production and
warehousing facilities,
 the products to be manufactured or stored at various
locations,
 the modes of transportation to be made available
along different shipping legs, and
 the type of information system to be utilized.

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  supply chain design decisions are typically made for
the long term (a matter of years) and are very
expensive to alter on short notice

 when companies make these decisions, they must take

into account uncertainty in anticipated market
conditions over the next few years.

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 Supply Chain Planning
 For decisions made during this phase, the time frame
considered is a quarter to a year
 Definition of a set of policies that govern short-term
operations
 Fixed by the supply configuration from previous
phase
 Starts with a forecast of demand in the coming year
 Planning includes making decisions regarding which markets will be
supplied from which locations, the subcontracting of manufacturing, the
inventory policies to be followed, and the timing and size of marketing
and price promotions

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 Supply Chain Planning
 Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
 Must consider demand uncertainty, exchange rates,
competition over the time horizon

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 Supply Chain Operation
 Time horizon is weekly or daily
 Decisions regarding individual customer orders
 Supply chain configuration is fixed and operating policies are
determined
 Goal is to implement the operating policies as effectively as
possible (to handle incoming customer orders in the best
possible manner)
 Allocate orders to inventory or production, set order due dates,
generate pick lists at a warehouse, allocate an order to a
particular shipment, set delivery schedules, place replenishment
orders
 Much less uncertainty (short time horizon) about demand info

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 Process View of a Supply Chain
There are two different ways to view the processes
performed in 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 of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Cycle View of a Supply Chain
 Each cycle occurs at the interface between two successive
stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired outcome
of each process.

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  Within each cycle, the goal of the buyer is to ensure
product availability and to achieve economies of scale
in ordering

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 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 View of
Supply Chain Processes
 Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand
 Pull: execution is initiated in response to a customer
order (reactive)
 Push: execution is initiated in anticipation of customer
orders (speculative)
 Push/pull boundary separates push processes from
pull processes

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 Push/Pull View of
Supply Chain Processes
 Useful in considering strategic decisions relating to
supply chain design – more global view of how
supply chain processes relate to customer orders
 Can combine the push/pull and cycle views
 The relative proportion of push and pull processes can
have an impact on supply chain performance

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 Supply Chain Macro Processes in
a Firm
 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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  Consider the purchase of coke at a convenience store.
Describe the various stages in the supply chain and
the different flows involved

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 Examples of Supply Chains
 Gateway
 Zara
 McMaster Carr / W.W. Grainger
 Toyota
 Amazon / Borders / Barnes and Noble
 Webvan / Peapod / Jewel

What are some key issues in these supply chains?

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 Gateway: A Direct Sales 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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