Supply Chain Management: Strategy,

Planning, and Operation

Seventh Edition
Chapter 1
Understanding the Supply
Chain
Learning Objectives
1.1 Discuss the goal of a supply chain and explain the impact
of supply chain decisions on the success of a firm.
1.2 Define the three key supply chain decision phases and
explain the significance of each one.
1.3 Describe the cycle and push/pull views along with the
macro processes of a supply chain.
1.4 Identify important issues and decisions to be addressed in
a supply chain.
1.5 Develop skill that employers have identified as critical to
success in the workplace.

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What Is a Supply Chain? (1 of 3)
• All parties involved, directly or indirectly, in
fulfilling a customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each organization, the supply chain
includes all functions involved in receiving and
fulfilling a customer request (new product
development, marketing, operations, distribution,
finance, customer service)

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What Is a Supply Chain? (2 of 3)
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to
manufacturers to distributors and information, funds, and
products in both directions
• May be more accurate to use the term “supply network”
or “supply web”
• Typical supply chain stages: customers, retailers,
wholesalers, distributors, manufacturers, suppliers

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 What Is a Supply Chain? (3 of 3)

Figure 1-1 Stages of an Automotive Supply Chain

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Flows in a Supply Chain

Figure 1-2 The Three Flows in a Supply Chain

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The Objective of a Supply Chain (1 of 3)

• Maximize net value generated

Supply Chain Surplus = Customer Value − Supply
Chain Cost

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The Objective of a Supply Chain (2 of 3)
• Example: a customer purchases a wireless router from Best Buy for
$60 (revenue)
• Supply chain incurs costs (convey information, produce
components, storage, transportation, transfer funds, etc.)
• Difference between $60 and the sum of all of these costs is the
supply chain profitability
• Supply chain profitability is total profit to be shared across all
stages of the supply chain
• Success should be measured by total supply chain surplus, not
profits at an individual stage

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The Objective of a Supply Chain (3 of 3)
• Customer the only source of revenue
• Sources of cost include flows of information,
products, or funds between stages of the supply
chain
• Effective supply chain management involves
the management of supply chain assets and
product, information, and fund flows to grow the
total supply chain surplus

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Importance of Supply Chain Decisions
• Wal-Mart, $1 billion sales in 1980 to $482 billion in
2016
• Seven-Eleven Japan, ¥1 billion sales in 1974 to
¥2.7 trillion in 2016
• Webvan folded in two years
• Borders, $4 billion in 2004, declared bankruptcy in
2010
• Dell, $56 billion in 2006, adopted new supply
chain strategies

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Summary of Learning Objective 1
The goal of a supply chain should be to grow overall supply
chain surplus. Supply chain surplus is the difference between
the value generated for the customer and the total cost
incurred across all stages of the supply chain. A focus on the
supply chain surplus increases the size of the overall pie for all
members of the supply chain. Supply chain decisions have a
large impact on the success or failure of each firm because
they significantly influence both the revenue generated and
the cost incurred. Successful supply chains manage flows of
product, information, and funds to provide a high level of
product availability to the customer while keeping costs low.

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Decision Phases in a Supply Chain
1. Supply chain strategy or design
– How to structure the supply chain over the
next several years
2. Supply chain planning
– Decisions over the next quarter or year
3. Supply chain operation
– Daily or weekly operational decisions

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Supply Chain Strategy or Design
• Decisions about the configuration of the supply chain, allocation of
resources, and what processes each stage will perform

• Strategic supply chain decisions

– Outsource supply chain functions
– 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 (1 of 2)
• Definition of a set of policies that govern short-
term operations
• Fixed by the supply configuration from strategic
phase
• Goal is to maximize supply chain surplus given
established constraints
• Starts with a forecast of demand in the coming
year

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Supply Chain Planning (2 of 2)
• Planning decisions:
– Which markets will be supplied from which
locations
– Planned buildup of inventories
– Subcontracting
– Inventory policies
– Timing and size of market promotions
• Must consider demand uncertainty, exchange
rates, competition over the time horizon in
planning decisions

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Supply Chain Operation
• Time horizon is weekly or daily

• Decisions regarding individual customer orders

• Supply chain configuration is fixed and planning policies are

defined
• Goal is to handle incoming customer orders as effectively as
possible
• 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)

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Summary of Learning Objective 2
Supply chain decisions may be characterized as strategic (design),
planning, or operational, depending on the time horizon over which
they apply. Strategic decisions relate to supply chain configuration.
These decisions have a long-term impact that lasts for several years.
Strategic decisions define the constraints for planning decisions, and
planning decisions define the constraints for operational decisions.
Planning decisions cover a period of a few months to a year and
include decisions regarding production plans, subcontracting, and
promotions over that period. Operational decisions span from
minutes to days and include sequencing production and filling
specific orders.

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Process Views of a Supply Chain
1. Cycle View: The processes in a supply chain are
divided into a series of cycles, each performed at
the interface between two successive stages of
the supply chain.
2. Push/Pull View: The processes in a supply
chain are divided into two categories, depending
on whether they are executed in response to a
customer order or in anticipation of customer
orders. Pull processes are initiated by a
customer order, whereas push processes are
initiated and performed in anticipation of
customer orders.
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 Cycle View of Supply Chain Processes (1 of 2)

Figure 1-3 Supply Chain Process Cycles

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Cycle View of Supply Chain Processes (2 of 2)

Figure 1-4 Subprocesses in Each Supply Chain Process Cycle

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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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Figure 1-5 Push/Pull View of Supply
Chains

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Push/Pull View – L.L. Bean

Figure 1-6 Push/Pull Processes for the L.L. Bean Supply Chain

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Push/Pull View – Ethan Allen

Figure 1-7 Push/Pull Processes for Ethan Allen Supply Chain for
Customized Furniture

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Supply Chain Macro Processes
Supply chain processes discussed in the two views can be
classified into
1. Customer Relationship Management (C R M):
– all processes at the interface between the firm and its
customers
2. Internal Supply Chain Management (I S C M):
– all processes that are internal to the firm

3. Supplier Relationship Management (S R M):

– all processes at the interface between the firm and its
suppliers

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Figure 1-8 Supply Chain Macro Processes

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Summary of Learning Objective 3 (1 of 2)
The cycle view divides processes into cycles, each
performed at the interface between two successive stages
of a supply chain. Each cycle starts with an order placed by
one stage of the supply chain and ends when the order is
received from the supplier stage. A push/pull view of a
supply chain characterizes processes based on their timing
relative to that of a customer order. Pull processes are
performed in response to a customer order, whereas push
processes are performed in anticipation of customer
orders.

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Summary of Learning Objective 3 (2 of 2)
All supply chain processes within a firm can be classified
into three macro processes: CRM, ISCM, and SRM. The C
RM macro process consists of all processes at the
interface between the firm and the customer that work
to generate, receive, and track customer orders. The I SC
M macro process consists of all supply chain processes
that are internal to the firm and work to plan for and
fulfill customer orders. The SRM macro process consists
of all supply chain processes at the inter- face between
the firm and its suppliers that work to evaluate and
select suppliers and then source goods and services from
them. Integration among the three macro processes is
crucial for successful supply chain management.

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Examples of Supply Chains
• Gateway and Apple
• Zara
• W.W. Grainger and McMaster-Carr
• Toyota
• Amazon
• Macy's

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Gateway and Apple
1. Why did Gateway choose not to carry any finished-product inventory at its
retail stores? Why did Apple choose to carry inventory at its stores?

2. What are the characteristics of products that are most suitable to be carried
in finished-goods inventory in a retail store? What characterizes products
that are best manufactured to order?

3. How does product variety affect the level of inventory a retail store must
carry?

4. Is a direct selling supply chain without retail stores always less expensive
than a supply chain with retail stores?

5. What factors explain the success of Apple retail and the failure of Gateway
Country stores?

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 Zara
1. What advantage does Zara gain against the competition by
having a very responsive supply chain?
2. Why has Inditex chosen to have both in-house
manufacturing and outsourced manufacturing? Why has
Inditex maintained manufacturing capacity in Europe even
though manufacturing in Asia is much cheaper?
3. Why does Zara source products with uncertain demand
from local manufacturers and products with predictable
demand from Asian manufacturers?
4. What advantage does Zara gain from replenishing its
stores multiple times a week compared to a less frequent
schedule?
5. Do you think Zara’s responsive replenishment
infrastructure is better suited for online sales or retail
sales?
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W.W. Grainger and McMaster-Carr
1. How many D Cs should be built and where should they be
located?

2. How should product stocking be managed at the D Cs? Should all

DCs carry all products?

3. What products should be carried in inventory and what products

should be left with the supplier to be shipped directly in
response to a customer order?

4. What products should W.W. Grainger carry at a store?

5. How should markets be allocated to D Cs in terms of order

fulfillment? What should be done if an order cannot be
completely filled from a D C? Should there be specified backup
locations? How should they be selected?

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Toyota
1. Where should the plants be located, and what
degree of flexibility should be built into each?
What capacity should each plant have?
2. Should plants be able to produce for all markets
or only for specific contingency markets?
3. How should markets be allocated to plants and
how frequently should this allocation be revised?
4. How should the investment in flexibility be
valued?

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 Amazon
1. Why is Amazon building more warehouses as it grows?
How many warehouses should it have, and where should
they be located?
2. Should Amazon stock every product it sells?
3. What advantage can online players derive from setting up
a brick-and-mortar location? How should they use the two
channels to gain maximum advantage?
4. What advantages and disadvantages does the online
channel enjoy in the sale of shoes and diapers relative to a
retail store?
5. For what products does the online channel offer the greater
advantage relative to retail stores? What characterizes
these products?
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Macy’s and W.W. Grainger
1. Should online orders be filled from stores or fulfillment
centers? What role(s) should each facility play?
2. How should store inventories be managed in an omni-
channel setting?
3. Should returns be kept at a store or sent to a fulfillment
center?

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Summary of Learning Objective 4 (1 of 2)
At a strategic level, a supply chain designer must
decide whether to build a responsive supply chain
like Zara or focus on lower costs. A decision must
be made on the location and capacity of each
facility and whether it will be dedicated or flexible in
terms of the products it produces and markets it
serves. The designer must decide whether products
will be sold directly to customers, through
distributors like Grainger, or through brick-and-
mortar retailers like Macy’s. If opting for omni-
channel retail, the designer must decide which
facilities will fulfill different customer orders.

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Summary of Learning Objective 4 (2 of 2)
The planner must then decide on the production
levels at each production site and inventory levels
at each DC and retail store. As customer orders
arrive, the operations manager must decide how
each order will be fulfilled given the available
inventory and production schedule. The goal when
making all these decisions is to maximize the
supply chain surplus.

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Developing Skills for Your Career
• Lessons learned in this book will help develop
career skills no matter what path you take
• Employers have identified communication, critical
thinking, collaboration, knowledge application and
analysis, business ethics and social responsibility,
data literacy, and information technology
application and computing skills as critical
• Link between strategic decision making and
analytics

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Summary of Learning Objective 5
Skills learned in this book will be of great use no
matter what path students choose to follow. The
book is developed with the premise that good
strategic decisions cannot be made without access
to relevant analytics, and all analytics should be
designed to support decision making. As a result,
students will develop critical thinking, the ability to
formulate and analyze problems, and support their
recommendations with analytics that uses data
literacy and computing skills.

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