Chapter 1 - Supply Chain Management: An Overview PDF

Chapter 1 SUPPLY C H A I N M A N A G E M EN T: A N O VE R VIE W Learning Objectives After reading this chapter, you should be able to do the following: Explain how efficient and effective supply chains can maximize customer service, product fulfillment, and cash flow. Discuss the development and shaping of supply chains in leading organizations and understand their contributions to their financial viability. Appreciate the important role of supply chain management among private as well as public or nonprofit organizations. Understand the contributions of supply chain management to organizational efficiency and effectiveness for competing successfully in the global marketplace. Explain the benefits that can be achieved from implementing supply chain best practices. Understand the major supply chain challenges and issues faced by organizations currently and in the future. 3 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 4 Chapter 1 Supply Chain Profile SAB Distribution: The Next Chapter SAB was established as a classic, middle-of-the-supply chain organization since it purchased consumer products from major manufacturers such as Kraft, Kimberly-Clark, Procter & Gamble (P&G), Unilever, and others and sold them to smaller distributors, wholesalers, and retailers. When Susan Weber assumed the role of CEO of SAB in 2010, she knew that in spite of several major changes, its continued survival depended upon the company reexamining its role in various supply chains and making appropriate strategic and tactical changes. COMPANY BACKGROUND SAB Distribution was established in 1949 in Harrisburg, Pennsylvania, by three World War II veterans (Skip, Al, and Bob) who had served as navy supply officers. Harrisburg was selected because of its central location in the mid-Atlantic region and because of its access to rail and highways for suppliers and potential customers. The founders of SAB recognized the need for a consumer products wholesaling company to serve medium- and small-size retailers within a 200-mile radius of Harrisburg. The company grew and prospered in subsequent years. The company was incorporated in 1978, and a CEO, Pete Swan, was appointed in 1980 when the founders retired. SAB’s market area expanded into nearby states, such as New York, New Jersey, and Delaware, and its product line expanded from nonperishable food products to include perishables and nonfood consumer products. Sue Purdum took over from Pete Swan in 1995 when the company was facing major competitive challenges that could have led to the sale of the company, but she “navigated” the company successfully. Susan Weber assumed the CEO role with the full knowledge that significant change was necessary if SAB was to continue to survive as a profitable organization. Essentially, SAB needed a transformation in the scope of its activities. CURRENT SITUATION SAB is faced with a number of challenges to its future existence. First and foremost, many of its customers compete against large retailers like Walmart that can buy directly from the same consumer product manufacturers as SAB, with no “middleman.” Walmart’s buying advantage had to be offset in some way to keep SAB’s customers competitive. In addition, globalization was affecting SAB’s business because of an increase in imported products for the more diverse population of the United States and the ongoing search for lower-priced alternatives. The net effect was a much more complex and competitive business environment with more potential volatility. When Sue Purdum assumed the role of CEO in 1995, she analyzed the competitive environment and understood the need to change SAB’s business practices. She focused upon efficiency in warehouse operations, improved fulfillment, and developed partnerships with a core group of motor carriers. Finally, she invested in information technology. The net effect of these changes lowered the cost of doing business for SAB’s customers and enabled them to be more competitive. It was a win-win since SAB also became more efficient and effective as well as more profitable. Initially, Susan Weber followed the lead of Sue Purdum, but she knew that she had to transform the company to attract large retailers as customers. Their current customers were losing market share to the larger retailers, which negatively impacted SAB’s profitability. Susan Weber realized that the large retailers outsourced part of their logistics operations to thirdparty logistics companies to lower their cost of doing business. Given SAB’s proficiency in logistics, she believed that there were opportunities for SAB to eliminate duplicative echelons in those supply chains. For example, between a producer’s plant and a retail store, there were often three or more distribution locations where products were stored and handled. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview The SAB managers recognized the challenge of Susan Weber’s assessment of their competitive market but also the opportunities associated with the changes that she outlined. After five years of Susan Weber’s leadership, SAB attracted five large regional retail chains in the Northeast and developed a distribution park for warehousing, a transportation hub, and a call center near Scranton, Pennsylvania. The new distribution park allowed SAB to expand their value-added services to customers by providing third-party logistics services (warehousing and inventory management, order fulfillment, delivery and special packaging). SAB hopes to attract additional regional chains such as Wegman’s. A focus for their new distribution park is fresh fruits, vegetables, and other perishable food items, commonly referred to as the cold supply chain. SAB’s success with their distribution park has caught the attention of several other companies who are planning similar operations along the eastern seaboard. Recently, Susan was informed by a daughter of one of the founders of SAB that the family had been contacted by a representative of a major investment group that wanted to buy the family’s share of the stock (65%) and take the company private. The potential buyout had major implications for Ms. Weber and her valued employees. She felt that SAB could survive in the current environment, but she would have to present a plan to the family owners that would convince them to maintain their current ownership position. Susan is analyzing and considering designing a plan to enable their retail customers to implement direct delivery from their stores to the residence of their customers. As you read this text, consider how SAB could address the challenges of their current environment including: (1) cost pressure; (2) having a responsive/demand-driven supply chain; (3) supply chain visibility; (4) more collaborative supply chain relationships; (5) improved information flow and data analytics, and (6) the feasibility of direct delivery to the final customer. Source: John J. Coyle, DBA, Center for Supply Chain Research®, Penn State University. 1-1 Introduction The first decade of the twenty-first century was a period of rapid change for most organizations, especially businesses. That rate of change has not slowed down, and the second decade has been more volatile than previous years. The external forces of change require organizations to be much more nimble and responsive; that is, organizations need to be able to change and/or transform themselves to survive in the intensely competitive, global environment. The SAB case is a good example of this survivor mode that forces companies to transform. SAB would have been driven out of business in the 1990s if it had not changed, and it now faces an even more daunting challenge, which will necessitate still bigger changes. Several quotes cited in a previous edition of this book are still apropos. They are as follows: “Change is inevitable, but growth and improvement are optional.” (John C. Maxwell, author) “If the rate of change outside exceeds the rate of change on the inside, the end is near.” (Jack Welch, former CEO General Electric Corporation) Susan Weber, CEO of SAB, understands the wisdom of these comments and the need to collaborate with their customers. The rationale for SAB to change can be made by comparing the top retail establishments in 2000, 2010, 2015, and 2019 (see Table 1.1). One could argue that most retailers are essentially supply chain companies since they buy products produced by others and sell these same products to their customers. While other factors such as merchandising, pricing, store location, and layout are very important, supply chain management and logistics are key ingredients for success in today’s highly competitive global environment. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 5 6 Chapter 1 Table 1.1 Leading Retailers (Sales/Year) 2000 2010 2015 2019 1. Wal-Mart 1. Wal-Mart 1. Wal-Mart 1. Wal-Mart 2. Kroger 2. Kroger 2. Costco 2. Amazon 3. The Home Depot 3. Target 3. Kroger 3. Kroger 4. Sears, Roebuck & Company 4. Walgreen 4. Home Depot 4. Costco 5. The Home Depot 5. Target 5. Kmart 6. Costco 6. Walgreen’s 5. Walgreens Boots Alliance 6. Albertson’s 7. CVS Caremark 7. Target 8. Lowe’s 7. CVS Caremark 9. Best Buy 8. Amazon.com 7. CVS Health Corporation 9. Lowe’s 8. Target 8. JC Penney 9. Costco 10. Safeway 10. Sears Holdings 10. Best Buy 6. The Home Depot 9. Lowe’s Companies 10. Albertsons Companies Source: National Retail Federation (NRF). https://nrf.com/resources/annual-retailer-lists/top-100-retailers. Susan Weber (CEO, SAB) appears to comprehend the potential role that supply chains can play in making retail organizations successful. She also seems to understand that the dynamics of today’s global environment requires thinking “out of the box.” Table 1.1 identifies leading retailers at 4 time intervals between 2000 and 2019, and demonstrates the forces of change and the need to adapt to the shifts that have occurred. Interestingly, four of the top 10 retailers in 2000 do not appear on the 2019 list (i.e., Sears Roebuck & Company; Kmart; JC Penney; and Safeway), and the 2019 list includes four companies that were not on the 2000 list (i.e., Amazon; Walgreens Boots Alliance; CVS Health Corporation; and Lowe’s Companies). Overall, the content of Table 1.1 documents the tumultuous business environment that has characterized the retail sector over the past 20 years. The more recent rise of Amazon has represented one of the most pervasive changes ever in the retail sector, and has certainly qualified as a disruptive innovation. This topic will be discussed further in various chapters of this text. At this juncture, an examination of the major external forces or change drivers shaping supply chains is appropriate to examine their impact on various organizations and their supply chains. 1-2 Shaping the Supply Chains of the Twenty-First Century: Evolution and Change The dynamics of the global environment changed dramatically during the 1990s, and organizations had to adapt to these changes or perish. Unfortunately, there were a number of casualties along the way. Some previously successful companies did not survive in the more competitive global marketplace because they did not adapt and change. Leading companies such as Westinghouse, Bethlehem Steel, and RCA are no longer in business. Currently, successful leaders such as IBM, General Electric, and McDonald’s are struggling to survive as they try to make appropriate changes in their business models. Some individuals argue that an appropriate business mantra should be “disrupt or be disrupted,” which may be a way of stating an older axiom, “think outside the box.” Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview Figure 1.1 7 External Change Drivers Technology Organizational Consolidation and Power Shift Globalization External Change Drivers Empowered Consumers Sustainability Government Policy and Regulation Source: Center for Supply Chain Research®, Penn State University. Six major external forces are driving the rate of change: globalization, technology, organizational consolidation, the empowered consumer, sustainability, and government policy and regulation (see Figure 1.1). The confluence of these factors in the twenty-first century has dramatically changed the economic landscape and provided an opportune business climate for the development of global supply chains and supply chain management. 1-2a Globalization Globalization was the most frequently cited change factor by business leaders, and it replaced the post-World War II Cold War as the dominant driving force in world economics. The concept of the global marketplace or the global economy took on a special meaning for all enterprises (profit and nonprofit; small, medium, and large; products or services) and for individual consumers in the 1990s and the first decade of the twenty-first century. Globalization led to a more competitive economic and geopolitical environment that resulted in opportunities and threats both economic and political. Some individuals have argued that there is no “geography” in the current global environment (figuratively speaking) or, perhaps more aptly, that time and distance have been compressed. For example, companies seeking to rationalize their global networks ask such questions as: (1) Where in the world should we source our materials and/or services? (2) Where in the world should we manufacture or produce our products or services? (3) Where in the world should we market and sell our products or services? (4) Where in the world should we warehouse and distribute our products? (5) What global transportation and related service alternatives should we consider? Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 8 Chapter 1 Some important issues or challenges for supply chains in the global economy are higher economic and political risk; shorter product life cycles; and the blurring of traditional organizational boundaries. All three deserve some discussion. Supply and demand have become more volatile for a number of reasons. Acts of terrorism, for example, the ISIS attacks in the Middle East and pirates attacking cargo ships, have serious implications for the flow of commerce. Companies have put security measures in place to protect their global supply chains and to act quickly to offset challenges to their supply chains, which has increased their cost, but the risk is ever present. Natural catastrophes such as hurricanes, floods, typhoons, and earthquakes have become more problematic because of climate changes and because they pose a very significant challenge for global supply chains. Challenges to supply and demand are usually exacerbated in number and severity by the distances involved, which necessitates risk mitigation strategies. It has been argued that an interruption or a disruption to a supply chain that cuts off the flow of information and products is analogous to a “heart attack” that cuts off the flow of blood to the heart. Like a heart attack, supply chain disruption can have lasting effects. The global supply chains of the best companies must be adaptive, resilient, and responsive to meet the challenges of the global economy and develop mitigating strategies for disruptive forces. Shorter product life cycles are a manifestation of the ability of products and services to be duplicated quickly. Technology companies are particularly vulnerable to the threat of their new products being reengineered. However, almost all products in the highly competitive global environment are faced with this issue. From a supply chain perspective, shorter product life cycles present a challenge for inventory management. Products that are duplicated will most likely face a faster reduction in demand and require new pricing policies, both of which present challenges to effective inventory management. The risk of obsolescence as new products are developed is another challenge for inventory management. It also means continually developing new products or reconfiguring old products to maintain market share. The rate of development and change in technology is particularly disruptive to existing enterprises and has led to the demise of some. The blurring of traditional organizational boundaries is the result of companies having to adjust or transform their business model or the way that they do business in the more competitive global economy. For example, to maintain financial viability (read profitability), companies may outsource activities and processes to another company that can provide what they need more efficiently and hopefully more effectively. They may also add to their current operations or services to provide additional value for customers. SAB followed this strategy to retain and add customers. Outsourcing is not new. No organization is completely independent. The competitiveness of the global environment, however, has increased the scope of outsourcing both domestically and globally. As previously mentioned, companies need to analyze how they do business in order to stay competitive and financially viable. Nike, for example, outsources all of its manufacturing and has done so for many years. Many automobile and computer manufacturers outsource components or parts that they need for finished products as well as logistics-related services. From a supply chain and logistics perspective, the growth in outsourcing is noteworthy because it increases the importance of effective and efficient supply chain management as supply chains are longer and more complex. A strong complement to the growth in the global economy has been the growth and development in the technology related to supply chains. Mention has been made of time and distance being compressed, and technology has certainly played a major role in making Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview this happen. Technology will be discussed as the next external change factor. It should be noted that some organizations think that technology has become a more important driver of change than globalization. 1-2b Technology Technology has had a major impact on supply chains as a facilitator of change as companies have transformed their processes. However, it is also a major force in changing the dynamics of the marketplace. Individuals and organizations are “connected” 24/7 and have access to information on the same basis via the Internet. Search engines, such as Google, Bing, and others, have made it possible to gather timely information quickly. We no longer have to wait for information to be “pushed out” to us; we can “pull” information as we need it. Vast stores of data and information are virtually at our fingertips. Social networks such as Facebook or Twitter are playing an ever-increasing role in business organizations and influence supply chains because of their impact on customer demand and the speed of information transfers. Some individuals have argued that another relevant mantra for businesses in the twenty-first century is “twitter and tweet or retreat.” Many companies see opportunities to “data mine” the social media to uncover demand-related information for improved forecasting and marketing. As will be discussed in more detail, “cloud computing,” is more than a “buzz word” and is revolutionizing information systems. Technology has allowed individuals and smaller organizations to connect to the world’s “knowledge pools” to create and establish opportunities for collaboration in supply chains. Outsourcing to the less-developed countries was enhanced by technology. Collaboration opportunities with individuals and companies throughout the globe have increased, which has created market opportunities as employment opportunities increased. Technology has spawned the development of Uber, Airbnb, and other such organizations, which have disrupted their respective marketplaces. Susan Weber, as SAB’s new CEO, will have to more fully exploit the opportunities presented by technology both on the procurement side of business and in marketing products to customers. Her predecessor used technology to improve internal processes, for example, warehouse operations and order fulfillment as well as transportation carrier collaboration. SAB will need to focus more externally with information technology to improve overall supply chain efficiency and effectiveness. 1-2c Organizational Consolidation and Power Shifts After World War II, product manufacturers became the driving force in supply chains. They developed, designed, produced, promoted, and distributed their products. Frequently, they were the largest organizations in the supply chain in terms of sales volume, number of employees, buying power, number of locations, and other factors. They typically exerted their influence throughout the supply chain often to their specific economic advantage, especially in the distribution of their products. During the 1980s and especially the 1990s, a significant change occurred as retail giants, such as Walmart, Sears, Kmart, Home Depot, Target, Kroger, McDonald’s, etc., became powerful market leaders and engines for change. While other retailers are not as large as Walmart, their size and economic buying power have also increased significantly. An important aspect of the economic power shift toward the retail end of the supply chain is that many consumer product companies find that 15 to 20 percent of their customers account for 70 to 80 percent of their total sales. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 9 10 Chapter 1 The large retailers were accorded services such as scheduled deliveries, “rainbow” pallets (mixed arrays of products or stock-keeping units [SKUs]), advance shipments notices (ASNs), shrink-wrapped pallets, etc. These services allowed retailers to operate more efficiently and often more effectively and provide scale economies to the producers, which was a win-win arrangement with savings passed on to the consumer. Subsequent chapters will more fully explicate the benefits. As more collaboration is practiced among organizations in the supply chains, they can gain shared cost savings and improved customer service. For example, sharing point-ofsale data is a powerful collaborative tool for mitigating the so-called “bullwhip effect” of inventory in the supply chain, which has multiple benefits for supply chain collaborators. Companies that report innovative best practices usually obtain about half of their innovative insights outside their company through collaboration with suppliers and customers. The power of information sharing and collaboration cannot be overstated. This is a key area for SAB to exploit as it tries to adapt to its competitive environment and increase sales with existing and new customers. Data sharing will help SAB to lower product stock-outs and related lost sales to improve on-shelf availability of their products for increased sales. 1-2d The Empowered Consumer The impact of the consumer is more direct for supply chains today because the consumer has placed increased demands at the retail level for an expanded variety of products and services. The implementation of an omni-channel distribution strategy by large retailers, which will be discussed in Chapter 4, is an excellent example of a current strategy made feasible with technology that is having a major impact on marketing sales at the retail level. Consumers are empowered by the information that they have at their disposal from the Internet and other sources. Their access to product sources and related information has expanded exponentially. Consumers have the opportunity to compare prices, quality, and service. Consequently, they demand competitive prices, high quality, tailored or customized products, convenience, flexibility, and responsiveness. They tend to have a low tolerance level for poor quality in products and services. They report their likes and dislikes on the Internet to third-party organizations such as Yelp. Some consumers have increased buying power due to high income levels. They demand the best quality, at the best price, with the best service. These demands place increased challenges and pressure on the various supply chains for consumer products. The demographics of our society with the increase in two-career families and singleparent households have made time and convenience critical factors for many households. The expectation for service is frequently 24/7 availability with a minimum of wait time. The age-old axiom of “let the buyer beware” should probably be changed to “let the seller beware.” The Internet enables buyers to expand their buying alternatives and quickly make comparisons before they purchase. The omni-channel distribution option provides additional flexibility for consumers. The power of the consumer has caused much change in how supply chains function. Supply chains have felt the pressure to keep prices stable even during inflationary periods. Collaboration has frequently been the basis for efficiencies to mitigate increased costs. 1-2e Government Policy and Regulation The fifth external change factor is the various levels of government (federal, state, and local) that establish and administer policies, regulations, taxes, etc., which impact businesses and their supply chains. The deregulation of several important sectors of our economy Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview 11 that occurred in the 1980s and 1990s is a good example. The deregulated sectors include transportation, communications, and financial institutions, which are cornerstones of the infrastructure for most organizations. Beginning in the late 1970s and into the 1980s, the U.S. transportation industry was deregulated at the federal level in terms of economic controls such as rates and areas of service. The net effect was that it became possible for transportation services to be purchased and sold in a more competitive environment. Transportation companies were also allowed to offer more than just transportation services. Many motor carriers, for example, became logistics services companies and offered services that include order fulfillment, inventory management, and warehousing. They have moved aggressively ahead in the deregulated environment to view themselves as outsourcing partners for potential strategic advantages (see Case 1.1). On the Line Changing Times for Drugs One of the U.S. industries being buffeted by the “winds of change” in the twenty-first century is the pharmaceutical industry, which has been a major force in the U.S. economy for many years. The industry has provided consistent and excellent employment opportunities and increased returns to shareholders for years. However, the industry has been challenged in recent years by more intense global competition; a related growth in the prescription and use of generic drugs; the end of patent protection for a growing number of their major drugs; a slower development of new “blockbuster” drugs to treat major illnesses; more regulation; increased risks of counterfeit drugs; and an unresponsive supply chain. One of several “cures” may come to mind for the challenges enumerated in earlier paragraph, but there is no question that there is a glaring need for managing their supply chains more efficiently and effectively along with better execution. Discussion with key executives noted a need to change their strategy from a push approach to a pull strategy. The push approach has led to overstocks of some SKUs and stock-outs of others with consequent higher inventory costs and perhaps lost sales. There is also a need for their supply chains to be more responsive to demand “signals” in a timely manner. Another needed change is more collaboration with suppliers, customers, and logistics service providers. In the past, pharmaceutical companies could essentially dictate and control what happened in their supply chains. Participants in the supply chain were usually not considered to be “partners” or needed collaborators. Valuable information and potential innovations were probably squandered along the way. As has been pointed out in recent years, supply chain collaborators and partners often provide half or more of the innovative changes that lowered cost and/or improved service. Another need is for improved information flow and management as well as more visibility along the supply chain. This is a necessary ingredient for improved decisions in logistics and transportation, and enhanced protection of drug integrity in the supply chain. Too frequently, data has been incomplete or incorrect resulting in lack of visibility, higher cost, and/or ineffective customer service. Timely and accurate Information flow is important and is a necessary part of improving visibility in pharmaceutical supply chains and the financial viability of the industry. The pharmaceutical industry is still an important part of the economy but like some other sectors and individual companies, they need to make innovative changes in their supply chains and related activities to be more competitive and financially viable in the twenty-first century. Source: John J. Coyle, DBA and Kusumal Ruamsook, Ph.D., Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 12 Chapter 1 The financial sector was also deregulated at the federal level. Financial markets became more competitive, flexible, and responsive to customer needs. The deregulation of financial institutions fostered changes in how businesses can operate with respect to cash flow, purchase cards, and short-term investment. These changes made organizations more cognizant of the role that supply chain management could play with asset efficiency and cash flow. All of the above have contributed to the focus on cash flow as previously discussed. It should be noted that there have been some negative aspects associated with the financial deregulation, which contributed, for example, to the great recession of 2008–2010. The communications industry also became more competitive. This scenario was different since the major cause of change was a Supreme Court decision that split up the AT&T/Bell telephone system into regional companies; separated the “long-lines” system of AT&T, and made it accessible to other companies such as Sprint that wanted to sell telephone services. Like the other two industries discussed earlier, the communications industry has undergone dramatic change and has become part of the information revolution with a number of other “players” including cable companies, Internet companies, etc. Businesses and the general consumer population have been impacted by the many changes in the communications industry from cell phones and pagers to e-mail, text messaging, twitter-tweets, and the Internet. Communications efficiency and effectiveness have led to dramatic improvements and opportunities in logistics and supply chains. Examples include asset visibility, quick response replenishment, improved transportation scheduling, rapid order entry, and same day delivery. The omni-channel option discussed in Chapter 4 is a major change in meeting customer needs at the retail level. Supply chain practices have been improved leading to lower cost and better customer service. The supply chain technology continues to improve and more examples will be delineated in subsequent chapters. 1-2f Sustainability A major priority in recent years has been the focus on incorporating sustainability practices in supply chain management. Categorically, the term sustainability includes concerns for society (people), environment (planet), and economy (growth). These three interrelated components are widely known as the “triple bottom line” (TBL). Thus, the conventional economic perspective on business is expanding to a more sustainable business mindset. This includes greater attention directed to being “green, and to address issues relating to social responsibility. Each of these dimensions of sustainability are discussed in greater detail throughout this text. The sustainability mindset has also evolved from focusing on a single firm’s operations to a supply chain perspective and created the concept and practice of sustainable supply chain management (SSCM). Suppliers are increasingly held to the same sustainability standard as the buyer’s firms, products and services are designed with full life-cycle considerations, and consumers are educated on sustainable ways to consume and dispose products. At the same time, sustainability reporting is a growing practice, either mandatory or voluntarily, due to the demand for transparency in the supply chains. The importance of sustainability factor is evidenced in the growing number of industry-based initiatives that aim to address sustainability issues unique to their respective industries. Examples are The Electric Utility Industry Sustainable Supply Chain Alliance (a nonprofit organization formed by electric utility companies in the United States), The Better Cotton Initiative (a group that includes members from civil society, suppliers and Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview manufacturers, brands and retailers, and cotton producers), and The Sustainable Apparel Coalition (an industry-wide group of over 100 leading apparel and footwear brands, retailers, suppliers, nonprofits, and nongovernment organizations). Supply chain sustainability is now at the forefront of supply chain management from risk and competitive advantage perspectives. Consumers and investors are paying attention to products’ and companies’ impacts on environment (e.g., carbon footprint, water consumption, rare mineral uses) and society (e.g., worker health and safety, diversity, animal welfare). Companies that fail to change from profit-oriented to TBL-oriented expose themselves to risks of negative brand reputation and image as well as low capital and future cash flow. In contrast, forward-looking companies turn sustainability into a source of innovation and brand differentiation. SAB Distribution is being buffeted by all of these change drivers. The marketplace is much more competitive; consumers are much more demanding and knowledgeable. Globalization and deregulation have made SAB much more vulnerable in its regional marketplace and much less insulated against larger competitors. Sustainability has brought additional risks to the supply chain risk profile. These change drivers represent both opportunities and threats for SAB, as well as for other businesses both large and small. SAB needs to use technology to improve their supply chain operations and changes in their business model and practices to survive. 1-3 Supply Chains: Development and Shaping for the Twenty-First Century 1-3a Development of the Concept It can be argued that supply chain management represents the third phase of an evolution that started in the 1960s with the development of the physical distribution concept that focuses on the outbound side of a firm’s logistics system (see Figure 1.2). The system relationships among transportation, inventory requirements, warehousing, exterior packaging, materials handling, and other activities or cost centers were recognized. For example, the selection and use of a mode of transportation, such as rail, affects inventory, warehousing, packaging, customer service, and materials-handling costs, whereas motor carrier service would probably have a different impact on the same cost centers. The transportation decision should be based upon lowest total system cost. The systems perspective is also an important concept underlying supply chain management and will be explored in more detail in Chapter 3. The 1980s, as noted, was a decade of change in the United States with the deregulation of transportation and financial institutions, and the integrated logistics management concept that added inbound logistics to the outbound logistics of physical distributions developed in a growing number of organizations. This was logical since deregulation of transportation provided an opportunity to coordinate inbound and outbound transportation movements of large shippers that could positively impact a carrier’s operating cost by minimizing empty backhauls, leading to lower rates for the shipper. Also, international or global sourcing of materials and supplies for inbound systems was growing in importance. Therefore, it became increasingly apparent that coordination between the outbound and Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 13 Chapter 1 14 Figure 1.2 Evolution of Supply Chain Management Activity fragmentation to 1960 Demand forecasting Purchasing Requirements planning Production planning Manufacturing inventory Warehousing Materials handling Packaging Finished goods inventory Distribution planning Order processing Transportation Customer service Strategic planning Information services Activity integration 1960–2000 2000 + Purchasing/ Materials Management Integrated Logistics Physical Distribution Supply Chain Management Marketing/Sales Finance Source: Center for Supply Chain Research®, Penn State University. inbound logistics system provided opportunities for increased efficiency and improved customer service. The underlying logic of the systems or total cost concept was the rationale for logistics management. In addition, Porter’s value chain concept developed as a tool for competitive analysis and strategy was a complement to integrated logistics. In the value chain illustration (see Figure 1.3), inbound and outbound logistics are identified as primary components of the value chain; that is, they can contribute value for customers and make the company financially viable to increase sales and improve cash flow. The more integrated nature of marketing, sales, and manufacturing with logistics is also an important dimension of the value chain and has become more important with the supply chain management focus. Supply chain management gained traction in the 1990s because of two major studies. The Grocery Manufacturers Association (GMA) commissioned a study by Cleveland Consulting Associates to analyze the supply chains or grocery manufacturers. The impactful conclusions indicated a potential savings of $30 billion a year by reducing inventory levels from 104 days of inventory to 61 days of inventory in their outbound supply chains. The other example of the importance of focusing upon the supply chain came from the Supply Chain Council, which published a comparison for 1996 and 1997 of “best-in-class” companies (top 10 percent) and the median companies that were reporting their metrics to the Council. The related costs of the best-in-class (BIC) companies were 7.0 percent of total sales, while the median company experienced 13.1 percent. In other words, the best-in-class companies spent 7.0 cents of every sales/revenue dollar for supply chain-related costs, while Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview Figure 1.3 15 Generic Value Chain Firm infrastructure rg Ma Human resource management Support activities in Technology development Procurement Service in Operations Outbound Marketing logistics and sales Ma rg Inbound logistics Primar y activities Source: Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance, 1985. the median company spent 13.1 cents of every sales dollar on supply chain–related costs. In 1997, the respective numbers were 6.3 percent and 11.6 percent for best-in-class companies versus the median company. A simple application of these numbers for a hypothetical company with $100 million sales in 1997, being best in class would mean an additional $5.3 million of gross profit to an organization, which frequently would be the equivalent profit from an additional $80 to $100 million of sales. At this point, a more detailed analysis and discussion of the supply chain is appropriate. Figure 1.4 presents linear and basic flows in the supply chain. Real-world supply chains are usually more complex than this example because they may be nonlinear or have more supply Figure 1.4 Integrated Supply Chain—Basics SCM is the art and science of integrating the flows of products, information and financials through the entire supply pipeline from the vendor’s vendor to the customers’ customers and consumers. Vendors Contracted Manufacturers Manufacturers Wholesalers/ Distributors Retailers/ Customers Consumers Product/Services Flow Information Flow Cash Flow Demand Flow Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 16 Chapter 1 Figure 1.5 Raw Material Supplier Supply Chain Network Manufacturing Plant Manufacturing Warehouse Wholesaler Warehouse Retailer Warehouse Retail Store Source: Center for Supply Chain Research®, Penn State University. chain participants (see Figure 1.5). Also, this supply chain does not adequately portray the importance of transportation and other service suppliers in the supply chain. In addition, some companies may be part of several supply chains. For example, chemical companies provide the ingredients for many different products manufactured by different companies. Figures 1.4 and 1.5 indicate that a supply chain is an extended enterprise that usually crosses the boundaries of several individual firms to coordinate the related flows of all the companies. This extended enterprise should attempt to execute a coordinated, two-way flow of goods and services, information, cash, and demand. The four supply flows described in Figure 1.4 are very important to the success of supply chains. Integration across the boundaries of several organizations in essence means that the supply chain needs to function similar to a single organization in satisfying the ultimate consumer. The management of a supply chain(s) is both an art and a science. Later chapters will discuss the many scientific applications and models utilized today in managing supply chains. However, supply chain management is also an “art” because of its dynamic and complex environment that requires collaboration among the organizations participating in the supply chain. Figure 1.6 provides additional detail relating to these supply chain flows. The top flow— products and related services—has traditionally been an important focus of logisticians and can be considered the “life blood” of the supply chain. Customers expect their orders to be delivered in a timely, reliable, and damage-free manner. Figure 1.4 also indicates that product flow is a two-way flow in today’s environment because of the growing importance of reverse logistics systems for returning products that are unacceptable to the buyer, because they are damaged, obsolete, or worn out. Reverse supply chains are very important for many consumer product companies and retailers and will be discussed in more detail in a later chapter. Third-party logistics companies that specialize in offering reverse flow systems can provide a valuable service for many companies. The second flow indicated is the information flow, which has become an extremely important factor for success in supply chain management and can be considered the fuel for the Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview Figure 1.6 Supply Chain Flows PRODUCT FLOW Physical movement of goods and materials i INFORMATION FLOW Enabling physical flow of products Decision making Supply chain collaborations FINANCIAL/CASH FLOW Management of working capital DEMAND FLOW Detect and understand demand signals Synchronize demand vs. supply Source: Center for Supply Chain Research®, Penn State University. supply chain. Traditionally, information was viewed as flowing in the opposite direction of products, that is, from the market or customer back into the supply chain. The information was primarily customer orders, which were the trigger for replenishment and the basis for forecasting. If there were long intervals between orders, the members of the supply chain were faced with more uncertainty about the level and pattern of the demand, which usually resulted in higher inventory or stock-out costs (bullwhip effect). One of the realizable outcomes of supply chain management is the sharing of sales information on a more real-time basis, which leads to less uncertainty and, therefore, less safety stock. In a sense, the supply chain is being compressed or shortened through timely information flows back from the marketplace, which leads to a type of supply chain compression or inventory compression. In other words, inventory can be eliminated from the supply chain by timely, accurate information about demand. Simply stated, “Information can be a substitute for inventory.” If point-of-sale (POS) data is available from the retail level on a real-time basis, it helps to mitigate the bullwhip effect associated with supply chain inventories and could significantly reduce cost. Note that the illustration also indicates a two-way flow for information. In a supply chain environment, information flowing forward in the supply chain has taken on increased significance and importance. Forward information flow can take many forms such as advance shipment notices, order status information, inventory availability information, etc. The forward information flow can also help to reduce uncertainty. A related aspect of forward information flow has been the increased utilization of barcodes and radio-frequency tags, which can increase inventory visibility and help to reduce uncertainty and safety stock. The improved visibility of pipeline inventory also makes possible many opportunities for improved efficiency such as transportation consolidation and merge-in-transit strategies. The combined two-way flow of timely, accurate information lowers supply chain–related costs while also improving customer service. The third flow is financials or, more specifically, cash. Traditionally, financial flow has been viewed as one-directional (backward) in the supply chain, as payment for goods, Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 17 18 Chapter 1 services, and orders received. A major impact of supply chain compression and faster order cycle times has been faster cash flow. Customers receive orders faster, they are billed sooner, and companies can collect sooner. The faster cash-to-cash cycle or order-to-cash cycle has been a bonanza for companies because of the impact on reducing working capital. In fact, some companies have what financial organizations refer to as “free” cash flow. They collect from their customers before they have to pay their vendors or suppliers. The cash can be used for a source of funding when it occurs on a regular basis. Cash flow has become an important metric for the financial markets to gauge the economic viability or vulnerability of companies. Most companies recognize the importance of accelerated cash flow or free cash flow and that supply chain management plays an important role in improved cash flow. The fourth and final flow is demand flow, which has received increased attention from supply chain managers with demand-driven systems. This is not a new concept for supply chain management but rather reflects the growth in technology that provides organizations the ability to better synchronize supply and demand by detecting and understanding demand “signals” and making appropriate adjustments to inventory replenishment and order fulfillment. For example, consumer product companies frequently had a 30-day production schedule “locked in” based upon a demand forecast by SKU. Consequently, these products rolled out to distribution centers regardless of what was actually being sold at the retail level. Production runs were rigid until the next period. Best-in-class companies have developed a more flexible production schedule with the opportunity to make adjustments in 24 hours. Production costs can be higher, but the tradeoff is the ability to meet spikes in demand or to slow down production of some SKUs that may not be selling at the level anticipated (higher cost but with more profit). It should be noted that some companies cannot make adjustments on such a short-term basis. Global supply chains present a special challenge because of the longer lead times, but technology has enabled companies to detect demand signals or market changes and make quicker adjustments, as will be discussed in subsequent chapters. SAB Distribution is obviously part of a supply chain with an intermediate position between manufacturers and retailers. Wholesalers had a traditional role, which was buying products in volume quantities at lower prices and selling a mix of products in smaller quantities at higher prices to retailers. They frequently played a role in promoting and financing product sales in addition to distributing the item. Manufacturers and retailers depended upon them for efficiency in their operations. Large-scale retailers and manufacturers willing and able to provide more tailored, customized services have put wholesalers in jeopardy. SAB has felt this changing environment. It needs to reevaluate its role in relation to retailers, and to add “value” services to help reduce costs for their customers or help improve their sales revenue, and make other strategic moves. Supply chain management provides organizations an opportunity to reduce cost (improve efficiency) and improve customer service (effectiveness) to increase revenue. 1-4 Major Supply Chain Issues The challenge to develop and sustain an efficient and effective supply chain(s) requires organizations to address a number of issues. The issues are discussed here but will be explored in much more depth in later chapters. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview 1-4a Supply Chain Networks Network facilities (plants, distribution centers, terminals, etc.) and the supporting transportation services are considered to be very important. However, the network system in a dynamic, global environment is critical. One of the challenges is the rapid changes that can take place. Companies and other organizations need a network system that is capable and flexible to respond and change with the dynamics of the marketplace whether in the short run or the long run. Technology companies, for example, may have to move manufacturing operations to a different country in six to nine months because of changes that can occur that affect their cost or customer service. The need for flexibility frequently means leasing facilities, equipment, and maybe supporting services. At times, the flexibility may be required for a shorter duration—for example, to respond to port strikes, floods, hurricanes, political uprisings, terroristic attacks, and other disruptions. Mitigating the risk from such disruptions is a critical strategy in today’s global networks. Private sector companies are placing increased emphasis on strategies to deal with the risk of disruptions whether they be natural dictators or other disruptive forces. Such a level of responsiveness requires information systems to provide as much warning as possible and plans in place on how to respond. 1-4b Complexity The globalization and consolidation in supply chains that were previously discussed have caused an increased complexity for organizations in terms of SKUs, customer and supplier locations, transportation requirements, trade regulations, taxes, and so forth. Companies need to take steps to simplify, as much as possible, the various aspects of their supply chains. For example, the number of SKUs has expanded for many companies, which exacerbates problems for inventory management and order fulfillment. Consequently, companies have been rationalizing SKUs to eliminate the slow movers and items that do not contribute to profitability. Locations also need to be analyzed to eliminate high-cost or duplicative operations. Customer service levels need to be rationalized as do vendors or supplier alternatives. Layers of complexity develop and may seem necessary, but organizations need to continually evaluate those areas of complexity by evaluating processes, training people, and exploiting technology. 1-4c Inventory Deployment Two interesting characteristics of supply chains are that inventory is often being duplicated along the chain and the bullwhip effect. Effective SCM usually provides an opportunity to reduce inventory levels. Coordination or integration can help reduce inventory levels on horizontal (single-firm) and vertical (multiple-firms) levels in the supply chain. Strategies such as compression and postponement can also have a positive impact. Inventory deployment is an important issue for supply chains because of the associated cost and related opportunities for increased efficiency. However, it is important to remember that inventory is a necessary ingredient for successful supply chains, but inventory levels must be managed carefully to reduce working capital. As discussed in the next section and subsequent chapters, information technology is a key ingredient for efficiency of inventory management. 1-4d Information The technology and communication systems that are available to organizations today lead to the collection and storage of vast amounts of data, but interestingly enough, organizations may not be taking advantage of the abundant data to develop information systems to Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 19 20 Chapter 1 improve decision making. The accumulation and storage of data unless it is shared horizontally and vertically in the supply chain and is used to make better decisions about inventory, customer service, transportation, etc., is almost useless. Information can be a powerful tool if it is timely, accurate, managed, and shared. It can be a substitute for inventory because it can reduce uncertainty. The latter is one of the major causes of higher inventory levels because it leads to the accumulation of safety stock. The challenge, frequently, is the sharing of information along the supply chain and the discipline to ensure the integrity of the data collected—a big challenge but one with much potential. 1-4e Cost and Value Frequent reference has been made in this chapter to efficiency (cost) and effectiveness (value). A challenge for supply chains is the prevention of suboptimization. In today’s environment, global supply chains compete against global supply chains, which means that the cost and value at the end of the supply chain are critical. This is another reason why supply chain collaboration is so important. All the members of a supply chain need to appreciate and understand the challenges and issues along the supply chain. Consider SAB’s situation. It has to be cognizant of the cost and value being offered by the large retailers who compete against its customers. It must think in terms of making its customers more competitive or attracting different customers where the synergies will lead to better outcomes. SAB’s expertise in warehousing, distribution, and inventory management can be exploited to ensure that their customers are efficient and effective. The supply chain perspective with vertical and horizontal views provides an opportunity to “think outside the box” (see Case 1.2). 1-4f Organizational Relationships Supply chain management emphasizes a horizontal process orientation that cuts across traditional functional silos within organizations and necessitates collaboration with external vendors, customers, transportation companies, 3PLs, and other service providers in the supply chain. In other words, internal collaboration or cooperation with marketing, sales, operations or manufacturing, and accounting or finance are very important as well as collaboration or cooperation with external organizations. Communication is critical to explain the opportunities for system tradeoffs that will make the supply chain more competitive. For example, the vice president of manufacturing may present a rationale for operating plants on a 24/7 basis to lower production costs, but what about the cost of warehousing and inventory of goods that have to be stored until sales are finalized? Looking at manufacturing cost in isolation could lead to higher overall system costs. In Chapter 3, we will explore the concept of systems analysis in more detail and the importance of Sales and Operations Planning (S&OP) will be explored in a later chapter. The internal and external collaborative effort in supply chains is a critical ingredient for success, but it is an ongoing challenge for most organizations. 1-4g Performance Measurement Most organizations have measures of performance or metrics in place to analyze and evaluate their efficiency and progress over different time periods. Sometimes, such measures are used for setting baseline performance objectives or expected outcomes, for example, orders filled and shipped per day. Measurement is important, and more attention will be devoted to this topic in Chapter 5. At this juncture, it is important to recognize that lower-level metrics Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview in an organization must connect directly to the high-level performance measures of the organization and the supply chain, which are usually net profit, return on investment, or assets and cash flow. In some instances, metrics are set that appear logical for the subunit of the organization, but are suboptimal for the overall organization or supply chain. The previous example of the vice president running the plants 24/7 to achieve the lowest possible unit cost of products could have been saving 3 cents per unit on manufacturing, but the extra expense of holding excess inventory could have cost 4 to 5 cents per unit, thus lowering the company’s net profit margin. The warehouse manager who is measured by the cost per cubic foot of units stored will be motivated to fill the warehouse to the ceiling (what is the tradeoff cost?). Consequently, the overall financial metrics of an organization should be the “drivers” of the lower level metrics. 1-4h Technology Technology, as indicated previously, can be viewed as a change driver, but it is also important as a facilitator of change that can provide improved efficiency and effectiveness. The challenge is to evaluate and successfully implement the technology to make the improvements desired. Sometimes technology is, figuratively speaking, thrown at a problem, which usually leads to frustration and then failure. The approach necessary is to analyze and then adjust or change processes, educate the people involved, and then select and implement the technology to facilitate the changes in the processes. Skipping the first two steps is analogous to the frequently cited bad approach to strategic planning—ready, fire, aim. The technology available today is almost overwhelming, but analysis and planning are necessary to achieve the expected outcomes. Technology cannot solve or mitigate problems without appropriate up-front analysis and planning. 1-4i Transportation Management Transportation can be viewed as the glue that helps the supply chain system function. The critical outcomes of the supply chain are “to deliver the right product at the right time, in the right quantity and quality, at the right cost, and to the right destination.” Transportation plays an important role in making these “rights” happen. Another aspect of the importance of transportation is related to some of the strategies that are being used by companies to remain competitive in today’s economy—for example, just-in-time inventory, lean logistics and manufacturing, and scheduled and one-day deliveries, etc. The challenge has been exacerbated by challenges and changes among transportation providers; shortages of drivers, fuel costs, and changes in driver hour regulations, which have led to what some individuals have called a transportation crisis or the “perfect storm.” Transportation has gone from being a readily available commodity to potential users, especially in the 1990s, to today where transportation service can be scarce in some market areas. A major challenge is the maintenance of the existing transportation infrastructure (roads, bridges, ports, waterways, tracks, and airports) and the need to increase capacity to meet the growth in demand. The transportation infrastructure is a major cause of concern for global supply chains especially for water transportation in the port areas. 1-4j Supply Chain Security As indicated, safe and reliable delivery of products to customers is expected of the supply chain. In the past, this was often accepted as a given, but today it is a concern and potential challenge. Globalization has obviously increased the risk of supply chain disruptions. Consequently, organizations must be prepared for potential disruption. Terroristic threats have Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 21 22 Chapter 1 changed some of the planning and preparation for supply chains that now often include some type of scenario analysis that can consider possible threats, assess probabilities, and plan for alternatives. This situation is not likely to improve in the near future, and companies need to be prepared. With global supply chains, vulnerability is exacerbated by distance and complexity. 1-4k Talent Management As supply chains have become more complex and comprehensive, the criticality of having educated and talented supply chain managers has become a top priority in many organizations. Efforts to attract, develop, and maintain an appropriate pool of talent from entry level to executive level is critical to the success of today’s supply chains. At one time, it was assumed that anyone with experience in another functional area of the organization (marketing, manufacturing, accounting, etc.) could easily transition to a position in logistics and/ or supply chain management. While that still does occur, most organizations recognize that the complex and special challenge of twenty-first century supply chains require experience and expertise in this area. Consequently, active recruiting at universities with supply chain and logistic programs is taking place. In addition, educational programs offered for logistics and supply chain managers are increasing in number and popularity. These are offered by universities and professional organizations. There are other examples, but all are indicative of the growing importance and need for talented and experienced managers. SUMMARY Cash flow has become one of the most important measures of financial viability for business organizations in today’s global markets. Supply chains are a very important determinant of improved cash flow since they directly impact cost, revenues, and asset requirements. Supply chains are an important determinant of working capital consumption since they impact inventory, accounts receivable, and cash. Efficient and effective supply chains can free up valuable resources and improve customer fulfillment so as to increase return on investment or assets and improve shareholder value. The accelerated rate of change in the global economy has increased the necessity of continual changes in supply chains or even transformation of the organization to remain competitive. The rate of change has been driven by a set of external forces including but not limited to globalization, technology, organizational consolidation and shifts in power in supply chains, an empowered consumer, and government policy and regulations. The conceptual basis of the supply chain is not new. In fact, organizations have evolved from physical distribution management to logistics management to supply chain management, which are all based upon effective systems analysis. Supply chains are extended enterprises that require managing four flows—products, information, financials (cash), and demand on a collaborative basis. Information systems and technology are an important part of successful supply chains. Supply chain performances should be measured in terms of overall corporate goals for success and supply chain strategies must be consistent with organizational strategies. Supply chains need to focus on the customers at the end of the supply chain and be flexible and responsive. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview Technology is important to facilitate change, but it should follow process change and employee education to address problems and issues appropriately. Transportation management, security, and sustainability have become increasingly important in the twenty-first century because of the political and economic changes that have occurred. Change with the changes, or you will be changed by the changes! STUDY QUESTIONS 1. Globalization and technology developments have led to some significant changes in the global economy. Discuss the importance of such changes to the United States. What is the impact upon supply chains? 2. The consolidation that has developed at the retail end of many supply chains has had an important impact. What changes have occurred in supply chain management because of retail consolidation and the related power shift? 3. Consumers have much more influence in the marketplace today. What factors have led to this “empowered consumer” situation? How has this factor changed supply chains in the last 10 years? Will consumer influence continue, and what will be the impact on supply chains? 4. Describe the three phases of the evolution of the supply chain concept. 5. Why should senior executives be concerned about supply chain management in their organizations? How can effective supply chain management improve the financial viability of their companies? 6. Supply chains encompass four flows. Describe the four flows, and why are they important? How are they related to each other? 7. During the 1980s and 1990s, managing the transportation function in supply chains was recognized as being important but not critical. Has this perspective changed, and, if so, how and why? What special challenges does transportation face in the future? 8. Collaboration is a very critical ingredient for successful supply chains. Why? What types of collaboration are important? What are some of the challenges and issues that need to be addressed? 9. Why is information so important in supply chains? What are the challenges to the successful development and implementation of effective information? What is the role of technology and information management? 10. Describe the major challenges and issues facing supply chains in the future. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 23 24 Chapter 1 CASE 1.1 Lehigh Valley Transport and Logistics Service (LVTLS) LVTLS was established in 1960 by Mason Delp as a local cartage company to provide pickup and delivery service for several interstate trucking companies in the Greater Lehigh Valley area of Pennsylvania. Mason saw signs of change in the area between Allentown and Philadelphia with the improvement of the interstate highway system and the improvements in the Pennsylvania Turnpike System providing North–South and East–West corridors along with other roadway additions and improvements. In addition, there was a definite population sprawl around Philadelphia. The roadway additions and improvements provided transportation access to many communities. Mason’s observations were correct and the area changed from predominantly agricultural to companies producing and manufacturing products and services. One very significant development was the establishment of a number of facilities for producing pharmaceutical products and an agglomeration of companies and services to support that industry. The growth and success of these companies provided the opportunity for Mason Delp to expand his motor carrier services to provide both less-than-truckload and truckload service throughout the mid-Atlantic states. When the motor carriers were deregulated in 1980, Mason established warehousing services in Lansdale, Pennsylvania as a complement to his trucking services. At that point “Logistics” was added to the name of the company. He promoted his son, Paul, to vice president of the warehousing division because of his experience and education. In 2000, Mason retired and Paul became the CEO. The company experienced growth in the warehousing business as the economy was expanding in the early years of the twenty-first century and Paul invested heavily in information systems and technology. However, the great recession of 2008 caused challenges and financial pain for LVTLS because of a downturn in business activity. The investments in information systems and technology mitigated the impact of the downturn. The organization has fully recovered by 2012 but Paul now recognizes the need for cost control and strategic relationships to buffer future economic volatility. He is particularly concerned about the business activity he has with pharmaceutical companies because of the challenges that they are facing. However, Paul recognizes that their challenges may be opportunities for LVTLS to develop collaborative relationships with a number of these companies to help them improve their supply chains management. CASE QUESTIONS 1. Discuss the challenges faced by the pharmaceutical industry. 2. Which of these challenges provide the best opportunity for LVTLS? Why? Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Supply Chain Management: An Overview CASE 1.2 Central Transport, Inc. Jamie Corman, the new president and CEO of Central Transport, recently met with Susan Weber, the current president and CEO of SAB Distribution. Jaime was promoted from CMO at Central Transport to CEO. Her predecessor had worked closely with the former CEO of SAB Distribution when SAB had transformed its operations about 10 years earlier to respond to changes in its competitive marketplace. Now, Ms. Weber was faced with new challenges and again needed the collaboration of Jaime and Central Transport to meet some new challenges. Susan has met extensively with the members of her executive team to develop a tentative plan for modifying the strategic direction of SAB and thwart the buyout of the company by a private investment firm. Susan was convinced that SAB could attract additional retailers in the mid-Atlantic states if it added to and improved its logistics services, namely, warehousing, transportation delivery, and inventory management. However, Susan felt that she needed a major collaborator with experience in these areas. She also felt that it would be better if the collaborator was a company SAB had worked with previously on a successful basis and was willing to take on some new challenges. Susan had decided to approach Wegman’s Food Markets, Inc. as a customer for these new services. Wegman’s was a very successful company in the Northeast that was privately owned and had expanded carefully into new market areas over the last 15 years. It offered more value services to its customers, including an in-store bakery, a restaurant and deli, more take-out options, and in-store cooking demonstrations. Wegman’s primary distribution point for their stores was located in a distribution park in Rochester, New York near their corporate headquarters. With their store expansion into the Washington, D.C. area and points further south into Virginia, they are developing a new distribution park in northwestern Pennsylvania to lower their cost and improve their service. Wegman’s was feeling the pressure to be more price competitive with Walmart and other food chains but also wanted to maintain their unique value added by in-store services for customers. Susan was also convinced that Wegman’s could be price competitive and to continue to increase their in-store services and expand their market opportunities. She felt that they would listen to her proposal to offer expanded services to help their company be more competitive. Now, she wanted Central to join with SAB in making Wegman’s a proposal. Jaime needs your help in developing a response to Susan. CASE QUESTIONS 1. Why and how has the competitive market place for SAB changed in the last five to seven years? 2. What advantages might Central experience in the proposed new venture? 3. What issues would SAB and Central face in the proposed new approach? Source: John J. Coyle, DBA, Used with permission. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 25

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