Reference Material-Introduction to Operations and Supply Chain Management (1).pdf

 RFID Tags- logs and ops mgt https://www.techtarget.c om/searcherp/tip/7-benef...

 RFID Tags- logs and ops mgt https://www.techtarget.c om/searcherp/tip/7-benef its-of-RFID-in-supply-cha in-management-and-logi stics warehouse magt system - WMSes tracking - tracking distribition and storage of goods - stores data about inventory levels, production levels - making product faster- accurate - proudct and bin number scanning/ - helps in optimized route planning - retrival after transport of goods - inventory counting and reconciliation -helps in sales forecasting - helps in automated receipt storage and distribution -helps in lowering manufacturing costs Most business professionals assume that Dell’s “Push-Pull” is merely a supply chain strategy, one that reduces the costs of inventory obsolescence by maintaining minimal inventory counts. However, at its core, it’s an order fulfillment strategy, one that drives the company’s supply chain by allowing it to push customized finished goods to its customer base. Once a customer places an order, their unique requirements pull components and consumables through the company's supply chain. Dell adheres to three essential principles in order to ensure that its approach is a success. -- 1. Minimal Inventory Counts: 2. Custom-Made Finished Goods 3. Strong Direct End-User Customer Service The strategy is predicated on having the company's customer base drive its assembly line and supply chain requirements. This is ultimately why Dell’s approach can be classified as a push-pull strategy. The company pushes several options to customers, options the company controls but ones that allow customers to choose a customized product. The customer’s choice then pulls demand for the computer manufacturer by dictating what parts, components and consumables are needed within its supply chain and assembly line. The customer makes a decision and that decision then determines what inventory is pulled through the supply chain. Apple outsources the manufacturing of its products to companies like Foxconn and Pegatron, which are responsible for assembling iPhones, iPads, and other devices. A small business might outsource its HR functions to a professional employer organization (PEO) like ADP TotalSource or TriNet to handle employee benefits, payroll, and compliance. Cost Savings: Reduces labor and operational costs. Focus on Core Competencies: Allows companies to concentrate on their main business activities. Access to Expertise: Provides access to specialized skills and technologies. Scalability: Offers flexibility to scale operations up or down based on demand. CombinedRatio=( PremiumsEarned ClaimsPayouts+Expenses )×100 Components of the Combined Ratio Claims Payouts (Loss Ratio): This represents the total amount paid out by the insurance company for claims, including any reserve adjustments for future claims. It reflects the cost of the risks underwritten by the insurer. Expenses (Expense Ratio): This includes all the operating expenses incurred by the insurance company, such as underwriting costs, commissions, salaries, marketing, and administrative expenses. Premiums Earned: This is the total revenue generated from the premiums charged to policyholders for the coverage provided. Interpretation of the Combined Ratio Combined Ratio < 100%: The company is operating at an underwriting profit. This means that the premiums earned are sufficient to cover claims payouts and expenses, with some profit left over. Combined Ratio = 100%: The company is breaking even on its underwriting operations. All premiums earned are used to cover claims and expenses, with no profit or loss. Combined Ratio > 100%: The company is operating at an underwriting loss. In this case, the premiums earned are not sufficient to cover claims payouts and expenses, resulting in a loss on underwriting activities. smart tactic  1 쏋 쏋 쏋 Understanding the Supply Chain LEARNING OBJECTIVES After reading this chapter, you will be able to 1. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm. 2. Identify the three key supply chain decision phases and explain the significance of each one. 3. Describe the cycle and push/pull views of a supply chain. 4. Classify the supply chain macro processes in a firm. In this chapter, we provide a conceptual understanding of what a supply chain is and the various issues that need to be considered when designing, planning, or operating a supply chain. We discuss the significance of supply chain decisions and supply chain performance for the success of a firm. We also provide several examples from different industries to emphasize the variety of supply chain issues that companies need to consider at the strategic, plan- ning, and operational levels. 1.1 WHAT IS A SUPPLY CHAIN? A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even cus- tomers themselves. Within each organization, such as a manufacturer, the supply chain includes all functions involved in receiving and filling a customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance, and customer service. Consider a customer walking into a Wal-Mart store to purchase detergent. The supply chain begins with the customer and his or her need for detergent. The next stage of this supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart stocks its shelves using inventory that may have been supplied from a finished-goods warehouse or a distributor using trucks supplied by a third party. The distributor in turn is stocked by the manufac- turer (say, Procter & Gamble [P&G] in this case). The P&G manufacturing plant receives raw material from a variety of suppliers, who may themselves have been supplied by lower-tier suppliers. For example, packaging material may come from Pactiv Corporation (formerly Tenneco Packaging) while Pactiv receives raw materials to manufacture the packaging from other suppliers. This supply chain is illustrated in Figure 1-1, with the arrows cor- responding to the direction of physical product flow. 1 2 Chapter 1 Understanding the Supply Chain Timber Paper Pactiv Company Manufacturer Corporation Wal-Mart P&G or Other Wal-Mart or Third Customer Manufacturer Store Party DC Chemical Plastic Manufacturer Producer FIGURE 1-1 Stages of a Detergent Supply Chain A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages. In our example, Wal-Mart provides the product, as well as pricing and availability information, to the customer. The customer transfers funds to Wal-Mart. Wal-Mart conveys point-of-sales data as well as replenishment orders to the warehouse or dis- tributor, who transfers the replenishment order via trucks back to the store. Wal-Mart transfers funds to the distributor after the replenishment. The distributor also provides pricing information and sends delivery schedules to Wal-Mart. Wal-Mart may send back packaging material to be recycled. Similar information, material, and fund flows take place across the entire supply chain. In another example, when a customer makes a purchase online from Dell Computer, the supply chain includes, among others, the customer, Dell’s Web site, the Dell assembly plant, and all of Dell’s suppliers and their suppliers. The Web site provides the customer with information regarding pricing, product variety, and product availability. Having made a product choice, the customer enters the order information and pays for the product. The customer may later return to the Web site to check the status of the order. Stages further up the supply chain use customer order information to fill the request. That process involves an additional flow of information, product, and funds among various stages of the supply chain. These examples illustrate that the customer is an integral part of the supply chain. In fact, the primary purpose of any supply chain is to satisfy customer needs and, in the process, gener- ate profit for itself. The term supply chain conjures up images of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. This is certainly part of the supply chain, but it is also important to visualize information, funds, and product flows along both directions of this chain. The term supply chain may also imply that only one player is involved at each stage. In reality, a manufacturer may receive material from several suppliers and then supply several distributors. Thus, most supply chains are actually networks. It may be more accurate to use the term supply network or supply web to describe the structure of most supply chains, as shown in Figure 1-2. A typical supply chain may involve a variety of stages, including the following: Customers Retailers Wholesalers/distributors Manufacturers Component/raw material suppliers Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary.  Chapter 1 Understanding the Supply Chain 3 Supplier Manufacturer Distributor Retailer Customer Supplier Manufacturer Distributor Retailer Customer Supplier Manufacturer Distributor Retailer Customer FIGURE 1-2 Supply Chain Stages Each stage in Figure 1-2 need not be present in a supply chain. As discussed in Chapter 4, the appro- priate design of the supply chain depends on both the customer’s needs and the roles played by the stages involved. For example, Dell has two supply chain structures that it uses to serve its customers. For its corporate clients and also some individuals who want a customized personal computer (PC), Dell builds to order; that is, a customer order initiates manufacturing at Dell. For these customers, Dell does not have a separate retailer, distributor, or wholesaler in the supply chain. Since 2007, Dell has also sold its PCs through Wal-Mart in the United States and the GOME Group, China’s largest elec- tronics retailer. Both Wal-Mart and the GOME Group carry Dell machines in inventory. This supply chain thus contains an extra stage (the retailer) compared to the direct sales model also used by Dell. In the case of other retail stores, the supply chain may also contain a wholesaler or distributor between the store and the manufacturer. 1.2 THE OBJECTIVE OF A SUPPLY CHAIN The objective of every supply chain should be to maximize the overall value generated. The value (also known as supply chain surplus) a supply chain generates is the difference between what the value of the final product is to the customer and the costs the supply chain incurs in filling the customer’s request. Supply Chain Surplus = Customer Value – Supply Chain Cost The value of the final product may vary for each customer and can be estimated by the maximum amount the customer is willing to pay for it. The difference between the value of the product and its price remains with the customer as consumer surplus. The rest of the supply chain surplus becomes supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain. For example, a customer pur- chasing a wireless router from Best Buy pays $60, which represents the revenue the supply chain receives. Customers who purchase the router clearly value it at or above $60. Thus, part of the supply chain surplus is left with the customer as consumer surplus. The rest stays with the supply chain as profit. Best Buy and other stages of the supply chain incur costs to convey information, produce components, store them, transport them, transfer funds, and so on. The difference between the $60 that the customer paid and the sum of all costs incurred by the supply chain to produce and distribute the router represents the supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages and inter- mediaries. The higher the supply chain profitability, the more successful is the supply chain. 4 Chapter 1 Understanding the Supply Chain For most profit-making supply chains, the supply chain surplus will be strongly correlated with profits. Supply chain success should be measured in terms of supply chain profitability and not in terms of the profits at an individual stage. (In subsequent chapters, we see that a focus on profitability at individual stages may lead to a reduction in overall supply chain profits.) A focus on growing the supply chain surplus pushes all members of the supply chain toward growing the size of the overall pie. Having defined the success of a supply chain in terms of supply chain profitability, the next logical step is to look for sources of value, revenue, and cost. For any supply chain, there is only one source of revenue: the customer. The value obtained by a customer purchasing detergent at Wal-Mart depends upon several factors, including the functionality of the detergent, how far the customer has to travel to Wal-Mart, and the likelihood of finding the detergent in stock. The cus- tomer is the only one providing positive cash flow for the Wal-Mart supply chain. All other cash flows are simply fund exchanges that occur within the supply chain, given that different stages have different owners. When Wal-Mart pays its supplier, it is taking a portion of the funds the customer provides and passing that money on to the supplier. All flows of information, product, or funds generate costs within the supply chain. Thus, the appropriate management of these flows is a key to supply chain success. Effective supply chain management involves the management of supply chain assets and product, information, and fund flows to maximize total supply chain surplus. A growth in supply chain surplus increases the size of the total pie, allowing contributing members of the supply chain to benefit. In this book, we have a strong focus on analyzing all supply chain decisions in terms of their impact on the supply chain surplus. These decisions and their impact can vary for a wide variety of reasons. For instance, consider the difference in the supply chain structure for fast-moving consumer goods observed in the United States and India. U.S. distributors play a much smaller role in this supply chain compared to their Indian counterparts. We argue that the difference in supply chain structure can be explained by the impact a distributor has on the supply chain surplus in the two countries. Retailing in the United States is largely consolidated, with large chains buying consumer goods from most manufacturers. This consolidation gives retailers sufficient scale that the intro- duction of an intermediary such as a distributor does little to reduce costs and may actually increase costs because of an additional transaction. In contrast, India has millions of small retail outlets. The small size of Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent replenishment—an order can be compared with the weekly grocery shopping for a family in the United States. The only way for a manufacturer to keep transportation costs low is to bring full truckloads of product close to the market and then distribute locally using “milk runs” with smaller vehicles. The presence of an intermediary who can receive a full truckload shipment, break bulk, and then make smaller deliveries to the retailers is crucial if transportation costs are to be kept low. Most Indian distributors are one-stop shops, stocking everything from cooking oil to soaps and detergents made by a variety of manufacturers. Besides the convenience provided by one-stop shopping, distributors in India are also able to reduce transportation costs for outbound delivery to the retailer by aggregating products across multiple manufacturers during the delivery runs. Distributors in India also handle collections, because their cost of collection is significantly lower than that of each manufacturer collecting from retailers on its own would be. Thus, the important role of distributors in India can be explained by the growth in supply chain surplus that results from their presence. The supply chain surplus argument implies that as retail- ing in India begins to consolidate, the role of distributors will diminish. 1.3 THE IMPORTANCE OF SUPPLY CHAIN DECISIONS There is a close connection between the design and management of supply chain flows (product, information, and funds) and the success of a supply chain. Wal-Mart, Amazon, and Seven-Eleven Japan are examples of companies that have built their success on superior design, planning, and  Chapter 1 Understanding the Supply Chain 5 operation of their supply chain. In contrast, the failure of many online businesses such as Webvan can be attributed to weaknesses in their supply chain design and planning. The rise and subsequent fall of the bookstore chain Borders illustrates how a failure to adapt its supply chain to a changing environment and customer expectations hurt its performance. Dell Computer is another example of a company that had to revise its supply chain design in response to changing technology and customer needs. We discuss these examples later in this section. Wal-Mart has been a leader at using supply chain design, planning, and operation to achieve success. From its beginning, the company invested heavily in transportation and information infra- structure to facilitate the effective flow of goods and information. Wal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost-effective manner. Frequent replenishment allows stores to match supply and demand more effectively than the competition. Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down costs and improve product availability. The results are impressive. In its 2010 annual report, the company reported a net income of more than $14.3 billion on revenues of about $408 billion. These are dramatic results for a company that reached annual sales of only $1 billion in 1980. The growth in sales represents an annual compounded growth rate of more than 20 percent. Seven-Eleven Japan is another example of a company that has used excellent supply chain design, planning, and operation to drive growth and profitability. It has used a very responsive replenishment system along with an outstanding information system to ensure that products are available at each of its convenience stores to match customer needs. Its responsiveness allows it to change the merchandising mix at each store by time of day to precisely match customer demand. As a result, the company has grown from sales of 1 billion yen in 1974 to almost 3 trillion yen in 2009 with profits in 2009 totaling 164 billion yen. The failure of many online businesses such as Webvan and Kozmo can be attributed to their inability to design appropriate supply chains or manage supply chain flows effectively. Webvan designed a supply chain with large warehouses in several major cities in the United States, from which groceries were delivered to customers’ homes. This supply chain design could not compete with traditional supermarket supply chains in terms of cost. Traditional supermarket chains bring product to a supermarket close to the consumer using full truckloads, resulting in very low transportation costs. They turn their inventory relatively fast and let the customer perform most of the picking activity in the store. In contrast, Webvan turned its inventory marginally faster than supermarkets but incurred much higher transportation costs for home delivery and high labor costs to pick customer orders. The result was a company that folded in 2001 within two years of a very successful initial public offering. As the experience of Borders illustrates, a failure to adapt supply chains to a changing environment can significantly hurt performance. Borders, along with Barnes & Noble, dominated the selling of books and music in the 1990s by implementing the superstore concept. Compared to small local bookstores that dominated the industry prior to that, Borders was able to offer greater variety (about 100,000 titles at superstores relative to fewer than 10,000 titles at a local bookstore) to customers at a lower cost by aggregating operations in large stores. This allowed the company to achieve higher inventory turns than local bookstores with lower operating costs per dollar of sales. In 2004, Borders achieved sales of almost $4 billion with profits of $132 million. Its model, however, was already under attack with the growth of Amazon, which offered much greater variety than Borders at lower cost by selling online and stocking its inventories in a few distribution centers. Borders inability to adapt its supply chain to compete with Amazon led to a rapid decline. By 2009, sales had dropped to $2.8 billion and the company lost $109 million that year. Dell is another example of a company that enjoyed tremendous success based on its supply chain design, planning, and operation but then had to adapt its supply chain in response to shifts in technology and customer expectations. Between 1993 and 2006, Dell experienced unprecedented growth of both revenue and profits by structuring a supply chain 6 Chapter 1 Understanding the Supply Chain Key Point Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm. To stay competitive, supply chains must adapt to changing technology and customer expectations. that provided customers with customized PCs quickly and at reasonable cost. By 2006, Dell had a net income of more than $3.5 billion on revenues of just over $56 billion. This success was based on two key supply chain features that supported rapid, low-cost customization. The first was Dell’s decision to sell directly to the end customer, bypassing distributors and retailers. The second key aspect of Dell’s supply chain was the centralization of manufactur- ing and inventories in a few locations where final assembly was postponed until the customer order arrived. As a result, Dell was able to provide a large variety of PC configurations while keeping low levels of component inventories. In spite of this tremendous success, the changing marketplace presented some new challenges for Dell. Whereas Dell’s supply chain was well suited for highly customized PCs, the market shifted to lower levels of customization. Given the growing power of hardware, customers were satisfied with a few model types. Dell reacted by adjusting its supply chain with regard to both direct selling and building to order. The company started selling its PCs through retail chains such as Wal-Mart in the United States and GOME in China. It also out- sourced a large fraction of its assembly to low-cost locations, effectively building to stock rather than to customer order. Unlike Borders, Dell is making a significant effort to adapt its supply chain to changing times. It remains to be seen whether these changes will improve Dell’s performance. In the next section, we categorize supply chain decision phases based on the frequency with which they are made and the time frame they take into account. 1.4 DECISION PHASES IN A SUPPLY CHAIN Successful supply chain management requires many decisions relating to the flow of information, product, and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. As a result, each category of decisions must consider uncertainty over the decision horizon. 1. Supply Chain Strategy or Design: During this phase, a company decides how to structure the supply chain over the next several years. It decides what the chain’s configuration will be, how resources will be allocated, and what processes each stage will perform. Strategic decisions made by companies include whether to outsource or perform a supply chain function in-house, the location and capacities of production and warehousing facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs, and the type of information system to be utilized. PepsiCo Inc.’s decision in 2009 to purchase two of its largest bottlers is a supply chain design or strategic decision. A firm must ensure that the supply chain configuration supports its strategic objec- tives and increases the supply chain surplus during this phase. As the PepsiCo CEO announced in a news release on August 4, “while the existing model has served the system very well, the fully integrated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to  Chapter 1 Understanding the Supply Chain 7 changes in the marketplace.” Supply chain design decisions are typically made for the long term (a matter of years) and are expensive to alter on short notice. Consequently, when companies make these decisions, they must take into account uncertainty in anticipated market conditions over the next few years. 2. Supply Chain Planning: For decisions made during this phase, the time frame considered is a quarter to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done. The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints established during the strategic or design phase. Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of demand and other factors such as costs and prices in different markets. Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions. For example, steel giant ArcelorMittal’s decisions regarding markets supplied by a production facility and target production quantities at each location are classified as planning decisions. Planning establishes parameters within which a supply chain will function over a specified period of time. In the planning phase, companies must include uncertainty in demand, exchange rates, and competition over this time horizon in their decisions. Given a shorter time frame and better forecasts than in the design phase, companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize performance. As a result of the planning phase, companies define a set of operating policies that govern short-term operations. 3. Supply Chain Operation: The time horizon here is weekly or daily. During this phase, companies make decisions regarding individual customer orders. At the operational level, supply chain configuration is considered fixed, and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders. Because operational decisions are being made in the short term (minutes, hours, or days), there is less uncertainty about demand information. Given the constraints established by the configura- tion and planning policies, the goal during the operation phase is to exploit the reduction of uncertainty and optimize performance. The design, planning, and operation of a supply chain have a strong impact on overall prof- itability and success. It is fair to state that a large part of the success of firms such as Wal-Mart and Seven-Eleven Japan can be attributed to their effective supply chain design, planning, and operation. In later chapters, we develop concepts and present methodologies that can be used at each of the three decision phases described earlier. Most of our discussion addresses the supply chain design and planning phases. Key Point Supply chain decision phases may be categorized as design, planning, or operational, depending on the time frame during which the decisions made apply. Design decisions constrain or enable good planning, which in turn constrains or enables effective operation. 8 Chapter 1 Understanding the Supply Chain 1.5 PROCESS VIEWS OF A SUPPLY CHAIN A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two ways to view the processes performed in 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 a 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. Cycle View of Supply Chain Processes Given the five stages of a supply chain as shown in Figure 1-2, all supply chain processes can be broken down into the following four process cycles, as shown in Figure 1-3: Customer order cycle Replenishment cycle Manufacturing cycle Procurement cycle Each cycle occurs at the interface between two successive stages of the supply chain. Not every supply chain will have all four cycles clearly separated. For example, a grocery supply chain in which a retailer stocks finished-goods inventories and places replenishment orders with a dis- tributor is likely to have all four cycles separated. Dell, in contrast, bypasses the retailer and distributor when it sells directly to customers. Customer Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle FIGURE 1-3 Supply Chain Supplier Process Cycles  Chapter 1 Understanding the Supply Chain 9 Buyer returns reverse Supplier stage flows to supplier or markets product third party Buyer stage places Buyer stage order receives supply Supplier stage Supplier stage receives order supplies order FIGURE 1-4 Subprocesses in Each Supply Chain Process Cycle Each cycle consists of six subprocesses as shown in Figure 1-4. Each cycle starts with the supplier marketing the product to customers. A buyer then places an order that is received by the supplier. The supplier supplies the order, which is received by the buyer. The buyer may return some of the product or other recycled material to the supplier or a third party. The cycle of activities then begins all over again. Depending on the transaction in question, the subprocesses in Figure 1-4 can be applied to the appropriate cycle. When customers shop online at Amazon, they are part of the customer order cycle—with the customer as the buyer and Amazon as the supplier. In contrast, when Amazon orders books from a distributor to replenish its inventory, it is part of the replenishment cycle— with Amazon as the buyer and the distributor as the supplier. Within each cycle, the goal of the buyer is to ensure product availability and to achieve economies of scale in ordering. The supplier attempts to forecast customer orders and reduce the cost of receiving the order. The supplier then works to fill the order on time and improve efficiency and accuracy of the order fulfillment process. The buyer then works to reduce the cost of the receiving process. Reverse flows are managed to reduce cost and meet environmental objectives. Even though each cycle has the same basic subprocesses, there are a few important dif- ferences among the cycles. In the customer order cycle, demand is external to the supply chain and thus uncertain. In all other cycles, order placement is uncertain but can be projected based on policies followed by the particular supply chain stage. For example, in the procurement cycle, a tire supplier to an automotive manufacturer can predict tire demand precisely once the production schedule at the manufacturer is known. The second difference across cycles relates to the scale of an order. Whereas a customer buys a single car, the dealer orders multiple cars at a time from the manufacturer, and the manufacturer, in turn, orders an even larger quantity of tires from the supplier. As we move from the customer to the supplier, the number of indi- vidual orders declines and the size of each order increases. Thus, sharing of information and operating policies across supply chain stages becomes more important as we move further from the end customer. A cycle view of the supply chain is useful when considering operational decisions because it clearly specifies the roles of each member of the supply chain. The detailed process description of a supply chain in the cycle view forces a supply chain designer to consider the infrastructure required to support these processes. The cycle view is useful, for example, when setting up infor- mation systems to support supply chain operations. 10 Chapter 1 Understanding the Supply Chain Key Point A cycle view of the supply chain clearly defines the processes involved and the owners of each process. This view is useful when considering operational decisions because it specifies the roles and responsi- bilities of each member of the supply chain and the desired outcome for each process. Push/Pull View of Supply Chain Processes All processes in a supply chain fall into one of two categories depending on the timing of their execution relative to end customer demand. With pull processes, execution is initiated in response to a customer order. With push processes, execution is initiated in anticipation of customer orders based on a forecast. Pull processes may also be referred to as reactive processes because they react to customer demand. Push processes may also be referred to as speculative processes because they respond to speculated (or forecasted) rather than actual demand. The push/pull boundary in a supply chain separates push processes from pull processes as shown in Figure 1-5. Push processes operate in an uncertain environment because customer demand is not yet known. Pull processes operate in an environment in which customer demand is known. They are, however, often constrained by inventory and capacity decisions that were made in the push phase. Let us compare a make-to-stock environment like that of L. L. Bean and a build-to-order environment like that of Dell to compare the push/pull view and the cycle view. L. L. Bean executes all processes in the customer order cycle after the customer order arrives. All processes that are part of the customer order cycle are thus pull processes. Order fulfillment takes place from product in inventory that is built up in anticipation of customer orders. The goal of the replenishment cycle is to ensure product availability when a customer order arrives. All processes in the replenishment cycle are performed in anticipation of demand and are thus push processes. The same holds true for processes in the manufacturing and procure- ment cycles. In fact, raw material such as fabric is often purchased six to nine months before customer demand is expected. Manufacturing itself begins three to six months before the point of sale. The processes in the L. L. Bean supply chain break up into pull and push processes, as shown in Figure 1-6. Push/Pull Boundary Push Processes Pull Processes Process Process Process Process Process Process Process 1 2 3 k k1 N1 N Customer Order Arrives FIGURE 1-5 Push/Pull View of the Supply Chain  Chapter 1 Understanding the Supply Chain 11 Customer Customer PULL Order Cycle PROCESSES Customer Order Cycle Customer Order L. L. Bean Arrives Replenishment and Manufacturing Cycle Procurement, PUSH Manufacturing, PROCESSES Manufacturer Replenishment Cycles Procurement Cycle Supplier FIGURE 1-6 Push/Pull Processes for the L. L. Bean Supply Chain For the PCs it sells through Wal-Mart, Dell’s order cycles and its push/pull boundary look like that of L. L. Bean with Wal-Mart as the retailer instead of L. L. Bean and Dell as the manufacturer. The situation is different when Dell builds customized computers to order for its customers. In this case, the arrival of a customer order triggers production of the product. The manufacturing cycle is thus part of the customer order fulfillment process in the customer order cycle. There are effectively only two cycles in the Dell supply chain for customized PCs: (1) a customer order and manufacturing cycle and (2) a procurement cycle, as shown in Figure 1-7. All processes in the customer order and manufacturing cycle at Dell are thus classified as pull processes because they are initiated by customer order arrival. Dell, however, does not place component orders in response to a customer order. Inventory is replenished in anticipation Customer PULL Order and PROCESSES Manufacturing Cycle Customer Order and Manufacturing Cycle Customer Order Arrives Procurement Procurement PUSH Cycle Cycle PROCESSES FIGURE 1-7 Push/Pull Processes for Dell Supply Chain for Customized PCs 12 Chapter 1 Understanding the Supply Chain Key Point A push/pull view of the supply chain categorizes processes based on whether they are initiated in response to a customer order (pull) or in anticipation of a customer order (push). This view is useful when considering strategic decisions relating to supply chain design. of customer demand. All processes in the procurement cycle for Dell are thus classified as push processes, because they are in response to a forecast. For build-to-order PCs, the processes in the Dell supply chain break up into pull and push processes as shown in Figure 1-7. A push/pull view of the supply chain is very useful when considering strategic decisions relating to supply chain design. The goal is to identify an appropriate push/pull boundary such that the supply chain can match supply and demand effectively. The paint industry provides another excellent example of the gains from suitably adjust- ing the push/pull boundary. The manufacture of paint requires production of the base, mixing of suitable colors, and packing. Until the 1980s, all these processes were performed in large factories, and paint cans were shipped to stores. These qualified as push processes, as they were performed to a forecast in anticipation of customer demand. Given the uncertainty of demand, the paint supply chain had great difficulty matching supply and demand. In the 1990s, paint supply chains were restructured such that mixing of colors was done at retail stores after customers placed their orders. In other words, color mixing was shifted from the push to the pull phase of the supply chain even though base preparation and packing of cans were still performed in the push phase. The result is that customers are always able to get the color of their choice, while total paint inventories across the supply chain have declined. Supply Chain Macro Processes in a Firm All supply chain processes discussed in the two process views and throughout this book can be classified into the following three macro processes, as shown in Figure 1-8: 1. Customer Relationship Management (CRM): all processes that focus on the interface between the firm and its customers 2. Internal Supply Chain Management (ISCM): all processes that are internal to the firm 3. Supplier Relationship Management (SRM): all processes that focus on the interface between the firm and its suppliers Supplier Firm Customer SRM ISCM CRM Source Strategic Planning Market Negotiate Demand Planning Price Buy Supply Planning Sell Design Collaboration Fulfillment Call Center Supply Collaboration Field Service Order Management FIGURE 1-8 Supply Chain Macro Processes  Chapter 1 Understanding the Supply Chain 13 Key Point Within a firm, all supply chain activities belong to one of three macro processes: CRM, ISCM, and SRM. Integration among the three macro processes is crucial for successful supply chain management. These three macro processes manage the flow of information, product, and funds required to generate, receive, and fulfill a customer request. The CRM macro process aims to generate customer demand and facilitate the placement and tracking of orders. It includes processes such as marketing, pricing, sales, order management, and call center management. At an industrial distributor such as W.W. Grainger, CRM processes include the preparation of catalogs and other marketing materials, management of the Web site, and management of the call center that takes orders and provides service. The ISCM macro process aims to fulfill demand generated by the CRM process in a timely manner and at the lowest possible cost. ISCM processes include the planning of internal production and storage capacity, preparation of demand and supply plans, and fulfillment of actual orders. At W.W. Grainger, ISCM processes include planning for the location and size of warehouses; deciding which products to carry at each warehouse; preparing inventory management policies; and picking, packing, and shipping actual orders. The SRM macro process aims to arrange for and manage supply sources for various goods and services. SRM processes include the evaluation and selection of suppliers, negotiation of supply terms, and communication regarding new products and orders with suppliers. At W.W. Grainger, SRM processes include the selection of suppliers for various products, negotiation of pricing and delivery terms with suppliers, sharing of demand and supply plans with suppliers, and the place- ment of replenishment orders. Observe that all three macro processes are aimed at serving the same customer. For a supply chain to be successful, it is crucial that the three macro processes are well integrated. The impor- tance of this integration is discussed in Chapters 10 and 17. The organizational structure of the firm has a strong influence on the success or failure of the integration effort. In many firms, marketing is in charge of the CRM macro process, manufacturing handles the ISCM macro process, and purchasing oversees the SRM macro process—with little communication among them. It is not unusual for marketing and manufacturing to have different forecasts when making their plans. This lack of integration hurts the supply chain’s ability to match supply and demand effectively, leading to dissatisfied customers and high costs. Thus, firms should structure a supply chain organization that mirrors the macro processes and ensures good communication and coordi- nation among the owners of processes that interact with one another. 1.6 EXAMPLES OF SUPPLY CHAINS In this section, we consider several supply chains and raise questions that must be answered during their design, planning, and operation phases. In later chapters, we discuss concepts and present methodologies that can be used to answer these questions. Gateway and Apple: Two Different Journeys into Retailing Gateway was founded in 1985 as a direct sales manufacturer of PCs with no retail footprint. In 1996, Gateway was one of the first PC manufacturers to start selling PCs online. After many years of selling its PCs without a retail infrastructure, Gateway introduced an aggressive strategy of opening Gateway retail stores throughout the United States in the late 1990s. Its stores carried no finished-goods inventory and were primarily focused on helping customers select the right configuration to purchase. All PCs were manufactured to order and shipped to the customer from one of the assembly plants. 14 Chapter 1 Understanding the Supply Chain Initially, investors rewarded Gateway for this strategy and raised the stock price to more than $80 per share in late 1999. However, this success did not last. By November 2002, Gateway shares had dropped to less than $4, and Gateway was losing a significant amount of money. By April 2004, Gateway had closed all its retail outlets and reduced the number of configurations offered to customers. In August 2007, Gateway was purchased by Taiwan’s Acer for a price of $710 million. By 2010, Gateway computers were sold through more than 20 different retail outlets including Best Buy and Costco. As you can imagine, this was quite a transition for the company to experience. In contrast, Apple has enjoyed tremendous success since it opened its first retail store in 2001. By 2010, Apple had more than 300 stores worldwide, and retail sales represented about 15 percent of the company’s total net sales. Unlike Gateway, Apple has always carried product inventory at its stores. Given its product designs, Apple has relatively little variety that it carries in its stores. Each of its stores has a relatively high level of sales with its Regent Street store in London reaching sales of 2,000 pounds per square foot in 2009. In the 2010 annual report, Apple listed retail sales totaling almost $10 billion, a growth of 47 percent relative to the previous year. The following questions highlight supply chain decisions that have a bearing on the differ- ence between Apple’s and Gateway’s performance: 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. Should a firm with an investment in retail stores carry any finished-goods inventory? What are the characteristics of products that are most suitable to be carried in finished-goods inventory? 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? Zara: Apparel Manufacturing and Retail Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer. In 2009, Inditex reported sales of about 11 billion euros from more than 4,700 retail out- lets in about 76 countries. In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks. This speed allows Zara to introduce new designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display match customer preferences much more closely than the competition. The result is that Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition. Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the manufacturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand are sourced out of Europe, whereas products that are more predictable are sourced from its Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house production occur after the sales season starts. This compares with less than 20 percent production after the start of a sales season for a typical retailer. This responsiveness and the postponement of decisions until after trends are known allow Zara to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions. In 2009, Inditex distributed to stores all over the world from eight distribution centers located in Spain. The group claimed an average delivery time of 24 hours for European stores and up to a maximum of 48 hours for stores in America or Asia from the time the order was  Chapter 1 Understanding the Supply Chain 15 received in the distribution center (DC) to the time it was delivered to the stores. Shipments from the DCs to stores were made several times a week. This allowed store inventory to closely match customer demand. The following questions raise supply chain issues that are central to Zara’s strategy and success: 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? How does the frequency of replenishment affect the design of its distribution system? 5. Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail sales? W.W. Grainger and McMaster-Carr: MRO Suppliers W.W. Grainger and McMaster-Carr sell maintenance, repair, and operations (MRO) products. Both companies have catalogs and Web pages through which orders can be placed. W.W. Grainger also has several hundred stores throughout the United States. Customers can walk into a store, call in an order, or place it via the Web. W.W. Grainger orders are either shipped to the customer or picked up by the customer at one of its stores. McMaster-Carr, on the other hand, ships almost all its orders (though a few customers near its DCs do pick up their own orders). W.W. Grainger has nine DCs that both replenish stores and fill customer orders. McMaster has five DCs from which all orders are filled. Neither McMaster nor W.W. Grainger manufactures any product. They primarily serve the role of a distributor or retailer. Their success is largely linked to their supply chain management ability. Both firms offer several hundred thousand products to their customers. Grainger stocks about 200,000 stock-keeping units (SKU), whereas McMaster carries about 500,000. Grainger also provides many other products that it does not stock direct from its suppliers. Both firms face the following strategic and operational issues: 1. How many DCs should be built and where should they be located? 2. How should product stocking be managed at the DCs? 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 DCs in terms of order fulfillment? What should be done if an order cannot be completely filled from a DC? Should there be specified backup locations? How should they be selected? 6. How should replenishment of inventory be managed at the various stocking locations? 7. How should Web orders be handled relative to the existing business? Is it better to integrate the Web business with the existing business or to set up separate distribution? 8. What transportation modes should be used for order fulfillment and stock replenishment? Toyota: A Global Auto Manufacturer Toyota Motor Corporation is Japan’s top auto manufacturer and has experienced significant growth in global sales over the past two decades. A key issue facing Toyota is the design of its global production and distribution network. Part of Toyota’s global strategy is to open factories in every market it serves. Toyota must decide what the production capability of each of the 16 Chapter 1 Understanding the Supply Chain factories will be, as this has a significant impact on the desired distribution system. At one extreme, each plant can be equipped only for local production. At the other extreme, each plant is capable of supplying every market. Prior to 1996, Toyota used specialized local factories for each market. After the Asian financial crisis in 1996/1997, Toyota redesigned its plants so that it could also export to markets that remain strong when the local market weakens. Toyota calls this strategy “global complementation.” Whether to be global or local is also an issue for Toyota’s parts plants and product design. Should parts plants be built for local production or should there be few parts plants globally that supply multiple assembly plants? Toyota has worked hard to increase commonality in parts used around the globe. While this helped the company lower costs and improve parts availability, common parts caused significant difficulty when one of the parts had to be recalled. In 2009, Toyota had to recall about 12 million cars using common parts across North America, Europe and Asia causing significant damage to the brand as well as the finances. Any global manufacturer like Toyota must address the following questions regarding the configuration and capability of the supply chain: 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 specific contingency markets? 3. How should markets be allocated to plants and how frequently should this allocation be revised? 4. What kind of flexibility should be built into the distribution system? 5. How should this flexible investment be valued? 6. What actions may be taken during product design to facilitate this flexibility? Amazon: Online Sales Amazon sells books, music, and many other items over the Internet and is one of the pioneers of online consumer sales. Amazon, based in Seattle, Washington, started by filling all orders using books purchased from a distributor in response to customer orders. As it grew, the company added warehouses, allowing it to react more quickly to customer orders. In 2009, Amazon had about 20 warehouses in the United States and another 30 in the rest of the world. It uses the U.S. Postal Service and other package carriers such as UPS and FedEx to send products to customers. Outbound shipping-related costs at Amazon in 2009 were almost $2 billion. With the Kindle, Amazon has worked hard to increase sales of digital books. As of 2009, Amazon offered more than 460,000 books in digital form. The company has also added a significant amount of audio and video content for sale in digital form. Amazon has continued to expand the set of products that it sells online. Besides books and music, Amazon has added many product categories such as toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest acquisitions was Zappos, a leader in online shoe sales. This acquisition added a lot of product variety. According to the Amazon annual report, this required creating 121,000 product descriptions and uploading more than 2.2 million images to the Web site! In 2010, another interesting acquisition by Amazon was diapers.com. Unlike Zappos, this acquisition added little variety but considerable shipping volumes. Several questions arise concerning how Amazon is structured and the product categories it continues to add: 1. Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located? 2. What advantages does selling books via the Internet provide over a traditional bookstore? Are there any disadvantages to selling via the Internet? 3. Should Amazon stock every product it sells? 4. What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage?  Chapter 1 Understanding the Supply Chain 17 5. What advantages/disadvantages does the online channel enjoy in the sale of shoes /diapers relative to a retail store? 6. For what products does the online channel offer the greater advantage relative to retail stores? What characterizes these products? 1.7 SUMMARY OF LEARNING OBJECTIVES 1. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm. The goal of a supply chain should be to maximize overall supply chain sur- plus. 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 grows 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. 2. Identify the three key supply chain decision phases and explain the significance of each one. Supply chain decisions may be characterized as strategic (design), planning, or operational, depending on the time period during which they apply. Strategic decisions relate to supply chain configuration. These decisions have a long-term impact lasting several years. Planning decisions cover a period of a few months to a year and include decisions such as production plans, subcontracting, and promotions over that period. Operational decisions span from minutes to days and include sequencing production and filling specific orders. Strategic decisions define the constraints for planning decisions, and planning decisions define the con- straints for operational decisions. 3. Describe the cycle and push/pull views of a supply chain. A cycle view of a supply chain 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 process- es are performed in response to a customer order, whereas push processes are performed in an- ticipation of customer orders. 4. Classify the supply chain macro processes in a firm. All supply chain processes can be classified into three macro processes based on whether they are at the customer or supplier interface or are internal to the firm. The CRM 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 ISCM 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 in- terface between the firm and its suppliers that work to evaluate and select suppliers and then source goods and services from them. Discussion Questions 1. Consider the purchase of a can of soda at a convenience store. this supply chain and the location of the push/pull Describe the various stages in the supply chain and the different boundary. flows involved. 5. Consider the supply chain involved when a customer orders a 2. Why should a firm such as Dell take into account total supply book from Amazon. Identify the push/pull boundary and two chain profitability when making decisions? processes each in the push and pull phases. 3. What are some strategic, planning, and operational decisions 6. In what way do supply chain flows affect the success or that must be made by an apparel retailer such as The Gap? failure of a firm such as Amazon? List two supply chain 4. Consider the supply chain involved when a customer decisions that have a significant impact on supply chain purchases a book at a bookstore. Identify the cycles in profitability. 18 Chapter 1 Understanding the Supply Chain Bibliography Cavinato, Joseph L. “What’s Your Supply Chain Type?” Supply Magretta, Joan. “The Power of Virtual Integration: An Interview Chain Management Review (May–June 2002): 60–66. with Dell Computer’s Michael Dell.” Harvard Business Fisher, Marshall L. “What Is the Right Supply Chain for Your Review (March–April 1998): 72–84. Product?” Harvard Business Review (March–April 1997): 83–93. O’Marah, Kevin. “Winning Tactics: Lessons from the Supply Chain Fuller, Joseph B., James O’Conner, and Richard Rawlinson. Top 25.” Supply Chain Management Review (September–October “Tailored Logistics: The Next Advantage.” Harvard Business 2010): 14–21. Review (May–June 1993): 87–98. Poirier, Charles C., Francis J. Quinn, and Morgan L. Swink. Kopczak, Laura R., and M. Eric Johnson. “The Supply Chain Manage- Diagnosing Greatness: Ten Traits of the Best Supply Chains. ment Effect.” Sloan Management Review (Spring 2003): 27–34. Ft. Lauderdale, FL: J. Ross Publishing, 2009. Lambert, Douglas M. “The Eight Essential Supply Chain Manage- Quinn, Francis J. “Reengineering the Supply Chain: An Interview ment Processes.” Supply Chain Management Review (September with Michael Hammer.” Supply Chain Management Review 2004): 18–26. (Spring 1999): 20–26. Lee, Hau L. “Aligning Supply Chain Strategies with Product Robeson, James F., and William C. Copacino, eds. The Logistics Uncertainties.” California Management Review (Spring 2002): Handbook. New York: Free Press, 1994. 105–119. Shapiro, Roy D. “Get Leverage from Logistics.” Harvard Magretta, Joan. “Fast, Global, and Entrepreneurial: Supply Chain Business Review (May–June 1984): 119–127. Management, Hong Kong Style.” Harvard Business Review Slone, Reuben E. “Leading a Supply Chain Turnaround.” Harvard (September–October 1998): 102–114. Business Review (October 2004): 114–121.  2 쏋 쏋 쏋 Supply Chain Performance: Achieving Strategic Fit and Scope LEARNING OBJECTIVES After reading this chapter, you will be able to 1. Explain why achieving strategic fit is critical to a company’s overall success. 2. Describe how a company achieves strategic fit between its supply chain strategy and its competitive strategy. 3. Discuss the importance of expanding the scope of strategic fit across the supply chain. 4. Describe the major challenges that must be overcome to manage a supply chain successfully. In Chapter 1, we discussed what a supply chain is and the importance of supply chain design, planning, and operation to a firm’s success. In this chapter, we define supply chain strategy and explain how creating a strategic fit between a company’s competitive strategy and its supply chain strategy affects performance. We also discuss the importance of expanding the scope of strategic fit from one operation within a company to all stages of the supply chain. 2.1 COMPETITIVE AND SUPPLY CHAIN STRATEGIES A company’s competitive strategy defines, relative to its competitors, the set of customer needs that it seeks to satisfy through its products and services. For example, Wal-Mart aims to provide high availability of a variety of products of reasonable quality at low prices. Most products sold at Wal-Mart are commonplace (everything from home appliances to clothing) and can be purchased elsewhere. What Wal-Mart provides is a low price and product availability. McMaster-Carr sells maintenance, repair, and operations (MRO) products. It offers more than 500,000 products through both a catalog and a Web site. Its competitive strategy is built around providing the customer with convenience, availability, and responsiveness. With this focus on responsiveness, McMaster does not compete based on low price. Clearly, the competitive strategy at Wal-Mart is different from that at McMaster. We can also contrast Blue Nile, with its online retailing model for diamonds, with Zales, which sells diamond jewelry through retail outlets. Blue Nile has emphasized the variety of diamonds available from its Web site and the fact that its margins are significantly lower than its bricks-and-mortar competition. Customers, however, have to wait to get their jewelry and do not have any opportunity to touch and see it before purchase (Blue Nile does provide a 30-day return period). At Zales, in contrast, a customer can walk into the retail store, be helped by a sales- person, and leave immediately with a diamond ring. The amount of variety available at a Zales store, however, is limited. Whereas Blue Nile offers more than 70,000 stones on its site, a typical Zales store carries less than a thousand. In each case, the competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety, and quality. A McMaster-Carr customer places greater emphasis on product variety and response 19 20 Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope Finance, Accounting, Information Technology, Human Resources New Marketing Product and Operations Distribution Service Development Sales FIGURE 2-1 The Value Chain in a Company time than on cost. A Wal-Mart customer, in contrast, places greater emphasis on cost. A Blue Nile customer, purchasing online, places great emphasis on product variety and cost. A customer purchasing jewelry at Zales is most concerned with fast response time and help in product selec- tion. Thus, a firm’s competitive strategy will be defined based on its customers’ priorities. Competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customers’ needs. To see the relationship between competitive and supply chain strategies, we start with the value chain for a typical organization, as shown in Figure 2-1. The value chain begins with new product development, which creates specifications for the product. Marketing and sales generate demand by publicizing the customer priorities that the products and services will satisfy. Marketing also brings customer input back to new product development. Using new product specifications, operations transforms inputs to outputs to create the product. Distribution either takes the product to the customer or brings the customer to the product. Service responds to customer requests during or after the sale. These are core processes or functions that must be performed for a successful sale. Finance, accounting, information technology, and human resources support and facilitate the functioning of the value chain. To execute a company’s competitive strategy, all these functions play a role, and each must develop its own strategy. Here, strategy refers to what each process or function will try to do par- ticularly well. A product development strategy specifies the portfolio of new products that a company will try to develop. It also dictates whether the development effort will be made internally or outsourced. A marketing and sales strategy specifies how the market will be segmented and how the product will be positioned, priced, and promoted. A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to the customer, along with any follow-up service and a specification of whether these processes will be performed in-house or outsourced. Supply chain strategy specifies what the operations, distri- bution, and service functions, whether performed in-house or outsourced, should do particularly well. Because our focus here is on supply chain strategy, we define it in more detail. Supply chain strategy includes a specification of the broad structure of the supply chain and what many tradi- tionally call “supplier strategy,” “operations strategy,” and “logistics strategy.” For example, Dell’s initial decision to sell direct, its 2007 decision to start selling PCs through resellers, and Cisco’s decision to use contract manufacturers define the broad structure of their supply chains and are all part of their supply chain strategies. Supply chain strategy also includes design decisions regard- ing inventory, transportation, operating facilities, and information flows. For example, Amazon’s decisions to build warehouses to stock some products and to continue using distributors as a source of other products are part of its supply chain strategy. Similarly, Toyota’s decision to have production facilities in each of its major markets is part of its supply chain strategy. For a firm to succeed, all functional strategies must support one another and the competitive strategy. For example, Seven-Eleven Japan’s success can be related to the excellent fit among its functional strategies. Marketing at Seven-Eleven has emphasized convenience in the form of easy  Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope 21 access to stores and availability of a wide range of products and services. New product development at Seven-Eleven is constantly adding products and services, such as bill payment services that draw customers in and exploit the excellent information infrastructure and the fact that customers frequently visit Seven-Eleven. Operations and distribution at Seven-Eleven have focused on having a high density of stores, being very responsive, and providing an excellent information infrastructure. The result is a virtuous cycle in which supply chain infrastructure is exploited to offer new products and service that increase demand, and the increased demand in turn makes it easier for operations to improve the density of stores, responsiveness in replenish- ment, and the information infrastructure. In the next section, we elaborate on this notion of fit and seek to answer this question: Given its competitive strategy, what should a company’s supply chain try to do particularly well? 2.2 ACHIEVING STRATEGIC FIT Strategic fit requires that both the competitive and supply chain strategies of a company have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build. For a company to achieve strategic fit, it must accomplish the following: 1. The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal. 2. The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully. 3. The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy. A company may fail either because of a lack of strategic fit or because its overall supply chain design, processes, and resources do not provide the capabilities to support the desired strategic fit. Consider, for example, a situation in which marketing is publicizing a company’s ability to provide a large variety of products quickly; simultaneously, distribution is targeting the lowest cost means of transportation. In this situation, it is likely that distribution will delay orders so it can get better transportation economies by grouping orders together or using inexpensive but slow modes of transportation. This action conflicts with marketing’s stated goal of providing variety quickly. Similarly, consider a scenario in which a retailer has decided to provide a high level of variety while carrying low levels of inventory but has selected suppliers and carriers based on their low price and not their responsiveness. In this case, the retailer is likely to end up with unhappy customers because of poor product availability. To elaborate on strategic fit, let us consider the evolution of Dell and its supply chain. Between 1993 and 2006, Dell’s competitive strategy was to provide a large variety of customiz- able products at a reasonable price. Given the focus on customization, Dell’s supply chain was designed to be very responsive. Assembly facilities owned by Dell were designed to be flexible and to easily handle the wide variety of configurations requested by customers. A facility that focused on low cost and efficiency by producing large volumes of the same configuration would not have been appropriate in this setting. The notion of strategic fit also extended to other functions within Dell. Dell PCs were designed to use common components and to allow rapid assembly. This design strategy clearly aligned well with the supply chain’s goal of assembling customized PCs in response to customer orders. Dell worked hard to carry this alignment to its suppliers. Given that Dell produced customized products with low levels of inventory, it was crucial that suppliers and carriers be highly responsive. For example, the ability of carriers to merge a PC from Dell with a monitor from Sony allowed Dell not to carry any Sony monitors in inventory. 22 Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope Starting in 2007, however, Dell altered its competitive strategy and supply chain. While it continued to offer customization, the company also branched out into selling PCs through retail stores such as Wal-Mart. The assortment at retail, however, is very different from the focus on customization in the direct sales channel. Through Wal-Mart, Dell offers a limited variety of desktops and laptops. It is also essential that monitors and other peripherals be available in inventory because a customer buying a PC at Wal-Mart is not willing to wait for the monitor to show up later. Clearly, the flexible and responsive supply chain that aligns well with customer needs for customization does not necessarily align well when customers no longer want customization but prefer low prices. This raises the question of how Dell should adjust the various functional strategies given the change in competitive strategy if it is to maintain strategic fit. One of Dell’s initial responses has been to not build everything to order and increase its reliance on contract manufacturers based in low-cost countries for assembly. How Is Strategic Fit Achieved? What does a company need to do to achieve that all-important strategic fit between the supply chain and competitive strategies? A competitive strategy will specify, either explicitly or implic- itly, one or more customer segments that a company hopes to satisfy. To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to satisfy the needs of the targeted customer segments. There are three basic steps to achieving this strategic fit, which we outline here and then discuss in more detail: 1. Understanding the Customer and Supply Chain Uncertainty: First, a company must understand the customer needs for each targeted segment and the uncertainty these needs impose on the supply chain. These needs help the company define the desired cost and service requirements. The supply chain uncertainty helps the company identify the extent of the unpredictability of demand, disruption, and delay that the supply chain must be prepared for. 2. Understanding the Supply Chain Capabilities: Each of the many types of supply chains is designed to perform different tasks well. A company must understand what its supply chain is designed to do well. 3. Achieving Strategic Fit: If a mismatch exists between what the supply chain does partic- ularly well and the desired customer needs, the company will either need to restructure the supply chain to support the competitive strategy or alter its competitive strategy. STEP 1: UNDERSTANDING THE CUSTOMER AND SUPPLY CHAIN UNCERTAINTY To under- stand the customer, a company must identify the needs of the customer segment being served. Let us compare Seven-Eleven Japan and a discounter such as Sam’s Club (a part of Walmart). When customers go to Seven-Eleven to purchase detergent, they go there for the convenience of a nearby store and are not necessarily looking for the lowest price. In contrast, low price is very important to a Sam’s Club customer. This customer may be willing to tolerate less variety and even purchase large package sizes as long as the price is low. Even though customers purchase detergent at both places, the demand varies along certain attributes. In the case of Seven-Eleven, customers are in a hurry and want convenience. In the case of Sam’s Club, they want a low price and are willing to spend time getting it. In general, customer demand from different segments varies along several attributes as follows: The Quantity of the Product Needed in Each Lot: An emergency order for material needed to repair a production line is likely to be small. An order for material to construct a new production line is likely to be large. The Response Time That Customers Are Willing to Tolerate: The tolerable response time for the emergency order is likely to be short, whereas the allowable response time for the construction order is apt to be long.  Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope 23 The Variety of Products Needed: A customer may place a high premium on the avail- ability of all parts of an emergency repair order from a single supplier. This may not be the case for the construction order. The Service Level Required: A customer placing an emergency order expects a high level of product availability. This customer may go elsewhere if all parts of the order are not immediately available. This is not apt to happen in the case of the construction order, for which a long lead time is likely. The Price of the Product: The customer placing the emergency order is apt to be much less sensitive to price than the customer placing the construction order. The Desired Rate of Innovation in the Product: Customers at a high-end department store expect a lot of innovation and new designs in the store’s apparel. Customers at Walmart may be less sensitive to new product innovation. Each customer in a particular segment will tend to have similar needs, whereas customers in a different segment can have very different needs. Although we have described the many attributes along which customer demand varies, our goal is to identify one key measure for combining all of these attributes. This single measure then helps define what the supply chain should do particularly well. Implied Demand Uncertainty. At first glance, it may appear that each of the customer need categories should be viewed differently, but in a fundamental sense, each customer need can be translated into the metric of implied demand uncertainty, which is demand uncertainty imposed on the supply chain because of the customer needs it seeks to satisfy. We make a distinction between demand uncertainty and implied demand uncertainty. Demand uncertainty reflects the uncertainty of customer demand for a product. Implied demand uncertainty, in contrast, is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires. For example, a firm supplying only emergency orders for a product will face a higher implied demand uncertainty than a firm that supplies the same product with a long lead time, as the second firm has an opportunity to fulfill the orders evenly over the long lead time. Another illustration of the need for this distinction is the impact of service level. As a supply chain raises its level of service, it must be able to meet a higher and higher percentage of actual demand, forcing it to prepare for rare surges in demand. Thus, raising the service level increases the implied demand uncertainty even though the product’s underlying demand uncertainty does not change. Both the product demand uncertainty and various customer needs that the supply chain tries to fill affect implied demand uncertainty. Table 2-1 illustrates how various customer needs affect implied demand uncertainty. Table 2-1 Impact of Customer Needs on Implied Demand Uncertainty Customer Need Causes Implied Demand Uncertainty to... Range of quantity required increases Increase because a wider range of the quantity required implies greater variance in demand Lead time decreases Increase because there is less time in which to react to orders Variety of products required increases Increase because demand per product becomes more disaggregate Number of channels through which Increase because the total customer demand is now disaggregated over more product may be acquired increases channels Rate of innovation increases Increase because new products tend to have more uncertain demand Required service level increases Increase because the firm now has to handle unusual surges in demand 24 Chapter 2 Supply Chain Performance: Achieving Strategic Fit and Scope Table 2-2 Correlation Between Implied Demand Uncertainty and Other Attributes Low Implied High Implied Uncertainty Uncertainty Product margin Low High Average forecast error 10% 40% to 100% Average stockout rate