Instructor ManuaFor Principles of Supply Chain Management A Balanced Approach, 6th Edition by Joel W

Instructor Manual for Principles of Supply Chain Management A Balanced Approach, 6th Edition by Joel Wisner, Keah-Choon Tan, G. Keong Leong

Chapter 1 Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 1: Introduction to Supply Chain Management

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

2 Complete List of Chapter Activities and Assessments............................................................................. 2 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 6 Additional Discussion Questions ............................................................................................................... 7

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter defines the supply chain and supply chain management. A description of what the remaining chapters will cover is provided. The importance of supply chain management (SCM) is explained, in addition to the origins of SCM in the United States. The foundations of SCM are presented in terms of the elements of supply, operations, logistics, and integration. Finally, the current trends in SCM are presented: use of supply chain analytics, improving supply chain sustainability, and increasing supply chain visibility.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center. 

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 1.1 Describe a supply chain and define supply chain management.

LO 1.2 Describe the objectives and elements of supply chain management.

LO 1.3 Describe local, regional, and global supply chain management activities.

LO 1.4 Describe a brief history and current trends in supply chain management.

LO 1.5 Understand the bullwhip effect and how it impacts the supply chain.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective 1.1 1.2 1.3 1.4 1.5

PPT slides

Activity/Assessment

Duration

4-7 8 – 10, 16 - 20 20 11 – 15, 21 - 23 10

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT, Beer Game

30 minutes 1 hour 15 minutes 45 minutes 2 hours

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KEY TERMS [

REMOVE FOR LIGHT VERSION]

Big data: huge volumes of data generated because of the enormous rise in computing capabilities.

Bullwhip effect: the continuing cycle of erratic demand, causing forecasts to include safety stock which in turn magnify supplier forecasts and cause production planning problems.

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Business process reengineering: the radical rethinking and redesigning of business processes to reduce waste and increase performance to enhance long-term competitive advantage.

Cold chain: refers to an alliance of companies that can monitor and protect the temperature of perishable products to maintain quality and safety from the point of origin through the distribution to the final consumer.

Customer relationship management: consists of the creation of alliances or partnerships with customers; these long-term close relationships resulted in less finished products safety stock and better use of resources.

Demand management: strategies and systems having the objective of matching available capacity to demand, either by improving production scheduling, curtailing demand, using a back-order system, or increasing capacity.

Distribution network: design of the facilities utilized for successful product delivery, including the number, size, type, and location of regional or local warehouses.

Enterprise resource planning (ERP): client/server supply chain management software that typically includes integrated supply chain management and e-commerce components.

Ethical and sustainable sourcing: purchasing from suppliers that are governed by environmental sustainability and social and ethical practices.

First-tier customers: direct customers of the firm.

First-tier suppliers: direct suppliers of the firm.

Global supply chain: consists of having operations in foreign locations to supply to global markets.

Inventory visibility: order communication system enables management to be aware of inventory status in the supply chain.

Lean production system: inventory management system based on operating with low inventory levels, faster delivery, lower stockouts, and higher quality; also known as just-in-time or the Toyota production system.

Logistics: delivery of products to customers through several different modes of transportation at the right time, right quality, and right volume based on a high level of planning and cooperation between the firm, its customers, and the various logistics elements employed (such as transportation, warehousing, and repackaging).

Material requirements planning (MRP): software system for managing their inventories, purchases, and production schedules.

Multi-channel fulfillment: allows consumers to shop for what they want, where they want, and then have their purchases delivered quickly and consistently.

Operations management: purchasing, assembling or processing the items into finished products, inventory and delivery of products; a foundation of supply chain management.

Radio frequency identification (RFID): system of scanning incoming cartons and pallets with RFID tags to have in-store inventory visibility.

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Reengineering: another term or business process reengineering.

Second-tier customers: the customers of the first-tier or direct customers of the focal firm.

Second-tier suppliers: the suppliers of the first-tier or direct suppliers of the focal firm.

Six Sigma quality management: strategic system to ensure continued quality compliance among suppliers and with internal production facilities.

Starting conditions: the initial status of the supply chain in terms of setup and inventory status.

Strategic partnerships: closer working relationships with customers in terms of long-term, higher volume sales.

Supplier certification: allows buyers to assume the supplier will meet certain product quality and service requirements covered by the certification, thus reducing duplicate testing and inspections and the need for extensive supplier evaluations.

Supplier evaluation: determination of the current capabilities of suppliers.

Supplier management: means encouraging or helping the firm‘s suppliers to perform in some desired fashion by assessing their current capabilities and then deciding how they need to improve.

Supplier relationship management: consists of utilizing smaller supplier bases and the development of more long-term, trusting, mutually beneficial supplier relationships.

Supply chain: consists of sourcing parts and materials; as well as designing, producing, storing, producing, and transporting goods and services.

Supply chain analytics: tools that harness data from internal and external sources to produce breakthrough insights that can help supply chains reduce costs and risks.

Supply chain management: the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities, including coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers.

Supply chain performance management: utilization of performance measurements along the supply chain to help firms keep track of their process integration and supply chain management efforts.

Supply chain process integration: consists of trading partners in the supply chain working together to make purchasing, inventory, production, quality, and logistics decisions that impact the overall costs and profits of the supply chain.

Supply chain visibility: the ability of suppliers, manufacturers, business partners, and customers to know exactly where their products are, at in point in the supply chain.

Supply management: strategic approach to purchasing.

Sustainability: broad term that includes protecting the environment, some aspects of social responsibility, as well as financial performance.

Third-party logistics providers: companies that provide inbound and outbound shipping, warehousing, and logistics services such as transportation, storage, documentation, and customs clearing services.

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Third-party logistics services: providing inbound and outbound shipping, warehousing, and logistics services such as transportation, storage, documentation, and customs clearing services.

Triple bottom line: refers to performance related to people, planet, and profits.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Supply Chain Management Defined (01.01, PPT slides 4-7)

II.

III.

IV.

a. Supply chain management (SCM) consists of the activities from purchasing, production, and logistics. b. Tiers of suppliers and customers are defined. c. Several definitions of SCM from various sources are provided.

1. Council of Supply Chain Management Professionals: The planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers and customers.

2. Institute for Supply Management: The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.

3. Business Dictionary: Management of material and information flows in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost. Supply chain management requires the commitment of supply chain partners to work closely to coordinate order generation, order taking, and order fulfillment.

The Importance of Supply Chain Management (06.02, 06.05, PPT slides 8-10) a. SCM has a significant impact on the performance of the organization. Downturns, such as the 2009 recession and pandemic in 2020 and 2021 exacerbate the effect. b. The bullwhip effect is described as the continuing cycle of erratic demand, causing forecasts to include safety stock which in turn magnify supplier forecasts and cause production planning problems.

The Origins of Supply Chain Management in the United States (06.04, PPT slides 11-15) a. The history of development from traditional mass manufacturing to inventory management and planning to JIT, TQM, BPR and alliances to relationships, sustainability and responsibility to increased supply chain capabilities is described.

The Foundations of Supply Chain Management (06.02, 06.03, PPT slides 16-20) a. The supply elements are described as supplier base reduction, supplier alliances, SRM, global, ethical, and sustainable sourcing.

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V.

b. The operations elements are demand management, CPFR, inventory management, ERP, lean systems, and Six Sigma quality. c. The logistic elements presented are logistics management, CRM, network design, RFID, global supply chains, sustainability, third-party logistics providers, and service response logistics. d. The integration elements explained are barriers to integration, risk and security management, performance management, and green supply chains.

Current Trends in Supply Chain Management (06.04, PPT slides 21-23) a. Supply chain analytics refers to examining raw supply chain data and then reaching conclusions or making predictions with the information.

1. The growth is being pushed by the enormous rise in computing capabilities and the huge volumes of data generated (big data). b. Improving supply chain sustainability is focused on meeting the needs of current supply chain members without hindering the ability to meet the needs of future generations in terms of economic, environmental, and social challenges. c. Increasing supply chain visibility is about achieving the ability of suppliers, manufacturers, business partners, and customers to know exactly where the products are, at any point in the supply chain.

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists) – they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Second run of The Beer Game: Duration 45 minutes. a. A modification of the Beer Game is beneficial for further learning. Gratitude goes

to Dr. James Cox III for sharing these innovative modifications. First, have the students play the game the normal way. Then, tell them that we will be playing it again. This time, they can change anything but the time to move shipments between the companies. Let them know that the average demand at the retailer is 10 cases per week based on the uniform distribution with a high value of 20 and a low value of 0. (Create a set of demand cards for this distribution that are the same for each team so that we can compare the results.) Give them time to discuss the changes each team plans to make. First, allow them time for a short break, asking them to come back and discuss the changes. This time, the game can be run more quickly for less time periods—about 20 weeks. We can then discuss our results. The students explain their changes and corresponding results. (Note: Using games is a great way to help students learn and retain the material in a beneficial and interactive experience.) b.

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 2: Purchasing Management

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

2 Complete List of Chapter Activities and Assessments............................................................................. 3 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 8 Additional Discussion Questions ............................................................................................................. 11

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the role of purchasing and its strategic impact. The traditional purchasing process, eprocurement, public procurement, and green purchasing are each described. How to handle small-value purchases is explained. This chapter also covers analyzing sourcing decisions, total cost of ownership, and break-even. The pros and cons of single sourcing versus multiple sourcing are addressed, in addition to centralized, decentralized, and hybrid purchasing structures. The opportunities and challenges of global sourcing are presented. Finally, the basic international trade law and commercial terms are presented.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 2.1

Describe the role of purchasing and its strategic impact on an organization‘s competitive advantage.

LO 2.2

Describe the traditional purchasing process, e-procurement, public procurement, and green purchasing.

LO 2.3

Recognize and know how to handle small-value purchase orders.

LO 2.4

Analyze sourcing decisions and the factors impacting supplier selection and diversity.

LO 2.5

Analyze total cost of ownership.

LO 2.6

Analyze the pros and cons of single sourcing versus multiple sourcing.

LO 2.7

Describe the key characteristics of centralized, decentralized, and hybrid purchasing organizations.

LO 2.8

Describe the opportunities and challenges of global sourcing.

LO 2.9

Describe the basic international trade law and commercial terms.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter Objective 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9

PPT slides

Activity/Assessment

Duration

5-9 10 - 16 17 18 - 23 26 24 - 27 28 - 30 31 - 35 36 - 37

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

30 minutes 30 minutes 15 minutes 45 minutes 20 minutes 30 minutes 15 minutes 15 minutes 15 minutes

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KEY TERMS Backward vertical integration: refers to acquiring upstream suppliers.

Barter: the complete exchange of goods or services of equal value with the exchange of currency.

Bid or surety bonds: guarantee the successful bidder will accept the contract.

Blank check purchase order: a special purchase order with a signed blank check attached, usually at the bottom of the purchase order.

Blanket order release: a production schedule which may be used to release a specific quantity against the order.

Blanket purchase order: covers a variety of items and is negotiated for repeated supply over a fixed period, such as quarterly or yearly.

Break-even analysis: a handy tool for computing the cost effectiveness of sourcing decisions when cost is the most important criterion.

Buy American: act that mandates U.S. government purchases and third-party purchases utilize federal funds to buy domestically produced goods.

Centralized/decentralized purchasing structure: structure used to negotiate national contracts at the corporate level, with decentralized buying at the business unit level.

Centralized purchasing: when a single purchasing department, usually located at the firm‘s corporate office, makes all the purchasing decisions, including order quantity, pricing policy, contracting, negotiations, and supplier selection and evaluation.

Contracts for the International Sale of Goods (CISG): United Nations governing code applied to the international sale of goods between private businesses, unless both parties elect to opt out.

Counterpurchase: an arrangement whereby the original exporter agrees to sell goods or services to a foreign importer and simultaneously agrees to buy specific goods or services from the foreign importer.

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Countertrade: agreement or contract to exchange goods or services for raw materials from local suppliers.

Decentralized/centralized purchasing structure: decentralizing purchasing at the corporate level, while centralizing the procurement function at the business unit level.

Decentralized purchasing: where individual, local purchasing departments, such as at the plant level, make their own purchasing decisions.

Department of Defense (DOD): major public procurement entity in the U.S. federal government.

Direct offset: usually involves coproduction, or a joint venture and exchange of related goods and services.

Early supplier involvement (ESI): consists of having suppliers assist in new product design and development to ensure cost-effective design choices, develop alternative conceptual solutions, select the best components and technologies, and help in design assessment.

Economies of scale: cost advantage from buying standardized or generic supplies over making them internally.

Expediting: a reactive approach that is used to speed up an overdue shipment.

Federal Acquisition Regulation (FAR): special rules and regulations for U.S. federal government purchases.

Federal Acquisition Streamlining Act (FASA): removes many restrictions on government purchases below the simplified acquisition threshold of $100,000.

Follow-up: a proactive approach to prevent late delivery by checking up on an order.

Forward vertical integration: refers to acquiring downstream customers.

General Services Administration (GSA): responsible for most US federal purchases.

Global sourcing: international agreements aimed at relaxing trade barriers and promoting free trade to expand supply bases.

Government Travel Charge Card (GTCC): is a travel purchasing or procurement card that provides government employees with a safe, effective, and convenient method to pay for expenses related to official travel.

Green purchasing: new sourcing concept to ensure that environmental considerations and human health are accounted for when making purchasing decisions.

Hybrid purchasing organization: combines centralized and decentralized purchasing because centralized may be too rigid or infeasible.

Import broker: person who performs transactions for a fee without taking title to the goods.

Import merchant: person who buys and takes title to goods and then resells them to the buyer.

Incoterms: acronym for International Commercial Terms; a uniform set of three-letter trade terms or rules.

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Indirect offset: involves exchange of goods or services unrelated to an initial purchase.

Industrial buyers: buyers whose primary task is to purchase raw materials for conversion purposes.

International Commercial Terms: a uniform set of three-letter trade terms or rules, called incoterms.

Inventory turnover: shows how many times a firm‘s inventory is utilized and replaced over an accounting period, such as a year.

Invitation for bid (IFB): solicitation of sealed bids by the U.S. government when the requirements are clear, accurate, and complete.

Leveraging purchase volume: concentration of purchases to achieve more clout and purchasing power.

Make-or-buy decision: a strategic decision about whether to make or buy parts or supplies that can impact a firm‘s competitive position.

Material requisition (MR): a request for material that is issued in duplicate.

Maximize competition: objective of procedures for purchasing by the government.

Merchant: wholesalers and retailers who primarily purchase for resale purposes.

Micro-purchase: U.S. government purchases of $10,000 and below can be made without obtaining competitive quotes.

National Aeronautics and Space Administration (NASA): major public procurement entity in the U.S. federal government.

Nontariff barriers: import quotas, licensing agreements, embargoes, laws, and other regulations imposed on imports and exports.

Offset: an exchange agreement for industrial goods or services as a condition of military-related export.

Open-end purchase order: covers a variety of items for repeated supply over a time period that allows for additional items and expiration dates to be renegotiated.

Original equipment manufacturers (OEM): the companies that make the final products.

Outsourcing: refers to buying materials or components from suppliers instead of making them in-house.

Payment bonds: protect the buyer against any third-party liens not fulfilled by the bidder.

Performance bonds: guarantees the work of the successful bidder meets specifications and, in the time, stated.

Petty cash: small cash reserve maintained by a midlevel manager or clerk to reimburse needed materials purchase based on receipt submission.

Planned order releases: plan from the material requirements planning (MRP) system or bill of materials (BOM) for releasing requisitions or placing orders directly with the suppliers.

Procurement cards (P-card): credit cards with a predetermined credit limit issued to authorized personnel of the buying organization to make low-dollar purchases; may be referred to as purchasing cards instead.

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Profit-leverage effect: measurement of the impact of a change in purchase spend on a firm‘s profit before taxes, assuming gross sales and other expenses remain unchanged.

Public procurement: refers to the management of the purchasing and supply management function in the government and nonprofit sectors, such as educational institutions, and hospitals.

Purchase requisition: the term used in some firms instead of material requisition.

Purchase spend: the money the firm spends on goods and services.

Purchasing cards (P-card): credit cards with a predetermined credit limit issued to authorized personnel of the buying organization to make low-dollar purchases; may be referred to as procurement cards instead.

Request for proposal (RFP): a request for a material requisition without a current supplier when the part is complicated and highly technical, or its complete specifications is unknown.

Request for quotation (RFQ): a request for a material requisition when there is no current supplier for the firm that begins by identifying a pool of qualified suppliers.

Return on assets (ROA): a financial ratio of a firm‘s net income in relation to its total assets.

Return on investment (ROI): the same as return on assets.

Sales agent: person who performs transactions for a fee without taking title to the goods.

Sales order: the supplier‘s offer that is legally binding when accepted by the buyer.

Sealed bids: opened in public at the purchasing office at the time designated in the invitation, with the facts about each bid being read aloud and recorded.

Simplification: refers to a reduction of the number of components, suppliers, or standard materials used in a product or process.

Simplified acquisition threshold: the level of $100,000 or below that has less restrictions for U.S. government purchases.

Single sourcing: refers to the deliberate practice of concentrating purchases of an item with one source from a pool of viable suppliers.

Sole sourcing: typically refers to a situation when the supplier is the only available source.

Stockless buying: an extension of a blank purchase order that requires the supplier to maintain a minimum inventory level to ensure availability for the buyer; may be referred to as system contracting instead.

Subcontracting: buying parts or components to free up capacity inside the firm.

Supplier development: when there is a lack of suitable suppliers, the firm assists existing or new suppliers to improve their processing capabilities, quality, delivery, and cost performance by providing the needed technical and financial assistance.

Supply management: the act of identifying, acquiring, and managing resources and suppliers to meet the organization‘s needs in the attainment of its strategic objectives.

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System contracting: an extension of a blank purchase order that requires the supplier to maintain a minimum inventory level to ensure availability for the buyer; may be referred to as stockless buying instead.

Tariff: an official list or schedule showing the duties, taxes, or customs fees imposed by the host country on imports or exports.

Tier-1: suppliers that provide parts or services directly to the OEM. Tier-2: suppliers that provide their outputs to Tier-1 suppliers.

Tier-3 suppliers: sell their outputs to Tier-2 suppliers.

Total cost of acquisition: or total cost of ownership includes the unit cost of the item, payment terms, cash discount, ordering cost, carrying cost, logistical costs, maintenance costs, and other more qualitative costs that may not be easy to assess.

Total cost of ownership: or total cost of acquisition includes the unit cost of the item, payment terms, cash discount, ordering cost, carrying cost, logistical costs, maintenance costs, and other more qualitative costs that may not be easy to assess.

Trading company: organization that carries a wide variety of goods which can be purchased.

Traveling requisition: request for materials and standard parts needed on a recurring basis.

Uniform Commercial Code (UCC): governs the purchase and sale of goods in the United States, except in Louisiana which uses the Napoleonic code.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. A Brief History of Purchasing Terms (02.01, PPT slides 5-6) a. The definitions of merchant buyers and industrial buyers are presented. b. Purchasing is a key business function that is responsible for the acquisition of required materials, services, and equipment. c. The term supply management is being increasingly used in place of purchasing.

1. It is the act of identifying, acquiring, and managing resources and suppliers to meet the organization‘s needs in the attainment of its strategic objectives.

2. Key activities include negotiations, logistics, contract development and administration, inventory control and management, supplier management and other activities.

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II.

III.

IV.

The Role of Supply Management in an Organization (02.01, PPT slides 7-9) a. The primary goals of purchasing are to ensure uninterrupted flows of raw materials, at the lowest total cots, to improve quality of the finished goods produced, and to maximize customer satisfaction. b. Purchasing can contribute to these objectives by actively seeking better materials and reliable suppliers, working closely with, and exploiting the expertise of strategic suppliers to improve the quality of raw materials, and involving suppliers and purchasing personnel in product design and development efforts. c. The financial significance of supply management is described by explaining the profitleverage, return on assets/investment, and inventory turnover effects.

The Purchasing Process (02.02, 02.03, PPT slides 10-17) a. The manual purchasing system is explained and presented in a figure. b. The material requisition and other types of requisitions are presented: purchase and traveling. c. If the material is not available in the warehouse, the buyer must identify a pool of qualified suppliers and issue a request for quotation (RFQ) or instead use a request for proposal (RFP) if the component is complicated and highly technical or its specifications or unknown. d. A purchase order is used when a suitable supplier is identified, or a qualified supplier is on file. e. A sales order is used if the supplier has its own terms and conditions, especially if it is the sole producer or holds a patent for the product. f. The e-procurement process is explained and presented using a figure.

1. The advantages of this process are time savings, cost savings, accuracy, real-time use, mobility, trackability, management benefits, and supplier benefits.

2. Small-value purchase orders are utilized to reduce processing costs.

(1) The alternatives presented are P-cards, blanket or open-end purchase orders, blank check purchase orders, stockless buying or system contracting, petty cash, standardization and simplification of materials and components, accumulating small orders to create a large order, and using a fixed order interval for a specific category of materials or supplies.

Sourcing Decisions: The Make-or-Buy Decision (02.04, PPT slides 18-23) a. Outsourcing refers to buying materials or components from suppliers instead of making them in-house. b. Backward vertical integration refers to acquiring upstream suppliers, while forward vertical integration refers to acquiring downstream customers. c. The make-or-buy decision is a strategic one that can impact an organization‘s competitive position. d. The reasons for buying or outsourcing are cost advantage, insufficient capacity, lack of expertise, and quality. e. The reasons for making are protect proprietary technology, no competent supplier, better quality control, use existing idle capacity; control of lead time, transportation, and warehousing costs; and lower cost. f. Break-even analysis is a handy tool for computing the cost effectiveness of sourcing decisions when cost is the most important criterion.

1. An example is provided.

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V.

VI.

VII.

VIII.

IX.

Roles of the Supply Base (02.06, PPT slide 24) a. The supply base or supplier base refers to the list of suppliers that a firm uses to acquire its materials, services, supplies, and equipment. b. Besides supplying the obvious purchased items, key or preferred suppliers also supply: 1. Product and process technology and expertise to support the buyer‘s operations 2. Information on the latest trends in materials, processes, or designs 3. Information on the supply market 4. Capacity for meeting unexpected demand 5. Cost efficiencies due to economies of scale Supplier Selection (02.05, 02.06, PPT slides 25-26) a. Factors to consider when selecting suppliers include product and process technologies, willingness to share technologies and information, quality, cost, reliability, order system and cycle time, capacity, communication capability, location, and service. b. Supplier diversity is a strategic sourcing initiative to ensure a diverse supplier base, including minority-owned, women-owned, veteran-owned, disability-owned, and small businesses. c. The total cost of ownership concept extends the traditional break-even analysis beyond considering only the original purchase cost and capital equipment cost; other qualitative and quantitative factors, including freight and inventory costs, tools, tariffs and duties, currency exchange fees, payment terms, maintenance, and nonperformance costs should be considered.

1. An analysis example is provided.

How Many Suppliers to Use (02.05, 02.06, PPT slide 27) a. Reasons for using a single supplier are to establish a good relationship, less quality variability, lower cost, transportation economies, proprietary product or process purchases, and volume too small to split. b. Reasons favoring multiple suppliers are need capacity, spread risk of supply interruption, create competition, information, and supplier diversity.

Purchasing Organization (02.07, PPT slide 28-30) a. Centralized purchasing is where a single purchasing department, usually located at the firm‘s corporate office, makes all the purchasing decisions, while decentralized purchasing is where individual, local purchasing departments, such as the plant level, make their own purchasing decisions. b. The advantages of centralization are concentrated volume, avoid duplication, specialization, lower transportation costs, no competition between units, and common supply base. c. The advantages of decentralization are better knowledge of unit requirements, local sourcing, and less bureaucracy. d. Three types of structures are presented: hybrid, decentralized/centralized, and centralized/decentralized.

Global Sourcing (02.08, PPT slide 31-35) a. Global sourcing, also known as international purchasing, has been increasing. b. The different types of purchasing personnel are presented: 1. An import broker or sales agent performs transactions for a fee without taking title to the goods.

2. Import merchants buy and take title to the goods and then resell them to the buyer.

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X.

3. A trading company, which carries a wide variety of goods, is another option. c. A tariff is an official list or schedule showing the duties, taxes, or customs fees imposed by the host country on imports or exports. d. Nontariff barriers are import quotas, licensing agreements, embargoes, laws, and other regulations imposed on exports and imports. e. A discussion of major international trade organization is included. f. Reasons for global sourcing are lower price of materials, higher quality of products, and faster delivery. g. Potential challenges for global sourcing are additional skills and knowledge for dealing with international suppliers, communication, logistics, and political environment. h. The terminology of countertrade, barter, offset, direct offset, indirect offset, and counterpurchase is presented. i. The international trade law and commercial terms of Contracts for the International Sale of Goods (CISG) and incoterms are explained. j. A list of rules for transport modes is presented.

Procurement in Government and Nonprofit Agencies (02.09, PPT slides 36-37) a. Public procurement or public purchasing refers to the management of the purchasing and supply management in the government and nonprofit sectors, such as educational institutions, and hospitals. b. It is characterized by competitive bidding, bid bonds, bid or surety bonds, performance bonds, and payment bonds. c. The rules that govern this type of purchasing are the Federal Acquisition Streamlining Act (FASA), Buy American act, and green purchasing.

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists) – they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Purchasing conflict Duration 15 minutes. a. Describe a typical conflict in purchasing and how to resolve it. b. Answer: It is common to be conflicted about buying in large or small quantities. The need met by buying in small quantities is having cash available. It is desirable to buy in large quantities due to quantity discounts or free freight. A way to break this conflict is to make an agreement to buy a large quantity over time to get the discounts.

2. Discussion: Make-or-buy decision Duration 15 minutes a. How can we ensure that the make-or-buy decision is not flawed? Consider how cost accounting works, in addition to whether or not the item is processed by a bottleneck/constraint. b. Answer: Judgments are made by comparing the price to buy from the outside relative to the cost to make it internally. Overhead is

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

16

typically allocated to the cost to make the part. However, the overhead will not be reduced when buying instead. Therefore, an ineffective decision can be made. c. If the part is only process by non-bottlenecks, the savings will not materialize. Usually overhead is not reduced, nor are direct labor expenses. The only tangible savings are raw material costs. d. If the part is processed by the constraint or bottleneck, the additional sales should be considered, not reduced costs. [return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 3: Creating and Managing Supplier Relationships

TABLE OF CONTENTS Table of Contents ...................................................................................................................................... 17 Purpose and Perspective of the Chapter ................................................................................................. 18 List of Instructor Downloads .................................................................................................................. 18 Chapter Objectives ................................................................................................................................... 18 Complete List of Chapter Activities and Assessments........................................................................... 18 Key Terms.................................................................................................................................................. 19 Chapter Outline ........................................................................................................................................ 20 Additional Discussion Questions ............................................................................................................. 21

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

17

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the importance of supplier relationships. The key factors for achieving successful partnerships are described. The impact of the pandemic on the relationships and how to manage relationships during a pandemic are presented. Supplier evaluation and the certification programs of ISO 9000 and ISO 14000 are explained. Finally, understanding the capabilities of supplier relationship management (SRM) and how to effectively benefit from SRM software is detailed.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 3.1

Explain the importance of supplier partnerships.

LO 3.2

Understand the key factors for developing supplier partnerships.

LO 3.3

Understand the impact of the COVID-19 pandemic on supplier relations.

LO 3.4

Develop a supplier evaluation and certification program.

LO 3.5

Explain the importance of a supplier recognition program.

LO 3.6

Understand how to manage supplier relationships during a pandemic.

LO 3.7

Understand the capabilities of supplier relationship management.

LO 3.8

Explain the benefits of using SRM software to manage suppliers.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective

PPT slides

Activity/Assessment

Duration

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

18

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

4 5 - 12 13 14 - 20 22 13 23 24 - 26

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

15 minutes 45 minutes 15 minutes 30 minutes 15 minutes 15 minutes 15 minutes 15 minutes

[return to top]

KEY TERMS Analytic SRM: allows the company to analyze the complete supplier database to analyze more difficult and important questions about supplier relationships, thus focusing more on long-term procurement strategies.

Communication transparency: means full disclosure of any obstacles, intentions, limitations, and issues discovered in-house or anywhere in the supply chain as soon as possible.

Continuous improvement: involves continuously making a series of small improvements over time, resulting in the elimination of waste in a system.

Environmental management system (EMS): presents guidelines on implementation of ISO 14000.

ISO 14000: a family of international standards for environmental standards.

Posttransaction costs: costs incurred after the goods are in possession of the company, agents, or customers; examples are field failures, company‘s goodwill/reputation, maintenance costs and warranty costs.

Pretransaction costs: costs incurred prior to order and receipt of the purchased goods, such as the costs of certifying and training suppliers, investigating alternative sources of supply, and delivery options for new suppliers.

Total cost of ownership (TCO): a broad-based performance metric, which is defined as ―the combination of the purchase or acquisition price of a good or service and additional costs incurred before or after product or service delivery.‖ Supplier relationship management (SRM): ―… encompasses a broad suite of capabilities that facilitate collaboration, sourcing, transaction execution, and performance monitoring between an organization and its trading partners. SRM leverages the latest technology capabilities to integrate and enhance supplieroriented programs along supply chains such as design-to-source, source-to-contract, and procure-to-pay.‖ Transactional SRM: tends to focus on short-term reporting and is event driven, focusing on such issues on what was purchased, which supplier was used, and the cost of the purchase.

Transaction costs: costs of the goods/services, in addition to the cost associated with placing and receiving the order.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Developing Supplier Relationships (03.01, 03.02, PPT slides 4-12)

II.

III.

a. Important to achieving win-win competitive performance for the buyer and supplier -these require a strategic perspective as opposed to a tactical position. b. Involve ―a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship.‖ c. The keys to successful partnerships are: 1. Building trust.

2. Shared vision and objectives.

3. Personal relationships.

4. Mutual benefits and needs.

5. Commitment and top management support.

6. Change management 7. Information sharing and transparent communications.

8. Relationship capabilities.

9. Performance metrics. The total cost of ownership is presented, which is often grouped into pretransaction costs, transaction costs, and posttransaction costs. d. Continuous improvement involves continuously making a series of small improvements over time, resulting in the elimination of waste in the system. e. Monitoring supplier relationships enables an organization to reap the benefits by improving supply chain performance.

Managing Supplier Relationships during the COVID-19 Pandemic (03.03, 03.06, PPT slide 13) a. Supplier relationships are more important than ever to mitigate the risk of supply chain disruptions, which were severe in the pandemic, particularly for healthcare supply chains. b. The essential elements for establishing strong supplier relationships are: 1. Mutual respect 2. Shared vision 3. Communication 4. Positive conduct 5. Supporting suppliers Supplier Evaluation and Certification (03.04, PPT slides 14-20) a. Supplier certification refers to ―an organization‘s process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections.‖ b. A process to identify the best and most reliable suppliers is utilized. c. Sourcing decisions are made on facts and not on perception. d. Frequent feedback can help avoid surprises and maintain good relationships. e. Suppliers should be allowed to provide constructive feedback to the customer.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

20

f.

IV.

V.

VI.

The weighted criteria evaluation system is presented with an explanation of its seven steps. g. The external certification programs of ISO 9000 and ISO 14000 are described.

Supplier Development (03.05, PPT slide 21) a. Supplier development is ―any activity that a buyer undertakes to improve a supplier‘s performance and/or capabilities to meet the buyer‘s short- and/or long-term supply needs.‖ b. The seven-step approach consists of: 1. Identify critical goods and services.

2. Identify critical suppliers not meeting performance requirements.

3. Form a cross-functional team.

4. Meet with top management of suppliers.

5. Rank supplier development projects.

6. Define details of the buyer-supplier agreement.

7. Monitor project status and modify strategies.

Supplier Recognition Programs (03.06, PPT slide 22) a. Companies should recognize and celebrate the achievements of their best suppliers. b. Award winners exemplify true partnerships, continuous improvement, organizational commitment, and excellence. c. Award-winning suppliers serve as role models for other suppliers.

Supplier Relationship Management (03.07, 03,08 PPT slides 23-26) a. Streamlining processes and communication between buyer and supplier using software applications b. SRM software automates the exchange of information resulting in: 1. improved procurement efficiency 2. lower business costs 3. real-time visibility 4. faster communication between buyer and seller 5. enhanced supply chain collaboration c. The five key points of an SRM system are: 1. Automation handles routine transactions 2. Integration spans multiple departments, processes, and software applications for internal users and external partners 3. Visibility of information and process flows in and between organizations 4. Collaboration through information sharing 5. Optimization of processes and decision making through enhanced analytical tools d. The difference between transactional SRM and analytic SRM is presented.

[return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

21

1. Discussion: Certification Duration 15 minutes. a. Compare and contrast ISO 9000 and ISO 14000. b. Answer: ISO 9000 is focused on quality management, achieving control of processes, and continuous improvement, while ISO 14000 is focused on environmental management.

Both are sets of international standards that provide an effective management approach.

ISO 9000 is a quality management system, while ISO 14000 is an environmental management system.

2. Discussion: Performance metrics Duration 30 minutes a. The Theory of Constraints (TOC) approach advocates utilizing Throughputdollar-days (TDD) and Inventory-dollar-days (IDD) as measurements of suppliers. Look online to learn more about this approach to explain it and discuss why it is beneficial. b. Answer: A delay of one day is different from a delay of 10 days. A delay on a $1K order is different from a delay on a $50K order. The TDD measurement judges the supplier’s due-date performance by summing, across all orders, the amount of time that the order is late multiplied by the value of the delayed order. The objective of this prime measurement is to reach 0 TDD. c. IDD is the summation of the value of inventory being held at its totally variable cost multiplied by the number of days held. The objective is to reduce this secondary measurement. d. The key is to realize that both time and money are important with respect to supplier performance. The primary measurement ensures reliability, while the secondary measurement focuses on improving effectiveness.

[return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 4: Ethical and Sustainable Sourcing

TABLE OF CONTENTS Table of Contents ...................................................................................................................................... 22 Purpose and Perspective of the Chapter ................................................................................................. 24 List of Instructor Downloads .................................................................................................................. 24 Chapter Objectives ................................................................................................................................... 24 Complete List of Chapter Activities and Assessments........................................................................... 24 Key Terms.................................................................................................................................................. 25

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

22

Chapter Outline ........................................................................................................................................ 27 Additional Discussion Questions ............................................................................................................. 30

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

23

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the importance of ethical and sustainable sourcing. First, definitions of each are provided, followed by explaining how to develop strategies for ethical and sustainable sourcing. Early supplier involvement is described, including its benefits. Utilizing supplier certifications is explained.

Strategic alliance development is described as a process, including how to achieve win-win agreements.

The practices of rewarding suppliers and benchmarking are presented. Finally, how to assess and improve the firm‘s sourcing function is described.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 4.1

Understand and appreciate the trends in ethical and sustainable sourcing.

LO 4.2

Define and describe the terms used in ethical and sustainable sourcing.

LO 4.3

Describe the differences between ethical and sustainable sourcing.

LO 4.4

Understand how ethical and sustainable sourcing strategies are developed and implemented.

LO 4.5

Understand the use of environmental supplier certifications.

LO 4.6

Discuss the benefits of strategic supplier alliances.

LO 4.7

Describe how and why sourcing practices are benchmarked.

LO 4.8

Discuss why firms would want to assess their sourcing capabilities.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

24

Chapter Objective 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8

PPT slides

Activity/Assessment

Duration

4 – 5, 18 - 20 6 - 13 7, 8, 11, 12 14 - 15 17 16, 21 - 26 27 - 28 29 - 31

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

25 minutes 45 minutes 15 minutes 15 minutes 15 minutes 30 minutes 15 minutes 15 minutes

[return to top]

KEY TERMS Benchmarking: the practice of copying what other businesses do best, resulting in a very effective way to quickly improve sourcing practices and supply chain performance.

Billback penalty: punishment equal to the costs resulting from late delivery or poor material quality.

Business ethics: the application of ethical principles to business situations.

Collaborative negotiations: when both sides work together to maximize the joint outcome or to create a joint optimal result.

Co-managed inventories: a shared form of VMI in which the buyer and supplier reach an agreement regarding how information is shared, order quantities, when an order is generated, and the delivery timing and location.

Corporate social responsibility: the practice of business ethics.

Distributive negotiations: when one party focuses on outcomes that favor their interests.

Early supplier involvement: working with suppliers early on in the development of new products to design parts at their facilities to match a buyer‘s specifications.

Ethical and environmental certifications: ethical and sustainable supplier certification programs.

Ethical sourcing: ―that which takes into account the public consequences of organizational buying or bringing about positive social change through organizational buying behavior.‖ Ethical Trading Initiative (ETI): an alliance of organizations seeking to take responsibility for improving working conditions and agreeing to implement the ETI Base Code, a standard for ethical practices for the firm and its suppliers.

Fair trade products: a product that is manufactured or grown by a disadvantaged producer in a developing country that receives a fair price for its goods.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

25

Functional products: maintenance, repair, and operating (MRO) materials and other commonly purchased items and supplies that are characterized by low profit margins, relatively stable demands, and high levels of competition.

Green purchasing: a practice of ensuring that purchased products or materials meet environmental objectives of the organization such as waste reduction, hazardous material elimination, recycling, remanufacturing, and material reuse.

Innovative products: might be new types of control mechanisms, new software applications, or new robotic systems that are characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition.

Integrative negotiations: another term for collaborative negotiations.

Outsource: buying materials, parts, services, and/or assembled components from suppliers in order to concentrate more resources and time on the firm‘s core business activities.

Purchasing spend: purchasing expense.

Rights and duties: an approach to deciding if an action is ethical by determining if the act is right in itself without regard for the consequences.

Strategic alliance development: an extension of supplier development (covered in Chapter 3) which refers to increasing the firm‘s key or strategic supplier‘s capabilities.

Strategic sourcing: managing the firm‘s external resources in ways that support the long-term goals of the firm, such as the development of ethical and sustainable sourcing initiatives, managing and improving supplier relationships capabilities, identification and selection of environmentally and socially conscious suppliers, and monitoring and rewarding supplier performance.

Strategic supplier alliances: formalized type of collaborative supplier relationship, involving commitments to long-term cooperation and trust, shared benefits and costs, joint problem solving, continuous improvement, and information sharing.

Supply base optimization: another term for supply base rationalization.

Supply base rationalization: the act of reducing purchases from marginal or poor-performing suppliers while increasing and concentrating purchases among their more reliable, top-performing suppliers.

Supply base reduction: another term for supply base rationalization.

Sustainable sourcing: sourcing that respects human rights and reduces poverty by creating profitable trading; works within the finite limits of the planet‘s resources; and moves towards a low carbon economy.

Three Ps: refers to people, planet, and profit.

Utilitarianism: an approach to deciding if an action is ethical by determining if the act creates the greatest good for the greatest number of people.

Value engineering: techniques used by suppliers to allow buying firms to design better quality and cost savings into the products from the time a product first hits the shelves.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26

Vendor managed inventory (VMI): suppliers manage their own inventories at the buyer‘s site, thus possibly reducing carrying costs and avoiding stockouts.

Win-win negotiations: another term for collaborative negotiations.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Ethical and Sustainable Sourcing Defined (04.02, 04.03, PPT slides 6-14) a. Business ethics is defined as the application of ethical principles to business situations. b. Two approaches for decided if an act is ethical are presented: 1. Utilitarianism decides based on whether the act creates the greatest good for the greatest number of people.

2. Rights and duties determine if the act is right without regard for the consequences. c. Ethical sourcing is defined as ―that which takes into account the public consequences of organizational buying or bringing about positive and social change through organizational buying behavior.‖ d. Ethical sourcing practices are: 1. Promoting diversity by intentionally buying from small firms, ethnic minority businesses, and women-owned enterprises.

2. Discontinuing purchases from firms that use child labor or other unacceptable labor practices.

3. Buying from firms in underdeveloped nations. e. Ethical sourcing policies should include: 1. Determining where all purchased goods come from and how they are made.

2. Knowing if suppliers promote basic workplace principles (such as decent wages, ability to unionize, and not using child labor).

3. Use of ethical ratings for suppliers (along with other standard performance criteria) 4. Reporting of supplier compliance performance to shareholders.

5. Providing detailed ethical sourcing expectations to suppliers. f. The Ethical Trading Initiative (ETI) is an alliance of organizations seeking to take responsibility for improving working conditions and agreeing to implement the ETI Base Code.

1. The ETI Base Code, which consists of nine clauses, is a standard for ethical practices for the firm and its suppliers as shown in Table 4.1.

2. Fair trade product: refers to one that is manufactured or grown by a disadvantaged producer in a developing country that receives a fair price for its goods.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27

II.

III.

g. Sustainable sourcing a process of purchasing goods and services that accounts for the long-term impact on people, profit, and the planet. h. Sustainable sourcing consists of three key areas of focus: 1. Respecting human rights and reducing poverty by creating profitable trading.

2. Working within the finite limits of the planet‘s resources.

3. Moving towards a low carbon economy. i. Green purchasing ensures purchased products or materials meet environmental objectives of the organization such as waste reduction, hazardous material elimination, recycling, remanufacturing, and material reuse. j. Sustainability: includes green purchasing, as well as financial performance and some aspects of social responsibility. k. Leading practices for sustainability are: 1. Grow revenues by introducing new and differentiated sustainable products and services.

2. Reduce costs by increasing resource efficiencies, avoiding noncompliant suppliers, and rethinking transportation and distribution systems.

3. Manage risk by managing reputation, and meeting regulations.

4. Build intangible assets by further enhancing reputation through responsibility.

Developing Ethical and Sustainable Sourcing Strategies (04.04, PPT slides 14-15) a. Two types of products with differing supply chains are described: 1. Functional products are maintenance, repair, and operating (MRO) materials and other commonly purchased items and supplies that are characterized by low profit margins, relatively stable demands, and high levels of competition.

2. Innovative products might be new types of control mechanisms, new software applications, or new robotic systems that are characterized by short product life cycles, volatile demand, high profit margins, and relatively less competition. b. The six steps of the ethical and sustainable sourcing strategy framework are presented and described in Table 4.3. The steps are: 1. Establish corporate ethical and sustainable sourcing policies.

2. Train purchasing staff and communicate policies.

3. Prioritize items based upon ethical and sustainability opportunities and ease of implementation. Get started.

4. Develop a performance measurement system.

5. Monitor progress and make improvements. Increase use of green and fair trade and green products and services.

6. Expand focus to include other departments and customers.

Ethical and Sustainable Sourcing Initiatives (04.01, PPT slides 16-20) a. Strategic supplier alliances are formalized type of collaborative relationship, involving commitments to long-term cooperation and trust, shared benefits and costs, joint problem solving, continuous improvement, and information sharing. b. The use of ethical and environmental certifications for suppliers is increasing. c. Supply base rationalization the act of reducing purchases from marginal or poorperforming suppliers while increasing and concentrating purchases among their more reliable, top-performing suppliers. d. Outsourcing involves buying materials, parts, services, and/or assembled components from suppliers to concentrate more resources and time on the firm‘s core business activities.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

28

IV.

V.

VI.

e. Vendor managed inventories (VMI) is when suppliers manage buyer inventories to reduce inventory carrying costs and avoid stockouts for the buyer. f. Co-managed inventories is a shared form of VMI in which the buyer and supplier reach an agreement regarding how information is shared, order quantities, when an order is generated, and the delivery timing and location.

Early Supplier Involvement (04.05, PPT slide 18) a. Early supplier involvement is about working with suppliers early on in the development of new products to design parts at their facilities to match a buyer‘s specifications. b. Value engineering are techniques used by suppliers to allow buying firms to design better quality and cost savings into the products from the time a product first hits the shelves.

Strategic Alliance Development (04.06, PPT slides 21-26) a. Strategic alliance development refers to improving the capabilities of key trading partners. b. Strategic alliance development results in better market penetration, access to new technologies and services, and better service. c. The five steps for maintaining a successful strategic alliance program are: 1. Determine the key strategic parameters to organize around.

2. Facilitate the dissemination of information.

3. Elevate the importance of the strategic alliance program.

4. Provide continuous evaluation of alliance performance, visibility, and support.

5. Reward suppliers as performance merits. d. Two types of negotiations are described: 1. Collaborative (win-win) negotiations are when both sides work together to maximize the joint outcome or to create a joint optimal result. The four-step process is described in Table 4.5: (1) Build a preparation process.

(2) Develop a negotiation database.

(3) Design a negotiation launch process.

(4) Institute a feedback mechanism.

2. Distributive negotiations are when one party focuses on outcomes that favor their interests.

Rewarding Supplier Performance (04.06, PPT slide 26) a. Rewarding suppliers for improving or maintaining high levels of performance achieves several objectives: 1. It provides an incentive to all suppliers to meet and surpass specific performance goals.

2. Provides an incentive to marginal suppliers to achieve a level of performance that will allow their status to be upgraded, potentially resulting in continued business.

3. It can give suppliers an incentive to create and share rewards, in turn, with their suppliers. b. Punishment is a negative reward, may be to reduce future business; or a billback penalty equal to the incremental costs resulting from a late delivery or poor quality. c. Suppliers can benefit in the following ways: 1. A share of the cost reduction resulting from supplier improvements.

2. A share of the cost savings resulting from supplier‘s suggestions made to the focal firm.

3. More business and/or longer contracts for higher performance.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29

VII.

VIII.

4. Access to in-house training seminars and other resources.

5. Company and public recognition in the form of awards.

Benchmarking Successful Sourcing Practices (04.07, PPT slides 27-28) a. Benchmarking is the practice of copying what other businesses do best, resulting in a very effective way to quickly improve sourcing practices and supply chain performance. b. Examples of collecting benchmarking data are: 1. Using surveys distributed to customers and suppliers.

2. Discussing sourcing strategies with colleagues.

3. Collecting published trade information. c. Successful purchasing practices are: 1. Use of central database to access information.

2. Software applications for sharing information.

3. Use of the Internet for supplier searches.

4. Alliances with key suppliers for specific components.

5. Supplier certification and elimination of incoming quality checks for key deliveries.

6. Involving suppliers in research and development of new products.

7. Reducing the firm‘s supply base.

8. Continuous measurement of supplier performance and setting targets.

9. Creating an ethical and sustainable supply chain.

Assessing and Improving the Firm‘s Sourcing Functions (04.08, PPT slides 29-31) a. The sourcing function is one of the most value-enhancing functions in any organization. b. Performance is periodically monitored against set standards, goals, and/or industry benchmarks. c. Surveys or audits can be administered as self-assessments as part of the evaluation process. d. The assessment criteria to evaluate purchasing performance are: 1. Participating in value engineering/value analysis efforts.

2. Finding and evaluating ethical and sustainable suppliers.

3. Optimizing the supply base.

4. Managing and developing local, regional, and global suppliers.

5. Creating early supplier involvement initiatives.

6. Creating strategic supplier alliances.

7. Furthering the integration and development of existing key suppliers.

8. Contributing to new product development efforts.

9. Initiating supplier cost reduction programs.

10. Contributing to the improvement of purchased product and service quality.

11. Maintaining and improving internal cooperative relationships.

[return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

30

1. Discussion: Great example of business ethics or sustainability 30 minutes. a. Find and discuss a great example of great ethical decision making in business to share with the class. Be sure to include the impact of the approach on performance. b. Answer: Ten great examples are provided in this article: https://www.greatworklife.com/ethical-decision-making-in-businessexamples/#10_Great_Examples_of_Ethical_Decision_Making_In_Business. One is Costco choosing to pay fair wages, while another is Best Buy‘s commitment to sustainability. In 2019, Best Buy was named by Barron‘s as America‘s most sustainable company. The Geek Squad team members drive hybrid cars. The company has recycled over two billion pounds of undesired electronics. Best Buy is the only national electronics chain still in business in the US. 2. Discussion: Example of scandal regarding ethics Duration 30 minutes a. Find and discuss a great example of unethical approaches in business that resulted in scandal to share with the class. Be sure to include the impact of the approach on performance. b. Answer: The following article discusses the ten largest ethical business scandals: https://www.ig.com/en/news-and-trade-ideas/top-10-biggestcorporate-scandals-and-how-they-affected-share-pr-181101. Enron was a huge scandal about cooking the books. The company ended up filing for bankruptcy. Another example is the Volkswagen emissions scandal. The US Environmental Protection Agency discovered that VW had cheated on emissions tests. The share price dropped dramatically. It cost the company over 31 billion Euros in fines and settlements. [return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 5: Demand Forecasting

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

2 Complete List of Chapter Activities and Assessments............................................................................. 2 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 4 Additional Discussion Questions ............................................................................................................... 8

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of demand forecasting. The role and importance of it are described.

Collaborative planning, forecasting, and replenishment (CPFR) is explained. The two categories of qualitative and quantitative forecasting techniques are defined and presented with the various types of each explained. Next, various ways to measure forecasting performance are presented. Finally, the chapter covers the topics of demand sensing, the use of artificial intelligence (AI), and machine learning (ML), changes recommended based on the pandemic, useful forecasting websites and software, and cloud-based forecasting.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 5.1

Explain the role of demand forecasting in a supply chain.

LO 5.2

Identify the components of a forecast.

LO 5.3

Compare and contrast qualitative and quantitative forecasting techniques.

LO 5.4

Assess the accuracy of forecasts.

LO 5.5

Explain collaborative planning, forecasting, and replenishment.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective 5.1 5.2 5.3

PPT slides

Activity/Assessment

Duration

4, 5, 31 - 36 12 7 - 23

Activity in PPT Activity in PPT Activity in PPT

1 hour 15 minutes 1 hour

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5.4 5.5

24 - 30 6

Activity in PPT Activity in PPT

30 minutes 15 minutes

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KEY TERMS Artificial intelligence (AI): basically, is self-learning machines.

Business cycle: variation in demand known as a recession or expansion tending to occur every eight to ten years.

Cause-and-effect forecasting: assumes that one or more factors (independent variables) are related to demand which can therefore be used to predict future demand.

Cloud-based forecasting: using supplier-hosted or software-as-a-service (SaaS) advanced forecasting applications that are provided to a company on a subscription basis.

Collaborative planning, forecasting, and replenishment (CPFR): strives for cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain by sharing information between suppliers and retailers.

Demand sensing: a way of identifying short-term trends quickly by not only depending on historical data, but also on real time inputs from external sources about the prevailing market situation, using artificial intelligence or machine learning to recognize patterns, or an automated model with self-adjusting algorithms.

Exponential smoothing forecast: is a sophisticated weighted moving average forecasting technique in which the forecast for the next period‘s demand is the current period‘s forecast adjusted by a fraction of the difference between the current period‘s actual demand and forecast.

Forecast bias: measures the tendency of a forecast to be consistently higher or lower than the actual demand, over time.

Forecast error: the difference between the actual quantity and the forecast.

Linear trend forecast: uses simple linear regression to fit a line to a series of data occurring over time.

Machine learning (ML): a type of AI that uses algorithms to better predict data.

Multiple regression forecast: uses several explanatory variables (independent) to predict the dependent variable of demand.

Naive forecast: the estimate for the next period is equal to the demand for the immediate past period.

Qualitative forecasting methods: are based on intuition or judgmental evaluation and are generally used when data is limited, unavailable, or not currently relevant.

Quantitative forecasting methods: use mathematical models and relevant historical data to generate forecasts.

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Simple moving average forecast: uses historical data to generate a forecast and works well when demand is fairly stable over time; it averages the data points to generate the forecast.

Time series forecasting: is based on the assumption that the future is an extension of the past; thus, historical data can be used to predict future demand.

Tracking signal: is used to determine if the forecast bias is within the acceptable control limits.

Weighted moving average forecast: is a weighted average of the n-period observations of past demand using unequal weights.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. The Importance of Demand Forecasting (05.01, 05.05, PPT slides 4-6)

II.

a. Organizations moving to a more effective demand-driven supply chain. b. Suppliers must find ways to better match supply and demand. c. Improved forecasts benefit all trading partners in the supply chain and mitigates supplydemand mismatch problems. d. Ways to closely match supply and demand: 1. Supplier holds plenty of stock available for delivery at any time.

2. Use of flexible pricing to change demand.

3. Utilize short-term methods to increase supply, such as overtime, subcontracting, or temporary workers. e. A forecast is an estimate of future demand and provides the basis for planning decisions. f. The goal is to minimize deviation between actual demand and forecast. g. The factors that influence demand must be considered when forecasting. h. Buyers and sellers should share all relevant information to generate a single consensus forecast. i. Good forecasting benefits are lower inventories, reduced stock outs, smoother production plans, reduced costs, and improved customer service. j. Collaborative, planning, forecasting, and replenishment (CPFR) seeks cooperative management of inventory through joint visibility and replenishment of inventory throughout the supply chain by information sharing between suppliers and retailers.

1. Technological, organizational, and cultural challenges are reasons why widespread adoption of CPFR has stalled.

2. Without a holistic view of account pricing, promotion, and new product introductions, the promise of collaborative initiatives was not realized.

Demand Forecasting Techniques (05.02, 05.03, PPT slides 7-23) a. Two categories of forecasting techniques exist:

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b.

c.

d. e. f.

g.

1. Qualitative methods are based on opinions and intuition and are generally used when data is limited, unavailable, or not currently relevant.

2. Quantitative methods use mathematical models and relevant historical data to generate forecasts.

Four types of qualitative forecasting techniques are presented and explained.

1. Jury of executive opinion: (1) A group of senior management executives collectively develop the forecast.

(2) This technique is good for long-range planning and new product introductions.

2. Delphi method: (1) Internal and external experts are surveyed during several rounds.

(2) Summary of responses is sent out to all the experts; they can modify their responses in next round.

(3) This technique is good for high-risk technology forecasting; large, expensive projects; or major new product introductions.

3. Sales force composite: (1) It is based on sales force‘s knowledge of the market and estimates of customer needs.

(2) A tendency exists for sales force to under-forecast.

4. Consumer survey (1) A questionnaire uses inputs from customers on future purchasing needs, new product ideas, and opinions about existing or new products.

Two categories of quantitative forecasting methods exist.

1. Time series forecasting: (1) This technique assumes the future is an extension of the past.

(2) The various types are naïve, simple moving average, weighted moving average, exponential smoothing, and linear trend.

2. Cause-and-effect forecasting: (1) This technique assumes one or more factors (independent variables) predict future demand (2) The two types are simple linear regression, and multiple regression.

All quantitative methods become less accurate as the forecast‘s time horizon increases.

For long-time horizon forecasts, use a combination of quantitative and qualitative techniques.

The data should be plotted to detect the following components of time series models: 1. Trend variations are one that are increasing or decreasing over many years.

2. Cyclical variations are wavelike movements that are longer than a year (e.g., business cycle).

3. Seasonal variations show peaks and valleys that repeat over consistent interval (i.e., hours, days, weeks, months, seasons, or years).

4. Random variations are due to unexpected or unpredictable events such as natural disasters.

Time series forecasting techniques are presented, along with their formulas, and in some cases graphs.

1. Naïve forecast is the estimate of the next period is equal to the demand in the past period.

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35

III.

IV.

V.

2. A simple moving average forecast uses historical data to generate a forecast. And works well when demand is stable over time.

3. A weighted moving average forecast is based on an n-period weighted moving average with unequal weights.

4. An exponential smoothing forecast is a type of weighted moving average, with only two data points needed: the forecast and actual demand for the previous time period.

5. A linear trend forecast consists of a trend being estimated using simple linear regression to fit a line to a time series. h. Cause-and-effect methods are presented, along with their formulas and graphs.

1. Simple regression: (1) Only one explanatory variable is used.

(2) This method is similar to the linear trend model.

(3) The x variable is no longer time, but rather an explanatory variable.

2. Multiple regression consists of several explanatory variables being used to predict the dependent variable of demand.

Forecast Performance (05.04, PPT slides 24-30) a. Forecast error is the difference between the actual quantity and the forecast. b. Several other measures of forecast performance that can also be calculated and defined with formulas presented.

1. Mean absolute deviation (MAD): a MAD of 0 indicates the forecast exactly predicted demand.

2. Mean absolute percentage error (MAPE) provides a perspective of the true magnitude of the forecast error.

3. Mean squared error (MSE) is analogous to variance since large forecast errors are heavily penalized.

4. Running Sum of Forecast Errors (RSFE) indicates bias in the forecasts or the tendency of a forecast to be consistently higher or lower than actual demand.

5. Tracking signal determines if forecast is within acceptable control limits.

(1) If tracking signal falls outside pre-set control limits, then (a) There is bias problem with the forecasting method. (b) Evaluation of forecast generation is warranted. c. Biased forecasts will lead to excessive inventories or stockouts. d. The key to accurate forecasts is collaboration with different partners inside and outside of the firm working together to eliminate forecasting error. e. Collaboration can lead to significant improvements in forecasting accuracy.

Demand Sensing (05.01, PPT slide 31) a. Demand sensing is a way of identifying short-term trends quickly so companies can better forecast what, when, and where consumers want goods. b. A good one would include: 1. Real-time inputs from several external sources to generate forecasts of the prevailing market situation.

2. Using pattern recognition technologies from AI and ML from sources of big data to generate useful information.

3. An automated model with self-adjusting algorithms that can learn from data without human intervention and generate forecasts for execution daily.

Demand Planning During the COVID-19 Pandemic and Beyond (05.01, PPT slide 32)

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36

VI.

VII.

VIII.

IX.

a. The recommended plans of action are: 1. Change forecasting models.

2. Identify future demand drivers.

3. Understand supply chain dynamics.

4. Increase communication with customers.

5. Restructure Sales and Operations Planning processes.

6. Plan product portfolio.

7. Clean data for the future.

Useful Forecasting Websites (05.01, PPT slide 33) a. Three useful forecasting websites are: 1. Institute for Business Forecasting & Planning: https://ibf.org/ 2. International Institute of Forecasters: www.forecasters.org 3. Business Forecasting: www.businessforcastingblog.com Forecasting Software (05.01, PPT slide 34) a. Software can be used to simplify the process and save the time required to generate a forecast when using a quantitative method. b. The four presented are: 1. Business Forecast Systems, Inc: www.forecastpro.com 2. John Galt: https://johngalt,com/forecastx-new/ 3. Mi9 Retail: https://mi9retail.com/retail-demand-management-software/ 4. SAS: https://www.sas.com/cs_cz/software/supply-chain/demand-drivenforecasting.html Artificial Intelligence and Machine Learning in Demand Forecasting (05.01, PPT slide 35) a. Artificial Intelligence (AI) basically is self-learning machines. b. Machine Learning (ML) is a type of AI that uses algorithms to better predict data. c. MIT study conclusions are: 1. Better data governance is needed.

2. Data privacy emerges as an opportunity.

3. Fostering an analytics culture improves innovation.

Cloud-based Forecasting (05.01, PPT slide 36) a. Cloud-based forecasting is supplier-hosted or software-as-a-service (SaaS) advanced forecasting applications that is provided on a subscription basis. b. Its benefits are: 1. Increased data storage and data analysis capabilities 2. New capabilities without extensive training 3. Reduction in IT costs 4. Improvement in forecast accuracy 5. Reduction in stockouts and inventory carrying costs 6. Improvement in employee productivity

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Typical forecasting realities 30 minutes. a. Discuss the typical forecasting realities that are common. b. Answer: Short-term and aggregate forecasts are more accurate than long-term forecasts.

Forecast performance is not usually great, though it can be in some cases. Inaccuracies lead to the two most significant negative effects that exist in retail: stockouts and surpluses. Both cause many negative outcomes, including on operational and financial performance.

2. Discussion: How to deal with inaccurate forecasts Duration 45 minutes a. Research how the Theory of Constraints (TOC) approach successfully deals with inaccurate forecasts in its pull replenishment solution and discuss what you learned. b. Answer: The TOC solution is focused on replenishing based on consumption, rather than forecast for the most part. Each link in the supply chain sets an inventory target based on the maximum expected demand during the reliable replenishment time. Each link orders based on what is sold with adjustments based on buffer management. The inventory targets or buffers are divided into three equal zones with the green zone being the top third, the yellow in the middle and the red being the bottom third. We track over time whether the buffer status is too much in the green or red zones. In these cases, the targets are adjusted by a third with new zone levels being designated. c. TOC utilizes forecasts to adjusts the buffers if expected changes in demand are predicted. We also realize that the most accurate forecasts are at the aggregate levels. Therefore, most of the inventory will be held back in the supply chain, rather than at the retail level. d. Two good resources to review are: i. https://en.m.wikipedia.org/wiki/Theory_of_constraints ii. https://medium.com/theory-of-constraints/answer-to-the-questionwhat-is-the-right-inventory-toc-64ad3ddc4c9

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 6: Resource Planning Systems

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38

TABLE OF CONTENTS Table of Contents

39

Purpose and Perspective of the Chapter

40

List of Instructor Downloads 40 Chapter Objectives

40

Complete List of Chapter Activities and Assessments 40 Key Terms

41

Chapter Outline

43

Additional Discussion Questions

46

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

39

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers material planning, capacity planning, and enterprise resource planning, which are all widely used for balancing demand with supply in both manufacturing and service organizations. An example was used to demonstrate how the aggregate production plan, master production schedule, material requirements plan, and distribution requirements plan are related to each other. This chapter also briefly discusses how the various material plans are related to the capacity plans. Finally, this chapter discusses the enterprise resource planning system, including its relationships with the traditional MRP and MRP-II systems, its advantages and disadvantages, implementation issues and ERP modules.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 6.1

Describe the chase, level, and mixed aggregate production strategies.

LO 6.2

Describe the hierarchical operations planning process in terms of materials planning (APP, MPS, MRP) and capacity planning (RRP, RCCP, CRP).

LO 6.3

Compute available-to-promise quantities, MRP explosion, and DRP implosion.

LO 6.4

Describe the limitations of legacy MRP systems, and why organizations are migrating to integrated ERP systems.

LO 6.5

Describe an ERP system and understand its advantages and disadvantages.

LO 6.6

Describe best-of-breed versus single integrator ERP implementations.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective

PPT slides

Activity/Assessment

Duration

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40

6.1 6.2 6.3 6l4 6.5 6.6

8 - 11 6 - 27 20 – 25, 28 29 - 33 31, 32, 36 34

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

45 minutes 1 hour 1.5 hours 30 minutes 30 minutes 15 minutes

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KEY TERMS Aggregate production plan (APP): a long-range materials plan that sets the aggregate output rate, workforce size, utilization and inventory, and/or backlog levels for an entire facility. It translates annual business plans and demand forecasts into a production plan for all products.

Available-to-promise (ATP) quantity: is the uncommitted portion of the firm‘s planning production (or scheduled MPS).

Best-of breed solution: picks the best application or module for each individual function required for the supply chain.

Bill of materials (BOM): is an engineering document that shows an inclusive listing of all component parts and subassemblies making up the end item.

Bullwhip effect: is the problem of a missed due date or stockout having cascading negative effects downstream in the supply chain.

Capacity: refers to a firm‘s labor and machine resources in terms of the maximum output per period of time that can be completed.

Capacity requirements planning (CRP): is a short-range planning technique that is used to check the feasibility of the material requirements plan.

Chase production strategy: adjusts capacity to match the demand pattern by hiring and laying off workers as needed.

Closed-loop MRP: is the expansion of material requirements planning to include aggregate production planning, master production scheduling, and capacity requirements planning.

Cloud computing: entails using software by simply logging on to remote servers without installing any software or storing data on local hard drives.

Demand time fence: is the firmed segment of the planning horizon.

Dependent demand: is the demand of the components and subassemblies needed for the independent demand final products.

Distribution requirements planning (DRP): is a time-phased finished goods inventory replenishment plan in a distribution network.

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41

Electronic data interchange (EDI): is an information system for relaying planned order releases to suppliers to coordinate production and purchasing.

Enterprise resource planning (ERP): is a type of information system that evolved from a manufacturing information system to directly connect all functional areas and operations of an organization, and in some cases, its suppliers and customers via a common software infrastructure and database.

Implosion: consists of the planned order releases of the central supply warehouse being passed on to the manufacturing facility where they are absorbed into the MPS. Indented bill of materials: is a multilevel bill of materials which is presented based on each level number increasing by lone level at each indentation.

Independent demand: is the actual demand of the final product.

Intermediate: normally span six to eighteen months and are created after long-range plans are established.

Lag capacity strategy: is a reactive approach that adjusts its capacity in response to demand.

Lead capacity strategy: is a proactive approach that adds or subtracts capacity in anticipation of future market conditions and demand.

Legacy MRP system: is a broad label used to describe an older information system that usually works at an operational level to schedule production within an organization.

Level production strategy: relies on a constant output rate and capacity while varying inventory and backlog levels to handle the fluctuating demand pattern.

Long-range: are established first and usually cover a year or more, tend to be more general, and specify resources in terms of aggregate hours and units, which are then used to guide intermediate or mediumrange plans.

Make-to-order: producing one-of-a-kind, specialty products based on customer specifications.

Make-to-stock: producing off-the-shelf, standard goods.

Manufacturing resource planning (MRP-II): combines material requirements planning (MRP) with master production scheduling, rough-cut capacity planning, capacity requirements planning, and other operations planning software modules.

Master production schedule (MPS): medium-range plan that is more detailed than the aggregate plan that shows the quantity and timing of the end items that will be produced.

Match-tracking capacity strategy: is a moderate strategy that adjusts capacity in small amounts in response to demand and changing market conditions.

Material requirements plan (MRP): short-range materials plan that provides the details regarding the required component parts that are time-phased to support the master production schedule.

Material requirements planning: planning process converting end items from the master production schedule into a set of time-phased component parts requirements.

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42

Medium-range: normally span six to eighteen months and are created after long-range plans are established.

Mixed production strategy: strives to maintain a stable core workforce while using other short-term means such as overtime, an additional shift, subcontracting, or the hiring of part-time and temporary workers to manage short-term high demand.

Option overplanning: consists of increasing total planned production to cover uncertainty in demand.

Planned order releases: are the net requirements of components based on the appropriate lead times to ensure orders are released on time.

Planning factor: shows the parent-component relationships and the exact quantity of each component.

Planning time fence: is the tentative segment of the planning horizon.

Product family: consists of different products that share similar characteristics, components, or manufacturing processes.

Resource requirements planning (RRP): is a long-range capacity planning module used to check whether aggregate resources can meet the aggregate production plan.

Rough-cut capacity plan (RCCP): is the medium-range capacity plan that is used to check the feasibility of the master production schedule.

Short-range planning horizon: usually cover a few days to a few weeks depending on the type and size of the firm and are created after intermediate or medium range plans are established.

Single integrator solution: picks all the desired applications from a single vendor for the ERP system.

Super bill of materials: enables the firm to forecast the total demand of a type of product and then break down the forecast into different models and options using percentages instead of forecasting each item separately.

System nervousness: can be defined as a situation wherein a small change in the upper-level production plan causes a major change in the lower-level production plan.

Time fence system: separates the planning horizon into two segments: a firmed and a tentative segment.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Operations Planning (06.01, PPT slides 6-7) a. Operations Planning a hierarchical process in terms of material and capacity planning.

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II.

III.

IV.

b. Three broad categories of operations are utilized: 1. Long-range are established first and usually cover a year or more, tend to be more general, and specify resources in terms of aggregate hours and units, which are then used to guide intermediate or medium-range plans.

2. Intermediate or medium range normally span six to eighteen months and are created after long-range plans are established.

3. Short-range usually cover a few days to a few weeks depending on the type and size of the firm and are created after intermediate or medium range plans are established.

The Aggregate Production Plan (06.01, PPT slides 8-11) a. An aggregate production plan a long-range materials plan that sets the aggregate output rate, workforce size, utilization and inventory, and/or backlog levels for an entire facility.

1. It translates annual business plans and demand forecasts into a production plan for all products.

2. Created by product family which consists of different products that share similar characteristics, components, or manufacturing processes. b. Three basic production strategies are utilized by organizations for creating the aggregate plan.

1. The chase strategy adjusts capacity to match the demand pattern by hiring and laying off workers as needed.

2. The level strategy relies on a constant output rate and capacity while varying inventory and backlog levels to handle the fluctuating demand pattern.

3. The mixed strategy strives to maintain a stable core workforce while using other short-term means such as overtime, an additional shift, subcontracting, or the hiring of part-time and temporary workers to manage short-term high demand.

4. Examples of each are provided.

The Master Production Schedule (06.02, PPT slides 12-16) a. The master production schedule is a medium-range plan that is more detailed than the aggregate plan that shows the quantity and timing of the end items that will be produced. b. The schedule time fence is described.

1. The demand time fence is the firmed segment of the planning horizon.

2. The planning time fence is the tentative segment of the planning horizon. c. Available-to-promise quantities is the portion of the planned production which is not committed.

1. An example of how to calculate ATP quantities is provided.

The Bill of Materials (06.03, PPT slides 17-19) a. The bill of materials (BOM) is an engineering document that shows an inclusive listing of all component parts and subassemblies making up the end item. b. The two types of demand are described.

1. Independent demand is the actual demand of the final product.

2. Dependent demand is the demand of the components and subassemblies needed for the independent demand final products. c. One way of presenting the BOM is indented so that each level number increases by one corresponding to each indentation. d. Another type of BOM is the super bill of materials, which enables the firm to forecast the total demand of a type of product and then break down the forecast into different models and options using percentages instead of forecasting each item separately.

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V.

VI.

VII.

VIII.

IX.

X.

The Material Requirements Plan (06.02, 06.03, PPT slides 20-25) a. The material requirements plan (MRP) converts end items from the master production schedule into a set of time-phased component parts requirements. b. Closed-loop MRP is the expansion of material requirements planning to include aggregate production planning, master production scheduling, and capacity requirements planning. c. MRP takes the information from the BOM to compute the net requirements of the final product and components, and then offsets the net requirements with appropriate lead times to ensure orders are released on time to fabricate or purchase the lower-level components.

1. This information, called planned order releases, are the net requirements of components based on the appropriate lead times to ensure orders are released on time.

2. An example of MRP computation without net requirements and planned order receipts is provided, followed by a different example with net requirements and planned order receipts.

Capacity Planning (06.02, PPT slides 26-27) a. Capacity refers to the firm‘s labor and machine resources.

1. Resource requirements planning is long-range capacity planning to meet the aggregate production plan.

2. A rough-cut capacity plan is utilized to check the feasibility of the master production schedule.

3. Capacity requirements planning is a short-range capacity planning technique utilized to check the feasibility of the material requirements plan. b. Three commonly recognized capacity strategies are described.

1. A lead capacity strategy is a proactive approach that adds or subtracts capacity in anticipation of future market conditions and demand.

2. A lag capacity strategy is a reactive approach that adjusts its capacity in response to demand.

3. A match-tracking capacity strategy is a moderate strategy that adjusts capacity in small amounts in response to demand and changing market conditions.

The Distribution Requirements Plan (06.03, PPT slide 28) a. The distribution requirements plan (DRP) is a time-phased finished-goods inventory replenishment plan in a distribution network. b. It is a logical extension of an MRP system. c. A clear benefit is visibility to avoid stocking excess finished goods. d. A DRP example is provided.

The Legacy Material Requirements Planning Systems (06.04, PPT slide 29) a. A legacy MRP system is a broad label for describing an older information system that usually works at an operational level to schedule production.

Manufacturing Resource Planning (06.04, PPT slide 30) a. The evolution of MRP resulted in the closed-loop MRP system, followed by manufacturing resource planning (MRP-II). b. Additional functions of the business were added to MRP-II. The Development of Enterprise Resource Planning Systems (06.05, PPT slides 31-32) a. Enterprise Resource Planning (ERP) systems tie together a variety of specialized systems, such as manufacturing resource planning, logistics and warehousing, accounting and

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45

XI.

XII.

XIII.

XIV.

finance, human resource management, customer relationship management, and supply chain management using a common, shared, centralized database.

The Rapid Growth of Enterprise Resource Planning Systems (06.05, PPT slide 33) a. The use of ERP has spread from manufacturing to services. b. It became popular due to concerns regarding Y2K impacts.

Implementing Enterprise Resource Planning Systems (06.06, PPT slides 34-35) a. Two types of solutions are described.

1. A best-of-breed solution picks the best application or module for each individual function for the supply chain.

2. The single integrator approach picks all the desired applications from a single vendor. b. The various reasons for ERP failure are lack of top management commitment, lack of adequate resources, lack of proper training, lack of communication, and an incompatible system environment.

Advantages and Disadvantages of Enterprise Resource Planning Systems (06.05, PPT slide 36) a. The advantages of ERP are added visibility of inventories throughout the supply chain, the ability to make better decisions swiftly, standardizing manufacturing processes and efficiently tracking performance. b. The disadvantages of ERP are substantial capital requirements, needing to change the business model and implementation challenges.

Enterprise Resource Planning Software Applications (06.05, PPT slides 37-38) a. ERP systems consists of many models that are linked together in real time. b. Cloud computing solutions enable companies to work off the internet without downloading all the software and data to computer hard drives.

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: MRP Duration 15 minutes. a. What can cause problems in successfully using MRP? b. Answer: The MPS must be feasible and have frozen periods of time using a demand time fence, which can be achieve through capacity resource planning. The BOM and inventory records must be accurate. Lack of proper training is another possible factor leading to failure.

2. Discussion: MRP Duration 15 minutes a. What assumptions about reality are incorporated into MRP? b. Answer: MRP assumes that there is sufficient capacity available. In addition, lead times are constant and known or can be effectively estimated. MRP also assumes demand is fairly constant. Stock accuracy and order status are assumed to be accurate.

3. Discussion: Operations Planning Duration 15 minutes a. Compare and contrast MRP, DRP, and ERP.

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b. Answer: Each of them is a time-phased planning process for operations management decisions that rely on computer technology. MRP is focused on planning the release of orders and materials to create the end items planned in the MPS. DRP focuses on managing finished goods replenishment in a distribution network. ERP is a comprehensive system for managing not only operations, but other business functions as well.

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2022 Cengage, 978-035-771-5680; Chapter 7: Inventory Management

TABLE OF CONTENTS Table of Contents ...................................................................................................................................... 47 Purpose and Perspective of the Chapter ................................................................................................. 48 List of Instructor Downloads .................................................................................................................. 48 Chapter Objectives ................................................................................................................................... 48 Complete List of Chapter Activities and Assessments........................................................................... 48 Key Terms.................................................................................................................................................. 49 Chapter Outline ........................................................................................................................................ 51 Additional Discussion Questions ............................................................................................................. 55

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47

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of inventory management. The various types of inventories are explained, in addition to the different costs of inventory and inventory turnovers. The ABC classification, ABC inventory matrix, and cycle counting are explained. RFID is presented, along with how it is used to manage inventory. The three models for ordering are covered: EOQ, Quantity Discount, and EMQ. Three statistical ROP models are explained. Finally, continuous and periodic review systems are addressed.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 7.1

Distinguish dependent from independent demand inventories.

LO 7.2

Describe the four basic types of inventories and their functions.

LO 7.3

Describe the costs of inventory and inventory turnovers.

LO 7.4

Describe ABC classification, the ABC inventory matrix, and cycle counting.

LO 7.5

Describe RFID and how it can be used in inventory management.

LO 7.6

Describe the EOQ model and its underlying assumptions.

LO 7.7

Describe the Quantity discount and the EMQ models and their relationships with the basic EOQ model.

LO 7.8

Describe the various statistical ROP models.

LO 7.9

Describe the continuous review and periodic review systems.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective

PPT slides

Activity/Assessment

Duration

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7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9

5 6 7-8 8 - 10 11 - 16 17 - 23 24 - 28 29 - 32 33 - 35

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

10 minutes 10 minutes 15 minutes 25 minutes 30 minutes 30 minutes 30 minutes 20 minutes 30 minutes

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KEY TERMS 80/20 rule: 80 percent of the objective can be achieved by doing 20 percent of the tasks, while the remaining 20 percent of the objective will take up 80 percent of the tasks.

ABC inventory control system: a useful tool to determine which inventories should be counted more frequently and managed more closely and which others should not.

ABC inventory matrix: combines two analyses to form a table: classification of inventory dollar usages into A, B, and C categories; and a second ABC analysis done based on current or on-hand inventory value.

Active RFID tags: markers on inventory that contain a power source to boost their range.

Big data: the collection of data sets that are too large and complex to be processed by traditional database management tools or data processing software applications.

Carrying costs: are the costs incurred for holding inventory in storage.

Continuous review system: inventory order is placed when the physical inventory level decreases to its reorder point.

Cycle counting: method for reconciling discrepancies between the physical inventory and inventory record on a monthly or periodic basis.

Dependent demand: the internal demand for parts based on the demand of the final product in which the parts are used.

Direct costs: are those that are directly traceable to the unit produced.

Economic manufacturing quantity (EMQ) model: a variation of the classic EOQ model that relaxes the instantaneous replenishment assumption by allowing usage or partial delivery during production.

Economic order quantity (EOQ) model: a classic independent inventory system that provides many useful ordering decisions.

Fixed costs: are independent of the output quantity.

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Fixed order quantity models: model for ordering decisions that assumes demand, delivery lead time, and other parameters are deterministic.

Holding costs: another term for carrying costs.

Independent demand: the demand for a firm‘s end products and has a demand pattern affected by trends, seasonal patterns, and general market conditions.

Indirect costs: those that cannot be traced directly to the unit produced and are synonymous with manufacturing overhead.

Inventory turnover ratio: the cost of revenue (cost of goods sold) divided by the average inventory.

Inventory turnovers: the ratio that shows how many times a company turns over its inventory in an accounting period, thus determining how efficiently a firm uses its inventory to generate revenue.

Near Field Communication (NFC): technology, which is a specialized subset of RFID, that is designed for short-range secured data exchange between NFC-enabled smart devices such as cell phones, tablets, wearables, and payment cards.

Order costs: are the direct variable costs associated with placing an order with the supplier.

Pareto analysis: another term for the 80/20 rule.

Passive RFID tags: markers on inventory that do not store power on the tags.

Periodic review system: physical inventory is reviewed at regular intervals, such as weekly or monthly, during which time orders are placed.

Price break point: the minimum quantity required to get a price discount.

Price-break model: another term for quantity discount model.

Production order quantity (POQ) model: another term for EMQ model.

Quantity discount model: a variation of the classic EOQ model that relaxes the constant unit price assumption to allow purchase quantity discounts.

Radio frequency identification (RFID): a system for tracking individual units of goods.

Reorder point (ROP): the lowest inventory level at which a new order must be placed to avoid a stockout.

Service level: in-stock probability.

Setup costs: are used in place of order costs to describe the costs associated with setting up machines and equipment to produce a batch of product.

Variable costs: change as a function of the output level.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Dependent Demand and Independent Demand (07.01, PPT slide 5) a. b. c. d. e. f.

II.

Inventory can be one of the most expensive assets of an organization.

Management must reduce inventory levels yet avoid stockouts.

Managing perishable inventory presents a unique challenge.

Excessive inventory (surpluses) is a sign of poor inventory management.

Excessive inventory and stockouts adversely affect financial performance.

Inventory management models are generally classified by the nature and types of inventory being considered into two categories of models: 1. Dependent demand is internal demand for parts based on the demand of the final product in which parts are used (e.g., subassemblies, components, and raw materials).

2. Independent demand is the demand for end products and has a demand pattern affected by trends, seasonal patterns, and general market conditions.

Concepts and Tools of Inventory Management (07.02, 07.03, 07.04, 07.05, PPT slides 6-16) a. Primary functions of inventory are to: 1. Buffer from uncertainty in the marketplace.

2. Decouple dependencies in the supply chain (e.g., safety stock). b. Four broad categories of inventories are: 1. Raw materials are unprocessed purchase inputs.

2. Work-in-process (WIP) is partially processed materials not yet ready for sale.

3. Finished goods are completed products ready for shipment.

4. Maintenance, repair, and operating (MRO) inventories are materials and supplies used in producing products (e.g., solvents, cutting tools). c. The various types of inventory costs are: 1. Direct costs are directly traceable to the unit produced (e.g., labor).

2. Indirect costs cannot be traced directly to the unit produced (e.g., overhead).

3. Fixed costs are independent of the output quantity (e.g., buildings, equipment).

4. Variable costs vary with output level (e.g., materials).

5. Order costs are direct variable costs for placing an order.

6. Holding or carrying costs are incurred for holding inventory in storage.

7. Setup costs are related to machine and equipment setups in manufacturing in place of ordering costs. d. Inventory investment measurements are: 1. Absolute value of inventory (on the balance sheet).

2. Cycle counting, or physically counting inventory on a periodic basis.

3. Inventory turnover or turnover ratio is how many times inventory ―turns‖ in an accounting period with higher ratios being better and is calculated by dividing the cost of revenue (cost of goods sold) by average inventory. e. 80/20 rule or Pareto analysis: 80% of objective is achieved by 20% of tasks, with remaining 20% of objective achieved by 80% of tasks.

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f.

ABC inventory control system determines which inventories should be counted and managed more closely than others 1. It groups inventory as A, B, and C Items: (1) A items are given the highest priority with larger safety stocks. Account for approximately 20% of the total items and about 80% of the total inventory cost.

(2) B items account for the other about 40% of total items and 15% of total inventory cost.

(3) C items have the lowest value and hence lowest priority. They account for the remaining 40% of total items and 5% of total inventory cost. g. The ABC inventory matrix combines two analyses to form a table: classification of inventory dollar usages into A, B, and C categories; and a second ABC analysis done based on current or on-hand inventory value. h. Radio Frequency Identification (RFID) tracks individual unit of goods without requiring direct line of sight to read a tag while information on the tag is updatable.

1. The components of RFID are: (1) A tag is computer chip and an antenna for wireless communication.

(2) The reader is a handheld or fixed-position RFID device that reads the tags.

(3) The communication network connects the readers to transmit inventory information to the enterprise information system.

(4) RFID software manages the collection, synchronization, and communication of the data with warehouse management, ERP and supply chain planning systems, and stores the information in a database.

2. Near Field Communication (NFC) is a secure form of data exchange between an NFC tag & Android-powered devices.

3. RFID standards are an electronic product code (EPC) standard, developed by the EPCglobal, Inc. (1) Classes 0, 1 and 2 are passive RFID tags that do not store power on the tags.

(2) Classes 3 and 4 are active RFID tags that contain a power source to boost their range.

(3) Class 5 tags communicate with other class 5 tags and devices.

4. These standards were approved as ISO 18000-6C. 5. The various ways that RFID automates the supply chain are presented.

(1) Materials Management: goods automatically counted and logged as they enter supply warehouse.

(2) Manufacturing: customer configurations encoded on tag can be incorporated automatically during the production process.

(3) Distribution Center: shipment leaving DC automatically updates ERP to trigger replenishment order and notify customer for delivery.

(4) Retail Store: reader placed on store shelf to trigger automatic replenishments when item reaches its reorder point. Can assist in cycle counting.

6. Global RFID implementation issues and challenges are described.

(1) Tagging strategies differ considerably by region.

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52

III.

(2) Consumer-privacy issues and high implementation costs for hardware and tags deter American retailers from moving into item-level tagging.

(3) China is skeptical about sharing potentially confidential information with foreign businesses and lag behind in RFID technology use.

(4) Tag and RFID system costs are major impediments to faster adoption.

(5) Differences between radio frequencies in different parts of the world.

(6) UHF signals are reflected by metal and absorbed by water.

7. Big data decision-making is described.

(1) Big data broadly refers to collections of data sets too large and complex to be processed by traditional database management tools or data processing software applications.

(2) Instead, massive parallel software applications running on hundreds, or thousands of servers simultaneously are required to store and process the data.

(3) Big data technology helps process data in real time to take advantage of information captured by RFID. Inventory Models (07.06, 07.07, 07.08, 07.09, PPT slides 17-35) a. Fixed order quantity models determine amount to order assuming that demand, delivery time, and other parameters are deterministic. b. The three types of fixed order quantity models are: 1. Economic Order Quantity (EOQ) Model 2. Quantity Discount or Price-Break Model 3. Economic Manufacturing Quantity (EMQ) or Production Order Quantity (POQ) Model c. The EOQ model is described.

1. It is a classic independent demand inventory systems that provides many useful ordering decisions.

2. It is a quantitative decision model based on the trade-off between annual inventory holding costs and annual order costs.

3. It seeks to determine optimal order quantity.

4. Order cost is direct variable cost associated with placing an order, which is often called setup cost.

5. Holding cost is cost incurred for holding inventory in storage, which is often called carrying cost.

6. The assumptions of the model are: (1) Demand is known and constant.

(2) Order lead time is known and constant.

(3) Replenishment is instantaneous.

(4) Price is constant.

(5) The holding cost is known and constant.

(6) Order cost is known and constant.

(7) Stockouts are not allowed.

7. The formula for the total annual inventory cost (TAIC) is presented as the sum of the annual costs each for holding, ordering, and purchasing.

8. An example is provided for how to derive the EOQ. (1) A graph is used to explain how it finds the minimum cost.

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(2) A graph of the physical inventory over time is also presented and explained. d. The Quantity Discount model is described.

1. It is one variation of the classic EOQ model/ 2. It relaxes the constant price assumption by allowing purchase quantity discounts.

3. It considers the trade-off between purchasing in larger quantities to take advantage of the price discount and the higher costs of holding inventory.

4. Due to step-wise shape of total inventory cost curve, the optimal order quantity lies on either one of the feasible EOQs or at the price break point.

5. The price break point is the minimum quantity required to get a price discount.

6. An example with a graph is presented and explained. e. The EMQ model is presented and explained.

1. It relaxes the instantaneous replenishment assumption by allowing usage or partial delivery during production.

2. This model is especially appropriate for a manufacturing environment with simultaneous manufacture and consumption.

3. Inventory builds up gradually during the production period rather than at once as in the EOQ model.

4. An example with a graph is presented and explained. f. Statistical reorder point models are presented.

1. The reorder point (ROP) is the lowest inventory level at which a new order must be placed to avoid a stockout.

2. Since the demand and delivery lead time tend to vary, safety stock is required.

3. In-stock probability is commonly referred to as the service level.

4. Three models are presented and explained with an example of each.

(1) Statistical ROP with probabilistic demand and constant lead time assumes lead time is constant, while demand during delivery lead time is unknown but can be specified using a normal distribution.

(2) Statistical ROP with constant demand and probabilistic lead time assumes demand is constant, while lead time is unknown but can be specified using a normal distribution.

(3) Statistical ROP with demand and lead Time both being probabilistic assumes both demand and lead time are unknown but can be specified by means of a normal distribution and holds safety stock to cover both types of variations. g. The characteristics of two types of review systems are presented.

1. Continuous review system: (1) Reality shows that stock records and actual quantity differ.

(2) Requires continuous review of inventory to determine when to reorder.

(3) Can be difficult to achieve and very expensive to implement.

2. Periodic review system: (1) Reviews physical inventory at specific points in time, such as weekly or monthly.

(2) Requires more safety stock than the continuous review system.

3. Several types of each system are briefly explained.

(1) Continuous review system:

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(a) (s, Q) continuous review policy: Orders the same quantity, Q, when physical inventory reaches the reorder point, s (b) (s, S) continuous review policy: When current inventory reaches or falls below the reorder point, s, sufficient units are ordered to bring the inventory up to a pre-determined level, S. (2) Periodic review system: (a) (nQ, s, R) periodic review policy: If at the time of inventory review, the physical inventory is equal to or less than the reorder point, s, the quantity, nQ, is ordered to bring the inventory up to the level between s and (s + Q). (b) (S, R) periodic review policy: At each review time, a sufficient quantity is ordered to bring the inventory up to a pre-determined maximum inventory level, S. (c) (s, S, R) policy: If at the time of inventory review, the physical inventory is equal to or less than the reorder point, s, a sufficient quantity is ordered to bring the inventory level up to the maximum inventory level, S. [return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Inventory viewed as an asset 30 minutes. a. Discuss the potential negative effects of viewing inventory as an asset. Consider how it is handled using cost accounting methods. b. Answer: Decisions are made based on impact on the balance sheet, profit and loss and cash flow statements. The main distortion of the system relates to inventory. It is a liability since it reduces the ability to compete yet is viewed in the statements as an asset. A key distortion occurs because overhead is allocated to inventory. Reducing inventory negatively affects the performance on the financial statements.

According to Throughput Accounting, a Theory of Constraints (TOC) approach, inventory should only be valued as is raw material and other variable costs. c. An example and further explanation are provided in an article at this link: https://www.weeond.com/post/inventory-asset-or-liabilitythroughput-accounting 2. Discussion: Order lead time Duration 15 minutes a. Discuss the impact of the order lead time on inventory levels. b. Answer: The order lead time should be considered as the time between placing orders of the same product. The higher it is, the higher the

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inventory levels that must be held. The TOC solution is to reduce the order lead time significantly, even to daily, if possible, by providing sales data to suppliers so that they can react quickly and effectively. [return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 8: Process Management – Lean and Six Sigma in the Supply Chain

TABLE OF CONTENTS Table of Contents

56

Purpose and Perspective of the Chapter

57

List of Instructor Downloads 57 Chapter Objectives

57

Complete List of Chapter Activities and Assessments 57 Key Terms

58

Chapter Outline

61

Additional Discussion Questions

65

© 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

56

PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of lean thinking and Six Sigma quality, which are two methodologies that are important to creating a competitive advantage in supply chain management. Lean thinking was developed at Toyota to reduce wastes and costs and improve quality. Six Sigma was developed at Motorola to improve quality. Both methodologies are described in detail in this chapter, along with explaining various tools that are part of them.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 8.1

Discuss and compare the major elements of lean and Six Sigma.

LO 8.2

Describe why lean, and Six Sigma are integral parts of SCM.

LO 8.3

Discuss the Toyota Production System and its association with lean production.

LO 8.4

Discuss the linkage between lean programs and environmental protection.

LO 8.5

Describe the historical developments of lean and Six Sigma.

LO 8.6

Describe and use the various tools of Six Sigma.

LO 8.7

Understand the importance of statistical process control for improving quality.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

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Chapter Objective 8.1 8.2 8.3 8.4 8.5 8.6 8.7

PPT slides

Activity/Assessment

Duration

5 - 44 7, 8, 30 5-6 24 4, 5, 25 25 - 44 45 - 55

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

2 hours 25 minutes 15 minutes 10 minutes 20 minutes 1 hour 1 hour

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KEY TERMS Acceptance sampling: testing the quality of a portion or sample of goods to determine whether or not a shipment will be accepted, returned to the supplier, or used for billback purposes when defective units are repaired or eliminated by the buyer.

Assignable variation: variations in process measurements that can be traced back to a specific cause.

Attribute data: measurements that indicate the presence of some attribute, such as color, satisfaction, workability, or beauty.

C charts: SPC chart that is utilized for attribute data to control the number of defects per unit of output in a process when multiple errors can occur in a defective unit.

Cause-and-effect diagrams: a tool that shows the problem at the front end of the diagram with each of the diagonals or fishbones representing groups of causes branching off with specific cases of each.

Check sheets: presents a list of potential problems based on experience and observation that direct employees keep a tally of the frequency of.

Consumer’s risk: another term for type-II errors.

Control charts: diagrams used to monitor process variabilities by collecting and plotting sample measurements of the process over time.

Critical-to-quality (CTQ) characteristics: service or product requirements that are critical to achieving customer satisfaction.

Defects per million opportunities (DPMO): the expected number of defects per million products or services produced.

Efficient consumer response (ECR): developed by the U.S. grocery industry to enable sharing of pointof-sale transactions at grocery stores via computer to upstream distributors and manufacturers, allowing the grocery stores to keep stock replenished while minimizing the need for safety stock inventories.

Equipment setups: preparing the production equipment to process the next run of a different type of goods.

Fishbone diagrams: another term for cause-and-effect diagram.

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Five-Ss: another technique for waste reduction that result in a cleaner workplace that is more organized and safer, thereby reducing processing waste and injury accidents, and improving productivity; it is not only a housekeeping program, but also problem identification and prevention system based on five Japanese words starting with the letter ―s.‖ Five-Why: a problem solution process that involves repeatedly asking ―why?‖ until the root (or most basic) cause is found and corrected that typically needs to be asked five times.

Flow diagrams: a tool that is a necessary first step in evaluating any manufacturing or service process by using annotated boxes representing process action elements and ovals representing wait periods, connected by arrows to show the flow of goods or services through a process to map it out prior to analysis.

Ishikawa diagrams: another term for cause-and-effect or fishbone diagram.

Just-In-Time (JIT): associated with Toyota managers like Mr. Taiichi Ohno along with his kanban system, encompassing continuous problem solving to eliminate waste.

Kaizen: to make the lean system work better, employees continuously seek ways to reduce supplier delivery and quality problems, and in the production area they solve movement problems, visibility problems, machine breakdown problems, machine setup problems, and internal quality problems.

Kaizen blitz: a rapid improvement event or workshop aimed at finding big improvements quickly.

Kanban: a type of signal or card that is use in the production process to start processing only as needed for the next step in production.

Keiretsu relationships: cooperative memberships between Japanese manufacturing firms and their suppliers.

Lean layouts: the primary design objective of this type of production layout is to reduce wasted movements of workers, customers, and/or WIP inventories, while achieving smooth product (or customer) flow through the facility.

Lean manufacturing: another term for lean thinking.

Lean production: another term for lean thinking.

Lean Six: another term for lean Six Sigma.

Lean Six Sigma: the combination of lean thinking and Six Sigma quality practices.

Lean supply chain relationships: when a focal firm, its suppliers, and its customers work together to identify customer requirements, remove waste and reduce costs, while improving quality and customer service.

Lean thinking: is a broader term closely related to JIT that describes a philosophy incorporating tools that seek to economically optimize time, human resources, assets, and productivity, while improving product and service quality.

Manufacturing cells: are designed to process any parts, components, or jobs requiring the same or similar processing steps, saving duplication of equipment and labor.

Muda: waste, such as of labor, inventories, space, time, and processing.

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Natural variations: variations in process measurements that are just environmental noise.

Opportunities for a defect to occur (OFD): the number of potential cases for a defect to occur in creating a product or service.

P charts: SPC chart that is utilized for attribute data to monitor the percent defective in samples tested.

Pareto charts: a tool for presenting data of process problems in order of most to least severe.

Pareto principle: refers to the observation that 20 percent of something is typically responsible for 80 percent of the results.

Part families: similarly processed parts.

Poka-yoke: error- or mistake-proofing in the design of processes to prevent mistakes or defects from occurring in the first place, or if they do happen, to prevent further errors.

Process diagrams: another term for flow diagrams.

Process maps: another term for flow or process diagrams.

Producer’s risk: another term for type-I errors.

Production kanban: a light, flag, or sign that is used to tell a work cell to begin processing more components to restock the empty container in its output area.

Pull system: demand is what pulls the production of goods through the process.

Quick response (QR): developed in the 1980s by the U.S. textile industry as an offshoot of JIT and was based on merchandisers and suppliers working together to cope with the demand for large numbers of SKUs with short product life cycles and high seasonalities by sharing information.

R chart: SPC chart that is utilized for variable data to track sample ranges, or the variations of the measurements (the difference between the largest and smallest) within each sample that must be used with an x chart.

Root causes: the most basic or earliest cause of the problem.

Seven wastes: a term created by Taiichi Ohno of Toyota to identify and reduce wastes related to these topics: waste elimination, lean supply chain relationships, lean layouts, inventory and setup time reduction, small-batch production scheduling, continuous improvement, and workforce empowerment.

Sigma drift: refers to the idea that process variations will grow over time, as process measurements drift off target.

Six Sigma: stresses a commitment by the firm‘s top management to help the firm identify customer expectations and excel in meeting and exceeding those expectations.

Statistical process control (SPC): a method that allows firms to visually monitor process performance, compare the performance to the desired levels or standards, and take corrective steps quickly before process variabilities get out of control and damage goods, services, and customer relationships.

The 4 Ms: the standard classifications of problems, which are materials, machines, methods, and manpower.

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Total quality management (TQM): a focus on the customer, performance measurement, and formal training in quality control methods.

Toyota Production System: essentially refers to lean as it was created and refined by Toyota‘s key executives over decades.

Type-I error: occurs when a buyer rejects a shipment of high-quality units because the sample quality level did not meet the acceptance standard (also known as producer‘s risk).

Type-II error: occurs when a buyer accepts a shipment of low-quality units because the sample did meet the acceptance standard (also known as consumer‘s risk).

U.S. Baldrige Quality Award: a U.S. law enabling an award for U.S. companies based on quality.

Variable data: measures that are continuous, such as weight, time, and length.

Waste elimination: one of the primary and long-term goals of all lean endeavors by reducing costs and adding value to goods and services by eliminating waste from production systems.

Work cells: another term for manufacturing cells.

X chart: SPC chart that is used to track the central tendency of the sample means of variable data that must be used with an R chart.

Yokoten: a Japanese term meaning ―across everywhere.‖

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Lean Production and the Toyota Production System (08.01, 08.03, 08.05, PPT slides 4-6) a. In the 1990s, supply chain management (SCM) goals are concerned with achieving process integration, low cost, and high levels of quality and responsiveness throughout the supply chain. b. Also, SCM emerged as a strategy combining several practices in use: 1. Quick response (QR) for speed and flexibility in textile 2. Efficient Consumer Response (ECR) for speed and flexibility in grocery 3. Just-in-Time (JIT): continuous reduction of waste 4. Keiretsu Relationships: cooperative partnership arrangements c. Philosophies and practices known as Lean Production (or Lean Manufacturing) or simply Lean Thinking came to America from Japan. d. Lean production is an operating philosophy of waste reduction and value enhancement that was originally created as the Toyota Production System by key Toyota executives.

1. Early versions were based on Ford assembly plants and U.S. supermarket distribution systems.

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II.

III.

2. Mr. Taiichi Ohno was a key developer of lean at Toyota. e. Key concepts incorporated in lean are: 1. Muda: waste in all aspects of production (e.g., labor, inventories, space, time, and processing) 2. Kanban: signal card in production to start production at a work center 3. Statistical process control (SPC) as part of the TQM efforts 4. Poka-yoke: error or mistake-proofing in processes Lean Thinking and Supply Chain Management (08.02, PPT slides 7-8) a. Lean production emphasizes: 1. Reduction of waste 2. Continuous improvement 3. Synchronization and integration of material flows within the organization, eventually including first-tier suppliers and customers b. Supply chain management (SCM) seeks to incorporate lean elements along entire supply chains using: 1. Cross-training, 2. Satisfying internal customer demand 3. Quickly moving products or people through the production system 4. Communicating demand forecasts and production schedules up the supply chain 5. Optimizing inventory levels along the supply chain The Elements of Lean (08.01, 08.05, PPT slides 11-23) a. The elements of lean are: 1. Waste elimination 2. Lean supply chain relationships 3. Lean layouts 4. Inventory and setup time reduction 5. Small batch production scheduling 6. Continuous improvement 7. Workforce empowerment b. Firms reduce costs and add value by eliminating waste from the productive system.

1. Waste encompasses wait time, inventories, material and people movement, processing steps, variability, any other non-value-adding activity.

2. The following seven wastes need to be addressed in lean: (1) Overproducing (2) Waiting (3) Transportation (4) Overprocessing (5) Excess inventory (6) Excess movement (7) Scrap and rework 3. The Five Ss is another technique for waste reduction that result in a cleaner workplace that is more organized and safer, thereby reducing processing waste and injury accidents, and improving productivity.

(1) It is not only a housekeeping program, but also problem identification and prevention system based on five Japanese words starting with the letter ―s.‖

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IV.

V.

c. Lean supply chain relationships consist of suppliers and customers working together to remove waste, reduce cost, improve quality and customer service.

1. Lean Thinking includes delivering smaller quantities, more frequently, to point of use at the focal firm.

2. Firms develop lean supply chain relationships with key customers resulting in mutual dependency and benefits occurring among these partners.

3. Locate production or warehousing facilities close to key customers. d. Primary objective of lean layouts is to reduce wasted movements of workers, customers and/or WIP inventories, while achieving smooth product (or customer) flow through the facility.

1. Move people and materials when and where needed, ASAP. 2. Lean layouts are very visual (lines of visibility are unobstructed) with operators at one processing center able to monitor work at another.

3. Manufacturing cells process similar parts or components saving duplication of equipment and labor and are often U-shaped to facilitate easier operator and material movements. e. Inventory and setup time reduction is important.

1. Excess inventory is a waste.

2. Reducing inventory levels causes production problems.

3. Once problems are detected, they can be solved.

4. The result is a smoother running organization with less inventory investment.

5. Reduce purchase order quantities and production lot sizes. f. Small batch production scheduling drives down costs by reducing purchased, WIP, and finished goods inventories making the firm more flexible to meet customer demand.

1. Small production batches are accomplished with the use of kanbans.

2. Kanbans generate demand for parts at all stages of production creating a pull system. g. Continuous Improvement focuses on improving quality.

1. Kaizen is a continuous approach to reduce process, delivery, and quality problems, such as machine breakdown problems, setup problems, and internal quality problems.

2. Kaizen blitz is a rapid improvement event or workshop to find big improvements quickly. h. Workforce Commitment is an important component for improvements.

1. Managers must support lean production by providing subordinates with the skills, tools, time, and other necessary resources to identify problems and implement solutions.

Lean Systems and the Environment (08.04, PPT slide 24) a. Lean green practices are: 1. Reduce waste 2. Reduce the cost of environmental management 3. Lead to improved environmental performance 4. Increase the possibility that firms will adopt more advanced environmental management systems The Origins of Six Sigma Quality (08.05, PPT slides 25-28) a. Six Sigma is near quality perfection (the statistical likelihood of non-defects 99.99966 percent of the time) or 3.4 defects/million observations.

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VI.

VII.

VIII.

IX.

b. It was pioneered by Motorola in 1987. c. Six Sigma is a statistics-based decision-making framework designed to make significant quality improvements in value-adding processes. d. An example for calculating defects per million observations is provided.

Comparing Six Sigma and Lean (08.01, PPT slide 29) a. Lean Six Sigma (or Lean Six) describes the melding of lean production and Six Sigma quality practices. b. Both use high quality input materials, WIP, and finished goods and continuous improvement (kaizen). c. Lean and Six Sigma use complementary tool sets and are not competing philosophies.

Six Sigma and Supply Chain Management (08.02, PPT slide 30) a. Process integration and communication lead to fewer negative chain reactions along the supply chain, such as greater levels of safety stock, lost time, and less productivity. b. Six Sigma is an enterprise and supply chain-wide philosophy that emphasizes a commitment toward excellence and encompasses suppliers, employees, and customers.

The Elements of Six Sigma (08.06, PPT slides 31-38) a. Deming‘s fourteen points for management are listed and described in a table. b. Crosby‘s four absolutes of quality are presented and described. c. Juran‘s quality trilogy is presented and described. d. The U.S. Malcolm Baldrige National Quality Award is briefly described with a list of recipients being presented in a table. e. The ISO 9000 and 14000 families of management standards are described. f. The DMAIC improvement cycle is described.

1. The steps are: (1) Define (2) Measure (3) Analyze (4) Improve g. The four types of Six Sigma training levels are described of yellow, green, black, and master black belt.

The Statistical Tools of Six Sigma (08.06, 08.07, PPT slides 39-55) a. The following tools are defined and explained with examples of each provided.

1. Flow diagrams consist of annotated boxes representing the process actions and ovals representing waiting, connected by arrows to show the flow of products or customers.

2. Check sheets tally frequencies for specific problems.

3. Pareto charts are for presenting data in an organized fashion, indicating process problems from most to least severe.

4. Cause-and-effect diagrams (fishbone or Ishikawa diagrams) are used to aid in brainstorming and isolating the causes of a problem. b. Statistical process control (SPC) allows firms to visually monitor process performance, compare the performance to desired levels or standards, and take corrective action.

1. Firms gather process performance data, create control charts to monitor process variability, then collect sample measurements of the process over time and plot on charts.

2. Natural variations are expected and random (cannot control).

3. Assignable variations have a specific cause (can control).

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4. Variable data is continuous (e.g., weight, length, time).

5. Attribute data indicates some attribute such as color, satisfaction, or beauty (yes/no, good/bad).

6. Variable data control charts are the x-bar and R charts, which are used in combination.

(1) The x-bar chart tracks central tendency of sample means.

(2) The R-chart tracks sample ranges (largest minus smallest in sample).

(3) The process for creating and analyzing each is described along with an example.

7. Attribute control charts are P charts and C charts.

(1) Each is explained with examples.

(2) P charts monitor the percent defective in each sample.

(3) C charts count the number of defects per unit of output.

8. Acceptance sampling is less time-consuming than testing every unit but can result in errors (1) When shipments are received from suppliers, samples are taken and measured against the quality acceptance standard. The shipment is assumed to have the same quality.

(2) Producer‘s risk is when a buyer rejects a shipment of good-quality units because the sample quality level did not meet standards (type-I error).

(3) Consumer‘s risk is when a buyer accepts a shipment of poor-quality units because the sample falsely provides a positive answer (type-II error). [return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Lean and MRP 30 minutes. a. Compare and contrast Lean and MRP. b. Answer:

Lean

MRP

Dealing with ―Murphy‖

Tries to eliminate (not possible)

Largely ignores

Inventory

Low inventory; in several locations throughout plant (kanbans)

Waves of inventory; High throughout plant

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WIP

Low

Very high

Times (i.e., processing and setup)

Assumed to be known (deterministic)

Assumed to be known (deterministic)

Production

Pull

Push

Plant

Advocates balanced plant (demand=capacity for all resources)

Not a concern (considered to be infinite)

Batches

Equal transfer and process batches

Equal transfer and process batches

Labor skills

Multi-skilled

Specialized

Short-term schedule flexibility

Low

Low

Throughput (output)

High

Low

Variation reduction

Focus on every resource

Not a concern

Capacities

2. Discussion: Lean implementation failures Duration 30 minutes a. Research and discuss why lean implementation failures are common. b. Answer: Various reasons explain why lean often fails to be successfully implemented. It is a philosophy, not just a collection of tools. Other reasons are lack of top management focus and involvement, ineffective communications, and lack of proper metrics. Lean requires a huge change that requires dedication and a deep understanding of what it is to implement.

[return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 9: Domestic U.S. and Global Logistics

TABLE OF CONTENTS Table of Contents

66

Purpose and Perspective of the Chapter

68

List of Instructor Downloads 68 Chapter Objectives

68

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Complete List of Chapter Activities and Assessments 68 Key Terms

69

Chapter Outline

74

Additional Discussion Questions

80

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of logistics, both domestically in the United States and globally. The elements addressed include the basics and transportation, including modes and pricing, warehousing options, 3PL provider services, sustainability in logistics, global logistical realities, and reverse logistics.

U.S. legislation regarding regulation and de-regulation of the transportation industry are covered. Overall, an understanding of how to make logistical decisions to improve supply chain management is achieved.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 9.1

Understand the strategic importance of logistics.

LO 9.2

Identify the various modes of transportation.

LO 9.3

Understand how U.S. regulation and deregulation have impacted transportation.

LO 9.4

Discuss the global aspects of logistics.

LO 9.5

Describe how logistics affects supply chain management.

LO 9.6

Examine and understand the interrelatedness of transportation, warehousing, and material handling.

LO 9.7

Identify a number of third-party logistics providers.

LO 9.8

Describe the various reverse logistics activities.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective

PPT slides

Activity/Assessment

Duration

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9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8

4-7 8 - 16 17 - 22 41 - 43 32 - 40 23 - 31 33 44 - 47

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

20 minutes 30 minutes 20 minutes 20 minutes 30 minutes 30 minutes 10 minutes 20 minutes

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KEY TERMS Air carriers: companies that transport freight via airplane.

Airline security: the Transportation Security Administration (TSA) ensures that air travel is safe in the United States.

Centralized warehousing system: in a given market area, relatively few warehouses are utilized.

Civil Aeronautics Act of 1938: established the Civil Aeronautics Board (CAA) to regulate air carriers; new entrants had to get CAA approval; CAB controlled rates; Civil Aeronautics Association controlled air safety.

Class rates: carrier rates that are published annually by the National Motor Freight Traffic Association (NMFTA), a nonprofit group of motor carrier companies.

Coal slurry: coal that has been pulverized into small particles and then suspended in water.

Cold chains: temperature-controlled (2 to 8 degrees Celsius) transportation, transfers, and warehousing.

Commodity rates: quoted costs that apply to a minimum quantity of goods that are shipped between two specified locations.

Consolidation warehouses: facility that collects large numbers of LTL shipments from nearby regional sources of supply, and then consolidate and transport in TL or CL quantities to a manufacturing or user facility located at some distance from the consolidation warehouse.

Container-on-flatcar (COFC): intermodal transportation (combination) of a container on a rail flat-car that is then moved via another mode of transportation.

Cost-of-service pricing: when carriers establish prices based on their fixed and variable costs of transportation.

Crossdocking: case where warehouses are not used to store things, but rather to receive bulk shipments, break them down, repackage various items into outgoing orders, and then distribute these orders to a manufacturing location or retail center.

Customs brokers: move global shipments through customs for companies as well as handle the necessary documentation to accompany the shipments.

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Customs-Trade Partnership Against Terrorism program (C-TPAT): a voluntary supply chain security program focused on improving the security of private companies‘ supply chains (international trucking in particular) with respect to terrorism.

Decentralized warehousing system: in a given market area, the number of warehouses used is relatively high.

Deep-sea transportation: water transportation of goods via supertankers and containerships.

Department of Transportation Act: assumed mission of FAA and a number of other agencies for research, promotion, safety, and administration of transportation; organized into nine operating and six administrative divisions; also established the National Transportation Safety Board.

Distribution center: facility used for repackaging and moving goods, rather than storing them.

Empty miles: when a truck returns from deliveries empty.

Exception rates: transportation rates that are lower than the NMFC class rates for specific origindestination locations or volumes that are generally established on an account-by-account basis.

Exempt carriers: for-hire carriers of goods that are exempt from regulation of services and rates.

Federal Aviation Act of 1958: created the Federal Aviation Agency to assume the mission of the CAA; FAA empowered to manage and develop U.S. airspace and plan the U.S. airport system.

FOB destination pricing: transportation costing quote that includes transportation to the buyer‘s location.

FOB origin pricing: when a buyer purchases good and supplies its own transportation to the shipping destination.

Foreign-trade zones (FTZ): secure sites within the United States under the supervision of the U.S. Customs and Border Protection.

Foreign freight forwarders: companies providing services to move goods from domestic facilities to foreign destinations using surface and air transportation and warehousing.

Free and Secure Trade program (FAST): the security program of C-TPAT. Freight brokers: bring carriers and shippers together.

General freight carriers: motor carriers that carry the majority of the goods shipped in the United States and include common carriers.

Global trade management systems: logistics execution system for managing global trade.

Green reverse logistics programs: efforts to reduce the environmental impact of certain modes of transportation used for returns, reducing the amount of disposed packaging and product materials by redesigning goods and processes, and making use of reusable totes and pallets.

High-speed trains: trains that travel between 85 and 120 miles per hour.

Horizontal collaboration: the process of two or more companies cooperating at the same level on a certain market activity to realize benefits they could not achieve independently.

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ICC Termination Act of 1995: eliminated the ICC and moved regulatory duties to the Department of Transportation.

Intermediately positioned strategy: places warehouses midway between the sources of supply and the customers.

Intermodal marketing companies (IMC): companies that act as intermediaries between intermodal railroad companies and shippers.

Intermodal transportation: the use of the combination of various transportation modes for one shipment that can make movement of goods cheaper, quicker, and more secure.

Lean warehousing: the movement of items more quickly through inbound and outbound warehouses and distribution centers using lean capabilities such as a greater emphasis on crossdocking, and increased automation.

Less-than-truckload (LTL) carriers or truckload (TL) carriers: trucking company classifications where LTL carriers move small packages or shipments that take less than a truckload while TL carriers move full truckloads.

Line haul rates: charges for moving goods to a nonlocal destination, such as between cities.

Load board: site where shippers can post loads for motor carriers to see, and motor carriers can post truck availabilities and locations for shippers to see.

Logistics: ―The process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods including services, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.

Logistics brokers: another term for freight broker.

Market positioned strategy: locates warehouses close to customers to maximize customer service levels.

Miscellaneous rates: apply to contract rates that are negotiated between two parties and to shipments containing a variety of goods set based on the overall weight of the shipment.

Motor Carrier Act of 1935: extended the ICA of 1887 to include motor carriers and brought them under ICC control, established five classes of operators: common, contract, private, exempt, and broker; mergers must be OK‘d by ICC. Motor carriers: companies that provide trucks that are used to offer door-to-door service, local pickup and delivery, and small as well as large shipment handling.

Negotiated pricing: prices are negotiated to fall somewhere in between cost-of-service pricing and valueof-service pricing.

Non-vessel operating common carriers (NVOCCs or NVOs): companies that operate very similarly to foreign freight forwarders but normally only use scheduled ocean liners.

Ocean Shipping Reform Act of 1998: deregulated ocean liner shipping; allowed contract pricing; rate filing not required.

Piggyback service: another term for container-on-flatcar service.

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Pipeline carriers: companies moving goods that are very specialized with respect to the goods that are either liquid or gaseous that they carry via a pipeline.

Place utility: is created when customers get things delivered to their desired locations.

Private carrier: transporter of goods that is not subject to economic regulation that typically moves goods for the company owning the carrier.

Private warehouses: storage facilities that are privately owned and used by an organization.

Product positioned strategy: locates warehouses close to the sources of supply to enable the firm to collect various goods while minimizing inbound transportation costs.

Public warehouses: for-profit organizations that contract out or lease a wide range of light manufacturing, warehousing, and distribution services to other companies.

Rail carriers: companies that transport goods by rail which are preferable when the distance is long, and the shipments are heavy or bulky.

Railroad Revitalization and Regulatory Reform Act: the ―4-R-Act‖ railroads were allowed to charge rates without ICC approval, within limits; ICC procedures were sped up.

Railway Passenger Service Act: created the National Railroad Passenger Corp. to preserve and upgrade intercity rail passenger service, resulting in the creation of Amtrak.

Real-time location systems (RTLSs): the use of active, Wi-Fi-enabled radio frequency identification (RFID) tags to allow tracking of rail cars and their assets in real time.

Reed-Bulwinkle Act: Amendment to the ICA of 1887 legalizing rate bureaus or conferences.

Returns management: another term for reverse logistics.

Reverse logistics: refers to the backward flow of goods from the customers in the supply chain occurring when goods are returned, either by the end-product consumer or by a business customer within the supply chain.

Right-shoring: combines near-shore, far-shore, and domestic opportunities into a single, flexible, and cost-driven approach to purchasing and logistics.

Risk pooling: describes the relationship between the number of warehouses, system inventories, and customer service.

Road trains: extra-long truck and trailer combinations transport goods between geographically dispersed communities not served by rail in Australia.

ROROs: roll-on-roll-off vessels that allow trucks and other cargo to be driven directly on and off the ship without the use of cranes.

Shippers’ associations: ―non-profit transportation membership cooperatives which arrange for the domestic or international shipment of members‘ cargo...‖ that enables contracting and aggregating cargo.

Shipping Act of 1984: partial deregulation of ocean transportation.

Specialized carriers: motor carriers that transport liquid petroleum, household goods, agricultural commodities, building materials, and other specialized items.

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Square root rule: suggests the system average inventory (as impacted by the changing number of warehouses in the system) is equal to the original system inventory times the ratio of the square root of the new number of warehouses to the square root of the original number of warehouses.

Staggers Rail Act of 1980: freed railroads to further establish rates within limits; legalized contract rates; shortened ICC procedure turnaround.

Third-party logistics services (3PLs): outside agents who move items effectively.

Time utility: is created when customers get goods delivered at precisely the right time, not earlier or later.

Trading companies: put buyers and sellers from different countries together and handle all of the export/import arrangements, documentation, and transportation for both goods and services.

Trailer-on-flatcar: rail flatcars carry trucking trailers.

Trailer-on-flatcar service (TOFC): service provided by railroads that have purchased trucking companies to offer point-to-point pickup and delivery service using motor carrier trailers and rail flatcars that carry the trailers.

Transportation Act of 1920: instructed the ICC to establish rates that allowed RRs to earn a fair return; established minimum rates; allowed ICC to set intrastate rates; allowed pooling agreements if they were in the public‘s best interest.

Transportation Act of 1940: extended the ICA of 1887 to include ICC control over domestic water transportation; ICC controlled entry, and services.

Transportation Act of 1958: amended the rule of rate making by stating that rates couldn‘t be held up to protect the traffic of any other mode.

Transportation brokers: another term for freight or transportation broker.

Transportation deregulation: encourages competition and allows prices to adjust as supply, demand, and negotiations dictate.

Transportation intermediaries: companies, which may or may not own any significant logistics capital assets, which find the most appropriate transportation mode or 3PL service.

Transportation management systems: logistics execution system for transportation.

Transportation regulation: ensures adequate transportation service throughout the United States while protecting consumers in terms of monopoly pricing, safety, and liability.

Transportation Worker Identification Credential (TWIC): transportation security initiative to ensure that workers are cleared.

United States-Mexico-Canada agreement: trading accord between the three countries that took effect in 2020 to replace the North American Free Trade Agreement (NAFTA).

Value-of-service pricing: pricing of transportation services at the highest levels the market will bear.

Warehouse management systems: logistics execution system for warehouses.

Water carrier: companies that ship goods on water.

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[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I.

II.

Introduction (09.01, PPT slides 4-6) a. Logistics is necessary to: 1. Move goods from suppliers to buyers 2. Move finished goods to the customer 3. Move work-in-process materials within a firm 4. Return or recycle goods 5. Store items along the way in supply chains. b. Products have little value to the customer until they are moved to the customer‘s point of consumption. c. Time utility: customers get goods delivered at precisely the right time, not earlier and not later. d. Place utility: customers get things delivered to their desired locations. e. Official definition of logistics: ―The process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods including services, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.‖ Council of Supply Chain Management Professionals Transportation Fundamentals (09.01, 09.02, 09.03, PPT slides 7-22) a. The Objective of Transportation: 1. Maximize value by correctly communicating the firm‘s service needs to for-hire transportation providers.

2. Services and prices are negotiated such that the transportation provider‘s delivery costs are covered while allowing them an acceptable profit contribution.

3. Ensure the desired services are performed effectively.

4. Satisfy customer requirements while minimizing costs and making a reasonable profit. b. For-hire transportation service companies are classified legally as either: 1. Common carriers offer transportation services to all shippers at published rates between designated locations without discrimination.

2. Contract carriers are not bound to serve the general public, but rather serve specific customers under contractual agreements, 3. Exempt carriers are exempt from regulation of services and rates if they transport certain goods or customers.

4. Private carriers are not subject to economic regulation and typically transports goods for the company owning the carrier. c. The five modes of transportation are: 1. Motor carriers (trucks) are the most flexible mode of transportation.

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2.

3.

4.

5.

6.

(1) Account for 70 percent of all freight tonnage moved in the United States.

(2) Competes with rail and air for short-to-medium hauls.

(3) Often classified as less-than-truckload (LTL) and truckload (TL) carriers.

(4) General freight carriers carry the majority of goods shipped in the United States and include common carriers.

(5) Specialized carriers transport liquid petroleum, agricultural commodities, building materials, and other specialized items.

Rail carriers compete most favorably when the distance is long, and the shipments are heavy or bulky (1) Relatively slow and inflexible service (2) Railroads have purchased motor carriers to offer point-to-point pickup and delivery service known as trailer-on-flatcar (TOFC) service.

(3) Use real-time location systems (RTLs) via Wi-Fi enabled RFID tags for tracking rail cars and their assets in real time.

(4) One trend is use of high-speed trains which range in the United States from 85 to 120 miles per hour.

Air carriers are expensive relative to other modes, but also very fast.

(1) Account for a small portion of total freight hauled.

(2) Cannot carry extremely heavy or bulky cargo.

(3) For light, high-value goods that need to travel long distances quickly.

(4) Limited in terms of geographic coverage.

(5) About half of the goods transported by air are carried by freight–only airlines, like FedEx. Water carriers are very inexpensive, but also slow and inflexible. Includes inland waterway, lake, coastal and intercoastal ocean, and global deep-sea.

(1) Inland waterway transportation is used for heavy, bulky, low-value materials (e.g., coal, grain).

(2) Development in deep-sea transportation and use of supertankers and containerships have made water transportation cheaper and more desirable.

(3) Competes with rail and pipeline carriers.

(4) Water carriers have paired with trucks for door-to-door delivery.

Pipeline carriers are very specialized with respect to the goods they can carry.

(1) Little maintenance needed once pipeline is running.

(2) Materials hauled in a liquid or gaseous state.

(3) Transported items include water, oil, gasoline, natural gas and coal slurry (pulverize coal in small particles suspended in water).

(4) Latest controversial pipeline is the proposed Keystone XL pipeline from Canada to Nebraska.

Intermodal transportation is the use of combinations of the various modes of transportation modes for one shipment that can make movement of goods cheaper, quicker, and more secure.

(1) Most common: trailer-on-flatcar (TOFC) service, and container-onflatcar (COFC), also called piggy-back service (2) The same containers can be placed on board containerships and freight airliners.

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(3) ROROs, or roll-on-roll-off containerships truck trailers, allow truck trailers or other cargo to be directly driven on and off the ship into secured in below-deck garages without the use of cranes.

7. Transportation pricing options are: (1) Cost-of-service pricing: prices based on fixed and variable costs of transportation of the carrier (2) Value-of-service pricing: transportation providers price based on the highest levels the market will bear (3) Negotiated pricing: prices fall somewhere between above two levels (4) Terms of Sale: (a) FOB (free on board) destination: supplier is legal owner of the product until it safely reaches its destination. (b) FOB origin pricing: goods are legal responsibility of buyer at supplier‘s finished goods pickup location (5) Line haul rates: charges for moving goods to a nonlocal destination, that further classified as: (a) Class rates: published annually by National Motor Freight Traffic Association (NMFTA) (b) Exception rates: rates are lower than NMFC class rates that are generally established on an account-by-account basis. (c) Commodity rates: apply to minimum quantities of products shipped between two specified locations (d) Miscellaneous rates: contract rates negotiated between two parties and shipments containing a variety of products 8. Transportation security (1) Aviation and Transportation Security Act (2001) created Transportation Security Administration (TSA) to oversee security at 430 U.S. airports.

(2) Department of Homeland Security (DHS) (2002) created to coordinate and unify national homeland security efforts.

(3) One hundred percent of air cargo prescreened as mandated by the Improving America‘s Security Act of 2007.

(4) Transportation worker identification credential (TWIC) became mandatory for all port workers in 2009.

(5) PrePass: prequalified U.S. motor carriers bypass state inspection and weigh stations at highway speeds, using automated vehicle ID tech.

9. Transportation Regulation and Deregulation (1) Pro: Regulation assures adequate transportation service throughout the country, while protecting consumers in terms of monopoly pricing, safety, and liability.

(2) Con: Deregulation encourages competition and allows prices to adjust as supply, demand, and negotiations dictate.

(3) Anti-trust, safety, and security laws already in place provide protection.

(4) Today, the U.S. transportation industry remains essentially deregulated.

(5) New calls in recent years for industry re-regulation have emerged due to transportation bankruptcies and consolidation.

(6) Table 9.2 lists and summarizes U.S. transportation regulation laws.

(7) Table 9.3 lists and summarizes U.S. transportation deregulation laws.

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III.

Warehousing and Distribution (09.05, 09.06, PPT slides 23-32) a. Warehousing enables firms to store purchases, WIP, and finished goods, as well as perform breakbulk and assembly activities. b. It also provides faster and more frequent deliveries, which can result in better customer service. c. Crossdocking (also referred to as distribution center): warehouses are not used to store inventory, but rather to receive bulk shipments, break down, repackage, and distribute components to a manufacturing location or retail center. d. Warehousing supports purchasing, production, and distribution activities e. Types of warehouses: 1. Consolidation warehouses collect large numbers of LTL shipments nearby for transport in TL or CL quantities long distances 2. Private warehouses are owned by the firm storing its own goods 3. Public warehouses are owned by for profit orgs and contract out or lease a wide range of light manufacturing, warehousing, and distribution services 4. Cold chains: temperature-controlled transportation, transfers, and warehousing f. Advantages of private warehouses: 1. Reduces the purchasing and transportation cost 2. Offers greater control of service 3. Provides better workforce utilization 4. Take advantage of cheaper sources of supply or labor 5. Can generate income and tax advantages through leasing of excess capacity and/or asset depreciation g. Disadvantages of private warehouses: 1. Financial risk and loss of flexibility 2. Binds firms to locations that may not prove optimal 3. Insurance companies do not like insuring goods in private warehouses h. Public warehouse services: 1. Breakbulk – large quantity shipments are broken down and items are combined into specific customer orders, then shipped out 2. Repackaging – after breakbulk, items repackaged for specific orders 3. Assembly – provide final assembly and create customized final goods 4. Incoming and outgoing quality inspections 5. Material handling, equipment maintenance, and documentation services 6. Short and long-term storage 7. Used in conjunction with cold chain services i. Risk Pooling and Warehouse Location 1. As the number of warehouses increases, the system becomes more decentralized.

Responsiveness and delivery service increase.

2. Warehousing operating and inventory costs increase. Trade-off between costs and customer service must be considered.

3. Risk pooling describes the relationship between the number of warehouses, inventory, and customer service; it is estimated by the square-root rule 4. The square-root rule is defined and demonstrated. j. The benefits of warehouse centralization are described. k. Warehouse Location 1. In the 1940s, Edgar Hoover recommended three types of strategies:

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IV.

V.

(1) Market-positioned strategy – warehouses close to customers maximizes distribution services and improve transportation economies of scale (2) Product positioned strategy – close to supply source for firm to collect goods and consolidate while minimizing inbound transport costs (3) Intermediately positioned strategy – midway between supply sources and customers when distribution requirements are high, and the product comes from various locations 2. In the 1820s, von Thunen argued that transportation costs alone should be minimized when considering facility locations. His model assumed that market prices and manufacturing costs would be identical regardless of the location of the warehouse.

3. In the 1950s, Greenhut‘s location theory was based on maximizing profit instead of focusing on transportation cost because demand and prices can potentially vary by location. The best locations may not minimize costs. l. Lean warehousing: As SCM capabilities improve, items move more quickly, resulting in developing the following leaner capabilities.

The Impacts of Logistics on Supply Chain Management (09.03, 09.06, 09.05, 09.07, PPT slides 17-35) a. 3PL supply base reduction advantages 1. Firms can select and use only the best-performing 3PLs. 2. Give those 3PLs a bigger share of the firm‘s business 3. Results in better levels of service and potentially lower prices 4. Larger share of business given to each 3PL can be used as leverage when negotiating prices, shipping schedules, and associated services. b. Mode and 3PL Selection 1. Firms use a mix of quantitative and qualitative factors to evaluate and select the most desirable transportation modes and 3PL services available for the various markets.

2. The most common technique is weighted factor analysis.

3. With today‘s competitive business climate, partnering with a 3PL (creating strategic logistics alliances) is very important. c. Other transportation intermediaries: (may not own any significant logistics capital assets) are beneficial providers for small companies with limited logistics expertise, and in some cases, large ones with great logistics needs.

1. Freight forwarder – consolidate LTL shipments into FTL 2. Freight, transportation, or logistic brokers bring shippers and carriers together 3. Shippers‘ associations – nonprofit cooperatives arrange for members‘ shipping 4. Intermodal marketing companies – purchase blocks of rail capacity and sell it to shippers Environmental Sustainability in Logistics (09.05, PPT slide 37) a. Reduction of empty miles decrease carbon emissions by ensuring trucks move when full. b. Horizontal collaboration is the process of two or more companies cooperating at the same level on a certain market activity to realize benefits they could not achieve independently. c. SmartWay certification program reduces transportation emissions. d. Coalition for Responsible Transportation (CRT) works with U.S. ports to implement clean truck programs.

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VI.

VII.

VIII.

e. Europe‘s 3PLs and ports are leading the way by introducing a number of green management initiatives.

Logistics Management Software Applications (09.05, PPT slides 38-40) a. Logistics software apps can be added to ERP software suite of applications, as the firm‘s needs and the users‘ level of experience dictates. Three popular ones are: 1. Transportation management systems (TMS) – used to find carriers, select the best mix of transportation services and pricing, better manage transportation contracts, rank transport option, clear customs, track fuel usage, and track carrier performance.

2. Warehouse management systems (WMS) track and control flow of goods from receiving dock to outbound shipment 3. Global trade management systems (GTM) provide global visibility and standardization and new opportunities to grow, expand, and help shippers manage regional and global trade agreements.

Global Logistics (09.04, PPT slides 41-43) a. Global Freight Security 1. Transportation across national boundaries introduces added complexity, particularly for security.

2. Customs-Trade Partnership Against Terrorism program (C-TPAT) and its security program Free and Secure Trade program (FAST) to protect supply chains from terrorism.

3. Goal – to ensure the security of global supply chains in general and international trucking b. Global Logistics Intermediaries 1. Customs brokers – move goods through customs and handle documentation 2. International freight forwarders – move goods to and from foreign destination.

Some use right-shoring which combines near-shore, far-shore and domestic opportunities into a single cost-driven approach 3. Trading companies – put buyers and sellers together and handle export/import arrangements 4. Non-vessel-operating common carriers – operate like freight forwarders, but use scheduled ocean liners c. Foreign Trade Zones (FTZ) are secure sites in United States under supervision of U.S. Customs and Border Protection that offer storage, exporting, manufacturing, assembly, repacking, testing, and repairing services d. The United States-Mexico-Canada Agreement (USMCA): trading accord that took effect in 2020 to replace the North American Free Trade Agreement (NAFTA) in which all duties and quantitative restrictions between the three countries were removed.

Reverse Logistics (09.08, PPT slides 44-47) a. Reverse Logistics or Returns Management is the backwards flow of goods from customers in the supply chain as returned items.

1. Returns have been increasing because of growth of online shopping, direct-tostore shipments, and direct-to-home shipments.

2. Retail returns range from 6 percent to 10 percent of sales.

3. Online retail returns range from 20 percent to 30 percent of sales.

4. Returns can have direct negative impact on the environment, customer service, a firm‘s reputation, and profitability.

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5. 3PL companies can provide product lifecycle or reverse logistics services. b. The Impact of Reverse Logistics on the Supply Chain can impact how consumers view a brand. The types of problems are described. c. Impact of Reverse Logistics on the Supply Chain: 1. Effective returns process can create goodwill and enhance customers‘ perceptions of product quality.

2. Returns information can be used to determine root cause analyses and reduce future design errors.

3. Returns can still create value as original products, refurbished products, or repair parts. d. Reverse Logistics and the Environment 1. Green reverse logistics programs – reduce environmental impact on landfills and deal with dangerous contaminants e. Reverse logistics can have a positive impact on the environment through recycling, reusing materials and products, refurbishing used products, and making use of reusable totes and pallets. [return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Reducing logistics costs versus increasing throughput 30 minutes. a. The emphasis in most cases is on reducing logistics costs, though in some cases experts argue for increasing profits. Discuss and analyze how we can best improve the performance of the firm. Consider the fact that an objective or goal is to make more money, not save costs. How can we be more effective in our logistical decision-making? b. Answer: The Theory of Constraints (TOC) is a management philosophy and set of applications that includes Throughput Accounting. The TOC operational measures are Throughput (T), Investment (I), and Operating Expense (OE). T is defined as sales revenue less the totally variable costs. I is all the money tied up in the firm. OE is the expenses related to turning I into T. All actions should be evaluated based on the impact on T, I, and OE. Increasing T is the highest priority. T minus OE is net profit. Our objective should be to increase T faster than OE. Therefore, it can make sense to make decisions that increase costs, such as logistical costs, to increase T and profit as well. For example, we could decide to use a more costly form of transportation to replenish goods that are out of stock and are high runners, thus increasing sales.

2. Discussion: Apply Pareto analysis to warehousing Duration 20 minutes a. How can we successfully apply Pareto analysis within a warehouse? b. Answer: Since most of the sales come from a small portion of the inventory, it makes sense to locate the “high runners” close to the dock.

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c. We can choose to apply TOC to this discussion as well. If we choose to reduce the order led time to daily orders, more picking of orders in large warehouses will be necessary, thus requiring more time given more movements. “In order to prevent picking from becoming a bottleneck, actions should be taken, such as moving several days’ worth of demand of each SKU near the dock for quick picking and replenishing it from the main inventory and/or hiring more pickers if needed.” (Source: Retailer Strategy and Tactic Tree, www.tocico.org) [return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 10: Customer Relationship Management

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

2 Complete List of Chapter Activities and Assessments 2 Key Terms

3

Chapter Outline

5

Additional Discussion Questions

11

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the customer relationship management (CRM), demonstrating its strategic importance. The importance of customer satisfaction and how to measure it are presented, included how to calculate customer lifetime value. The key tools and components of CRM are described, followed by an explanation of the steps to implement a successful CRM program. Finally, four trends in CRM are discussed.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 10.1

Discuss the strategic importance of CRM.

LO 10.2

Describe the components of a CRM initiative.

LO 10.3

Calculate customer lifetime value.

LO 10.4

Discuss the implementation procedures for CRM programs.

LO 10.5

Describe how information is used to create customer satisfaction and greater profits for the firm.

LO 10.6

Discuss the importance of data security in CRM.

LO 10.7

Describe how social media and cloud computing have impacted CRM.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective 10.1

PPT slides

Activity/Assessment

Duration

4-7

Activity in PPT

20 minutes

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10.2 10.3 10.4 10.5 10.6 10.7

8-16 11 17-23 10, 11, 16 24-25

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

1 hour 25minutes 1 hour 20 minutes 30 minutes

[return to top]

KEY TERMS Big data analytics: the desire to analyze all of the customer information as the number of customers, and thus transactions, grows.

Call centers: group of customer service representatives who answer questions and resolve customer complaints or problems.

Clickstream: how a customer navigates a firm‘s website.

Cross-selling: occurs when customers are sold additional goods as the result of an initial purchase.

Customer churn: customers stop purchasing a firm‘s products.

Customer contact centers: another term for call center.

Customer defection analysis: determining the reasons why a firm has lost customer business.

Customer lifetime value (CLV): the net present value of an annuity of the annual profit of a customer based on their expected lifetime in years.

Customer profitability: determination of whether a customer is profitable or unprofitable for the firm.

Customer relationship management (CRM): refers to building and maintaining profitable long-term customer relationships.

Customer service: many definitions exist, such as delivering goods on time, to satisfy the customer.

Customer value: another term for customer profitability.

Data warehouse: centralized data warehouse containing all customer information.

Event-based marketing: the idea is to offer the right goods and services to customers at just the right time.

Knowledge management system: provides a variety of information to sales reps to enable quick decision-making, better customer service, and a better-equipped and more productive sales staff.

Lead management system: allows sales reps to follow prescribed sales tactics when dealing with sales prospects or opportunities, to aid in closing the deal Mobile marketing: placing advertising messages on mobile phones.

Perfect order: occurs when all seven Rs are satisfied.

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Permission marketing: the idea is to let customers select the type and time of their communications with organizations.

Posttransaction elements: refers to the after-sales services, such as warranty repair capabilities.

Pretransaction elements: these customer service elements precede the actual product or service purchase, such as customer service policies.

QR codes: a quick response code is tagged on each product to enable customers to scan it to learn more about it, such as comparing prices.

Relationship marketing: another term for permission marketing.

Sales activity management system: used to reduce errors, improve sales force productivity and boost customer satisfaction.

Sales force automation (SFA): products that are used by the sales force for documenting field activities, communicating with the home office, and retrieval of sales history and other company-specific documents in the field.

Sales territory management systems: allows sales managers to obtain current information and reporting capabilities regarding each salesperson‘s activities on each customer‘s account, total sales in general for each sales rep, their sales territories, and any ongoing sales initiatives.

Segment customers: group customers in a variety of ways (e.g., by sales territory, preferred sales channel) so that customized communications and marketing efforts can be directed to specific customer groups.

Seven Rs Rule: the seven Rs stand for having the right product, in the right quantity, in the right condition, at the right place, at the right time, for the right customer, at the right cost.

Target marketing: focusing marketing efforts on the specific customer segments.

Transaction elements: occur during the sale of the product or service, such as the order lead time.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I.

Introduction (10.01, PPT slide 4) a. ―Finding a new customer costs five times as much as keeping an old customer‖ b. CRM means focusing on customer requirements, then delivering products and services in a manner resulting in high levels of customer satisfaction. c. CRM refers to automated transaction and communication applications—a suite of software modules or a portion of the larger enterprise resource planning system.

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II.

III.

d. CRM must still include talking to customers, understanding their behavior and their requirements, and then building a system to satisfy those requirements.

Customer Relationship Management Defined (10.01, PPT slides 4-7) a. CRM definitions: 1. ―The infrastructure that enables the delineation of and increase in customer value, and the correct means by which to motivate valuable customers to remain loyal— indeed to buy again.‖ 2. ―…helps the firm focus on its relationships with individual people – including customers, service users, colleagues, or suppliers – throughout the firm‘s lifecycle with them, including finding new customers, winning their business, and providing support and additional services throughout the relationship.‖ 3. ―…a core business strategy for managing and optimizing all customer interactions across an organization‘s traditional and electronic interfaces.‖ 4. CRM is building and maintaining profitable, long-term customer relationships b. Seven deadly sins of CRM failure: 1. Viewing CRM primarily from a technology perspective 2. Lack of customer-centric vision 3. Not understanding the concept of a customer‘s lifetime value 4. Insufficient top management support 5. Not re-engineering business processes 6. Underestimating the challenges in integrating various sources of data 7. Underestimating the challenge in effecting change c. Successful CRM programs: 1. Are both simple and complex 2. Involves training users and treating customers right, to make them feel valued 3. Also means finding affordable ways to identify customers and their needs, and then designing customer contact strategies geared toward creating customer satisfaction and loyalty 4. Doing these things right will produce bottom line results.

Key Tools and Components of CRM (10.02, 10.03, 10.05, PPT slides 8-16) a. Segmenting customers – grouping customers to create specialized communications about products 1. Target marketing efforts – addressing specific customer segments avoids becoming a nuisance to the wrong customers 2. Relationship marketing or permission marketing – customers select the type and time of communication (opting-in or opting-out) 3. Mobile marketing – placing advertising messages on mobile phones 4. QR codes – using the camera function on a smartphone and downloading a QR code reader app enables scanning the code on a product to learn more.

5. Facebook, LinkedIn, and Instagram allow companies to create their own customized webpages that potential consumers can choose to visit.

6. Cross selling – occurs when customers are sold additional goods as the result of an initial purchase (e.g., e-mails from Amazon.com describing other books the customer might like).

7. If it is successful, customers perceive this as individualized attention, and it results in more satisfied and loyal customers.

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b. Predicting customer behaviors: By understanding customers‘ current purchasing behaviors, future behaviors can be predicted.

1. Along with determining what customers might purchase next, another desirable CRM activity is customer defection analysis.

2. Customer defection analysis – finding methods to retain customers 3. Customer churn reduction – reducing customer defections (those that quit purchasing from the firm) c. Customer value or customer profitability determination – calculating the customer lifetime value for firms 1. An example is provided demonstrating how to calculate customer lifetime value. d. Personalizing customer communications – by understanding customer behaviors and preferences, firms customize communications 1. Clickstream – how a customer navigates a website 2. Event-based marketing – offer the right products and services to customers at just the right time e. Automated Sales Force Tools 1. Sales force automation (SFA) - used for documenting field activities, communications with the home office, and retrieving sales history and other documents in the field 2. Sales activity management system – tool offering sales reps a guided sequence of sales activities 3. Sales territory management system – sales managers obtain information regarding each sales rep‘s activities (e.g., total sales per rep) 4. Lead management system – allows sales reps to follow prescribed tactics when dealing with prospects to aid in closing the deal.

5. Knowledge management system (KMS) – enables quick decision making, better customer service, & a better-equipped & happy sales staff. f. Managing Customer Service Capabilities: 1. What does customer service actually mean?

2. The ―Seven Rs Rule‖: having the right product, in the right quantity, in the right condition, at the right place, at the right time, for the right customer, at the right cost.

3. Performance measures are often designed around satisfying the seven Rs. These kinds of services can come at a cost.

4. Perfect order: when the seven Rs are all satisfied. g. Customer Service Elements: 1. Pretransaction elements – precede the sale (e.g., customer service policies, the mission statement, the organization‘s service structure, and system flexibility) 2. Transaction elements – occur during the sale and include the order lead time, the order processing capabilities and the distribution system accuracy 3. Posttransaction elements - occur after the sale and include warranty repair capabilities, complaint resolution, product returns, and operating information h. Call centers - can categorize calls, determine average resolution time, forecast future demand, and improve the overall productivity of the staff, increasing customer satisfaction levels

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IV.

1. Have existed for many years, with some organizations using them effectively to satisfy and keep customers loyal, while others see them as a necessary cost of doing business and viewed them as a drain on profits 2. Virtual queuing allows callers to request a callback from an agent without losing their place in the phone queue 3. Viewed as a source of revenue - staff are expected to pursue cross-sell and upsell opportunities 4. Outsourcing to offshore company really exploded starting in the late 1990s i. Measuring Customer Satisfaction: 1. Customers are frequently given opportunities to provide feedback about a product, service, or organization.

2. Customers communicate through feedback cards or surveys which can be personalized to specific customer segments.

3. Website surveys in some cases don‘t ask the questions that customers want to answer.

4. Actually, talking with and listening to customers, and then taking action based on what customers are saying lets them know the firm is completely engaged.

Designing and Implementing a Successful CRM Program (10.04, PPT slides 17-23) a. Step 1 – Creating the CRM plan 1. A solid plan for a CRM project is crucial both as an aid to purchasing and implementing CRM apps, and to obtain executive approval and funding for the project.

2. The plan should include: (1) Objectives of the CRM program (2) CRM‘s fit with corporate strategy (3) New applications to be purchased (4) Integration or replacement of existing methods or CRM legacy systems (5) Requirements for (6) Costs and time frame for implementation b. Step 2 – Involve CRM users from the outset 1. In order to get acceptance of a new CRM initiative, employee involvement and support is required.

2. Create a project team with members from all affected organizational areas.

3. The team should be heavily involved in evaluating and selecting the CRM applications, and then implementing and integrating the apps in each department.

4. During implementation, closely monitoring system performance will keep users convinced of the value of the initiative and keep everyone committed to its success. c. Step 3 – Select the right application and provider 1. Find an appropriate application and determine the how much customization will be required to get the job done.

2. This can be accomplished a number of ways including: (1) visiting a CRM-oriented tradeshow (2) using a CRM consulting firm (3) searching CRM or business publications (4) using the knowledge of internal IT personnel who already know the market

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V.

(5) searching the many CRM supplier directories and websites 3. It is recommended to compare the following software characteristics: (1) Integration and connection requirements (2) Processing and performance requirements (3) Security requirements (4) Reporting requirements (5) Usability requirements (6) Function-enabling features (7) Performance capabilities d. Step 4 – Integrate Existing CRM Applications 1. In most firms, CRM is a collection of various applications implemented over time, not just one single product.

2. One of the biggest mistakes is departments implementing CRM without communicating their actions to other departments.

3. Customer contact mechanisms need to be coordinated so that every CRM app user in the firm knows about all contact activity for each customer.

4. One centralized database or data warehouse contains all customer information.

5. Big data analytics - analyzing large volumes of data to make quick decisions e. Step 5 – Establish Performance Measures 1. Measures linked to CRM program objectives (and customers) allow managers to monitor the progression of their system in meeting objectives.

2. Serves to keep everyone excited and informed about the benefits of a welldesigned program and will identify any implementation or usage problems as they occur, allowing causes to be found and solutions to be implemented quickly.

3. Measures should concentrate on areas deemed strategically important, such as program productivity, new customers added, or sales generated from the program.

4. Metrics should be transparent and easy to measure.

5. At the user level, tactical metrics should be developed and tracked. f. Step 6 – Training for CRM Users 1. Provide and require training for all of the initial users.

2. Provide ongoing training as applications are added and as other personnel begin to see the benefits of the CRM system.

3. Training can also help convince key users, such as sales, call center, and marketing personnel of the benefits and uses of CRM applications.

4. Training is one area crucial to CRM program success.

5. Unfortunately, a survey showed 43% of respondents stating their user training ―needed improvement.‖ 6. Personal gains need to be shown to the users to ensure CRM program success.

Trends in CRM (10.07, PPT slides 24-25) a. The top trends in CRM for 2021 and beyond are: 1. The customer experience (1) Engaging with customers is today more important than ever, making the customer experience an important brand differentiator.

(2) It is one of the top priorities for 65% of executives according to 2020 Forbes and Salesforce research.

2. Use of artificial intelligence

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(1) Today, AI is experiencing major growth within CRM. (2) Marketers using AI jumped from 29% in 2018 to 84% in 2020.

(3) One biggest benefit is its capacity to take over tedious, time-consuming manual tasks.

3. Mobile CRM (1) For field sales reps, mobility has long been a key requirement for CRM. (2) The COVID-19 pandemic emphasized the need to utilize mobility, meaning accessibility from anywhere, anyplace, and anytime.

4. Use of social media (1) It has become a focal point for CRM due to the impact of COVID-19.

(2) With in-person communications and experiences stopping in 2020, digital channels became the go-to for everything.

(3) Digital platforms offer safety, speed, and convenience.

(4) Able to connect in real time & build brand equity where users spend time. [return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Marketing and CRM 45 minutes. a. This chapter presented content regarding various types of marketing. The Theory of Constraints (TOC) has an effective solution for marketing. Let‘s learn more about it and then have a discussion about how to apply it. b. I explain the key concepts of TOC that need to be understood in order to have an effective discussion. In order to understand the current reality of an organization, we need to determine the root cause (or core conflict) that is causing its undesirable effects (UDEs). We can then create a future reality by surfacing assumptions underlying the core conflict and then to find ways to challenge or invalidate them to create a solution. The key is to meet a significant need of the customer to the extent that no significant competitor can. c. Marketing is bringing the market to desire your product or service, while sales is turning a prospective buyer into a customer by closing the deal. For Marketing efforts need to focused on solving the undesirable effects (UDEs) that the customers segments are suffering from. Let‘s look at the case of a manufacturer addressing the core conflict of a retail shop. The objective is to run a successful shop. In order to run a successful shop, we must have cash available. In order to have cash available, we must buy in small quantities. In order to run a successful shop, we must also have profitable sales. In order to have profitable sales, we must buy in small quantities. The analysis of assumptions caused the manufacturer to offer enough goods needed for proper visual display plus reasonable stock given on consignment terms, not charge for freight, and deliver goods frequently (daily, weekly, or bi-monthly according to sales volume). This solution was

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successfully implemented by a luggage manufacturer resulting in a significant increase in sales and profits. Their competitors did not offer the same solution. (Note: to learn more about the TOC marketing solution, I recommend reading chapter 22 of The Theory of Constraints Handbook and the novel It’s Not Luck which was written by Dr. Eli Goldratt, the founder of TOC). d. Answer: In your groups, come up with another customer segment and find ways to address their current reality to improve it to a better one.

2. Discussion: CRM and managing the sales funnel Duration 30 minutes a. This chapter covered the topic of using automated sales force tools to track and guide their activities to improve sales. We will apply TOC to the topic of managing the sales funnel. A sales funnel is the tracking of the steps starting from a prospect becoming a customer. See the discussion question above for an explanation of some key concepts of TOC. TOC was first applied in managing operations. Specifically, the production solution was created to improve flow based on the understanding that one or few constraints exist. In manufacturing, a particular machine or department could be the constraint or bottleneck most limiting the ability to generate Throughput. By focusing on exploiting the constraint, its capacity will increase. Some examples of exploitation are ensuring that the machine does not have lost capacity due to breakdowns, processing defective materials, and offloading work to other resources when possible. We need to ensure that the sales opportunities that flow through the sales funnel with as few delays as possible. (Note: to learn more about this solution, I recommend reading chapter 21 of The Theory of Constraints Handbook.) b. Discuss in groups some ideas for how you would apply the TOC solution to the sales funnel. You should read some of the content on the Theory of Constraints in Wikipedia to facilitate your analysis and discussion.

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 9780357715680; Chapter 11: Global Location Decisions

TABLE OF CONTENTS Purpose and Perspective of the Chapter ................................................................................................... 2 List of Instructor Downloads ........................................................................................................................ 2 Chapter Objectives ..................................................................................................................................... 2 Complete List of Chapter Activities and Assessments............................................................................. 2 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 5 Additional Discussion Questions ............................................................................................................. 11

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of global location decisions through understanding the impact of global location strategy on a supply chain. The critical factors influencing location decisions are described, including regional trade agreements. Several location evaluation models are presented with examples of applying the steps of each. The advantages of business clusters are explained, as well as the impact of sustainable development on facility location. Finally, the impact of the COVID-19 pandemic on making facility location decisions is described.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center. 

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.



A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 11.1

Explain the impact of global location decisions on a supply chain.

LO 11.2

Identify the factors influencing location decisions.

LO 11.3 Understand the impact of the regional trade agreements on location decisions.

LO 11.4

Use several location evaluation models.

LO 11.5

Understand the advantages of business clusters.

LO 11.6

Explain the impact of sustainable development on facility location.

LO 11.7 Understand the impact of the COVID-19 pandemic on facility location.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective 11.1

PPT slides

Activity/Assessment

Duration

4-8

Activity in PPT

30 minutes

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11.2 11.3 11.4 11.5 11.6 11.7

9-25, 40-41 14-16 26-34 35-37 38-39 42

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

1.5 hour 20 minutes 1 hour 30 minutes 20 minutes 20 minutes

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KEY TERMS 3D printing: a ―process of making a three-dimensional solid object of virtually any shape from a digital model.‖ Additive manufacturing: another term for 3D printing.

Association of Southeast Asian Nations (ASEAN): was created in 1967 in Bangkok, Thailand and is comprised of the ten countries in the Southeast Asian region: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

Business clusters: represents a new way of thinking about location decisions, challenges conventional logic on how companies should be configured, and provides a different approach to organizing a supply chain; according to Michael Porter: ―clusters are geographic concentrations of interconnected companies and institutions in a particular field.‖ Climate change: global warming; consists of greenhouse gas emissions negatively affecting the climate of the world.

Common Market for Eastern and Southern Africa (COMESA): established in 1994 to ―be a fully integrated, internationally competitive regional economic community with high standards of living for all its people ready to merge into an African Economic Community.‖ Contributor factory: plays a greater strategic role than a server factory by getting involved in product development and engineering, production planning, making critical procurement decisions, and developing suppliers.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): trade agreement including eleven countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, which began on December 30, 2018.

European Union (EU): set up after World War II, the European Union was officially launched on May 9, 1950, with France‘s proposal to create a European federation consisting of six countries: Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. Eventually, the EU consisted of 27 member states, with currently five candidate countries.

Green development: term used to describe environmentally friendly development.

Lead factory: is a source of product and process innovation and competitive advantage for the entire organization.

Offshore factory: manufactures products at low cost with minimum investment in technical and managerial resources.

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Outpost factory: is set up in a location with an abundance of advanced suppliers, competitors, research facilities, and knowledge centers to get access to the most current information on materials, components, technologies, and products.

Quality-of-life factors: quality of life is defined as ―general well-being of individuals and societies.‖ This list includes such factors as achieving educational excellence, growing a vibrant economy, and preserving the natural environment.

Regional Comprehensive Economic Partnership (RCEP): trade agreement signed in 2020 between 15 counties (Australia, Brunei, Cambodia, China, Philippines, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Singapore, Thailand, and Vietnam). India was in the initial list of countries, but chose to withdraw from the agreement.

Right-to-work laws: in the United States as of December 2020, there are 27 states with these type of laws, which are defined as a law that ―secures the right of employees to decide for themselves whether or not to join or financially support a union.‖ Server factory: is set up primarily to take advantage of government incentives, minimize exchange risk, avoid tariff barriers, and reduce taxes and logistics costs to supply the regional market where the factory is located.

Source factory: has a broader strategic role than an offshore factory with plant management heavily involved in supplier selection and production planning.

Southern Common Market (MERCOSUR): economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela formed in March 1991, which was created with the goal of forming a common market/customs union between the participating countries for free movement of goods, services, and people.

Sustainable development: ―development that meets the needs of the present without compromising the ability of future generations to meet their own needs.‖ United States-Mexico-Canada Agreement (USMCA): an updated and rebalanced agreement which came into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA)—the original trade agreement between the United States, Canada, and Mexico implemented January 1, 1994.

Weighted-factor rating model: a method commonly used to compare the attractiveness of several locations along a number of quantitative and qualitative dimensions.

World Trade Organization (WTO): is the successor to the General Agreement on Tariffs and Trade (GATT), which was responsible for setting up the multilateral trading system after World War II; today, is the ―only global international organization dealing with the rules of trade between nations.‖

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

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I

Introduction (11.01, PPT slides 4-5) I.a Facility location affects the efficiency and effectiveness of managing supply chains, the level of service provided to customers, and a firm‘s overall competitive advantage.

I.b Once a decision on locating a facility is made, it is costly to move or shut down that facility.

I.c Thus, facility location has a long-term impact on a supply chain and must be an integral part of a firm‘s supply chain strategy.

I.d Companies can locate anywhere in the world due to increased globalization, technology, faster transportation, improved communication, and open markets.

I.e Location still matters – business clusters show that innovation and competition are geographically concentrated; their existence provides clear evidence that innovation and successful competition are concentrated geographically.

I.f Global location decisions involve location of the facility, defining its strategic role, and identifying markets to be served by the facility.

II

Global Location Strategies (11.01, PPT slides 6-8) II.a Global location decisions are made to optimize the performance of the supply chain and be consistent with the firm‘s competitive strategy.

II.b However, COVID-19 showed what a global pandemic can do to an interconnected global economy. Seemingly overnight, the world changed.

II.c Sixty percent of survey respondents of an IBM study indicated they were planning to consolidate activities in their home country in 2020—vastly different from previous years.

II.d Firms competing on cost will select location that provides a cost advantage in terms of logistics and inventory costs.

II.e Firms competing on speed of delivery use the hub-and-spoke approach to determine location, with each hub being picked for its central location and easy access to customers.

II.f To get the most out of foreign-based facilities, managers must treat these plants as source of competitive advantage since they have a strategic role to perform.

II.g Professor Ferdows suggests a framework consisting of six strategic roles depending on the strategic reason for the facility‘s location and scope of its activities, which are shown on the next slide.

II.g.1 Offshore factory—low cost with minimum investment in technical and managerial resources.

II.g.2 Source factory—broader strategic role with plant management heavily involved in supplier selection and production planning II.g.3 Server factory—set up primarily to take advantage of government incentives, minimize exchange risk, avoid tariff barriers, and reduce taxes and logistics costs

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II.g.4 Contributor factory—plays a greater strategic role by getting involved in product development and engineering, production planning, critical procurement decisions, and developing suppliers II.g.5 Outpost factory—set up in a location w/ an abundance of advanced suppliers, competitors, research facilities, and knowledge centers to get access to most current info on materials , components, technologies, and products.

II.g.6 Lead factory—source of product and process innovation and competitive advantage for the entire organization III

Critical Location Factors (11.02, 11.03, PPT slides 9-25) III.a

Important questions to consider:

III.a.1 What will be the reaction of shareholders, customers, competitors, and employees?

III.a.2 Where is the target market located?

III.a.3 Will the location provide a sustainable competitive advantage?

III.a.4 What will be the impact on product or service quality?

III.a.5 Can the right people be hired?

III.a.6 What will be the effect on supply chains?

III.a.7 What is the projected cost?

III.a.8 What will be the impact on delivery performance?

III.a.9 How will the market react?

III.a.10 Is the transfer of people necessary, and, if so, are employees willing to move?

III.b The World Trade Organization (WTO) is the successor to the Agreement on Tariffs and Trade (GATT).

General

III.b.1 The ―only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiate and signed by the bulk of the world‘s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably and freely as possible.‖ III.b.2 The WTO has 164 members, and its goal is to help producers of goods and services, exporters, and importers conduct their business.

III.b.3 Other WTO functions include: III.b.3.1

Administering the agreements

III.b.3.2

Providing a forum for trade negotiations

III.b.3.3

Handling trade disputes

III.b.3.4

Monitoring national trade policies

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III.b.3.5 Providing technical assistance and training programs for developing countries III.b.3.6

Cooperating with other international organizations

III.c As of June 15, 2021, there are 349 regional trade agreements under the WTO. Examples of better-known ones are: III.c.1 European Union (EU): [1950] currently consists of 27 members— established the euro notes and coins in 2002.

III.c.2 The United States-Mexico-Canada Agreement (USMCA): [2020] among the United States, Mexico, and Canada replacing NAFTA. III.c.3 Southern Common Market (MERCOSUR): [1991] among Argentina, Brazil, Paraguay, Uruguay, and Venezuela.

III.c.4 Association of Southeast Asian Nations (ASEAN): [1967] was created in Bangkok, Thailand and is comprised of the ten countries in the Southeast Asian region: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

III.c.5 Common Market of Eastern and Southern Africa (COMESA): [1994] established in 1994 to ―be a fully integrated, internationally competitive regional economic community with high standards of living for all its people ready to merge into an African Economic Community.‖ III.c.6 Regional Comprehensive Economic Partnership (RCEP): [2020] trade agreement between 15 counties (Australia, Brunei, Cambodia, China, Philippines, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Singapore, Thailand, and Vietnam). India was in the initial list of countries but chose to withdraw from the agreement.

III.c.7 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP): trade agreement including eleven countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, which began on December 30, 2018.

III.d Nation‘s competitiveness: ―a measure of a country's advantage or disadvantage in selling its products in international markets.‖ III.e

Two competing sources for national competitiveness rankings:

III.e.1 IMD World Competitiveness Ranking published annually by the Swiss business school IMD III.e.1.1 Features 63 economies and provides businesses with the basic info on location decisions III.e.1.2 Rankings are based on 337 criteria broadly grouped into four factors: economic performance, government efficiency, business efficiency, and infrastructure (each with subfactors) III.e.2 World Economic Forum (WEF) prepares The World Competitiveness Yearbook

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III.f

IMD World Competitiveness Ranking Factors (each has 5 subfactors) III.f.1 Economic performance: ―macro-economic evaluation of the domestic economy, international trade, international investment, employment, and prices III.f.2 Government efficiency: ―extent to which government policies are conducive to competitiveness‖ III.f.3 Business efficiency: ―extent to which the national environment encourages enterprises to perform in an innovative, profitable, and responsible manner‖ III.f.4 Infrastructure: ―extent to which basic, technological, scientific, and human resources meet the needs of business‖

III.g

WEF‘s 12 Pillars of Competitiveness

III.g.1 Institutions—legal and administrative framework III.g.2 Infrastructure—transportation, telecommunication, and power networks III.g.3 ICT adoption—how readily adopt new technology III.g.4 Macroeconomic stability—fiscal deficits, inflation, unemployment, GDP growth III.g.5 Health—investment in health services and quality of basic education III.g.6 Skills—amount of different types of training in the workforce III.g.7 Product market—overall environment for goods exchange III.g.8 Labor market—environment for male and female workers III.g.9 Financial system—how resources are channeled to businesses III.g.10 Market size—availability of domestic and international markets for firms III.g.11 Business dynamism—quality of networks, and firm‘s operations and strategies III.g.12 Innovation capability—support for it III.h

Government Taxes and Incentives

III.h.1 Government incentives, business attitudes, economic stability, and taxes are important location factors.

III.h.2 Countries with high tariffs (taxes) discourage importing of goods.

III.h.3 High tariffs encourage multinational corporations to produce locally.

III.h.4 However, WTO membership requires countries to open up markets and reduce tariffs on imported goods.

III.h.5 Many countries have set up foreign trade zones (FTZs) where materials can be imported duty-free as inputs to production that are exported.

III.h.6 Broad-based personal income tax and corporate income tax are additional factors to consider.

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III.i

Currency Stability III.i.1 Exchange rate plays important role in costs of production in another country.

III.i.2 Also, risks associated with international operations are a factor.

III.j

Environmental Issues III.j.1 Environmental management has a significant impact on human health.

III.j.2 North American Agreement on Environmental Cooperation (NAAEC) - foster the protection and improvement of the environment III.j.3 The WTO agreement makes direct reference to sustainable development and the desire to protect and preserve the environment.

III.j.4 WTO plays role in UN‘s 17 Sustainable Development Goals.

III.k

Access and Proximity to Markets

III.k.1 Relocation to China not just for cheap labor but for access to the market.

III.k.2 In the service industry, proximity to customers is even more critical.

III.k.3 Convenience is a factor in consumer choice.

III.l

Labor Issues Key Factors III.l.1 Labor availability, productivity, and skill III.l.2 Unemployment and underemployment rates III.l.3 Wage rates; turnover rates; labor force competitors III.l.4 Employment trends

III.m

Access to Suppliers

III.m.1 Supplier proximity influences the delivery of materials and effectiveness of the supply chain, including transportation costs.

III.n

Logistics Issues

III.n.1 Logistics costs, and ease and speed of transportation are important in location selection strategy.

III.o

Utility Availability and Cost

III.o.1 Electricity supply has not kept pace with high speed of development.

III.o.2 In heavy industries - cost & availability of energy are critical.

III.o.3 China is the world‘s largest producer and installer of solar power in world.

III.p

Quality-of-Life Issues

III.p.1 Achieving Educational Excellence III.p.2 Growing a Vibrant Economy

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III.p.3 Preserving the Natural Environment III.p.4 Promoting Social Well-being and Harmony III.p.5 Enjoying Arts, Culture, and Recreation III.p.6 Sustaining a Healthy Community III.p.7 Maintaining Responsive Government III.p.8 Moving Around Efficiently and Safely III.p.9 Keeping the Community Safe III.q

Right-to-Work Laws

III.q.1 As of Dec 2020, 27 U.S. states have these laws which secures employee rights to decide whether or not to join or financially support a union.

III.q.2 Trend to locate in sunny, incentive-friendly, nonunionized South will most likely continue to grow.

III.r Land Availability and Costs III.r.1 As land and construction costs in big cities continue to escalate, the trend is to locate in the suburbs and rural areas, which also have attractors.

III.r.2 While we have observed many U.S. manufacturers moving overseas to find cheaper production locations, one Chinese billionaire moved his operations to the U.S. IV

Facility Location Techniques (11.04, PPT slide 26-34) IV.a

The Weighted-Factor Rating Model

IV.a.1 Compares attractiveness of locations along a number of quantitative and qualitative dimensions.

IV.a.2 Steps: IV.a.2.1

Identify the factors.

IV.a.2.2

Assign weights to each factor. Weights typically sum to 1.

IV.a.2.3

Determine a relative performance score for each factor.

IV.a.2.4 Multiply the factor score by the weight, then sum the weighted scores.

IV.a.2.5 The location with the highest total weighted score is the recommended location.

IV.a.3 An example of using this model is provided.

IV.b

The Break-Even Model

IV.b.1 Useful location analysis technique when fixed and variable costs can be determined by location

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IV.b.2 Steps: IV.b.2.1

Identify locations to be considered.

IV.b.2.2 Determine fixed cost of land, property taxes, insurance, equipment, and buildings.

IV.b.2.3 Determine unit variable cost: costs of labor, materials, utilities, and transportation.

IV.b.2.4

Construct total cost lines for each location on a graph.

IV.b.2.5

Determine break-even points on the graph.

IV.b.2.6

Identify the range over which each location has lower cost

IV.b.3 An example of using this model is provided.

V

Business Clusters (11.05, PPT slides 35-37) V.a A number of trends in the past decade have dramatically impacted the facility location process.

V.b Markets are increasingly globalized due to liberalization of trade, technological advances, and increased demand from many regions of the world.

V.c Research parks and special economic/industrial zones serve as magnets for business clusters.

V.d Business clusters represent a new way of thinking about location decisions, challenges conventional logic on how companies should be configured, and provides a different approach to organizing a supply chain.

V.e According to Michael Porter: ―clusters are geographic concentrations of interconnected companies and institutions in a particular field.‖ V.f Different types of business clusters: V.f.1 High-tech clusters, such as Silicon Valley in California.

V.f.2 Factor endowment clusters, which are created due to competitive advantage arising from a geographic location, such as Napa vineyards.

V.f.3 Knowledge-service clusters found in developing countries with concentrations of lower-cost technical and analytical skills.

V.f.4 Low-cost manufacturing clusters involving auto production, electronics, and textiles in developing countries.

V.g Reasons for success of business clusters: V.g.1 Close cooperation, coordination, and trust among clustered companies in related industries.

V.g.2 Fierce competition among rival companies located in the cluster.

V.g.3 Companies are more productive in their operations due to access to local supplier base, information, and technology.

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V.g.4 Companies are able to recruit from the local pool of skilled and experienced workers.

V.g.5 Competitive environment leads to companies tending to respond quicker to customer needs and trends.

VI

Sustainable Development and Facility Location (11.06, PPT slide 38-39) VI.a Sustainable Development—―meets the needs of the present without compromising the ability of future generations to meet their own needs‖

VI.b Its critical issues are energy consumption/production, air pollution, and climate change.

VI.c Calls for the development of cleaner, more fuel-efficient and affordable energy technologies, as well as renewable energy technologies are due to increased fossil fuel consumption and global warming, increasing prices of crude oil, thus affecting supply chain costs.

VI.d Industrial development is the engine for economic growth and eradicating poverty in emerging countries.

VI.e Resource efficiency and technology innovation are opportunities for reducing cost and increasing competitiveness and employment, which are central to managing an effective supply chain.

VI.f Air pollution has serious impacts on human health, the environment, and the economy.

VI.g The importance of climate change resulted in an international treaty, the United Nations Framework Convention on Climate Change (UNFCCC), to reduce global warming and cope with inevitable temperature increases.

VI.h Green Development—describes environmentally friendly development; ―prioritizes what its proponents consider to be environmental sustainability over economic and cultural considerations.‖ VII

Additive Manufacturing and Its Impact on Facility Location (11.02, PPT slides 40-41) VII.a 3D printing or additive manufacturing is a ―process of making a threedimensional solid object of virtually any shape from a digital model.‖

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VII.b Benefits includes shorter lead times, mass customization, reduced parts count, more complex shapes, parts on demand, efficient material use, and lower energy consumption.

a.

VIII

This technology is applicable to a wide range of industries such as defense, aerospace, automotive, medical, and metals manufacBenefits manufacturing.

Initially, it was used for rapid prototyping, but new developments make it possible to use in actual production.

b.

Digital dentistry is one growth area for this technology where dentists use 3D printers to build teeth, dentures, braces, and implants in-house.

c.

No need to make physical impressions, just to use oral scanners.

d.

The affordability of 3D printers could keep businesses from going oversees for their manufacturing needs or bring manufacturing back to the U.S.

e.

Companies are now using 3D printers to create new products, improve old ones, and improve their business processes (e.g., GE, Boeing, and Reebok).

f.

A small business or an entrepreneur can now afford to have its own little factory.

COVID-19 and Its Impact on Global Location Strategies (11.07, PPT slide 42) VIII.a As a result of the pandemic, many companies are expected to increase the use of digital technologies and automation in the future.

VIII.b The digital transformation effort is expected to have an impact on the firm‘s global operating footprints.

VIII.c VIII.d mitigation.

Workforces will need to develop new skills as a result.

Two other issues that rise to the top are supply chain diversification and risk

VIII.e New questions emerge regarding consolidation (few suppliers) versus diversification (many suppliers).

Need to reevaluate the benefits and risks of a consolidated foo[return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1

Discussion: Global location decisions 45 minutes or more 1.a Discuss in your teams the factors an organization should consider when setting up their global supply chain, such as exchange rates, transportation time, and other critical factors.

1.b Answer: My PhD dissertation (at Arizona State University published in 1996) was titled ―Capacitated location and logistics decisions under stochastic demand and exchange rate

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movements: A simulation study.‖ I, Dr. Lisa Ferguson, collected real data and wrote a simulation program to analyze how to make those types of decisions more effectively. I have included most of the summary of my dissertation below. The study focused on evaluating the three main currencies (and corresponding regions) of the German Deutsche Mark, Japanese Yen, and U.S. dollar.

1.c ―This research has achieved the goals: (1) to present a discussion of global networks and interview results of global firms concerning supply chain management, (2) to define the research problem and present an application case, and (3) to evaluate decision rules in a simulation model.

1.d ―This research studied the capacitated assembly plant location and logistics decisions with a long-term time frame, a primary objective of maximizing the net present value of the cash flows in the numeraire currency, and a secondary objective of service level, under stochastic, growing demand and foreign exchange rate movements. In particular, the simulation model compared all possible combinations of a small set of location, capacity expansion, demand allocation, and lot-sizing rules. The research hypotheses addressed the effects of exchange rate volatility, integrated decision-making, duty charge levels, and demand variability on the performance of the decision rules.‖ 1.e ―The literature review indicated that integrated decision-making, foreign exchange rates, and international factors, such as tax rates and duties, impact the performance of global supply chain management decisions. The literature review provided some of the decision rules that were tested in the simulation model.‖ 1.f ―The literature review assisted in the compilation of a more comprehensive list of international factors that influence global supply chain management decisions. Refer back to Chapter Three for the detailed list and categories. This list was then narrowed to the factors that were included in the simulation study. Figure 7.1 presents the major categories of international factors and indicates which categories included some factors that were included in the simulation model.‖ (Note: Figure 7.1 points out that the global supply chain management categories included in the study are costs (economic impacts), productivity, risk/sensitivity to long-term changes, policies and regulations, barriers/difficulties, and market).

1.g ―The results of this exploratory study indicate that managers should integrate location and logistics decision-making to improve performance. In particular, the use of regional manufacturing with two shifts is probably the best way to improve net present value while maximizing the service level. For more detail on the results, refer back to Chapter Six. Further research should compare this strategy with the use of low-cost manufacturing and two shifts. One way to do so would be to adjust the growth rate based on the service level.‖ 1.h ―The results of the simulation study also indicate that the best decision rules for improving the service level are capacitated lot-sizing, the use of two shifts, and least cost demand allocation. Therefore, the best strategy may be to use regional manufacturing, two shifts, least cost demand allocation, and capacitated lot-sizing. However, further analysis is necessary for determining the interaction between all of decision rules and the two performance measures using MANOVA. Managers should also realize that foreign exchange rates do have a significant impact on performance, in terms of net present value. Therefore, exchange rates should be considered when making global supply chain management decisions.‖

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2

Discussion: Location decisions Duration 30 minutes 2.a Once the material on the Theory of Constraints (TOC) from the discussion question sections of Chapters 7 and 14, this question can be asked. How do we make effective location decisions with respect to the key concepts of TOC covered?

2.b Answer: For location decisions, we should estimate the impact of each alternative on T, I, and OE, as well as consider the impact on this decision on the size of the buffer, which affects the inventory target levels.

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 9780357715680; Chapter 12: Service Response Logistics

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

2 Complete List of Chapter Activities and Assessments............................................................................. 3 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 6 Additional Discussion Questions ............................................................................................................. 13

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of service response logistics (SRL). First, services and manufacturing are compared and contrasted. SRL and its elements are described. The importance of service locations and layouts are explained, in addition to techniques explained and demonstrated for making layout decisions.

The strategies for managing capacity, wait times, distribution, and quality in services are described.

Queuing system design issues and calculating queue characteristics is explained. Various techniques for managing customers‘ perceived waiting times are presented. The different distribution channels available for services are explained. Finally, the chapter ends with defining service quality, and describing how to measure and improve it.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 12.1

Understand how supply chain management for services differs from supply chain management for manufacturers.

LO 12.2

Define service response logistics and describe all of its elements.

LO 12.3

Understand the importance of service layouts and perform a layout analysis using several techniques.

LO 12.4

Describe the strategies for managing capacity, wait times, distribution, and quality in services.

LO 12.5

Understand queuing system design issues and calculate queue characteristics.

LO 12.6

Use various techniques for managing customers‘ perceived waiting times.

LO 12.7

Understand the different distribution channels available for services.

LO 12.8

Define service quality, and describe how to measure and improve it.

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COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter Objective 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8

PPT slides

Activity/Assessment

Duration

4-6, 25-26 7-15 16-24 27-36 37-52 53 54-58 28, 59-62

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

30 minutes 1 hour 1.5 hours 1 hour 1.5 hours 15 minutes 40 minutes 30 minutes

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KEY TERMS Arrival pattern: way in which customers arrive at a service.

Back-of-the-house operations: operations within a service that have a low level of contact with customers which tend to be managed as manufacturing centers, where the emphasis is on maximizing quality outputs while achieving economies of scale.

Balking: customer behavior of refusing to join the queue once they see how long it is.

Baumol’s disease: productivity growth problem named after a noted U.S. economist in which the growth tends to be low in service-oriented economies.

Capacity utilization: is the actual customers served per period divided by the capacity and multiplied by 100 to be a percentage.

Chase demand strategy: basic strategy for managing capacity when the amount of capacity is allowed to vary with demand.

Closeness desirability rating: these ratings are determined for each department pair, with the objective being to design a layout that maximizes an overall desirability rating for the entire facility.

Cost leadership strategy: generic competitive strategy which often requires a large capital investment in automated production equipment and significant efforts in the areas of controlling and reducing costs, doing things right the first time, standardizing services and aiming marketing efforts at cost-conscious consumers.

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Customer contact centers: center that integrates the firm‘s website and traditional call center to offer 24/7 support where customers and potential customers can contact the firm and each other using telephone, e-mail, chat rooms, and e-bulletin boards.

Demand management: set of tactics also known as queue management that must be used when a level demand strategy is used.

Differentiation strategy: generic competitive strategy that is based on creating a service that is considered unique.

Eatertainment: the combination of restaurant and entertainment elements.

Edutainment: when a service organization combines learning with entertainment to appeal to customers (also known as infotainment) to increase revenues.

Entertailing: refers to retail locations with entertainment elements.

Facilitating products: goods that can be purchased by services such as computers, furniture, and office supplies that are not part of the services sold, but rather consumed inside the firm meaning these products must also be managed.

Five dimensions of service quality: survey results identification of the ways in which customer rate quality – reliability, responsiveness, assurance, empathy, and tangibles.

Focus strategy: generic competitive strategy that refers to a service that can effectively serve a narrow target market or niche better than other firms trying to serve an entire market.

Franchising: allows services to expand quickly into dispersed geographic markets, protect existing markets, and build market share by authorizing an individual or group to offer the service of the company.

Front-of-the-house operations: operations within a service that have a high level of contact with customers and are characterized by hiring front-line service providers with good public relations skills, taking good care of customers, and giving employees the power and resources to solve customers‘ problems quickly and effectively.

Infotainment: when a service organization combines learning with entertainment to appeal to customers (also known as edutainment) to increase revenues.

Level demand strategy: basic strategy for managing capacity when the firm utilizes a constant amount of capacity regardless of demand variations.

Microfranchise: another type of franchising concept that is seen as a good way for economically disadvantaged people to make a living.

Mixed Internet distribution strategy: combining traditional retailing with online retailing.

Multiple-channel queuing system: configuration in which multiple services acting in parallel.

Multiple-factor productivity: measurement of productivity based on dividing the outputs produced by the sum of inputs, such as the sum of labor, material, energy, and capital costs.

Multiple-phase queuing system: configuration in which multiple servers acting in series.

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Perceived waiting times: customer‘s perception of the waiting time can be much shorter or longer than it really is.

Pure Internet distribution strategy: selling or providing good and services with only over the Internet.

Pure services: services that offer few, if any tangible goods to customers.

Queue discipline: describes the order in which customers are served.

Queue management: set of tactics also known as demand management that must be used when a level demand strategy is used.

Queue times: time that service customers spend including waiting at checkout counters, waiting for a table at a restaurant, and waiting on hold on the cellphone.

Queuing systems: design of the waiting system for a service.

Reneging: customer behavior in which they give up or leave the queue or waiting line before receiving the service.

Service bundles: customers purchase a bundle of attributes when purchasing a service, including the explicit service itself, the supporting facility, facilitating goods, and implicit services.

Service capacity: most often defined as the number of customers per day the firm‘s service delivery systems are designed to serve, although it could be some other period of time such as customers per hour or customers per shift.

Service delivery systems: a type of service system that falls along a continuum with mass-production, low customer contact systems at one extreme (such as ATMs) and highly customized, high customer contact systems at the other (such as an expensive beauty salon).

Service layout strategies: work in combination with location decisions to further support the overall business strategies of differentiation, low cost, or market focus.

Service response logistics: the management and coordination of the organization‘s activities that occur while the service is being performed.

Single-factor productivity: measuring productivity based on outputs produced divided by the inputs of one type used, such as labor hours or labor dollars.

State utility: means that services do something to things that are owned by the customer (such as transport and store their supplies, repair their machines, cut their hair, and provide their healthcare).

Virtual queues: technology enables customers to not have to physically stand in line since their place in queue is tracked by a computerized system that allows them to roam the premises until their hand-held monitor lights up.

Walk-through service audits: a way to monitor the service delivery system by observing its attributes from the time customers initially encounter the service until they leave.

Walmart effect: postulation that the booming growth in information technology has allowed many bigbox retailers such as Walmart to realize large productivity growth rates.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I.

II.

Introduction (12.01, PPT slides 4-5) a. Services differ from manufacturers in a number of ways: tangibility of the end product, the involvement of the customer in the production process, the assessment of product quality, the labor content contained in the end products, and facility location decisions. b. Many services are pure services, offering few or no tangible products to customers (e.g., lawyers and entertainers). c. Some services have end products with a larger tangible component (e.g., restaurants and repair facilities). d. Most manufacturers, on the other hand have tangible goods, with a relatively small service component. e. In services, customers are often directly or indirectly involved in the production of the service. f. Services may provide state utility - they do something to things owned by the customer (e.g., transport and store supplies; provide their healthcare). g. Managing the interactions between service firms and their customers while the service is being performed is of paramount importance to success. h. Developed countries are becoming increasingly service oriented. i. The Internet is creating global ―e-preneurs‖ whole business is solely online. j. Services are playing a more important role in the global economy. k. Service jobs are replacing those in manufacturing.

An Overview of Service Operations (12.01, 12.02, 12.03, PPT slides 6-24) a. Differences between goods and services 1. Services cannot be inventoried – typically are produced and consumed simultaneously 2. Services are often unique – can customize services; thus, hiring and training are important for customer satisfaction 3. Services have high customer-service interaction – though today many are finding ways to automate or standardize their offering, or utilize customers to provide some of the service to reduce costs and improve productivity 4. Services are decentralized – due to inability to inventory services and because of competition b. Service Productivity 1. The service productivity formula is shown and explained.

2. Baumol‘s disease – productivity growth tends to be low in service-oriented economies 3. The Walmart effect – postulates that the booming growth in IT has allowed many big-box retailers such as Walmart to realize large productivity growth rates 4. In services with high labor costs, there is often a desire to reduce labor costs to improve productivity (since labor cost is considered a productivity input).

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c.

d.

e.

f.

g.

5. This can lead to relocation to reduce labor costs, outsourcing of jobs to other, lower cost service providers, and layoffs of workers – can be risky Other strategies address the numerator of the productivity equation 1. The use of technology or automation to increase outputs 2. Increased interest for robotics and process automation technologies Improving productivity can be quite challenging due to 1. Desire in many cases for customized, labor-intensive services 2. Because of the difficulty of assessing service quality Global Service Issues 1. The growth and export of services are occurring everywhere as world economies improve and the demand for services increases.

2. Even during the pandemic, services were finding ways stay competitive and expand.

3. Successfully managing services as they expand into foreign markets involves a number of issues: (1) Labor, facilities, and infrastructure support (2) Legal and political issues (3) Domestic competitors and the economic climate (4) Identifying global customers Service Strategy Development – generic competitive strategies 1. Cost Leadership Strategy (1) Often requires a large capital investment in production equipment and significant efforts in the areas of controlling and reducing costs, doing things right the first time, standardizing services and aiming marketing efforts at cost-conscious customers 2. Differentiation Strategy (1) Based on creating a service that is considered unique 3. Focus Strategy (1) Service that can effectively serve a narrow target market or niche better than other firms trying to serve an entire market The Service Delivery System 1. Service managers design their firms‘ service bundles and then design the most effective delivery system.

(1) Explicit service itself (storage and the use of your money at a bank) (2) Supporting facility (bank building, drive-up tellers, and website) (3) Facilitating goods (deposit forms, monthly statements and coffee in the lobby), (4) Implicit services (security provided, the atmosphere in the bank, privacy, and user-friendliness of the website) 2. Falls along a continuum with mass-production, low customer contact systems at one extreme (such as ATMs) and highly customized, high contact systems at the other (such as an expensive beauty salon).

3. Back-of-the-house operations tend to be managed as manufacturing centers with emphasis on maximizing quality outputs while achieving economies of scale.

4. Front-of-the-house operations are characterized by hiring front-line service providers with good public relations skills, taking good care of customers, and

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III.

giving employees the power and resources to solve customers‘ problems quickly and effectively.

5. The service bundle delivery system should be audited periodically to assess its ability to meet customer expectations in a cost-effective way.

6. Need to continually monitor customer complaints, talk to and observe customers, and track customer feedback using their comment cards and website comment forms (as well as looking at the bottom line) 7. Walk-through service audits can be used to observe service system attributes from the time customers initially encounter the service until they leave.

8. Several good tools are service system surveys to be completed by managers, employees, and/or customers, and service process maps. h. Location Strategies 1. Have a significant impact on customer visits and long-term profitability 2. Viewed as moderate- to long-term decision because of the typically high costs of construction, remodeling, and relocation (with the exception of services that don‘t have permanent structures, such as online services, renting space in an office building, or a teacher visiting customers‘ homes) 3. Global market opportunities, global competitors, and technological and demographic changes contribute to the importance of a good location.

4. Desirable to consider a number of relevant factors to reduce reliance on personal preferences and intuition.

5. A number of location analysis models can aid in the location decision. i. Layout Strategies 1. Work in combination with location decisions to further support firm strategy 2. Office layout strategies tend to be departmentalized to allow specialists to share resources 3. To reduce distance traveled – to cut travel times of customers or service workers moving from one area to another (e.g., a health clinic) 4. To maximize closeness desirability – place certain desirable pairs of departments closer to one another 5. Closeness desirability rating between departments used to maximize desirability rating for the entire facility 6. Example 12.2 demonstrates how to apply the layout strategy of distance traveled.

7. Example 12.3 shows how to apply the layout strategy based on closeness desirability ratings.

Supply Chain Management in Services (12.01, 12.03, 12.08, PPT slides 25-28) a. In many respects, service-producing organizations are like goods-producing organizations. Both 1. Make purchases 2. Deal with suppliers 3. Incur order costs and inventory carrying costs 4. Transport, count, store, and the assess quality of their purchased inventories b. Services require use of facilitating products that are not part of the services sold (e.g., computers, furniture, office supplies), which must be managed. c. In other respects, service firms are unlike goods-producing organizations:

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IV.

1. Service firms typically deal with the end customers in their SCs, whereas most goods-producing firms deal with wholesalers, distributors, other manufacturers or retailers.

2. Service firms interact closely with their customers.

3. Services performed usually contain higher labor content than manufactured goods.

4. Customers‘ primary concerns are with the service itself and the way it is delivered.

5. For this reason, the distribution elements of interest to services revolve around customers and how they are being served. d. Table 12.1 presents considerations in services regarding transportation, warehousing, and inventory. e. Service Quality and Customers 1. The satisfaction or perceived level of quality a customer experiences is of paramount concern to most services.

2. Service quality includes many elements which can change over time 3. Elements of sustainability or being ‖green‖ allows a firm to stand out – including food, water, and energy.

4. Quality assessments vary based on both tangible and intangible elements of the services provided and the satisfaction of the customers.

5. Many call centers that fail to satisfy them have opportunities to improve.

6. The ―gold standard‖ for call centers is their first call resolution score.

7. All elements of SCM hold strategic importance for services.

The Primary Concerns of Service Response Logistics (12.04, 12.05, 12.06, 12.07, 12.08, PPT slides 29-62) a. Service Response Logistics (SRL) - management and coordination of the organization‘s activities that occur while the service is being performed. b. The four primary activities of SRL are about managing 1. Service capacity – enables ability to meet variable demand since services cannot be inventoried.

2. Waiting times – managing queues well keeps customers satisfied when demand variability cannot be adequately met.

3. Distribution channels - use of these is important for delivery of service products since services usually must be decentralized to attract customers.

4. Service quality – affects customer satisfaction. c. Managing Service Capacity 1. Service capacity is most often defined as the # of customers per time period the firm‘s service system is designed to serve 2. When demand exceeds capacity, firms turn away customers, make them wait in line, or hire personnel.

3. Hiring, training, supervising, and equipping personnel are quite costly (in many cases 75% of total operating costs) 4. Service managers must forecast demand for various segments of time and services processes, and then provide capacity to meet the forecasted demand.

5. The service capacity utilization formula is presented and explained.

6. Two most basic strategies for managing capacity: (1) Level demand strategy

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(a) Capacity remains constant regardless of demand variations (b) When demand exceeds capacity, queue management tactics deal with excess customers (2) Chase demand strategy (a) Amount of capacity is allowed to vary with demand (b) Must be ready to utilize, transfer or reduce service capacity when excess is available (c) Develop or borrow capacity quickly when demand exceeds capacity 7. Capacity Management When Demand Exceeds Capacity (1) Strategies to minimize cost of hiring and laying off employees, for periods of high demand (a) Cross-training and sharing employees (b) Using part-time employees (c) Using customers - self-service (d) Using technology (e) Using employee scheduling policies (f) Using demand management techniques to smooth or shift demand (2) The use of part-time workers is illustrated in Example 12.4.

8. Capacity Management When Capacity Exceeds Demand (1) Too much excess capacity means higher fixed costs, resulting in higher prices for services provided, and may also affect customers‘ perceptions of quality (e.g., seeing a mostly-deserted restaurant during peak hours) (2) Instead of disposing of excess capacity, the following strategies deal with low demand: (a) Long-term: lay off workers or reduce location size (b) Finding other uses for service capacity (c) Use demand management techniques, such as lowering prices during off-peak periods or designing aggressive marketing campaigns to use during slow business periods. d. Managing Queue Times 1. Issues to consider to design a good queuing system (1) What is the average arrival rate of the customers?

(2) In what order will customers be serviced?

(3) What is the average service rate of providers?

(4) How are customers‘ arrival and service times distributed?

(5) How long will customers wait in queue before they either leave or lower their perceptions of service quality?

(6) How can customers be kept in line even longer without lowering their perceptions of service quality?

2. Queuing System Design – The input process (1) Customer arrivals are referred to as the demand source, which can be considered either finite or infinite.

(2) Most queuing models assume customers stay in line - customers do not balk (refuse to join the queue), or renege (leaving the line) (3) Customers appear in arrival patterns:

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3.

4.

5.

6.

(a) Deterministic interarrival time (known pattern) (b) Poisson distribution (random pattern) (4) The formula for using the Poisson distribution to determine the probability of x-customers arriving within some time period, T, is presented.

(5) Example 12.5 illustrates the application of that formula.

Queuing System Design – Queue Characteristics (1) Queuing models generally assume infinite length of a queue.

(2) Queuing configuration can contain single or multiple lines.

(3) Queue discipline describes order in which customers are served.

(4) Virtual queues - Customers‘ places in queue are tracked by a computerized system allowing them to roam the premises until signaled by a device (a) Reduces balking and reneging (b) Queue jumping sometimes allowed at a cost Queuing System Design – Service Characteristics (1) Provided either by single server or by multiple servers who act in series or in parallel (2) Multiple servers acting in parallel is referred to as a multiple channel queuing system (3) Multiple servers acting in series is referred to as a multiple phase queuing system (4) Single channel, single phase configuration is the most basic (5) Another characteristic is the time required to complete each of the services provided (6) Figure 12.1 shows the four types of queuing system configurations.

(7) The formula for determining the probability that the service time, t, will be less than or equal to some specified time, T is presented.

(8) Example 12.6 presents the example of applying that formula.

Queuing System Applications (1) The Single-Channel, Single-Phase Queuing Model (a) The most widely used and simplest of all queuing models (b) The various formulas for this model are presented. (c) Example 12.7 presents an example application of this model and its formulas.

(2) The Multiple-Channel, Single-Phase Model (a) The number of servers is now greater than one. (b) The formulas for this model are presented. (c) Example 12.8 presents an example applying this model‘s formulas.

Managing Perceived Waiting Times (1) Managing perceived waiting times – often viewed as much shorter or longer than it actually is (2) First and Second Laws of Service (a) Law1: Satisfaction = perception – expectation (b) Law 2: It‘s hard to play catch-up ball (3) Waiting time management techniques:

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(a) Keep customers occupied (b) Start the service quickly (c) Relieve customer anxiety (d) Keep customers informed (e) Group customers together (f) Design a fair waiting system e. Managing Distribution Channels 1. Distribution channels involve traditional methods and new channels that incorporate new Internet technologies.

(1) Eatertainment combines restaurant and entertainment elements (2) Entertailing refers to retail locations with entertainment elements (3) Edutainment (infotainment) combines learning with entertainment to appeal to customers looking for substance along with play 2. Franchising (1) Allows services to expand quickly into dispersed geographic markets, protect existing markets, and build market share.

(2) Good strategy for expansion when owners have limited financial resources (3) Microfranchising is a concept that offers ready-made, low-risk starter jobs for people with little or no education and little available capital, while giving established companies additional distribution avenues.

3. International Expansion (1) The search for larger and additional markets has driven some services to expand globally.

(2) Today, the world has become essentially borderless due to the Internet and other communication mediums, more freedom of movement, greater use of common currencies and expansion.

(3) Operate/partner with firms familiar with the region‘s markets, suppliers, infrastructure, government regulations, and customers.

(4) Foreign currency exchange rate fluctuations can pose a problem.

(5) Must address language and cultural barriers 4. Internet Distribution Strategies (1) Internet retailing is growing faster than traditional brick-and-mortar retailing.

(2) Primary advantages of Internet - ability to offer convenient sources of real-time information, integration, feedback, and comparison shopping.

(3) Many retailers today sell products exclusively over the Internet (a pure strategy), while others use it as a supplemental distribution channel (a mixed strategy).

(4) Advantages of a pure Internet distribution strategy (a) Online companies can become more centralized (b) Reduced labor, capital and inventory costs (c) Decentralized marketing efforts reach a vastly distributed audience (5) Customer contact centers integrate websites and call centers to offer 24/7 support

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f.

(6) The mixed Internet distribution strategy is emerging as a strong business model - combines traditional retailing with Internet retailing Managing Service Quality 1. Quality occurs during the service delivery process and typically involves interactions between a customer and service firm personnel.

2. Customer satisfaction with service depends not only on the ability of firm to deliver what customers want, but also on the customers‘ perceptions of the quality of service rendered.

(1) When expectations are met or exceeded, quality is high.

(2) With unmet expectations, perception of quality is poor.

3. Thus, service quality is highly dependent upon the ability of the firm‘s employees and service systems to meet or exceed customers‘ varying expectations.

4. The Five Dimensions of Service Quality (1) Reliability—consistently performing the service correctly & dependably (2) Responsiveness—promptly or timely service (3) Assurance—using knowledgeable, competent, courteous employees who ability to convey trust and confidence to customers (4) Empathy—providing caring and individual attention to customers (5) Tangibles—the physical characteristics of the service, including the facilities, servers, equipment, associated goods, and other customers (6) Table 12.3 presents examples of each of these five service quality dimensions.

5. Recovering from Poor Service Quality (1) Inevitably, from time to time, customer expectations will not be met.

(2) In most cases, quick recovery from the failure can keep customers loyal and coming back, and may serve as good word-of-mouth advertising.

(3) This involves empowering employees to identify and solve problems quickly and with empathy.

(4) Successful services offer guarantees to their customers.

(5) Firms that anticipate where service failures can occur develop recovery procedures, train employees in these procedures, and then empower employees to remedy customer problems.

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists)—they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Student Satisfaction Survey Duration 30 – 45 minutes a. This instructor‘s manual includes access to a satisfaction survey I created years ago to measure and improve student satisfaction. I suggest you ask them to anonymously fill it out, turn it in, and discuss it, then analyze the results. What do they think of its structure

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and content? In the answer section, I will explain why its design and how to analyze it to learn and make improvements as a professor. b. Answer: The survey was created to apply the principles of service quality and customer satisfaction with the course and instructor to evaluate and improve the learning experience we provide in the classroom. Based on the literature review, I decided to design the survey around the different processes in the classroom and course, namely professor character traits, management of the class, assignments, course design, testing, grading, feedback, and course materials. The survey includes a question to obtain the overall rating for each one of these processes. For each of these processes, we also compiled a comprehensive listing of possible dimensions or attributes that may affect student satisfaction with each process. c. Analyzing the survey results: We need to address three primary sets of questions. The first set of questions relates to the determinants of overall student satisfaction in the classroom. For each process, we hypothesize that the each of the different processes has a significant effect on overall satisfaction. The second set of questions deals with the attributes that contribute to each of the eight processes. For each process, we hypothesize that the dimensions for that process have a significant effect on the measure of overall satisfaction with the process. Finally, the third set of questions relates to the determinants of repurchase and referral of the instructor. Repurchase relates to the likelihood that the student would take another class from the same instructor if given the opportunity to do so. Referral relates to the likelihood of the student recommending the instructor to other students. d. The results of the survey were analyzed to multiple regression analysis determine which processes contribute to students’ overall satisfaction in the classroom. In addition, the results were analyzed to determine which attributes determine overall satisfaction with each process. The results indicate that the processes of professor character traits, management of the class and course materials affect the overall satisfaction measures for instructor and course. For professor character traits, the instructor’s knowledge of the subject matter, attentiveness and likability were the most significant determinants of the level of satisfaction. For management of the class, the control of the class and the variety of teaching methods used were the most significant determinants. For course materials, understandable materials, relevance, and coverage significantly affect overall satisfaction with course materials. Clearly, satisfaction with the instructor affected the likelihood of students taking another course

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with the instructor (repurchase) or referring the instructor to other students.

2. Discussion: Service Guarantee Duration: 20 minutes. a. After discussing service quality, I ask them to provide some examples of service guarantees, as well as the benefits of them. One benefit is getting valuable feedback from customers, which doesn‘t commonly happen when there is no guarantee. This information can be very useful for improving quality and satisfaction. I then tell them that I am share the guarantee that was offered by a pest extermination company named BBBK. b. Here is the guarantee for hotel and restaurants offered by the pest exterminator BBBK: c. ―You don‘t owe one penny until all the pests on your premises have been eradicated. If you are ever dissatisfied with BBBK‘s service, you will receive a refund for up to 12 months of the company‘s services—plus fees for another exterminator of your choice for the next year. If a guest spots a pest on your premises, BBBK will pay for the guest‘s meal or room, send a letter of apology, and pay for a future meal or stay. If your facility is closed down due to the presence of roaches or rodents, BBBK will pay any amount of fines, as well as all lost profits, plus $5,000.‖ (Hart, 1988, p. 54) d. I then ask if BBBK failed or succeeded as a company with that guarantee. It was a successful company named ―Bugs‖ Burger Bug Killers (BBBK), which was formed in 1960 in Miami, by creating the guarantee and then designing the company procedures to support the guarantee. In 1986, for sales of $33 million, only $120,000 was paid out for the guarantee (Hart, 1988). The firm was able to charge up to 10 times the normal rate of its competitors for such high quality service backed by a guarantee. BBBK was sold to Johnson Wax in 1986, with an agreement to keep the guarantee and accounts in 43 states. e. Next, you can discuss how to ensure a service guarantee is successful. According to Hart, it is ―(1) unconditional, (2) easy to understand and communicate, (3) meaningful, (4) easy (and painless) to invoke, and (5) easy and quick to collect on.‖ (Hart, 1988, p. 55) f. Another good discussion topic is about how to design the procedures to reduce the chances of paying out on the guarantee. Domino‘s Pizza used to have a guarantee that if the pizza you ordered was not delivered in 30 minutes or less, it would be free. How would you suggest designing processes to reduce the chances of late delivery? g. Reference: Hart, C. W. L., ―The Power of Unconditional Service Guarantees,‖ Harvard Business Review, July-Aug., 1988, 54-62.

3. Discussion: Service Recovery Duration: 20 minutes a. We know that an important difference between manufacturing and service quality is customers being involved directly in the production process.

We also know that it is not possible to achieve a 100% quality level.

So, what can we do when a quality problem arises? The solution is service recovery. I will now share with you a true study that was shared in a paper on service recovery in Harvard Business Review about a large group of vacationers taking a plane to Club Med Cancun. b. ―The vacationers had nothing but trouble getting from New York to their Mexican destination. The flight took off 6 hours late, made 2 unexpected stops, and circled for 30 minutes before it could land. Because of all the delays and mishaps, the plan was en route for 10 hours more than planned and ran out of food and drinks. It finally arrived at 2 o‘clock in the morning with a landing so rough that oxygen masks and luggage dropped

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from overhead. By the time the plane pulled up to the gate, the soured passengers were faint with hunger and convinced that their vacation was ruined before it had even started.‖ (p. 148) I suggest pausing and then asking: How would you feel if you were on that plane? ―One lawyer on board was already collecting names and addresses for a class action lawsuit.‖ (p. 148) c. ―Silvio de Bortoli, the general manager of the Cancun resort and a legend throughout the organization for his ability to satisfy customers got word of the horrendous flight and immediately created an antidote. He took half the staff to the airport, where they laid out a table for snacks and drinks and set up a stereo system to play lively music. As the guests filed through the gate, they received personal greetings, help with their bags, a sympathetic ear, and a chauffeured ride to the resort. Waiting for them at Club Med was a lavish banquet, complete with mariachi band and champagne. Moreover, the staff had rallied other guests to wait up and greet the newcomers, and the partying continued until sunrise. Many guests said it was the best time they‘d had since college.‖ (p. 148-149) d. ―In the end, the vacationers had a better experience than if their flight from New York had gone like clockwork. Although the company probably couldn‘t measure it, Club Med won market share that night. After all, the battle for market share is won not be analyzing demographic trends, ratings points, and other global measures but rather by pleasing customers one at a time.‖ (p. 149) e. References: Hart, C. W. L., Heskett, J. L. and Sasser, Jr., W. E., ―The Profitable Art of Service Recovery,‖ Harvard Business Review, July-August, 1990, 148-156.

4. Discussion: Queues Duration: 20 minutes a. Both of the queuing models presented in this chapter were single-phase configurations.

Can you think of a case in which it would be beneficial to have a second phase or step for delivering the service? Explain. b. Answer: In drive-through service for restaurants, the waiting time can be reduced during busy times by adding a second window or by having an employee stand outside in the line to take orders using an electronic device able to process the order and submit it over the Internet to the staff inside the facility. Splitting the actual service work between two windows or a person and the window actually enables not only faster service, but also improved productivity. [return to top]

Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 9780357715680; Chapter 13: Supply Chain Process Integration

TABLE OF CONTENTS 1 List of Instructor DownloadsError! Bookmark not defined.

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Complete List of Chapter Activities and Assessments............................................................................. 2 Key Terms.................................................................................................................................................... 3 Chapter Outline .......................................................................................................................................... 5 Additional Discussion Questions ............................................................................................................. 11

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter addresses the topic of supply chain process integration. The importance of integrating processes both internally and externally is discussed, in addition to the advantages and obstacles to doing so. The role played by information systems in creating information visibility is described. The various processes needing integration are described, along with how to align them. The various causes of the bullwhip effect are addressed with explanations about how they impact process integration. Finally, various issues associated with supply chain risk and security are discussed.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 13.1

Discuss the overall importance of process integration in supply chain management.

LO 13.2

Describe the advantages of, and obstacles to process integration.

LO 13.3

Understand the important issues of internal and external process integration.

LO 13.4

Understand the role played by information systems in creating information visibility along the supply chain.

LO 13.5

Describe the various processes requiring integration along the supply chain.

LO 13.6

Understand the various causes of the bullwhip effect and how they impact process integration.

LO 13.7

Discuss the various issues associated with supply chain risk and security.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter

PPT slides

Activity/Assessment

Duration

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Objective 13.1 13.2 13.3 13.4 13.5 13.6 13.7

4 4-32 5-23 25 5-23 24-32 33-39

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

15 minutes 1 hour 1 hour 20 minutes 1 hour 1 hour 45 minutes

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KEY TERMS Active RFID tags: microchip devices that draw power from an internal battery and are priced in the $10 to $70 range depending on the volume required and battery type.

Bullwhip effect: this can be a pervasive and expensive problem along supply chains where forecasts of trading partner demand, the addition of safety stock, and the corresponding orders to suppliers traced back up the supply chain can become amplified, thus causing what is called the bullwhip effect.

C-TPAT compliance: refers to a partnership among U.S. Customs, the International Cargo Security Council (a U.S. nonprofit association of companies and individuals involved in transportation) and Pinkerton (a global security advising company, headquartered in New Jersey), whereby companies agree to improve security in their supply chain in return for ―fast lane‖ border crossings between the U.S. and Canada, and the U.S. and Mexico.

Cloud-based communication platforms: data is stored on the Internet in cloud systems, thus enabling connectivity and visibility to quickly share information with suppliers and customers.

Collaborative education: training of supply chain partner employees.

Customer relationship management process: provides the firm with the structure for developing and managing customer relationships by identifying key customers, determining their needs, and then developing goods and services to meet their needs.

Data warehouses: centralized warehouses used to collect data from various divisions of the firm.

Demand forecast updating: case in which demand forecasts are modified by suppliers based on updated information based on purchase orders placed by the buying firm, which can magnify fluctuations, thus contributing to the bullwhip effect.

Demand management process: balances customer demand and the firm‘s output capabilities through the activities of forecasting demand, and then utilizing techniques to vary capacity and demand within the purchasing, production, and distribution functions.

Emergency sourcing: having contracts in places to quickly move freight in case of emergencies.

Everyday low pricing (EDLP): pricing products to have the same low prices, thus eliminating promotions that cause forward buying.

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Forward buying: buyers order additional inventory to take advantage of special promotions, quantity discounts or other special discounts.

Functional silos: describes the case where in a firm each department is operating separately to the detriment of the organization overall.

Information visibility: it is particularly important for importers, shippers, and logistics providers of a firm to be able to access information about product safety standards, trade agreements, security requirements, as well as other data, such as visibility into inventory.

Internal supply chains: can be complex, particularly if firms have multiple divisions and global organizational structures.

Key supply chain processes: the eight key processes are customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development and commercialization, and returns management.

Key trading partners: critical trading partners that will eventually enable the successful sale and delivery of end products to the final supply chain customers.

Knowledge management solutions: Internet applications tied to desktop applications that enable realtime collaboration and flow of information between supply chain partners, the ability to ―see‖ into suppliers‘ and customers‘ operations, faster decision making, and the collection of supply chain performance metrics.

Legacy systems: old method, technology, computer system, or application program that is outdated, but still in use.

Manufacturing flow management process: set of activities responsible for making the actual product, establishing the manufacturing flexibility required to adequately serve markets, and designing the production system to meet cycle-time requirements.

Order batching: waiting to place an order until a certain time or reorder point is reached, thus causing the need for extra safety stock.

Order fulfillment process: set of activities that allows the firm to fill customer orders while providing the required levels of customer service at the lowest possible delivered cost.

Passive RFID tags: microchip devices that don‘t contain a power source, require power from a tag reader, and cost an average of about four cents, depending upon purchase volume, packaging, and how the tag is made.

Process: a set of activities designed to produce a good or service for an internal or external customer.

Process integration: means sharing information and coordinating resources to jointly manage a process or processes.

Product development and commercialization process: is responsible for developing new goods and services to meet changing customer requirements and then getting these products to market quickly and effectively.

Radio-frequency identification tag (RFID): microchip devices that can be attached to pallets or cases to relay information on the goods‘ whereabouts as they move through the supply chain.

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Rationing: allocating or limiting units of product available for sale to each buyer in cases where demand exceeds finished goods available, such as allocating the percentage of total demand to be the same percentage provided based on their order quantities.

Returns management process: is beneficial in terms of maintaining customer service and identifying product improvement activities though such activities as environmental compliance with substance disposal and recycling, writing operating and repair instructions, troubleshooting, and designing an effective reverse logistics process.

Shortage gaming: situation where buyers figure out the relationship between their orders and what is supplied, then inflate their orders to satisfy their real needs.

Silo mentality: an arrogant ―I win, you lose‖ mentality that can be evidenced when only using the cheapest or hungriest suppliers, paying little attention to the needs of customers, and assigning few resources to new goods and services designs.

Supplier relationship management process: defines how the firms manages its relationship with suppliers, such as by seeking out best-performing suppliers, and establishing relationships with them.

Supply chain risk: the likelihood of an internal or external event that disrupts supply chain operations, causing potential reductions in service levels, product quality, and sales, along with an increase in costs.

Supply chain security management: is concerned with reducing the risk and impacts of intentionally created disruptions in supply chain operations including product and information theft and activities seeking to endanger personnel or sabotage supply chain infrastructure.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I.

II.

Introduction (13.01, 13.02, PPT slide 4) a. The ultimate goal in supply chain management is to create value for the services and goods provided to end customers, which, in turn, provides benefits to the firms in the supply chain network. b. To accomplish this, firms in the supply chain must integrate their process activities internally and then with their trading partners. c. Process integration means sharing information and coordinating resources to jointly manage a process or processes. d. The benefits of collaboration and information sharing between trading partners can be significant.

The Supply Chain Management Integration Model (13.02, 13.03, 13.05, PPT slides 5-23) a. Figure 13.1 shows the nine steps of the SCM integration model. b. Step 1: Identify Critical SC Trading Partners

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1. Use trusted suppliers that provide a large share of the firm‘s critical products and services 2. Identifying primary trading partners allows the firm to concentrate on managing links with these companies 3. Firms should map the network of primary trading partners 4. Identifying only the first-tier primary trading partners allows the firm to concentrate its time and resources on managing important process links with these companies, enabling the overall supply chain to perform better c. Step 2: Review and Establish SC Strategies 1. On an annual basis, management should identify basic SC strategies associated with each trading partner to ensure that those strategies are consistent with the ones in the firm.

2. Product strategies should then translate into internal functional policies regarding types of parts purchased and suppliers used, the manufacturing processes employed, the designs of goods and services, the warranty and return policies offered, and potentially the amount of outsourcing employed.

3. Alternatively, if end products are competing based on sustainability, then strategies and functional policies need to be aligned among SC participants. d. Step 3: Align SC Strategies with Key SC Process Objectives 1. Once the primary strategy has been identified for a SC‘s end product, managers need to identify important processes linking SC trading partners and establish process objectives to ensure resources and efforts are aligned.

2. Key processes and methods used to manage process links will vary among supply chain partners.

3. Functional silos (departments whose only concern is about itself) may affect integration.

4. A process is a set of activities designed to produce a product or service for an internal or external customer.

5. Eight key processes identified as important in supply chains: (1) Customer relationship management (2) Customer service management (3) Demand management (4) Order fulfillment (5) Manufacturing flow management (6) Supplier relationship management (7) Product development and commercialization (8) Returns management 6. Customer Relationship Management (1) Tailoring product and service agreements to meet customer needs (2) Measuring customer profitability and the firm‘s impact on customers (3) Monitor impact of customer relationship management (CRM) efforts 7. Customer Service Management (1) Providing information to customers such as product availability, shipping dates, and order status (2) Administering product and service agreements (3) Monitoring and reporting customer service performance 8. Demand Management

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(1) Balancing customer demand with the firm‘s output capacity (2) Forecasting demand and coordinating with production, purchasing, and distribution (3) Increase the accuracy of forecasts (4) Track the success of various demand management activity implementations 9. Order Fulfillment (1) Meeting customer requirements by synchronizing the firm‘s marketing, production, and distribution plans (2) Location of suppliers, production facilities, and distribution centers (3) Modes of inbound/outbound transportation used (4) System used for entering, processing, communicating, picking, delivering, and documenting customer orders 10. Manufacturing Flow Management (1) Enable the right mix of flexibility and velocity to satisfy demand (2) Interface with demand management and customer relationship management processes (3) Need an adequate material requirements planning (MRP) system (4) Must have a good set of performance metrics 11. Supplier Relationship Management (1) Screening and selecting suppliers (2) Developing close working relationships with key suppliers (3) Negotiating product and service agreements (4) Managing suppliers (5) Monitoring supplier performance and improvement 12. Product Development and Commercialization (1) Selecting new product ideas (2) Developing new products and getting them to market quickly and effectively (3) Assessing the success of each new product (4) Developing customer feedback mechanisms 13. Returns Management (1) Managing used product disposition and product recalls (2) Writing operating and repair instructions (3) Troubleshooting and warranty repairs (4) Environmental compliance with substance disposal and recycling (5) Collecting returns data (6) Minimizing future returns e. Step 4: Develop Internal Performance Measures for Key Processes 1. Processes should support overall supply chain strategy 2. Performance measures should be designed for each of the key processes and functional objectives 3. Performance should be continuously measured using metrics designed for each process 4. Firm can track progress toward meeting each objectives f. Step 5: Assess and Improve Internal Integration of Key SC Processes

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III.

1. Coordination and collaboration internally and externally between firm trading partners 2. Transition from functional silos to teamwork and cooperation across business functions 3. Formation of cross-functional teams 4. Management support and resources 5. ERP systems that link business processes and facilitate communication 6. Develop an understanding of the internal supply chain g. Step 6: Develop SC Performance Measures for Key Processes 1. External performance measures should align with internal performance measures 2. Monitor links with trading partners in key SCM processes 3. Design measures consistent with overall supply chain strategies h. Step 7: Assess and Improve External Process Integration and Performance 1. Build, maintain, and strengthen relationships 2. Share knowledge management solutions, such as forecast information, new products, and expansion plans.

3. Monitor performance metrics to identify lack of process integration and supply chain weaknesses 4. Knowledge management solutions enable real-time collaboration and flow of information between supply chain partners i. Step 8: Extend Process Integration to 2nd Tier Supply Chain Partners 1. Integrate process to 2nd-tier partners and beyond 2. Radio-frequency identification (RFID) tag relays product‘s location as it moves through the supply chain 3. Passive RFID tags don‘t contain internal power 4. Active RFID tags use battery power and are very expensive j. Step 9: Reevaluate the Integration Model Annually 1. Revisit the integration model annually for changes within supply chains 2. Assess the impact of changes on integration efforts Obstacles to Process Integration along the Supply Chain (13.02, 13.06, PPT slide 24-32) a. Silo Mentality: ―I win, you lose‖ 1. Examples are using the cheapest suppliers, ignoring customers, and assigning few resources to new product and service design.

2. Internally, the silo mentality might be found between personnel of different departments.

3. Firm must strive to align supply chain goals and their own goals and incentives.

4. Performance reviews should include the ability of their department to integrate processes internally and externally and meet SC goals.

5. Managers must educate suppliers and customers regarding the overall impact of their actions on the SC b. Lack of SC Visibility 1. Information visibility is particularly important in global supply chains and is frequently cited as a common process integration problem.

2. Time updating data causes higher inventory cost and longer response times 3. Visibility into inventory allows firms improve performance 4. This is becoming easier with use of cloud-based communication platforms

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c.

d.

e.

f.

g.

h.

i.

5. RFID technology promises to add real-time information visibility to supply chains Lack of Trust – Successful process integration between trading partners requires trust and trust is earned over time. Collaboration and trust are based on: 1. Start small – begin collaborating on a small scale 2. Look inward – establish trust internally first 3. Gather ‗round and meet face-to-face 4. Go for the win-win – optimize business for all SC members 5. Do not give away the store – some information should remain proprietary 6. Just do it – simply start sharing information Lack of Knowledge 1. Technology has caught up with the vision, thus enabling collaboration and process integration across extended supply chains.

2. Firms spend significant time influencing and increasing the capabilities of themselves and their partners.

3. Training of supply chain partner employees is known as collaborative education, and can result in more successful supply chains and higher partner returns.

4. For all organizations, successful SCM requires a regimen of ongoing training.

Activities Causing the Bullwhip Effect 1. Forecasts and their corresponding orders can become amplified causing the bullwhip effect 2. Variations in demand lead to problems in capacity planning, inventory control, and workforce and production scheduling 3. Ultimately resulting in lower levels of customer service, greater overall levels of safety stock, and higher total supply chain costs Bullwhip Effect: Demand Forecast Updating - Ways to avoid it: 1. Make actual demand data available to suppliers 2. Use the same forecasting techniques 3. Vendor-managed inventory (VMI) 4. Reduce the length of the supply chain 5. Reduce the lead times from order to delivery Bullwhip Effect: Order Batching 1. Orders are placed at varying indeterminate time intervals 2. Also can occur when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets 3. Solutions (1) Use smaller order sizes (2) Use a freight forwarder to consolidate small shipments (3) Use automated order systems to order more frequently Bullwhip Effect: Price Fluctuations 1. Result in significant forward buying activities for buyers, who ―stock up‖ to take advantage of the low price 2. Eliminate price discounting among SC members. Many retailers have adopted everyday low prices (EDLP).

3. Buyers can negotiate with their own suppliers to offer EDLP. Bullwhip Effect: Rationing and Shortage Gaming

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IV.

1. Rationing - occurs when demand exceeds a supplier‘s finished goods available, thus requiring the firm to fulfill partial orders to customers based on a set percentage of the order size 2. Shortage gaming - when buyers figure out relationship between their orders and what is supplied, they inflate their orders 3. Solution: sellers should allocate short supplies based on the demand histories of their customers Managing Supply Chain Risk and Security (13.07, PPT slides 33-39) a. Managing Supply Chain Risk 1. Increase safety stocks also known as stockpiling and forward buying (stopgap alternative that can be costly) 2. Identify backup suppliers and logistics services for emergency sourcing 3. Diversify the supply base geographically (exposes additional political, customs, and exchange rate risks) 4. Utilize a supply chain IT system – collect and share information 5. Develop a formal risk management program (identifies potential disruptions) b. Managing Supply Chain Security 1. Reducing the risk of intentionally created disruptions in supply chain operations, including product and information theft and activities seeking to endanger personnel or sabotage supply chain infrastructure.

2. A supply chain is only as secure as its weakest link.

3. Security management collaboration should include, for example, contractual requirements for secure systems, ―standards of care‖ for movement and storage of goods as they move along the SC, and the use of law enforcement in security planning, training, and incident investigation. c. Table 13.4 shows and describes the four levels of security system response. d. Basic Initiatives 1. Procedures and policies for securing offices, manufacturing plants, warehouses, and other physical facilities 2. Provide security for personnel, computing systems, and freight shipments 3. Use of security badges and guards 4. Conduct background checks on applicants 5. Use anti-virus software and passwords 6. Use shipment tracking technologies e. Reactive Initiatives 1. Represent a somewhat deeper commitment than basic initiatives, but still lack a cohesive and firm-wide plan for security management.

2. Implement security systems in response to attacks/emergencies 3. C-TPAT compliance: partnership involving U.S. Customs where companies receive ―fast lane‖ border crossings passes 4. It involves assessing suppliers‘ security practices, developing continuity plans for various events, and implementing specific training and education programs. f. Proactive Initiatives 1. Venture outside of the firm to include suppliers and customers, and more formalize the approach to security management by: 2. Creating an executive-level position such as director of corporate security

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3. Hiring of former military, intelligence, or law enforcement personnel with security management experience 4. A formal and comprehensive approach for assessing the firm‘s exposure to security risks 5. Use of cyber-intrusion detection systems 6. Development of freight security plans in collaboration with 3PLs 7. Active participation of employees in industry security g. Advanced Initiatives h. Firms with these types of initiatives are recognized as industry leaders with respect to their security initiatives such as: i. Full collaboration with key suppliers and customers in developing quick recovery and continuity plans for supply chain disruptions j. Consideration of past security failures to develop better security systems k. Design of complete SC security plan implemented by all key SC partners l. Train participants to test the resilience of the supply chain to security disruptions m. Use of emergency control center to manage responses to unexpected supply chain disruptions [return to top]

ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists) – they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Second run of The Beer Game: Duration 45 minutes. a. A modification of the Beer Game is beneficial for further learning. The game was described in the appendix of chapter 1 of the textbook. I am grateful to Dr. James Cox III for sharing these innovative modifications with me many years ago. First, have the students play the game the normal way. Then, tell them that we will be playing it again.

This time, they can change anything but the time to move shipments between the companies. Let them know that the average demand at the retailer is 10 cases per week based on the uniform distribution with a high value of 20 and a low value of 0. (Create a set of demand cards for this distribution that are the same for each team so that we can compare the results.) Give them time to discuss the changes each team plans to make.

First, allow them time for a short break, asking them to come back and discuss the changes. This time, the game can be run more quickly for less time periods—about 20 weeks. We can then discuss our results. It is beneficial to track the performance of the supply chain during both runs of the games using the inventory record sheet provided in the appendix. The students explain their changes and corresponding results. (Note: Using games is a great way to help students learn and retain the material in a beneficial and interactive experience. They typically remember the learning experience of a good learning game for many years.) I included the second run of the game in this chapter because it covers the bullwhip effect in detail.

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b. I will briefly explain the Theory of Constraints (TOC) solution for distribution and supply chains in this manual and provide good references to access to learn more. The chapter I wrote on Strategy and Tactic Trees for the Theory of Constraints Handbook, including an explanation about part of the Retailer S&T tree, is provided as part of the instructor downloads. The full Retailer S&T tree is available at (as are other S&T trees created by Dr. Eli Goldratt) at www.tocico.org (choose Learn TOC, then Resources and References, followed by Strategy and Tactic Trees) and www.harmonytoc.com (which provides software for creating and implementing S&T trees). c. ―The TOC solution for distribution (managing inventories in the supply chain, which is all the companies involved in producing and deliveries supplies to the market) is known as Pull Distribution. How to implement this solution, along with key points regarding what to change and what to change to, are effectively described in the Retailer S&T tree and the Consumer Goods S&T tree. The core conflict in distribution is focused on meeting the needs of reducing costs and protecting sales through actions in conflict about holding high or low levels of inventories. The key to resolving this conflict is to understand more about forecasts (predictions) of demand. Forecasts guide decisions about how much to hold and where to hold the inventory. Forecasts of sales of a specific product (SKU) at a specific location are usually unreliable – not very accurate. It is important to note that forecasts are known to be more reliable or accurate further back in the supply chain (back toward the manufacturing plant), such as in a central distribution center. These realizations and others led to the development of the key solution elements for distribution. Instead of pushing inventory toward the end of the supply chain where we buy the product (i.e. from the shelf), it is pulled back in the supply chain (we keep more of the inventories backward in the chain). Each link/company in the supply chain holds only the level of inventory needed to meet demand within the reliable replenishment time from its supply point. The level of inventory is set to be an inventory target that addresses most of the possible higher level of demand that can occur during the reliable replenishment time. The inventory target is then divided into three zones (red, yellow and green) for buffer management. If the inventory level is too much in the red (too low) or green (too high), then it is automatically adjusted because that means either sales can be lost or inventories are blocking valuable shelf space. The system also allows for changing the inventory target based on expected spikes in demand. Pulling inventory back in the supply chain to where forecasts are more reliable causes the total inventory in the supply chain to be much lower.‖ d. ―A typical result of Pull Distribution is inventory turns more than doubling. Let‘s look at an example to understand the meaning and impact of inventory turns. If a retail shop currently has four inventory turns per year, then they are in essence selling what they hold on the shelves and the back storeroom in entirety four times a year. And since there are twelve months in a year, they must holding on average three months‘ worth of inventory. Improved inventory turns result from switching the supply-chain mode of operation from ―prepare to forecasted consumption‖ to ―react to actual consumption.‖ When the inventory turns of our retailer double, this means that 1.5 months of inventory is being held in the shop. This means that shelf space that is freed up can be used to offer a larger variety of products. Since the retailer will have an effective inventory target which is quickly adjusted using buffer management to changes in actual consumption, the result will be a decreased chance of out-of-stock items. In addition, the financial measures of net profit to sales ratio, return on investment, and cash flow all increase

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significantly. Pull Distribution enables achieving a substantial decrease in inventories, coupled with a significant increase in availability and sales in a matter of a few weeks. A really interesting and informative novel written by Dr. Eli Goldratt focused on the retail industry is Isn’t It Obvious?. After having read this novel, I believe it is the best way to understand how to implement Pull Distribution, in addition to the S&T trees and the Insights into Distribution and Supply Chain. I think that many retailers could read this novel and implement the changes needed without assistance from consultants. Another good source on content about Pull distribution and supply chain management, but more importantly about how to successfully approach life, is Eli Goldratt‘s book The Choice.‖ (The source of this quoted material is a paper titled ―Significantly Improving the U.S. Health Care System: A Lesson in Overcoming Resistance to Change,‖ by Dr. Lisa Ferguson © 2009.) e. Answer: If I were one of the players on a team in The Beer Game, I would recommend to each link in the supply chain that we apply the TOC pull distribution solution. The lead time between each link is two weeks, with an average demand of 10, with a maximum of 20 following the uniform distribution. Since the average demand per week is 10 units, we should place 10 in each of the boxes in between for inventory on the way to start the game. What we need to do is order what is sold each week with modifications based on the buffer status. Each week, the closest order of inventory on the way is received before filling the customer order. We need to make sure that the inventory at each facility is at least 20 units when filling customer orders to ensure that we don‘t lose sales or dissatisfy customers. I would recommend starting with 20 units in the inventory of each facility and then adjust the inventory target based on buffer management.

2. Silo mentality: Duration 45 minutes or more a. The silo mentality is common in most medium and large organizations. I recommend that the instructor review the discussion content at the end of the instructor‘s manual for chapter 14, including the 2013 TOCICO International Conference presentation referenced. That presentation also includes content about functional silos. The students can also view that presentation for free online. I suggest having a discussion about why silos happen and how to get rid of them. b. Answer: In order to manage an organization that is not small, it is common to divide it into units or functions with each having their own objective and performance measures. Doing so typically causes each unit to focus on improving its own performance, which can actually harm the organization overall. All parts of the organization need to work together to align their efforts to support the goal and high level strategy of the organization. The content covered in the presentation referenced above and chapter 14 of the instructor’s manual provides helpful information on choosing the right performance measures. More importantly, we can ensure an organization becomes ever-flourishing through the use of the TOC Transformational Strategy and Tactic Tree.

Discussing the content of my chapter in the Theory of Constraints Handbook and the Retailer S&T tree would be very helpful for this discussion.

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Instructor Manual Wisner, Tan & Leong, Principles of Supply Chain Management – A Balanced Approach, 6th edition, © 2023 Cengage, 978-035-771-5680; Chapter 14: Performance Measurement Along Supply Chains

TABLE OF CONTENTS Table of Contents

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Purpose and Perspective of the Chapter

135

List of Instructor Downloads 135 Chapter Objectives

135

Complete List of Chapter Activities and Assessments 135 Key Terms

136

Chapter Outline

137

Additional Discussion Questions

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PURPOSE AND PERSPECTIVE OF THE CHAPTER This chapter covers the topic of performance measurement along supply chains. A discussion of why managers need to assess the performance of their firms as well as their supply chains is provided, along the merits of financial and nonfinancial performance measures. A number of traditional and world-class performance measures are listed and described, in addition to the Balanced Scorecard and the SCOR model. How to design a supply chain performance measurement system is detailed.

LIST OF INSTRUCTOR DOWNLOADS The following product-level supplements provide additional information that may help you prepare for your course. They are available in the Instructor Resource Center.  

A PowerPoint of the book chapter is available for download from the Instructor‘s Resource Center.

A solutions and answers guide for the book chapter is available for download from the Instructor‘s Resource Center.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: LO 14.1

Discuss why managers need to assess the performance of their firms as well as their supply chains.

LO 14.2

Discuss the merits of financial and nonfinancial performance measures.

LO 14.3

List and describe a number of traditional and world-class performance measures.

LO 14.4

Describe how the Balanced Scorecard and the SCOR models work.

LO 14.5

Describe how to design a supply chain performance measurement system.

COMPLETE LIST OF CHAPTER ACTIVITIES AND ASSESSMENTS The following table organizes activities and assessments by objective, so that you can see how all this content relates to objectives and make decisions about which content you would like to emphasize in your class based on your objectives. For additional guidance, refer to the Teaching Online Guide.

Chapter

PPT slides

Activity/Assessment

Duration

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Objective 14.1 14.2 14.3 14.4 14.5

4-9 10-16 10-25 31-37 21-37

Activity in PPT Activity in PPT Activity in PPT Activity in PPT Activity in PPT

45 minutes 45 minutes 1.5 hour 45 minutes 1.5 hour

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KEY TERMS Balanced scorecard (BSC): approach to performance measurement that was developed in 1992 by Drs. Robert Kaplan, David Norton, and representatives from a number of companies, as a way to align an organization‘s performance measures with its strategic plans and goals.

Carbon footprints: the amount of carbon dioxide or greenhouse gas emissions released causing damage to the environment due the usage of fossil fuels by individuals, organizations, events, and usage of products.

Environmental sustainability: addressing the need for protecting the environment and reducing greenhouse gas emissions, causing the demand for products and services to change, along with regulations impacting how supply chains operate.

Green supply chain management (GSCM): the objective of an effective supply chain environmental performance system.

Performance dashboards: a term sometimes used to refer to web-based balanced scorecard applications.

Performance measurement: the process of quantifying the efficiency and effectiveness of various activities.

Performance variance: the difference between the standard and actual performance.

Scorecarding: another term for applying the Balanced Scorecard (BSC).

Single-factor productivity measures: how much output is generated per cost of labor.

Total productivity measures: how much output is generated overall from the inputs, with an example of the output divided by the sum of the costs of labor, capital, energy, and material.

Triple bottom line (TBL): combines several important performance measures as a framework incorporating social, environmental, and financial dimensions.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I.

II.

Introduction (14.01, PPT slides 4-6) a. ―You can‘t improve what you aren‘t measuring.‖ b. Performance measurement is the process of quantifying the efficiency and effectiveness of various activities. c. Firms with best supply chains create hierarchies of precise performance measures at the execution level combined with a distillation of meaning at the strategic level. d. Firms need to develop an entire system of meaningful performance measures to become and then remain competitive, particularly when managing supply chains is one of the imperatives. e. The importance of having both financial and nonfinancial performance measures has become evident. f. Designing standards and monitoring them provides better information for decisionmaking. g. At the strategic level, sustainability factors like carbon emissions are considered among the traditional cost and service trade-offs, while green initiatives and people-related programs are becoming more commonplace. h. Nearly 70% of companies accelerated their digital footprint, including using technology to enable more seamless customer experiences. i. Adding several tiers of suppliers and customers complicates performance measurement. j. When managing supply chains, assessing the performance of several tiers of suppliers and customers further complicates an already formidable performance measurement problem. k. Firms aim toward achieving adequate performance and continually improving on those measures. l. Performance measures must be visible and communicated to all SC members while managers collaborate to achieve results that allow firms to plan ahead, create value, and realize benefits. m. It is only through cooperation and shared planning and benefits that an effective supply chain-wide performance measurement system can be designed and implemented.

Viewing Supply Chain as a Competitive Force (14.01, PPT slides 7-9) a. Understanding End Customers 1. Supply chains must look at each segment of the market they serve & determine needs of those customers including: (1) Variety of products required (2) Quantity and delivery frequency needed (3) Product quality desired (4) Level of sustainability sought (5) Pricing of the products b. Understanding SC Partner Requirements 1. Supply chain strategies must consider potential trade-offs existing between: (1) Cost

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III.

(2) Quality (3) Sustainability (4) Service requirements 2. Companies along supply chain must become more responsive 3. Ways to increasing supply chain efficiency (lower prices for goods) (1) Use slower transportation modes (2) Buy and deliver in larger quantities (3) Reduce quality of the parts and supplies purchased c. Adjusting Supply Chain Member Capabilities 1. Audit their capabilities to determine if what they do particularly well is consistent with the needs of the end customers and other SC members.

2. Matching or adjusting SC member capabilities with end customer requirements can be a very difficult task, particularly if communication and cooperation levels among companies are not excellent, or if companies are serving multiple SCs and customer segments requiring different sets of capabilities.

3. Continually reassess performance with respect to requirements.

4. Be more responsive to customer needs, quicker to anticipate changes in the markets, and control costs.

Traditional Performance Measures (14.02, 14.03, PPT slides 10-20) a. Cost-based and financial statistics are reported to shareholders in annual report, balance sheet, and income statement data. b. Problems: 1. This information doesn‘t necessarily reflect the underlying performance of an organization‘s productive systems.

2. Cost and profit info can be hidden or manipulated to make performance seem far better than reality (e.g., Enron) 3. Maximizing current stock prices does not mean firm is performing well.

4. Financial performance measures cannot adequately capture a firm‘s ability to excel in various process areas. c. Use of Organization Costs, Revenue, and Profitability Measures 1. Several problems are associated with using costs, revenues, and profits to gauge a firm‘s performance.

2. Uncontrollable environmental forces can be the cause of good or poor performance (e.g., windfall profits that occur when prices rise due to supply interruptions).

3. Another problem is the difficulty in attributing financial contributions to various functional units or underlying processes of an organization.

4. Reductions in one area may get transferred somewhere else in the firm 5. Many departments and units are interdependent and share costs, equipment, labor, and revenues, making it very hard to split them out.

6. Using costs alone as a unit performance measure can result in actions that actually hurt the organization (e.g., rewarding purchasing for cutting costs might increase return rates and warranty repairs due to low quality inputs).

7. Minimizing transportation costs might also look great on financial statements, but may result in late deliveries, lower customer service, and lost customers.

8. Finally, the practice of allocating overhead and making decisions based on overhead costs is a waste of time.

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IV.

d. Use of Performance Standards and Variances 1. Establishing standards for performance comparison purposes can be troublesome, particularly when the standards are unrealistic.

2. Output standards can create a goal that can drive employees and managers do whatever it takes to reach the goal, even if it means producing shoddy work or ―cooking the books.‖ 3. When performance expectations are not met, perfectly good products, employees, or departments can be branded as losers.

4. Additionally, once goals are actually reached, there is no further incentive to keep improving.

5. Performance variance — the difference between the standard and actual performance 6. Managers can be pressured to find ways to make up variances, resulting in decisions that may not be in the long-term best interests of the firm.

7. Examples: producing to output quota regardless of finished goods inventory level, or purchasing unneeded supplies to use up department budget.

8. When applied at the functional level, standards can reinforce the idea of functional silos (departments only concerned with what is going on in their department), instead of optimizing the firm or supply chain performance. e. Productivity and Utilization Measures 1. Formulas for the overall total productivity measure and single-factor productivity measure are presented.

2. Useful, but may encounter same problems as revenues, costs, and profits 3. Decisions made to improve productivity may actually increase costs and reduce quality or output in the long term, as well as hurt employee morale.

4. There is a tendency to continue producing and adding to inventory to keep machines and people busy 5. Less time may be spent doing preventive maintenance and training for greater performance and profits in future.

6. Traditional measures favor the short term.

7. An application of the application of productivity measures in an example is provided.

World-Class Performance Measurement Systems (14.03, 14.05, PPT slides 21-25) a. Steps to Develop World-Class Performance Measures 1. Identify the firm‘s strategic objectives.

2. Develop an understanding of each functional area‘s set of requirements for achieving the strategic objectives.

3. Design and document performance measures for each functional area that adequately track each required capability.

4. Assure the compatibility and strategic focus of the performance measures to be used.

5. Implement the new performance monitoring system.

6. Identify internal and external trends likely to affect firm and functional area performance over time.

7. Periodically evaluate the firm‘s performance measurement system as these trends and other environmental changes occur.

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V.

VI.

8. Table 14.1 presents the world-class performance measures in the three capability areas of quality, cost, and customer service.

Supply Chain Performance Measurement Systems (14.05, PPT slides 26-30) a. Performance measurement systems for SCs must 1. Link SC trading partners to achieve breakthrough performance in satisfying end users.

2. Overlay the entire supply chain to assure that all contribute to the supply chain strategy and satisfaction of end customers when in a collaborative SC setting. b. In successful SCs, members jointly agree on appropriate SC performance measures. c. Focus of system should be on value creation for end customers, since customer satisfaction drives sales for all of the SC members. d. Environmental sustainability 1. Addresses need to protect the environment and reduce greenhouse gas emissions.

2. SC performance must include assessments of environmental performance. e. Green supply chain management (GSCM) 1. Objective of an effective SC environmental performance system with integration of environmental thinking into SCM. 2. Promotes the sharing of responsibility along the SC 3. The design of an effective GSCM should be discussed by all key SC member and be compatible with existing performance measurements. f. Triple bottom line (TBL): combines several important performance measures in a framework incorporating social, environmental, and financial dimensions.

1. It differs from traditional performance frameworks since it includes environmental and social measures that can be difficult to assign numerical measurements.

2. The TBL dimensions are also called the three Ps — people, planet, and profits. g. Carbon footprint: SCs evaluate design configurations and various options for reducing total carbon emissions (can be done using software). h. Specific measures that must be adopted by SC trading partners 1. Total SCM costs — costs to process orders; purchase & manage inventories; and information systems.

2. SC cash-to-cash cycle time — avg. # of days between paying for materials and getting paid by SC partners.

3. SC production flexibility — avg. time required to provide an unplanned 20% increase in production.

4. SC delivery performance — avg. % of orders filled on or before the requested delivery date.

5. SC perfect order fulfillment performance — average % of orders that arrive on time, complete, and undamaged.

6. SC e-business performance — avg. % of electronic orders received for all SC members.

7. SC environmental performance — % of SC members that are ISO 14000 certified and % with director of environmental sustainability, avg. % env. goals met, avg. # of policies adopted to reduce greenhouse gas emissions, or avg. % of carbon footprints offset.

The Balanced Scorecard (14.04, 14.05, PPT slides 31-33)

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VII.

a. The Balanced Scorecard (BSC) approach to performance measurement was developed in 1992 by Kaplan, Norton, and company reps, as a way to align an organization‘s performance measures with its strategic plans and goals. (also referred to as scorecarding) b. The framework consists of four perspectives: 1. Financial perspective 2. Internal business process perspective 3. Customer perspective 4. Learning and growth perspective c. Figure 14.1 presents the BSC framework. d. Web-Based Scorecards 1. A number of software applications are available to help design scorecards, which link via the web to a firm‘s enterprise software system.

2. Web-based balanced scorecard applications are also sometimes referred to as performance dashboards.

3. Performance dashboards let managers track ―big picture‖ corporate objectives, core process performance and more tactical, detailed data.

4. Managers see real-time progress toward organizational milestones 5. Helps ensure decisions remain in sync with the firm‘s overall strategies The SCOR Model (14.04, 14.05, PPT slides 34-37) a. One of the more recognized methods for integrating supply chains and measuring performance is the use of the Supply Chain Operations Reference (SCOR) model developed in 1996. b. It helps integrate the operations of supply chain members by linking the delivery operations of a seller to the sourcing operations of a buyer. c. Separates supply chain operations into six process categories: 1. Plan 2. Source 3. Make 4. Deliver 5. Return 6. Enable d. Figure 14.2 presents the SCOR model processes and linkages. e. The SCOR model is designed to enable effective communication, performance measurement, and integration of processes between SC members. f. SCORmark is a new tool which allows member firms to benchmark performance against peer companies. g. Companies generally use SCOR-based benchmarking to: 1. Set reasonable performance goals based on the SCOR model 2. Calculate performance gaps against a global database 3. Develop company-specific roadmaps for supply chain competitive success

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ADDITIONAL DISCUSSION QUESTIONS The following are discussion questions that do not appear in the text, PPTs, or courseware (if courseware exists) —they are for you to use as you wish. You can assign these questions several ways: in a discussion forum in your LMS; as whole-class discussions in person; or as a partner or group activity in class.

1. Discussion: Performance measurement using TOC Duration: 1 hour or more a. Research or learn from your professor about the Theory of Constraints (TOC) measures performance, including its application known as Throughput Accounting (TA). Share what you learned. Integrate it with the teachings of the chapter and/or compare and contrast approaches. b. Answer: In Chapter 1 of this Instructor’s Manual, a discussion about the best-selling novel, The Goal, is presented. I will summarize in this section the key content in the book that is also part of TA related to performance measurement. c. Note: the next items are summarized content are mainly based on a presentation I co-created to deliver at the TOCICO International Conference in Germany. Source: Ferguson, L.A. and Lenhartz, C, Basics Workshop: Finance and Measures, TOCICO 2013 International Conference, www.tocico.org) d. The goal of an organization or high-level strategy is: “The Organization is an Ever-Flourishing company; continuously and significantly increasing value* for all stakeholders – employees (including suppliers), clients and shareholders (while preventing harm to the world due to its actions or lack of action). (*increasing value: stability (green curve) and growth (red curve)).” The necessary conditions are to provide satisfaction to the market now as well as in the future, provide a secure and satisfying environment to employees now as well as in the future, and make money now as well as in the future.

(Note: the source of this content, including the following quotes ending with the tactic come from the VV for Retail Organizations Strategy and Tactic Tree, © 2014-5 by Illuminutopia, LLC which is modified from the Retailer S&T tree by Goldratt, E.M. in 2010.) e. The assumptions that need to be validated as fact to lead us to what the tactic must be are: i. “Realizing a Viable Vision (VV) — a jump in profitability while increasing sales exponentially year after year — turns a company into an Ever Flourishing Company.” ii. “For the Company to achieve the VV, its Throughput must grow (and continue to grow) much faster than Operating Expense.” iii. “Exhausting the Company's resources and/or taking too high risks severely endangers the chance of achieving the VV.”

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f. Given the strategy and these facts, the tactic must be: “Build a decisive competitive edge (DCE) and the capabilities to capitalize on and sustain it, on big enough markets without exhausting the Company 'sCompany’s resources and without taking real risks.” g. The three financial measures are net profit (NP), return on investment (ROI), and cash flow (CF), which should all be increasing. NP is an absolute measurement, ROI a relative measure, and CF a measure of survival. h. The three operational measurements are Throughput (T), Investment (I), and Operating Expense (OE). T is “the rate at which the organization generates ‘goal units’ (i.e., the rate at which the system generates money through sales which is sales minus the totally variable costs (TVC). I is all the money tied up in the organization.” OE is “all the money the organization spends to generate ‘goal units’ (to turn investment into throughput).” NP is T minus OE. ROI is NP/I. CF is cash inflows less cash outflows in terms of changes in T, I, and OE. i. “Our first priority is to increase T. Then, we focus on decreasing I, followed by decreasing OE, as long as we are not jeopardizing T.” j. “Local performance measures should be evaluated based on the following criteria: i. Relatively few measures ii. Within control of the individual or department iii. Real-time information provided iv. Tied to the constraint and the five focusing steps / process of ongoing improvement (POOGI) v. Focused on improving flow” 2. Discussion: TOC measurements for interfaces Duration 1 hour or more a. Research or learn from your professor about the Theory of Constraints (TOC) measurements for the interfaces. Share what you learned. Integrate it with the teachings of the chapter and/or compare and contrast approaches. b. Answer: This content is also a summary of what was presented at the TOCICO 2013 International Conference. The primary measurement: Throughput Dollar Days (TDD), which is ―Things that should have been done and were not. Thus, reliability is endangered.‖ The secondary measurement: Inventory Dollar Days (IDD), which is ―Things that should not have been done, but nevertheless were.‖ (excess inventory). ―Thus, effectiveness was jeopardized.‖ (Modified from source: Modified from source: Goldratt, E. M., and A. (R.) Goldratt, 2003, TOC Insights into Distribution and Supply Chain) c. ―Every delay in measured, not just being late, but also by how many days. The financial value of the sale should be measured as well. TDD is the summation (over all products not yet supplied) of the throughput times the number of days from receipt of the order to shipment.‖ The target is zero TDD.

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d. ―Every area (department) carrying inventory can be measured according to: the value of the item (only the raw material purchasing costs are considered) and the number of days each item remains in the area. The IDD is a snapshot: how much money is stuck in the area and for how long. Summation (over all products/parts in inventory) of the value of the inventory (at TVC) times the number of days each stays in the warehouse / department‖ or even another organization. The target is to reduce IDD. e. The third measurement is inventory turns, which ―is the current common measurement of the effectiveness of flow in the system.‖ It is defined as Throughput/Inventory. ―It measures the average of how much inventory is being held (waiting) in a certain area.

(For example, two days‘ or weeks‘ worth of the inventory that is needed, based on current average demand, is being held in that department.)‖ The shortcomings of this measurement are: f. ―Being an average, it does not clearly help us identify the problematic area; it does not provide information regarding variability. g. In addition, the dollar value of the inventory is not specifically considered. h. Thus, the combined effect of time (delays) and money is provided only at a very global level.‖ i. We need to have different measurements for policies and decisions versus execution.

This topic can be another discussion question. j. Answer: The measurement to evaluate the plan in terms of policies and decisions are T, I, and OE. The reality is though that good policies and decisions are insufficient since problems can arise in execution. This is why we also need to have separate measurements for execution to evaluate whether the actions taken are aligned with the plan created. k. The measurements of policies and decisions: i. Primary measurement: Throughput (T) ii. Secondary measurements: Investment (I) and Operating Expense (OE) (reduce these, but not at the expense of the primary measurement) l. Measurements of execution: i. Primary measurement: TDD ii. Secondary measurements: IDD and local operating expense (reduce these, but not at the expense of the primary measurement) m. (Note: content was modified from source: Goldratt, E. M. and A. (R.) Goldratt, 2003, TOC Insights into Distribution and Supply Chain) 3. Discussion TOC book titled Throughput Economics Duration 1 hour or more a. I highly recommend the book titled Throughput Economics: Making Good Management Decisions. Three top TOC experts co-authored the book, which I, Dr. Lisa Ferguson, edited. Schragenheim, Camp, and Surace address the problems of traditional cost accounting and provide a practical methodology to make better decisions using TOC concepts and applications. A number of great examples and cases are provided to explain the recommended approach. [return to top]

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