Supply chain management: a global perspective, 2nd edition - The latest updated ebook version is rea

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Warehousing,150

Third-PartyLogistics(3PL)Providers,153

ChapterHighlights,153

KeyTerms,154 DiscussionQuestions,154 Problems,154

CaseStudy:StrategicSolutionsInc.,154 CaseQuestions,156 References,156

8 FORECASTINGAND DEMAND PLANNING 157

WhatIsForecasting?,159

ManagerialInsightsBox:ForecastingbeyondWidgets,160 GlobalInsightsBox—MatchingSupplyandDemand:WorldHealth Organization(WHO),162 TheForecastingProcess,163

ManagerialInsightsBox:PredictiveAnalytics,165 TypesofForecastingMethods,166

BigDataAnalyticsBox—ImprovingWeatherForecasting:NOAA,168 TimeSeriesForecastingModels,169 CausalModels,175

MeasuringForecastAccuracy,178

CollaborativeForecastingandDemandPlanning,180 SupplyChainLeader’sBox—UsingCollaborativeTechnology:Li& Fung,181

ChapterHighlights,183

KeyTerms,183 DiscussionQuestions,183 Problems,184

CaseStudy:SpeedyAutomotive,185 CaseQuestions,187 References,187

9 INVENTORY MANAGEMENT 188

BasicsofInventoryManagement,190

ManagerialInsightsBox—ServiceInventory:Zoots,191

SupplyChainLeader’sBox:JohnDeere&Company,195 InventorySystems,195 Fixed-OrderQuantitySystems,198

BigDataAnalyticsBox—AnalyticsDrivenInventory:Dell,205 Fixed-TimePeriodSystems,205 IndependentversusDependentDemand,207

GlobalInsightsBox:IntelCorporation,208 ManagingSupplyChainInventory,208

PREFACE

Supplychainmanagement(SCM)isthefastest-growingareaofbusinesstodayandisatthecore ofsuccessofmostleadingcompanies.KnowledgeofSCMisnecessarytoparticipateinthisgrowingandexcitingcareerfield.However,SCMischallenginginscopeandcomplexity.Eventoday thereisamisunderstandingofSCM.MostpeopleassumethatSCMispartoflogisticsanddistribution,orpurchasing,orperhapsmarketing.Theydonotunderstandtheintricaciesandbroad reachofthisrapidlyevolvingareaofbusiness.Thisbookisdesignedtoprovidestudentswitha comprehensiveunderstandingofSCM,keyissuesinvolved,andtheverylatestbusinessthinking. ThisbookisdifferentfromotherSCMtextbooks.Itisspecificallywrittenasacomprehensive SCMtextprovidinganintegratedglobalandtechnologyfocusedperspective.

RecenttrendshavemadethestudyofSCMespeciallychallenging.Today’sbusinessenvironmenthasforcedcompaniestocompeteinverydifferentwaysthanjustafewyearsago.The followingistrueoftoday’sorganizations:

• Inadditiontocompetingontraditionaldimensionssuchasquality,time,cost,andcustomization,companiesmustberapidinnovators.Theymuststayabreastofquicklychanging customerdemandsandhaveresponsivesupplychainsinplace.

• Technologicaladvancements—includingbigdataanalytics,autonomousvehicles,3-D printing,InternetofThings(IoT),andnextgenerationRFID—havetransformedsupply chains.The“intelligentsupplychain”thatistechnologicallydrivenisbecomingthenormfor companies.

• Today’sorganizationsoperateinaglobalenvironmentandareaffectedbyglobaltrade.Many companiesservemultipleglobalmarkets,withproductssourcedandproducedacrossmany continents.Theymustplan,design,andmanageacomplexsupplychainnetwork.

• Focuson“green”andsustainabilityhasbecomeprominent.Issuesofenvironmentalandsocial responsibilityarebecomingcriticalelementsofSCM,spanningconcernssuchassourcing, packaging,manufacturing,anddistribution.

• Unprecedentedthreatstosecurityareforcingcompaniestoinvestinsystemstoprotectproductsandinformationthroughouteverystepofthesupplychain.Addressingissuesofsecurity insupplychaindesignisacriticalaspectofSCM.

• Aglobalrecessionhascreatedtremendousfinancialpressuresoncompaniesandtheirsupply chains.Companiesarebeingforcedtoremaincompetitiveandinnovativewhilecutting,or maintaining,costs.

ThistextaddressesSCMwithinthisrealisticglobalandtechnologicallydrivenbusinessenvironment,inacompleteandcomprehensivemanner.Itiswritteninanaccessiblemannerenabling studentstoeasilygraspthematerial,thenextendandelevatediscussionintheclassroom.Each chapterendswithabusinesscasetoreinforcetheconceptslearned.Thetextbookisintended toprovidethefoundationalconceptsforundergraduateandgraduate-levelclassesinSCM,as

wellasrelatedareassuchasoperationsmanagementandpurchasing.Inaddition,thebookisan excellentresourceforexecutiveeducationandtrainingseminars.

GoalsoftheBook

1.ProvideaComprehensiveFoundationofSCM. ThistextiswrittentoprovideacomprehensivefoundationofSCM,fromitsbroadmeaningandstrategicimplications,tooperational conceptsandtechniques.WhiletherearesomeexcellenttextbooksthatprovidefoundationalconceptsofSCM,fewpresenttheseconceptsinacomprehensiveandintegratedmannerthatisthe hallmarkofSCM.

ThetextbeginswithanintroductiontotheholisticandintegratednatureofSCM.Supply chainstrategyisdiscussednext,asthedriverofSCM,followedbythedesignofthesupply chainnetwork.Participationoforganizationalfunctions—includingmarketing,operations,sourcing,andlogistics—arediscussed,aswellastheirlinkagestoSCM.Next,planningandcontrollingthesupplychainisdiscussed,fromforecastingandmaterialsmanagement,toleanandSix Sigma.AttentionisdevotedtotopicsthatareofspecificinteresttoSCM,includingcollaborativeforecastingmethodssuchasCPFRandS&OP.Finally,thetextlooksatissuesofmanaging thesupplychain.Thisincludesmanagingsupplychainrelationships,fromdevelopingalliances tonegotiationstrategies.Entirechaptersaredevotedtothemostcutting-edgeissuesinbusinesstoday:globalbusiness,atechnologicallydrivenenvironment,andsustainablesupplychain management.

2.ProvideCross-FunctionalandIntegrativeCoverageofSCM. Thistextiswritten topresentSCMwithanequalandbalancedcoverageofkeybusinessfunctions,theirinteractions, andtheirintegration.SCMistrulyboundaryspanningandisintertwinedwithallorganizational functions.Also,SCMiscross-functionalinitsdecision-makingrequirementsandneedstobe presentedassuch,ratherthanasanoffshootofanotherbusinessfunction.Thistexthasequal coverageoftherelevantbusinessfunctions,theirintegration,andtheirimpactonthefunctionality ofSCM.

3.ProvideUnderstandingofBusinessIssues. SCMisintertwinedwithbestbusiness practices.ItisatthecoreofsuccessofleadingcompaniessuchasApple,BMW,Wal-Mart,P&G, Amazon,Zara,Starbucks,Teslamotorcompanyandothers.Thesecompanieshaveachieved world-classstatusinlargepartduetoastrongfocusonSCM.Thistextisrichinbusinessexamples thatillustrateSCMbestpracticesandshowcasethecomplexityofSCMbusinessdecisions.These examplesshowSCMtobeanexcitingareaofstudy,onthecuttingedgeofbusiness.

Features

1.Cross-FunctionalCoverage. SCMispresentedasacross-functionalareaofbusiness studywithequalcoverageoffunctionssuchasmarketing,operations,sourcing,andlogistics, andtheirintegration.

2.GlobalFocus. Today’ssupplychainstraversetheglobe.Thiscreatesnumerouschallenges, suchasdesigningaglobalsupplynetwork,dealingwithinternationaltariffsandforeigngovernmentregulation,differencesintransportationandtechnology,managingcross-culturalwork teams,andaddressingcustomerissuesthatarisefromculturalexpectations.Eachchapterhasat leastoneboxlabeled“GlobalInsights,”whichprovidesasummaryofaglobalissuethatpertains tothetopicathandandanassociatedbusinessexample.

3.ManagerialFocus. ThetextisrichwithcuttingedgeSCMbusinessexamples.Each chapterhasatleastoneboxlabeled‘SupplyChainLeadersBox’thatillustratesthelatestbusiness practicesofthetopicaddressed.Eachchapterbeginswithacurrentbusinessexample.Inaddition,

eachchapterendswithauniquecasewrittentoaddresskeymanagerialissuesandastrongemphasisonmanagerialdecisionmaking.

4.StrategicFocus. SCMisastrategicfunction.Asaresult,thetexthasastrongstrategic focus.Eachchapterhasatleastoneboxlabeled“ManagerialInsightsBox,”whichillustrates currentbusinessthought,usingestablishedandrecognizedsources(HBR,BusinessWeek,The WallStreetJournal,SupplyChainManagementReview,etc.).

5.StrongPedagogy. Thetextiswritteninareadableandaccessiblemanner.Eachchapter endswithdiscussionquestions,acasewithquestionsdesignedtopromotemanagerialthinking, and,whereappropriate,homeworkproblemsandexercises.Iconsthroughoutchaptersshowfocus oncross-functionalcoverage,globalcoverage,sustainability,technology,andtheservicesupply chain.Further,thechaptersinthetextarelinkedtotheoveralltopicratherthanbeingpresented asanassembledcompilationofmaterial.

ChangestoThisEdition

Anumberofchangeshavebeenmadetothiseditiontomakethetextascurrent,user-friendly,and relevantaspossible.Allthechaptershavebeenupatedtoincorporatethelatestavailableinformation,withincreasedemphasisontechnology,digitization,andanalytics.Thebusinessexamples havebeenupdated,andalargenumberofclassexerciseshavebeenadded.Thefollowingfeatures havebeenaddedtothisedition:

BigDataAnalytics: Allchaptershavebeenupdatedtoincludestate-of-the-artimpactofbig dataanalyticsonsupplychains.Eachchapternowhasone‘BigDataAnalyticsBox’thatshowcasesanexampleofhowbigdataanalyticsisimpactingthetopiccoveredinthechapter.This rangesfromhowretailerssuchasTargetcapturecustomerpreferences,tohowUPSusesits state-of-the-artnavigationsystem.

TechnologyFocus: Advancementsintechnologyarechangingsupplychains.Theseinclude 3-Dprinting,driverlessvehicles,next-generationRFID,InternetofThings(IoT),cloudcomputing,machinelearning,andmanyothers.Thesetechnologieshaveenabledthe“intelligent supplychain”andarediscussedineverychapter.

ClassroomExercises: Eachchapternowincludesclassexercisesdesignedtofosterclassroom discussion.Theseexercisesareclassroomtestedandincludeinstructordetailsonhowto conducttheexerciseandprovideaseriesofquestionswithsuggestedsolutionstoguidethe discussion.

UpdatedExamples: Throughoutthechaptersallexamplesanddatahavebeenupdated.The focusoftheupdatewastomaketherevisionrichinexamplesofbothlargesupplychains,as wellasthoseofsmallandmediumfirmstohighlightkeyconcepts.

InstructorResources

Theinstructor’swebsiteoffersseveralresourcesdesignedtoassistprofessorsinpreparinglectures andassignments,including:

Instructor’sManual Includesasuggestedcourseoutline,teachingtipsandstrategies,answersto allend-of-chaptermaterial,additionalin-classexercises,andmore.

TestBank AcomprehensiveTestBankcomprisedoftrue/false,multiple-choice,shortanswer, andessayquestionsisavailableontheinstructorsite.Thequestionsarealsoavailableasa ComputerizedTestBank.

PowerPointSlides Fullcolorslideshighlightkeyfiguresfromthetextaswellasmanyadditionallectureoutlines,concepts,anddiagrams.Theseprovideaversatileopportunitytoadd high-qualityvisualsupporttolectures.

Acknowledgments

Thedevelopmentofthissecondeditionof SupplyChainManagement benefitedgreatlyfromthe commentsandsuggestionsofcolleagues.I’dliketoacknowledgethecontributionsmadebythe followingindividuals:

AnthonyJ.Avallone, BerkeleyCollege

Ming-LingChuang, WesternConnecticutStateUniversity

VerdaBlythe, UniversityofWisconsin

ThomasW.Buchner, UniversityofMinnesota

RobertR.Bugge, TempleUniversity

JohnF.Kros, EastCarolinaUniversity

SimonCroom, UniversityofSanDiego

DonaldB.Fisher, DixieStateCollege

JohnD.Hanson, UniversityofSanDiego

RogerDeanIles, UniversityofMemphis

ShamKekre, TepperSchoolofBusiness,CarnegieMellonUniversity

DaleFranklinKehr, UniversityofMemphis

RhondaLummus, IndianaUniversity

MaryJ.Meixell, QuinnipiacUniversity

MichaelJRacer, UniversityofMemphis

YoungRo, UniversityofMichigan

JeffreySchaller, EasternConnecticutStateUniversity

SridharSeshadri, UniversityofTexas

TheodoreStank, UniversityofTennessee-Knoxville

SrinivasTalluri, MichiganStateUniversity

TinaWakolbinger, UniversityofMemphis

SpecialThanks

IwouldalsoliketoofferspecialacknowledgmenttothepublishingteamatWileyfortheircreativity,talent,andhardwork.ThankyoualsotoJohnWoodforhishelpwithresearchonsustainability andsupplychainrelationships,aswellastocountlessstudentswiththeirassistanceoncasedevelopmentandend-of-chapterproblems.

IntroductiontoSupplyChain Management

LEARNINGOBJECTIVES

Aftercompletingthischapter,youshouldbeableto:

• Define“supplychainmanagement,”andexplaintheactivitiesinvolved.

• Identifytheflowsthroughasupplychain,andexplainthebullwhipeffect.

• Describetheriseofsupplychainmanagementanditsglobalimplications.

• Describecharacteristicsofacompetitivesupplychain.

• Identifyandexplainkeytrendsthatdrivetoday’ssupplychains.

CHAPTEROUTLINE

◾ WhatIsSupplyChainManagement(SCM)?

SCMActivities

ManagingFlowsThroughtheSupplyChain

TheBullwhipEffect

CustomerFocus

TheServiceSupplyChain

◾ TheBoundary-SpanningNatureofSCM

IntraorganizationalIntegration

Cross-EnterpriseIntegration

SCMVersusLogistics

◾ TheRiseofSCM

◾ CharacteristicsofaCompetitiveSupplyChain

Responsiveness

Reliability

RelationshipManagement

◾ TrendsinSCM

Globalization

Outsourcing

InformationTechnology

BigDataAnalytics

1

theverylatestbusinessthinking.Thiswillprepareforyouforasuccessfulcareerinanew andexcitingbusinessfield.

Today’sbusinessenvironmenthasforcedcompaniestocompeteinverydifferentways fromjustafewyearsago.Inadditiontocompetingontraditionaldimensionssuchas quality,time,cost,andcustomization,companiesmustberapidinnovators.Theymust stayabreastofquicklychangingcustomerdemandsandincreasingglobalcompetition. Advancesintechnology,theInternet,bigdataanalytics,andunprecedentedthreatsto securityareforcingcompaniestobeflexibleandresponsive.Atthesametime,adown economyhascreatedtremendousfinancialpressures.SCMisthebusinessconcept throughwhichcompaniescanachievethislevelofcompetitivenesswhilemaintaining costs,anditisintertwinedwithtoday’sbestbusinesspractices.Companiesunderstand thattheycannotachievetheneededlevelofcompetitivenessinthecurrentglobal economywithoutSCM.

KnowledgeofSCMwillgiveyoutheskillsneededtohelpyourorganizationgaina competitiveadvantageinthemarketplace.Itwillalsohelpyoumoveintooneofthe fastest-growingcareerfieldstoday.

WhatIsSupplyChainManagement(SCM)?

Supplychainmanagement(SCM) isthedesignandmanagementofflowsofproducts, information,andfundsthroughoutthesupplychain.Itinvolvesthecoordinationandmanagementofalltheactivitiesofasupplychain.Assuch,SCMmayappeardeceptivelysimple.Infact, itisacomplexbusinessconceptthatisfarreachinginthenatureandtypeofdecisionsinvolved. BeforewecanbegintolookatthefullcomplexityofSCM,itisimportanttofirstunderstandthe meaningoftheterm supplychain.

A supplychain isthenetworkofallentitiesinvolvedinproducinganddeliveringafinished producttothefinalcustomer.Thisincludessourcingrawmaterialsandparts;manufacturing, producing,andassemblingtheproducts;storinggoodsinwarehouses;orderentryandtracking; distribution;anddeliverytothefinalcustomer.AsimplesupplychainisillustratedinFigure1.1. Theflowsthroughthesupplychainbeginwithsupplierswhosupplyandtransportraw materialsandcomponentstoproducersormanufacturers.Manufacturerstransformthese

materialsintofinishedproductsthatarethenshippedeithertothemanufacturers’owndistributioncentersortowholesalers.Next,theproductsareshippedtoretailerswhoselltheproductto finalcustomers.ConsidertheStarbuckssupplychainwejustdiscussed.Atthebeginningofthe supplychainarecoffeefarmersatvariouslocationsacrosstheglobethatgrowthecoffeebeans. Thecoffeebeansarepicked,packagedinburlapbags,andtransportedtocoffeeroasters,entities thatroastthebeans.Theroastedbeansarethensenttocoffeedistributors,whothensort,package, andmovethebeanstoretaileroutletssuchasStarbuckscafés,tobepurchasedbytheconsumer.

Atypicalsupplychainmayinvolvemanydifferenttradingpartners,calledstages.Thesesupply chainstagesmayincludethefollowing:

• Suppliers

• Producers

• Wholesalers/Distributors

• Retailers

• Customers

Notethateverysupplychainisdifferentandthatthesestagesareagenericrepresentationofa supplychain.Infact,eachstagemaynotbepresentineverysupplychain.Thenumberofstages thatarepartofasupplychainanditsappropriatedesignwilldependonboththecustomer’sneeds, therolesofthestagesinvolved,andthevalueeachstageprovides.

Supplychainsareunderincreasingfinancialpressure,andstagesthatdonotaddvaluetothe supplychainarequicklybypassedoreliminated.Forthisreason,asupplychainisoftencalleda valuechain ora valuenetwork.Today’sconceptofthesupplychaincomesfromtheconceptof a“valuechain”thatwasintroducedbyaHarvardBusinessSchoolprofessor,MichaelPorter,in thel980s.MichaelPorterexplainedthatacompany’scompetitiveadvantagecannotbeunderstood bylookingatafirmasawhole.Rather,itscompetitiveadvantagecomesfromthemanydiscrete activitiesthatafirmperformsandthateachoftheseactivitiescontributestothefirm’stotalcost position.Thisconceptofeachactivitycontributingtothetotalvaluehasnowbeenextendedto theentiresupplychain.Infact,ithasbeenoftensaidthatitisnotcompaniesthatcompete.Rather, itistheirsupplychainsthatcompete.

Aswelookatasupplychainitisimportanttopointoutsomecommonterminologyusedto describetherelationshipsofsupplychainstagestooneanother.Eachcompanyinasupplychain hasitssuppliersandcustomers.Thestagesofthesupplychainthatcomprisetheinbounddirection towardthecompany,orthe“focalfirm,”arecalledthe“upstream”partofthesupplychain.

Thestagesofthesupplychainawayfromthe“focalfirm”aretermed“downstream.”This isshowninFigure1.2.Forexample,ifthefocalfirmwasamanufacturer,allinboundsupplierswouldbeconsidered“upstream,”whereasdistributors/wholesalersandretailers/customers wouldcomprisethe“downstream”partofthesupplychain.Beingabletorefertopartsofthe supplychainaseither“upstream”or“downstream”providesaconvenientpointofreference. Similarly,suppliersthatdirectlysupplygoodsorservicestoacompanyaretermed“first-tier suppliers.”Suppliersthatsupplytoacompany’s“first-tiersuppliers”aretermed“second-tiersuppliers,”andsoonmovingupthechain.Thisprovidesacommonterminologyforcompaniesto understandwhichsuppliersarebeingreferenced.

Theterm supplychain impliesalinearchainofparticipantsfromsupplierstofinalcustomers. Atruesupplychainisactuallymorelikeacomplexnetwork,asshowninFigure1.3.Aproducermayreceivematerialsfrommultiplesuppliers.Manydistributorsandwholesalersreceive inventoryfrommanymanufacturers,andmostretailersreceiveproductsfrommanydifferentdistributors.Forthisreasonasupplychainisoftenreferredtoasasupplychainnetworkorsupply web,tomoreaccuratelydescribethenatureoftheserelationships.Infact,manycompaniesare partofmultiplesupplychains.

FIGURE1.2 Stagesofthesupplychain.

FIGURE1.3 Thesupplychainnetwork.

Thesupplychainnetworkcanactuallytakeonmanydifferentshapes.Somearelinear,as showninFigure1.3.Otherstakeontheformofhub-and-spokeoraweb.Oftenthetypeofnetworkcanberelatedtothenumberofsuppliers,theirlocations,andthetypeofproductbeing produced.Forexample,DellComputerCorporationbecamefamousformandatingthatallits first-tiersuppliersmustbewithina15-minuteradiusanywherearounditsAustin,Texas,manufacturingfacility.Thisisanexampleofahub-and-spokesupplynetwork,withthefocalfirmin thecenterofthedesign,andamodelthathasbeenfollowedbymanyothermanufacturers.

SCMActivities

Nowthatweunderstandwhatconstitutesasupplychainorsupplynetwork,wecanlookatthe issuesinvolvedinmanagingit.RecallthatSCMinvolvesthecoordinationandmanagementof all theactivitiesofasupplychain.Itisresponsibleformanagingthesystemofflowsbetweenthe differententitiesofasupplychaintosatisfythefinalcustomerandmaximizetotalsupplychain profitability.SCMisadynamicandever-changingprocessthatrequirescoordinatingallactivities amongmembersofthesupplychain.

SCMactivitiesincludethefollowing:

• Coordination: SCMinvolvescoordinatingthemovementofgoodsandservicesthroughthe supplychain,fromsupplierstomanufacturerstodistributorstofinalcustomers;italsoincludes

movementofgoodsbackupthesupplychain,asproductsmaybereturned.Coordination alsoinvolvesthemovementoffundsthroughthesupplychainasproductsarepurchasedand sold.Thisincludesvariousfinancialarrangementsandtermsofpurchasebetweenbuyersand suppliers.

• InformationSharing: SCMrequiressharingrelevantinformationamongmembersofthe supplychain.Thisincludessharingdemandandsalesforecasts,point-of-saledata,promotionalcampaignsplanned,andinventorylevels.Considerthatamanufacturermustknowif aretailerisplanninganadvertisingcampaigntoensurethatenoughoftheproductisbeing produced.Otherwise,theretailermayrunoutofstock.Similarly,themanufacturer’ssuppliers mustbeawareofincreasedproductionplanstoprovidesufficientcomponentparts.Sharing thisinformationenablestheentirechaintoworkinunison.

• Collaboration: SCMrequirescollaborationbetweensupplychainmemberssothatthey jointlyplan,operate,andexecutebusinessdecisionsasoneentity.Thisisimportantfordecisionsthatrangefromproductdesignandprocessimprovementtoimplementingbusiness initiativesorfollowingaparticularbusinessstrategy.Forexample,thismayincludecollaboratingonwaystocutcostsorimprovequalitystandardsthroughouttheentiresupplychain.

ManagingFlowsThroughtheSupplyChain

Recallthatmanyflowsmovethroughasupplychainnetwork.Thefirstistheflowof products throughthesupplychain,fromthebeginningofthechainthroughvariousstagesofproduction, tothefinalcustomer.However,goodsalsoflowbackthroughthechain.Thisisintheformof returnedproductsthatareunacceptabletocustomersforavarietyofreasons,suchasdamagedor obsoletegoods.ThisisanareaofSCMcalled reverselogistics becausethedirectionofproduct flowisreversed.Theincreasedfocusoncustomeraccommodationhasresultedinanincreasein theamountofgoodsreturnedfromcustomers.

Thesecondimportantflowthroughthesupplychainisthatof information thatisshared betweenmembersofthesupplychain.Manysimplifiedsupplychainsviewtheproductflowing fromsupplierstocustomersandinformationflowingintheoppositedirection,frompoint-of-sale backtosuppliers.Inthissimplifiedcase,theprimaryinformationisdemandorsalesdata,which isusedtotriggerreplenishmentandservesasthebasisforforecasting.Inamorerealisticcase, salesinformationissharedonareal-timebasis,whichleadstolessuncertaintyandlesssafety stock.Thesharingofreal-timeinformationservestocompressorshortenthesupplychainfrom atimestandpoint.Theresultofthismoretimelyandaccurateinformationisareductioninthe amountofinventorycarriedthroughoutthesupplychain.

Thethirdimportantflowthroughthesupplychainisthatof funds.Inasimplifiedsupply chain,financialflowisoftenviewedasonedirectional,flowingbackwardinthesupplychain aspaymentforproductsandservicesreceived.However,asproductsflowinbothdirectionsso doesthetransferoffunds.Amajorimpactonfundtransferandthefinancialsofcompanieshas beensupplychaincompression.Ashorterordercycletimemeansthatcustomersreceivetheir ordersfaster.Itmeansthattheyarebilledsoonerandthatcompaniesreceivepaymentsooner. Thisspeedingupofthemoneycollectionprocesshashadahugeimpactontheprofitabilityof certainfirms.ConsiderDellComputerCorporation,acompanythathasgainedmuchfromthe compressedsupplychain.Dellturnsoveritsinventoryroughlyeveryfourdays.However,they oftenreceivepaymentaweekinadvance,wellbeforeDellpaysitssuppliers,providingalarge financialbenefittoDell.

ThekeytosuccessfulSCMisthemanagementoftheseflowsthroughthechain.SCMis adynamicprocessandprovidesmanyopportunitiestoreducethecostofdoingbusinessand improvecustomerservice.Atthesametime,thechallengesofSCMareoftenunderestimated. Infactthereasonforthefailureofmanyonlinebusinessesisduetotheirinabilitytomanage

isalsoasupplierofinputsandinformation,whichcanchangetheservicedelivery.Consider thelegalenvironment,wherethecourseoflegalactiongreatlydependsoninformationprovided bytheclienttotheattorney.Similarly,auniversitystudentmayhavetheoptiontoconductan independentstudyunderthesupervisionofafacultymember,changingthesetcourseofstudy.

Servicesupplychainstendtobeconsiderablyshorterthanmanufacturingsupplychains.The providertypicallyinteractsdirectlywithcustomers,withoutthebufferofretailersanddistributors, enablingeasiersharingofinformation.Servicesupplychainsalsotendtolookmorelikehubs thanchains.Oneofthedisadvantagesisthattheydonothavethebuffersofinventoryasseen inmanufacturing.Thismeansthattheyneedtohaveotherorganizationalmechanismsthatgive themflexibilitywhenhandlingthevariationofcustomer-suppliedinputsanddemands.Thisalso makesinformationsharingwithcustomersmuchmorecritical.

Evenservicecompaniesthatprovidepurecontenttocustomers,suchasthoseintheentertainmentindustry,relyheavilyontheirsupplychainstodelivercustomervalueandremain competitive.Thisincludesindustriessuchasfilm,computergames,andsportsandincludes companiessuchasDisney,WarnerBros.,andTicketmaster.Thesecompaniesareincreasingly relyingonSCMprocessandtechnologyimprovementstoensurecoordinationofinformation andmaintaincompetitiveness.

SupplyChainLeader’sBox

◾ AMAZON.COM

ThelargestInternet-basedretailerintheworld,Amazon .com,hassoughttomakeitselfacustomer-centriccompany fromitsbeginninginJuly1995.Amazon.comisaservice companythatisaleadingmerchandiserofeverythingfrom gourmetfoodtoappareltoelectronics,inadditiontobooks andmusic.Fromtheverybeginning,Amazonunderstood thatitsfocusmustbeonsatisfyingthecustomerbyproviding thehighestlevelsofservice.Ratherthanfocusingonmarketingoradvertising,Amazonplaceditsfocusonhavinga superiorsupplychainthatprovidesuncompromiseddeliverytocustomers.Inaddition,Amazonconductsbusiness onaninternationalscale,shippingtomorethan200countries.Coordinatingandorchestratingthisrangeofproduct offeringstosomanygloballocationswithperfectdeliveriesisadauntingtask.Toachievethis,Amazonhasbuiltan

impressivelogisticsnetworkthatincludesitsownfleetof jets,automatedwarehouses,robots,drones,andadigitally drivensupplychain.ForAmazon,logistics,shipping,anda superSCMhavecombinedtogivethecompanyitsstellar reputation.

PartofAmazon’ssupplychainproficiencyisbasedonits strictoperationsphilosophy,whichfocusesonleansystems, quality,andefficiency.Itismorereminiscentofindustrial manufacturingthantraditionalretailpractices.Forinstance, AmazontakesaSixSigma1 approachtoitsdistributionoperationsandappliesleanmanufacturingandtotalqualitymanagement(TQM)methodologiestoitsprocesses.Amazon’s onlineproficiencyissuchthatmanybrick-and-mortarretailerssuchasTargetandToys“R”UsusetheAmazonwebsite fortheire-commerceefforts.

Adaptedfrom:Leonard,David,“WillAmazonKillFedEx?” Bloomberg BusinessWeek ,August31,2016.

TheBoundary-SpanningNatureofSCM

Toorchestrateandoptimizeallflowsfromsourcetoconsumption,SCMmusttakeatotalsystems viewpoint.SCMmustensurethattheneedsoffinalcustomersaresatisfiedthroughthecoordinationofmaterialsandinformationflowsthatextendfromthemarketplace,throughthefirmand itsoperationstoallitssuppliers.

1 SixSigmaperformanceischaracterizedby3.4defectspermillion,or99.99966%perfect.Wewilldiscussthisindetaillaterin thetext.

suppliercollaboration.Toyotaengagesincollaborationwithsuppliersfromtheearlieststagesof productdesign—asystemcalled“earlysupplierinvolvement.”Thishasledtoasignificantcost reductioninproducingitscars.

Inadditiontocollaborativeplanning,achievingfullcross-enterpriseintegrationrequiresthe sharingofrisksandrewards.Mostorganizationsstillfunctioninawaythatminimizestheirown riskandmaximizestheirownrewards.Thisstrategymaymeanthatoutcomestheyachieveare attheexpenseofothercompanies.ThecooperativeandcollaborativeapproachofSCMispredicatedonthewin–winoutcome.Althoughadversarialrelationshipscanprovidefinancialgain,the win–winstrategyhasshowntobethebeststrategyoverthelongrun.

SCMVersusLogistics

ManypeopleconfuseSCMwithlogistics.Therefore,itisimportanttoclarifytheirdifferentroles indevelopingacompetitiveadvantage.SCMisaboutthecollaborationbetweensupplychainpartnersinastrategicefforttoachievesuperiorcompetitiveness.Therefore,SCMrequiresmanaging differentaspectsofthecoordinationprocess,suchasinformation,technology,distribution,products,rawmaterials,finances,andmostofall,relationships.TherelationshipsinvolvedinSCM arecomplexandrequirecoordinatingmanagerialprocesseswithinfirms(intraorganizational)and betweenfirms(cross-enterprise).

Logistics,incontrasttoSCM,consistsofthetasksinvolvedinmovingandpositioninginventorythroughoutthesupplychain,asshowninFigure1.6.Logisticsisafunctionthatsupports SCMonparwithmarketing,operations,andsourcing.SCM,ontheotherhand,isastrategicand managerialconcept.Thefunctionoflogisticsinvolvesorderprocessingandtracking,inventory management,transportation,warehousing,materialhandling,andpackaging.Theseactivities needtobecoordinatedandintegratedthroughoutallentitiesofthechain.Withoutlogisticsthere wouldbeinventorystock-outsatsomelocationsandtoomuchinventoryatothers.Consequently, logisticsisafunctionthatsupportsSCM.

NoticethatSCMisaboutmanagingandcoordinatingmanyflows,includinginventory. Logistics,ontheotherhand,isthepartofSCMthatisconcernedwithmanagingtheflowof inventory.

LogisticsisvitaltoSCMasitisakeysupportingfunction.Logisticsmustplanandcoordinate allmaterialflowfromsourcetousersasoneintegratedsystem,ratherthanaseriesofindependent activitiesashasbeendoneinthepast.Logisticsisthefunctionthatisbasicallyresponsiblefor linkingthemarketplacewiththemanufacturingprocess,sourcingactivities,andthedistribution networktoprovidehighcustomerserviceatlowercosts.Inessence,logisticsisthelinkbetween themarketplaceandtheoperatingactivitiesofthebusiness.Thescopeoflogisticsspansfrom managementofrawmaterialsthroughthedeliveryofthefinalproduct.

TheRiseofSCM

TofullyappreciateSCM,itisimportanttolookatitsrapidriseasacriticalbusinessconcept.SCM evolvedinthe1990sandusheredinaneweraofbusinesscompetition.Thiswasadirectresultof greateconomicchangesofthetimefortheglobaleconomyandanincreasinglyuncertainbusiness

inventories—toguardagainstthisuncertainty—whichthenresultsinhighercosts.Thebestway toreduceuncertaintyisbyincreasingreliabilitythroughtheredesignofprocessesthatimpact performance.

Onefactorthatgreatlyimprovesreliabilityinsupplychainsisimprovedvisibility.Typically, thefurtheronegoesupthesupplychain,themorelimitedthe“visibility”ofdownstreamactivities. Organizationsthatarefurtherupthechainhavetypicallyreliedondemandfromtheirimmediate customerinthechaintoforecastdemand.Thislackofcoordinationhasresultedintheclassic“bullwhip”effect.Supplychaincoordinationandsharingofreal-timedataandinformation throughinformationtechnologyhaspermittedvisibilitytoallentitiesinthechain.Thisresultsin greatlyimprovedvisibilityand,consequently,supplychainreliability.

RelationshipManagement

Animportantcharacteristicofcompetitivesupplychainsistheirfocusonrelationshipbuilding andcollaboration,ratherthanthearm’s-lengthadversarialrelationshipsthathadbeendominant inthepast.Inmanyindustries,forexample,thepracticeof“single-sourcing”iswidespread. Ithasbeendocumentedthatsuchpracticesimprovequality,productinnovation,anddesign whilereducingcostsandimprovingoverallresponsiveness.Underlyingthisideaisthatthe buyer–supplierrelationshipshouldbebasedonapartnershipoftrust,commitment,andfairness. Therearenumerousadvantagestosuchrelationshipsthatcanbelongtermandmutually beneficial.ThecompetitiveadvantageofcompaniessuchasToyotaandHondaovertheir competitorsintheautoindustrycomesfromthecollaborativerelationshipstheyhavedeveloped withtheirsuppliers.Aswehaveseenthusfar,SCMisprimarilyaboutthemanagementof relationshipsacrosscomplexnetworksofcompanies.Successfulsupplychainswillbethosethat aregovernedbyaconstantsearchforwin–winrelationshipsbasedonreciprocityoftrust.

GlobalInsightsBox

◾ ZARA

TheSpanishretailerZaraexemplifiesthattooperateasuccessfulglobaloperationacompanymayhavetodefymost ofthecurrentconventionalwisdomabouthowsupplychains shouldberun.Zarahasadaptednumerousbestpracticesto createitsownbrandofglobalSCMthatmayseemunorthodoxtosome.Forexample,Zarahasbeenknowntosend ahalf-emptytruckacrossEurope,paytoairfreightcoatsto Japantwiceaweek,ormoveunsolditemsoutofitsretail storesafteronlytwoweeks.Formostobservers,thiswould benowaytorunasupplychain.Ofcourse,noneofthesetacticsareespeciallyeffectivebythemselves.Rather,theystem fromaholisticapproachtoSCMthatoptimizestheentire chaininsteadoffocusingonindividualparts.

Intoday’seconomy,wheremostcompanieshaverushed tooutsource,Zarakeepsalmosthalfofitsproduction in-house.Ratherthanpushingitsfactoriestomaximizeoutput,thecompanyfocusescapitalonbuildingextracapacity

togiveitflexibility.Also,Zaramanufacturesanddistributes productsinsmallbatches,ratherthanchasingeconomies ofscale.Toensuretopperformance,thecompanymanages alldesign,warehousing,distribution,andlogisticsfunctions itself.Theresultisasuper-responsivesupplychainuniquely tailoredtofullysupportZara’sbusinessmodel.Zaracan design,produce,anddeliveranewgarmenttoits2,100-plus storesworldwideinjustafewdays.However,Zarakeeps alimitedamountofinventory.InaZarashop,customers canalwaysfindnewproductsbuttheyknowthatsupplyis limited.Thiscreatesasenseofurgencyforthecustomer topurchaseratherthanwaitingforamarkdown,translating intohighprofitmarginsandaconsistentyearlygrowth.More recentlyZarahasnoticedgrowthinonlinesalesandisshifting moreinventorytobeavailableonline,usingthesamesupply chainstrategy.Zaraoffersamodelwhereprofitsaregained throughcontrollingtheentireend-to-endsupplychain.

Adaptedfrom:“ZaraLookstoOnlineGrowthandCutsStoreSalesForecasts.” Fortune,March2016.

TrendsinSCM

Today’sorganizationsfaceanumberoftrendsthatimpactthewaysupplychainsaredesigned andmanaged.Thesetrendsarearesultofafast-changingglobalandtechnologicallyconnected economythatcreatesuniquechallengescompaniesmustaddress.Welookatthesehere.

Globalization

IntheeyesoftheeconomistThomasFriedman,globalizationhasreplacedtheso-calledColdWar ofthepost–WorldWarIIeraasthedominantdrivingforceofworldeconomics.2 Theconceptof the“globalmarketplace”haschangedthemeaningofhowandwherebusinessisconducted,for allenterprisesandforindividualcustomers.Changesininformationtechnology,transportation, andgovernmentpolicieshavemadetheconceptoftheglobaleconomyafactoflife.Anumberof countrieshaveaggressivelypursuedopeningupinternationaltrade.Thishasservedtoopennew marketsandsourcesofsupplyformostcompanies,bothlargeandsmall.Further,theseopportunitieshavebeenmadepossiblethroughinformationtechnology,whichhashelpedbreakthe distancebarrier.Companieshavebenefitedfromalargerchoiceofproductsources.Consumers havealsobenefitedduetogreaterproductchoice,higherquality,andlowercost.

Managingglobalsupplychains,however,hasanumberofchallenges.Thedistancefactor canbecomeasignificantbarrierwhenshipmentsmovethousandsofmilesfromsuppliersto customers.Inanenvironmentofreducedcycletimes,expectedhigherlevelsofreliability,and emphasisonefficiency,thedistancefactorpresentsspecialchallengestosupplychainmanagers.

Outsourcing

Outsourcing ishiringathirdpartytoperformasetoftasksforafee.Companieshavehistorically androutinelyoutsourcedcertainactivities,suchasjanitorialservices,recordsmanagement,or uniformcleaning.Thedifferencetodayisthatcompaniesareoutsourcingalmostallactivities andonamuchlargerscale.

Increasedcompetitivepressurehasforcedcompaniestorecognizethattheycompetethrough their corecompetencies (sometimestermed“distinctivecompetencies”).Thismeansthatan organizationcreatessuperiorvalueforcustomersbymanagingtheircorecompetenciesbetter thancompetitors.Tobeabletofocusoncorecompetencies,manycompaniesoutsourceother activitiestothosethatcandothembetter.Outsourcingcaninvolvehiringoutoneaspectofthe operation,suchasshipping,tooutsourcinganentirepartofthemanufacturingprocess.Thepracticehasrapidlygrowninrecentyearsandhashelpedcompaniesbemoreefficientbyfocusingon whattheydobest.

SupplyChainLeader’sBox

◾ WAL-MART

Evensomeofthemostsuccessfulcompanieshaveencountereddifficultiesinmanagingtheirglobalsupplychains.For example,Wal-MartencounteredlargeproblemswhenenteringtheBrazilianmarket.Wal-Martquicklyfoundthatthey

neededtoadaptproductofferingstolocaltastes,suchas replacingfootballswithsoccerballsandofferingdelicounter itemsthatincludedsushi.Changingproductlines,however, wastheeasypart.TherewereotheraspectsofWal-Mart operationsthatcausedgreaterproblems.Thelogistical aspectsofoperatingintheSouthAmericanmarketshave

2 ThomasL.Friedman, TheLexusandtheOliveTree (NewYork:Farrar,StrausandGiroux,l999),1–25.

beenespeciallychallenging.Forexample,rapidorder fulfillmenttimeisnotnearlyaseasytoaccomplishinBrazil asintheUnitedStates,whereWal-Marthaseasyaccessto suppliersandtransportationcompanies.

SãoPauloischaracterizedbybumper-to-bumpertraffic, whichimpedestimelydeliveryandsmoothreplenishment forWal-Martstores.Further,thereareoccasionalmysterious“disappearances”ofshipmentsthatcreatesignificant

deliveryproblems.Finally,largestoresinBrazilhavedifficulty achievingtheeconomiesofscaleoftheirU.S.counterparts. Still,Wal-Martfeelsthatthereistremendouspotentialfor growthandexpansion,anditisconfidentthatitcanadjust tobesuccessful.

Adaptedfrom:Friedman,ThomasL. TheLexusandtheOliveTree NewYork:Farrar,StrausandGiroux,May1999.

Theconvergenceoftechnologiesattheturnofthiscenturyhastakentheconceptof outsourcingtoanewlevel.Massiveinvestmentsintechnology,suchasworldwidebroadband connectivity,theincreasingavailabilityoflower-costcomputers,andthedevelopmentof softwaresuchase-mail,searchengines,andothersoftwarehaveallowedindividualstowork togetherinrealtimefromanywhereintheworld.Theresulthasbeentheoutsourcingofvirtually anyjobimaginable.Manufacturershaveoutsourcedsoftwaredevelopmentandproductdesign toengineersinIndia,accountingfirmshaveoutsourcedtaxpreparationtoIndia,andevensome hospitalshaveoutsourcedthereadingofCATscanstodoctorsinIndiaandAustralia.

InformationTechnology

Animportantdriverofsupplychainmanagementistechnology.Technologicaladvanceshave enabledcompaniestoproduceproductsfaster,withbetterquality,atalowercost,andthistrend willcontinue.Manyprocessesthatwerenotimaginableonlyafewyearsagohavebeenmade possiblethroughtheuseofinformationtechnology.

Advancementsin informationtechnology haveinparticularhadthegreatestimpactonSCM. Informationtechnologyistechnologythatenablesstorage,processing,andcommunicationwithin andbetweenfirms.Infact,informationtechnologycanbeviewedasanenablerofSCM,as withoutitcoordinationbetweensupplychainmemberswouldnotbepossible.Themostpopulartypeofinformationtechnology,andmostfamiliartoall,istheInternet,whichhashad thegreatestimpactonthewaycompaniesconductbusiness.TheInternethaslinkedtrading partners—customers,buyers,andsuppliers—andhasenabledelectroniccommerceandthevirtualmarketplace.Thisisoneofthegreatestforcesthathasmadeinformationsharingalongthe supplychainpossible.

Anotherpowerfulinformationtechnologyisenterprisesoftware,suchas enterpriseresource planning(ERP).Thesearelargesoftwareprogramsusedforplanningandcoordinatingall resourcesthroughouttheentireenterprise.Theyallowdatasharingandcommunicationwithin andoutsidethefirm,enablingcollaborativedecisionmaking.

Otherexamplesofinformationtechnologiesthathaveimpactedthesupplychaininclude wirelesscommunicationtechnologies.Weareallfamiliarwithcellularphonesandpagersfrom everydaylife.However,thesetechnologiescanalsosignificantlyimprovebusinessoperations. Forexample,wirelesshomingdevicesandwearablecomputersarebeingusedinwarehousesto quicklyguideworkerstothelocationsofgoods.Thisservestosignificantlyimprovewarehouse operationsandlogistics.Wirelesstechnologies,enhancedbysatellitetransmission,canrapidly transmitinformationfromonesourcetoanother.Forexample,Wal-Martusescompany-owned satellitestoautomaticallytransmitpoint-of-saledatatocomputersatitswarehousesfor replenishment.

Globalpositioningsystems(GPS) areanothertypeofwirelesstechnologythatuses satellitetransmissionstocommunicateexactlocationsandhavedramaticallyimprovedlogistics