SCM Chapter Notes

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SCM text book CHAPTER ONE Discussion Questions & answers 1

Consider the purchase of a can of soda at a convenience store. Describe the various stages in the supply chain and the different flows involved. When a customer purchases a can of soda at a convenience store, his purchase represents the end of a supply chain’s delivery of an item and the beginning of information regarding his purchase flowing in the opposite direction. The supply chain stages include customers, retailers, wholesalers/distributors, manufacturers, and component/raw material suppliers. A customer’s purchase moves product towards the customer and dollars and information towards the retailer. The retailer places an order from the wholesaler/distributor to replenish stock, thereby moving information back up the supply chain while moving product down the supply chain. As the order is filled, the retailer will move dollars back up the supply chain. The wholesaler/distributor transmits information and dollars to the manufacturer who produces product and ships it down the supply chain to the wholesaler. Finally (or initially, depending on your perspective) the manufacturer moves orders (information) and dollars towards suppliers in exchange for material flow into their production processes.

2

Why should a firm like Dell take into account total supply chain profitability when making decisions? Dell realizes that their ultimate success lies with the success of their supply chain and its ability to generate supply chain surplus. If Dell was to view supply chain operations as a zero sum game, they would lose their competitive edge as their suppliers’ businesses struggled. Dell’s profit gained at the expense of their supply chain partners would be short lived. Just as a physical chain is only as strong as its weakest link, the supply chain can be successful only if all members cooperate and focus on a global optimum rather than many local optima.

3

What are some strategic planning and operational decisions that must be made by an apparel retailer like The Gap? As The Gap plans supply chain strategy it must first consider the marketing function’s pricing plans in order to structure a supply chain consistent with these plans. Strategic considerations such as the capacity of each supplier and assembly operations, sourcing decisions and how logistics are to be handled are all part of the design. The supply chain must also settle on communication channels and frequencies.

[Type text] Supply chain planning takes the strategic decisions as a given and seeks to exploit efficiencies in the chain to maximize supply chain surplus. The entire chain should collaborate in forecasting and planning production to achieve a global optimum. The forecasts should take into account planned promotions and known seasonal fluctuations in demand. The operational decision takes the plans as a given and makes day-to-day decisions to process customer orders, allocate resources to certain customers, trigger orders from supply chain members, and deliver product. 4

Consider the supply chain involved when a customer purchases a book at a bookstore. Identify cycles in this supply chain and the location of the push/pull boundary. All supply chain processes can be broken down into four process cycles that connect the five stages of the supply chain; the customer order cycle, the replenishment cycle, the manufacturing cycle, and the procurement cycle. The customer order cycle connects the customer with the retailer; this connection is made as the book, perhaps Supply Chain Management by Chopra and Meindl, is selected and paid for by the customer. The replenishment cycle connects the retailer and the distributor and is triggered by the retailer’s need to fill the empty shelf space with another copy of this tome. The manufacturing cycle connects the distributor and the manufacturer. As demand for the book is realized and distributors empty their warehouses, they signal the manufacturer to print another million copies to fill their empty warehouses. Finally, the procurement cycle connects the manufacturer and the supplier. The manufacturer requires raw material inputs of paper, ink, etc., to begin the assembly process for another batch of Supply Chain Management. The push/pull boundary exists where demand switches from reactive (pull) to speculative (push) production. For most bookstore supply chains the push/pull boundary is between the customer order cycle and the replenishment cycle. The customer order pulls the book from the book store shelf but the initial production of the book was triggered by a build order that moved materials along the supply chain to the retail outlet.

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Consider the supply chain involved when a customer orders a book from Amazon. Identify the push/pull boundary and two processes each in the push and pull phases. In Amazon’s original operations design the push/pull boundary existed betwixt the retailer (Amazon) and their distributor. Amazon ordered product from the distributor and the customer order arrived. Today, Amazon has six warehouses where it stocks an inventory of items it is confident that will sell. In this scenario, the push/pull boundary exists between the customer and the retailer.

[Type text] Processes in the pull phase are the order fulfillment, shipping, customer returns, and customer billing. Processes in the push phase are production, stock replenishments, shipping, and payment. 6

In what way do supply chain flows affect the success or failure of a firm like Amazon? List two supply chain decisions that have a significant impact on supply chain profitability. The success or failure of a company like Amazon is decided by the effective function of its supply chain. The flow of products from publishers to distributors to customers must be rapid and reliable in order to satisfy customers. The flow of information back through the supply chain allows all members to coordinate efforts. The flow of money allows all supply chain members to maintain operations. Supply chain profitability is influenced by sourcing, promotion, and fulfillment decisions.

CHAPTER TWO Discussion Questions

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1. How would you characterize the competitive strategy of a high-end department store chain such as Nordstrom? What are the key customer needs that Nordstrom aims to fill? The Nordstrom web site states the following. Over the years, the Nordstrom family of employees built a thriving business on the principles of quality, value, selection, and service. Today, Nordstrom is one of the nation’s leading fashion retailers, offering a wide variety of high-quality apparel, shoes, and accessories for men, women, and children at stores across the country. We remain committed to the simple idea our company was founded on, earning our customers’ trust one at a time. Nordstrom fills customer needs for high quality fashion merchandise and outstanding levels of customer service. Price is no object for the typical Nordstrom shopper. 2. Where would you place the demand faced by Nordstrom on the implied demand uncertainty spectrum? Why? Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand. A high-end department store chain such as Nordstrom falls on the high end of the implied demand uncertainty scale. The fashion items that Nordstrom stocks have extremely high product margin, high forecast errors and stockout rates, and once the season is over, these items are sold at deep discounts at their Nordstrom Rack outlet stores. 3. What level of responsiveness would be most appropriate for Nordstrom’s supply chain? What should the supply chain be able to do particularly well? Supply chain responsiveness takes many forms, including the ability to respond to a wide range of quantities, meet short lead times, handle a large variety of products, build innovative products, meet a high service level, and handle supply uncertainty. The Nordstrom supply chain must be highly responsive in the areas of handling highly innovative fashion products, customer response, and service level; they are effective in supplying well-heeled customers with merchandise and their return policy is legendary in the Pacific Northwest. 4. How can Nordstrom expand the scope of the strategic fit across the supply chain? Scope of strategic fit refers to the functions within the firm and stages across the supply chain that devise an integrated strategy with a shared objective. By adopting an intercompany interfunctional scope strategy, Nordstrom will maximize supply chain surplus. Nordstrom can move in this direction by working with their suppliers as if they are actually owned by Nordstrom. Rather than viewing the supply chain as a zero-sum game of inventory cost minimization and profit maximization,

[Type text] Nordstrom must recognize that spreading the wealth and occasionally taking on more inventory than is optimal for them will result in improved customer service. The intercompany interfunctional scope of strategic fit requires more effort than the other approaches presented in this section; Nordstrom must evaluate all aspects of their supply web. 5. Reconsider the previous four questions for other companies such as Amazon.com, a supermarket chain, and auto manufacturer, and a discount retailer such as WalMart. Amazon.com focuses on cost and flexibility by providing books, music and a host of other household products at low prices. Customers place orders online and expect to receive purchases in a number of days. Customer orders are processed at central warehouses or are drop shipped from suppliers by mail or common carrier. For the most part, the implied demand uncertainty for Amazon.com is low as they cast such a wide net. Amazon.com’s supply chain must be responsive in terms of flexibility; they handle an incredibly diverse range of products. Amazon.com’s supply chain should be able to provide low prices wide variety and reasonable delivery schedules for its customers. In every link of the supply chain, Amazon.com must function on the cost-responsiveness efficient frontier in order to support its competitive strategy. A supermarket chain focuses on cost and quality, with some specialty chains adding flexibility by carrying a broader range of products that may be targeted towards customers interested in organic products or ethnic cuisine. Implied demand uncertainty for a supermarket chain tends to be low; shoppers are typically repeat customers and have a constant demand level. The supermarket supply chain must be responsive by receiving produce quickly to ensure freshness and have a high service level. Supermarket supply chains tend to be well-established and can improve strategic fit by emphasizing speed to maintain freshness, hence perceived quality. Auto manufacturers have extremely complicated supply chains that are increasingly focused on flexibility and lean operations. Implied demand uncertainty for auto manufacturers varies considerably by target market and manufacturer. Automotive supply chains among the big three in the United States have made great progress in the last decade and recognize that they must be responsive from a time and flexibility standpoint. Wal-Mart’s supply chain is obsessed with cost and is facilitated by a low implied demand uncertainty, their impressive logistics system and their management information systems. Their supply chain is able to respond quickly to fill a wide variety of products to keep merchandise on Wal-Mart’s shelves. Wal-Mart’s level of coordination along the supply chain is excellent; it would be difficult to point out areas where true intercompany interfunctional scope of strategic fit has not been

[Type text] achieved. The sole supply chain criticism that surfaces is an occasional report that suppliers feel as if supply chain surplus is not shared equitably. 6. Give arguments to support the statement that Wal-Mart has achieved very good strategic fit between its competitive and supply chain strategies. The best argument to support the statement that Wal-Mart has achieved very good strategic fit is their success as a company. Competition today is supply chain versus supply chain, not company versus company, so a company’s partners in the supply chain often determine the company’s success. Wal-Mart’s strategic focus on cost is evident in their competitive, product development, supply chain, and marketing strategy. Their marketing strategy of advertising every day low prices appeals to consumers and does not disrupt the supply chain by causing surges in demand. Visiting one of their big box stores reveals low-priced merchandise, both national and store brands, stacked from floor to ceiling without elaborate displays or decoration. Wal-Mart’s logistics and information systems are famous for coordinating their entire supply chain and allowing it to meet customer needs at minimal cost. 7. What are some factors that influence implied uncertainty? How does the implied uncertainty differ between an integrated steel mill that measures lead times in months and requires large orders and a steel service center that promises 24-hour lead times and sells orders of any size? From a customer perspective, implied demand uncertainty increases when the customer’s range of quantity required increases, lead times decrease, variety of product increases, rate of innovation increases and required service levels increase. We also see high implied uncertainty attributed with high product margins, forecast errors above 40%, stockout rates above 10% and forced season-end markdowns. On the supply side we see increased supply uncertainty when the supply source has frequent breakdowns, unpredictable and low yields, poor quality, limited supply capacity, and evolving production processes. For the steel mill that requires large orders and has lead times measured in months both the implied demand and supply uncertainty is less due to a better predictable capability and a better defined schedule for production. Due to the increasing number of sizes and the shorter response time associated with the steel service center, implied uncertainty is high. 8. What is the difference in implied uncertainty faced by a convenience store chain such as 7-Eleven, a supermarket chain, and a discount retailer such as Costco? When customers go to a convenience store chain such as 7-Eleven, they go there for the convenience of a nearby store and are not necessarily looking for the lowest price. Implied demand uncertainty would be high as customers are looking for a

[Type text] variety of products and convenience versus cost and demand levels are hard to predict. A supermarket chain focuses on cost and quality, with some specialty chains adding flexibility by carrying a broader range of products that may be targeted towards customers interested in organic products or ethnic cuisine. Implied demand uncertainty for a supermarket chain tends to be low; shoppers are typically repeat customers and have a constant demand level. The supermarket supply chain must be responsive by receiving produce quickly to ensure freshness and have a high service level. Supermarket supply chains tend to be well-established and can improve strategic fit by emphasizing speed to maintain freshness, hence perceived quality. Low price is very important to customers of discount retailers such as Costco. This customer is willing to tolerate less variety and even purchase very large package sizes as long as the price is low. Customer demand can be more predictable and supply side needs are large and fairly stable. 9. What are some problems that can arise when each stage of a supply chain focuses solely on its own profits when making decisions? Identify some actions that can help a retailer and a manufacturer work together to expand the scope of strategic fit. High inventories, poor quality, low customer service, increased returns are just a number of problems that occur when each stage of a supply chain focuses solely on its own profits. The trucking company requires full truck loads for delivery forcing the retailer to carry more inventory than wanted or needed. The supplier offers discounts to their buyers to maximize production but forcing the buyers to purchase in larger quantities than desired. This concept was very prevalent during the 1950s and 1960s as companies to minimize local costs and maximize their own profits. Today, retailers and manufacturers have the opportunity to plan promotions jointly such as Wal-Mart and P&G. They can share sales information to determine customer trends. Joint product development opportunities are being explored throughout the supply chain between retailers, manufacturers and raw material suppliers.

CHAPTER THREE Discussion Questions

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1. How could a grocery store use inventory to increase the responsiveness of the company’s supply chain? The logistical driver of inventory encompasses all raw materials, work in process, and finished goods within a supply chain. A grocery store can be more responsive in the eyes of its customers if it offers a broader variety of SKUs and/or maintains a greater quantity of each SKU. A greater quantity of each SKU is problematic for highly perishable items like produce, meat, fish, etc. For these items, a grocery store supply chain should be set up to permit frequent orders so that freshness is ensured and a stockout situation won’t exist for a significant length of time. A grocery store supply chain should use historical demand patterns for seasonal items to relieve stress on all members and provide customers with product during peak demand periods. 2. How could an auto manufacturer use transportation to increase the efficiency of its supply chain? Transportation, a logistical driver, entails moving inventory from point to point in the supply chain. The trade-off in transportation is between the cost of transportation and the speed at which product is transported. Slower modes of transportation reduce cost, but could be a reasonable approach if suppliers are colocated with the assembly operations. If the supply chain is designed in such a way, and assembly operations are located with proximity to markets, then the supply chain can be run cheaply without holding too much inventory in transit. 3. How could a bicycle manufacturer increase responsiveness through its facilities? Facilities, another logistical driver, are the actual physical locations in the supply chain network where product is stored, assembled, or fabricated. A facility that is designed to be flexible can respond quickly to market demands by retooling to produce different models or products, whereas a dedicated facility cannot. Locating a facility close to the market will increase responsiveness at the cost of decreased economies of scale that might be achieved with a centralized location. A facility that is under capacity will be less responsive than a facility that is appropriately sized or has excess capacity. 4. How could an industrial supplies distributor use information to increase its responsiveness? Information is a cross-functional driver and consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout the supply chain. Information serves as a connection among all members of the supply chain and operates within each member to facilitate internal operations. Accurate information can improve responsiveness by helping an

[Type text] industrial supplier better match supply and demand. Information that is gathered farther down the supply chain can be transmitted instantaneously and accurately to the supplies distributor. Instead of waiting for a human to call or FAX an order, the distributor can replenish inventory to the necessary levels or provide what is needed to fill the order as it is realized. 5. Motorola has gone from manufacturing all its cell phones in-house to almost completely outsourcing the manufacturing. What are the pros and cons of the two approaches? Sourcing is the set of business processes required to purchase foods and services. These decisions are crucial because they affect the level of efficiency and responsiveness that Motorola can achieve. The Motorola production system for their line of pagers was hailed as a breakthrough in mass customization, so it was somewhat surprising when Motorola outsourced cell phones.. Sourcing decisions should be made based on the total supply chain surplus; if a third party can help the chain achieve greater surplus, then the function is a prime candidate for outsourcing. Motorola was willing to give up some control and possibly some of its design talent and assembly expertise because it felt that the supplier could provide product of an appropriate level of quality with the responsiveness necessary. Products and services that are outsourced are rarely brought back in-house and should never be tied too closely to the outsourcing party’s core competency. 6. How can a home delivery company like Peapod use pricing of its delivery services to improve its profitability? Pricing is the process by which a firm decides how much to charge customers for its goods and services. Pricing affects the customer segments that choose to buy the product as well as the customer’s expectations. Peapod can use everyday low pricing of its products to ensure stability in the supply chain, but can influence demand by varying the delivery charges. For example, by establishing a minimum order amount of $50 and charging $10 to deliver an order under $75, Peapod provides an incentive for a customer to pile on additional items to save on per unit shipping. An order over $100 incurs a delivery fee of $7, which is the lowest delivery charge for a residential customer. Peapod also varies delivery charges by time of day; evening delivery times on weekdays and morning deliveries on Sunday within narrow windows cost an extra dollar, wider delivery windows are $1 less. The delivery latitude allows Peapod’s delivery drivers to schedule more efficiently thereby increasing profitability.

7. What are some industries in which products have proliferated and life cycles have shortened? How has the supply chains in these industries adapted?

[Type text] The authors cite the example of running shoes increasing from five styles in the early 70s to almost 300 by the late 90s. Other products that have seen an explosion in variety include personal electronics, beverages, snack and prepared foods, entertainment, tires, and personal services. Supply chains have leveraged information systems, recognized the need to collaborate on product and process design, and supply chain execution. The supply chain stance has shifted towards a partnership orientation from a focus on price negotiations. 8. How can the full set of logistical and cross-functional drivers be used to create strategic fit for a PC manufacturer targeting both time sensitive and price conscious customers? The logistical drivers, facilities, inventory, and transportation, and the crossfunctional drivers, information, sourcing, and pricing, must be used in concert to achieve the appropriate balance of efficiency and responsiveness for the supply chain to be successful. A PC manufacturer that wants to deliver product both quickly and efficiently can make cost and time trade-offs among these drivers to achieve their goals. These trade offs across drivers afford more flexibility but require constant vigilance as the trade-offs within each driver change. In addition, some drivers may be altered more easily, e.g., order quantity and transportation media, than other drivers, e.g., location and sourcing. The trade-offs within each driver are summarized in the table: Driver Facilities Inventory Transportation Information Sourcing Pricing

More Responsive Multiple Plants Flexible Plants Higher Inventory Higher Speed Accurate Real Time Transmission Responsive supplier Differential Pricing

More Efficient Single Plant Dedicated Plant Lower Inventory Lower Speed Less Accurate Batched Transmission Efficient supplier Everyday Low Pricing

Case Note: Seven-Eleven Japan Co. refer pg: no 79 The goal of this case is to illustrate how a firm can be successful by structuring its supply chain to support its supply chain strategy. Once Seven-Eleven Japan decided to provide responsiveness by rapid replenishment, it then structured its facilities, inventory,

[Type text] information, and distribution to support this choice. The case also brings up the question of whether the same approach can work in the United States, especially given the greater distances and lower store density.

Questions 1.

A CONVENIENCE STORE CHAIN ATTEMPTS TO BE RESPONSIVE AND PROVIDE CUSTOMERS WHAT THEY NEED, WHEN THEY NEED IT, WHERE THEY NEED IT. WHAT ARE SOME DIFFERENT WAYS THAT A CONVENIENCE STORE SUPPLY CHAIN CAN BE RESPONSIVE? WHAT ARE SOME RISKS IN EACH CASE?

As responsiveness increases, the convenience store chain is exposed to greater uncertainty. A convenience store chain can improve responsiveness to this uncertainty using one of the following strategies, especially for fresh and fast foods: Local capacity: The convenience store chain can provide local cooking capacity at the stores and assemble foods almost on demand. Inventory would be stored as raw material. This is seen at the U.S. fast food restaurant franchise Subway where dinner and lunch sandwiches are assembled on demand. The main risk with this approach is that capacity is decentralized, leading to poorer utilization. Local inventory: Another approach is to have all inventory available at the store at all times. This allows for the centralization of cooking capacity. The main risk is obsolete inventory and the need for extra space. Rapid replenishment: Another approach is to set up rapid replenishment and supply the stores what they need and when they need it. This allows for centralization of cooking capacity, low levels of inventory, but increases the cost of replenishment and receiving. 2.

SEVEN-ELEVEN'S SUPPLY CHAIN STRATEGY IN JAPAN CAN BE DESCRIBED AS ATTEMPTING TO MICRO-MATCH SUPPLY AND DEMAND USING RAPID REPLENISHMENT. WHAT ARE SOME RISKS ASSOCIATED WITH THIS CHOICE?

The main risk for Seven-Eleven is the potentially high cost of transportation and receiving at stores. Micro-matching supply and demand using rapid replenishment assumes that each store will repeat the same demand pattern on a daily basis. The tour bus phenomenon, where a group of unanticipated customers comes to the store and buys all of a type of product will cause difficulty for regular customers. During such an event, the store will likely stock out and customers may visit the next Seven-Eleven site down the block to make their purchases. Some of this demand may permanently shift, causing a local ripple; the replenishment may be excessive at one site and insufficient at an adjacent site for the next cycle. Another possible issue would result from delays in transportation; although deliveries are scheduled for off-peak hours, a disruption in traffic flow will result in low service levels for the next wave of demand.

3.

WHAT HAS SEVEN-ELEVEN DONE IN ITS CHOICE OF FACILITY LOCATION, INVENTORY MANAGEMENT, TRANSPORTATION, AND INFORMATION INFRASTRUCTURE TO DEVELOP CAPABILITIES THAT SUPPORT ITS SUPPLY CHAIN STRATEGY IN JAPAN?

[Type text] All choices made by Seven-Eleven are structured to lower its transportation and receiving costs. For example, its area dominance strategy of opening at least 50-60 stores in an area helps with marketing but also lowers the cost of replenishment. All manufacturing facilities are centralized to get the maximum benefit of capacity aggregation and also lower the inbound transportation cost from the manufacturer to the distribution center (DC). Seven-Eleven also requires all suppliers to deliver to the DC where products are sorted by temperature. This reduces the outbound transportation cost because of aggregation of deliveries across multiple suppliers. It also lowers the receiving cost. The information infrastructure is set up to allow store managers to place orders based on analysis of consumption data. The information infrastructure also facilitates the sorting of an order at the DC and receiving of the order at the store. The key point to emphasize here is that most decisions by Seven-Eleven are structured to aggregate transportation and receiving to make both cheaper. 4.

SEVEN-ELEVEN DOES NOT ALLOW DIRECT STORE DELIVERY IN JAPAN, WITH ALL PRODUCTS FLOWING THROUGH ITS DISTRIBUTION CENTER. WHAT BENEFIT DOES SEVEN-ELEVEN DERIVE FROM THIS POLICY? WHEN IS DIRECT STORE DELIVERY MORE APPROPRIATE?

Direct store delivery (DSD) would lower the utilization of the outbound trucks from the Seven-Eleven DC. It would also increase the receiving costs at the stores because of the increased deliveries. Thus, Seven-Eleven forces all suppliers to come in through the DC. DSD is most appropriate when stores are large and nearly-full truck load quantities are coming from a supplier to a store. This was the case, for example, in large U.S. Home Depot stores. For smaller stores it is almost always beneficial to have an intermediate aggregation point to lower the cost of freight. In fact, Home Depot itself is setting up these intermediate facilities for its new stores that are often smaller. 5.

WHAT DO YOU THINK ABOUT THE 7DREAM CONCEPT FOR SEVEN-ELEVEN JAPAN? FROM A SUPPLY CHAIN PERSPECTIVE IS IT LIKELY TO BE MORE SUCCESSFUL IN JAPAN OR THE UNITED STATES? WHY?

7dream makes sense given that Japanese customers are happy to receive their shipments at the local convenience store. From a logistics perspective, online deliveries can piggy back on Seven-Eleven’s existing distribution network in Japan. Deliveries from the online supplier can be brought to the DC where they are sorted along with other deliveries destined for a store. This should increase the utilization of outbound transportation allowing Seven-Eleven to offer a lower cost alternative to having a package carrier deliver the product at home. The primary negatives are that 7dream will use up storage space and require the store to be able to retrieve specific packages for customers. One can argue that the concept may be more successful in Japan given the existing distribution network of Seven-Eleven and the frequency of visits by customers. Online delivery is able to link with the existing network. The high visit frequency ensures that packages are not occupying valuable store shelf space for a long time. Also, the frequent visits ensure that the marginal cost to the customer of picking up at a Japanese Seven-Eleven is small. This is less likely to be the case in the United States. 6.

SEVEN-ELEVEN IS ATTEMPTING TO DUPLICATE THEIR SUCCESSFUL JAPANESE SUPPLY CHAIN STRUCTURE IN THE UNITED STATES WITH THE INTRODUCTION OF

[Type text] CDCS. WHAT ARE THE PROS AND CONS OF THIS APPROACH? KEEP IN MIND THAT STORES ARE ALSO REPLENISHED BY WHOLESALERS AND DSD BY MANUFACTURERS.

The difficulty of duplicating the Japan supply chain structure in the United States follows primarily from the much lower density of U.S. Seven-Eleven stores. This is compounded by the fact that Seven-Eleven stores are getting both direct store deliveries as well as wholesaler deliveries to its stores. Setting up its own DCs does not allow Seven-Eleven to get the same level of transportation aggregation as it gets in Japan. Its own distribution system would help more if all wholesaler deliveries and direct store deliveries were stopped and routed through the DC. Even then, having its own distribution system would add much less value than in Japan given the lower density of stores and larger distance between stores. 7.

THE UNITED STATES HAS FOOD SERVICE DISTRIBUTORS LIKE MCLANE THAT ALSO REPLENISH CONVENIENCE STORES. WHAT ARE THE PROS AND CONS TO HAVING A DISTRIBUTOR REPLENISH CONVENIENCE STORES VERSUS A COMPANY LIKE SEVEN-ELEVEN MANAGING ITS OWN DISTRIBUTION FUNCTION?

One can contend that a distributor brings much more value to the table in the United States relative to Japan. Given the lower density of stores, a distributor is able to aggregate deliveries across many competing stores. This allows a distributor to reach levels of aggregation that cannot be achieved by a single chain such as Seven-Eleven. The big disadvantage to having all deliveries done through a distributor is that Seven-Eleven is unable to exploit having a large number of stores. In fact, it may be argued that going through the distributor has Seven-Eleven subsidize deliveries to competing smaller chains that may also be using the same distributor.

CHAPTER FOUR Discussion Questions 1. What differences in the retail environment may justify the fact that the fast-moving consumer goods supply chain in India has far more distributors than in the United States?

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India is a land of shopkeepers selling to over a billion consumers. India is becomingly increasingly Westernized, but it will be quite a while (if not forever) before shopkeepers are supplanted by large retailers. The sheer volume of small store owners requires a large number of distributors to service them. The younger generation in India, particularly the IT rich areas of Bangalore and Chennai, have far higher disposable income than the older generation and the rest of the country. These young workers have very different retail habits and are causing changes in India’s shopping and supply chain needs. Poor infrastructure, although not entirely a retail concern, is another reason why India may need far more distributors than in the U.S. 2. A specialty chemical company is considering expanding its operations into Brazil, where five companies dominate the consumption of specialty chemicals. What sort of distribution network should this company utilize? If the expansion into Brazil is merely a sales operation, then distributor storage with last mile delivery is the best network design. If the expanded operations include manufacturing capabilities, then manufacturer storage with direct shipping is a strong possibility. Given the nature of the product, package carrier delivery is not an option and retail storage with customer pickup is out of the question since this is a B2B scenario. In-transit merge would be an option only if the manufacturer established a network of plants in Brazil, perhaps focused factories relatively close to each customer. The chemical company has only five customers to serve; it would not require too large an investment in logistical infrastructure to effectively serve all five without intervention by a distributor. Their short supply chain would be easier to coordinate due to the stable demands and information sharing that is possible in a B2B scenario. 3. A distributor has heard that one of the major manufacturers from which it buys is considering going direct to the consumer. What can the distributor do about this? What advantages can it offer the manufacturer that the manufacturer is unlikely to be able to reproduce? The two supply network designs that the distributor can propose to counter the manufacturer’s proposal are the distributor storage with package carrier delivery and the distributor storage with last mile delivery. Both of these counter-proposals offer higher order visibility for the customer while having simpler information infrastructure than with manufacturer storage. The response time for both is excellent, and the customer experience is also superior to the direct model. If the manufacturer is trying to provide excellent customer service, the increased costs in transportation and potentially higher levels of inventory may be acceptable tradeoffs. 4. What types of distribution networks are typically best suited for commodity items?

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Commodity items are available from many sources and customers expect them to be delivered quickly; if a supply chain can’t be responsive, the customers will move on to the next source. A distribution network designed for retail storage with customer pickup achieves quick response for high demand, low variety products. Other commodity products can be effectively distributed using distributor storage with last-mile delivery, which is also suited for high demand, quick response products. 5. What type of networks are best suited to highly differentiated products? The networks that are best suited to highly differentiated products are the manufacturer storage with direct shipping and the manufacturer storage with intransit merge. Both approaches have the ability to aggregate inventories and postpone product customization, which would help support a wider variety of products. 6. In the future, do you see the value added by distributors decreasing, increasing, or staying about the same? It is doubtful that value added by distributors will decrease over time; the nature of competition in all areas would suggest that distributors that add less value would be winnowed out. It is more likely that distributors will be asked to do more or may volunteer to do so as a means of differentiating themselves from the competition. 7. Why has e-business been more successful in the PC industry compared to the grocery industry? In the future, how valuable is e-business likely to be in the PC industry? The PC industry is selling a highly customized product that is purchased on a perhousehold basis, less routinely than the commodity products that make up groceries. A company like Dell can leverage the Internet as a marketing and distribution tool to advertise new capabilities and options before bricks and mortar retailers can. Dell also removes whatever intimidation (or frustration) factor might be experienced by conversing with in-store sales representatives. Computers have a very high value to shipping cost ratio, so the increased shipping costs when compared to a traditional store are negligible. Groceries have a much lower ratio; although in-store shoppers are incurring costs to pick up their groceries, those costs are hidden in comparison to the delivery charge on an itemized bill from Peapod. E-business will continue to be a valuable tool in the PC industry; none of the advantages currently being enjoyed by Dell and Gateway are likely to change significantly. 8. Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle? Why?

[Type text] E-business is more likely to be more beneficial in the early part of a product’s life cycle. E-business strengths include flexible pricing, promotions, and product portfolios and greater speed in disseminating product information. Later in the life cycle, a product is likely to be a commodity, which doesn’t play to the strengths of this channel. 9. Consider the sale of home improvement products at Home Depot or a chain of hardware stores such as True Value. Who can extract the greatest benefit from going online? Why? Both entities and other hardware companies like Ace are already on-line. An article titled “Home Depot’s Self-Improvement – Company Business and Marketing” by Eric Young in The Industry Standard, September 11, 2000, indicates that Home Depot is the last major player to go on-line, but brings the deepest pockets. Those of us that have stood in line with the contractors realize that many of Home Depot’s items are ill-suited to a web enterprise and the clientele is equally ill-suited. Contractor sales are such a significant portion of Home Depot’s sales in comparison with the mix at True-Value, that it is likely that True-Value will ultimately benefit more from an e-commerce division. The article goes on to say, “Each chain is employing a slightly different e-commerce strategy. Whereas Home Depot wants its site to replicate its merchandise mix, True Value limits the number of items it offers online. For example, at True Value, Net shoppers won't find products most people need in a hurry, such as toilet-tank fix-it kits. "You're not going to wait three days to have it shipped so you can stop the water from dripping into your neighbor's apartment," says Neil Hastie, CIO at TrueValue.com. Ace Hardware, meanwhile, thinks bigger is better. Its site offers almost everything in its stores, plus about 15,000 additional products. Ace's supplementary online offerings are a windfall from its investment in OurHouse.com, a Web-based home improvement site that handles Ace's online sales. The two companies split online revenues. Ace joined forces with OurHouse to get a leg up in e-commerce. "We didn't want to be left in the starting gate," says Ken Nichols, a retail operations vice president for Ace. Waiting in the wings is Lowe's, the nation's second-largest home improvement chain. Like Home Depot, Lowe's wants to expand its online presence but is approaching e-commerce slowly. Beginning in October, the retailer will offer a wide selection in a limited number of categories, such as hand tools and appliances. Lowe's will deliver Net orders directly to buyers or to the store closest to the customer, again like Home Depot. Meanwhile, Internet-only retailers are scrambling to win over customers, vowing to compete against offline chains in price and selection. CornerHardware, for example, says it currently has 125,000 products available -- three times the number available at an average Home Depot store. The pure Internet players acknowledge that they don't have the brand recognition of Home Depot. But they hope to build their brands before Home Depot and the other brick-and-mortar stores establish a strong online presence. Still, it's not clear that

[Type text] any are benefiting from first-mover advantage. Already two Net pure-plays -Hardware.com and HomeWarehouse.com -- have gone under.” 10. Amazon.com sells books, music, electronics, software, toys, and home improvement products online. In which product category does e-business offer the greatest advantage compared to a retail store chain? In which product category does e-business offer the smallest advantage (or a potential cost disadvantage) compared to a retail store chain? Why? Amazon’s greatest e-business advantage comes from book sales; they are able to list millions of book titles that a physical store cannot possibly carry on their shelves. Cost advantages for Amazon are few and far between; the item price to shipping cost ratio for books, music, and software is not as high as most consumers would prefer. Amazon certainly has no cost advantage with music and software. Both are readily sold over the Internet; it would behoove Amazon to partner with another Seattle-area company to make this the norm. Electronics, hardware, and even toys are products that most consumers would like to experience before making a selection. Any cost advantage Amazon might have in these sectors may be overshadowed by an inability to hold the item on-line. 11. Why should an e-business such as Amazon.com build more warehouses as its sales volume grows? Amazon initially tried to run their entire book business with no warehousing facilities, instead relying on other distributors to carry their entire inventory. Next, Amazon ran their business out of a single warehouse in Seattle and discovered it wasn’t feasible; the trade-off of responsiveness and cost was causing excessive delays in getting products to customers. Now Amazon uses a hybrid of these two systems, carrying items that it knows will sell in its own warehouses and letting others carry items that have greater demand uncertainty. As Amazon’s business grows, it should continue to establish warehouses to spread its facilities closer to pockets of new customers, thus achieving better levels of responsiveness while still maintaining its cost advantage.

CHAPTER 5 Discussion Questions 1. How do the location and size of warehouses affect the performance of a firm such as Amazon.com? What factors should Amazon.com take into account when making this decision? The location and size of Amazon’s warehouses have a direct bearing on how responsive and efficient they can be. At one time Amazon ran their on-line bookstore out of one warehouse in Seattle; this warehouse was small by today’s standards and was unable to keep up with peak demand. Amazon has since added

[Type text] other geographically distributed warehouses that hold the items with steadier demand. The dispersion of warehouses allows Amazon to ship from closer to the customers and the stocking of items with more even demand allows for a higher service level at a reasonable cost. Amazon should consider what regions are underserved by the current network of warehouses and where it is most economical to locate the next warehouse, effectively balancing their efficiency and responsiveness with their strategy. 2. How do import duties and exchange rates affect the location decision in a supply chain? Tariffs refer to any duties that must be paid when products are moved across international, state, or city boundaries. If a tariff is excessive, it provides a strong disincentive to do business across borders with entities in that area. The classic workaround to a high tariff is adding a location inside the area. Some regions have developed trade agreements that limit or eliminate the tariff on goods. Exchange rates specify how much one currency is worth in terms of another. As one currency gains against another, it may be beneficial to add shift production to the area using the devalued currency. This makes the goods more affordable for the population. Companies with flexible production capabilities can shift some production from area to area depending on the buying power of local markets. 3. What are different roles played by production facilities within a global network? The different strategic roles for facilities in a global network are as follows: • Offshore facility: low-cost facility for export production. This is strictly a low-cost producer for an export market • Source facility: low-cost facility for global production. This facility is also viewed as a low-cost provider, but provides output for the entire global network. • Server facility: regional production facility This facility supplies the market in the country where it is located • Contributor facility: regional production facility with development skills. This facility serves the market where it is located but is also responsible for customization that increases salability in that country. • Outpost facility: regional production facility built to gain local skills. This facility plays the role of a server facility but more importantly, it obtains access to knowledge or skills that exist in that region. • Lead facility: facility that leads in development and process technologies. This facility creates new processes, technologies and products for the entire network. 4. Amazon.com has built new warehouses as it has grown. How does this change affect various cost and response times in the Amazon.com supply chain?

[Type text] Logistics and facility costs incurred within a supply chain change as the number of facilities, their location, and capacity allocation is changed. As Amazon has added warehouses, their logistics, inventory and facility costs have changed. An increased number of warehouses increases that fixed cost but can be exploited to reduce transportation costs. These potentially fall if the warehouses are spread throughout a distribution area, which increases responsiveness at a similar cost or maintains responsiveness at a reduced cost. Inventory costs also change with an increased number of warehouses; Amazon is holding more total inventory and can take advantage of pooling to reduce quantities of some items. 5. McMaster-Carr sells maintenance, repair, and operations equipment from five warehouses in the United States. WW Grainger sells products from more than 350 retail locations, supported by several warehouses. In both cases, customers place orders using the Web or on the phone. Discuss the pros and cons of the two strategies. WW Grainger has the more responsive network; a customer with a critical repair need can drive to a local retail location to pick up the necessary part. McMaster Carr’s network is less responsive; critical supplies would be scheduled for overnight delivery in all likelihood. WW Grainger has the greater facility cost since it has more locations, although the retail facilities provide a presence that doubles as a marketing tool not enjoyed by McMaster Carr. McMaster Carr’s facility expense is much lower and their network model shifts the transportation cost more fully to the customer. A WW Grainger customer travels the last mile to pick up an order, but Grainger must ship from their warehouse to the retail locations. 6. Consider a firm such as Dell, with very few production facilities worldwide. List the pros and cons of this approach and why it may or may not be suitable for the computer industry. The advantage for Dell’s network design is lower facility costs; they can locate in just enough countries to avoid tariffs and mitigate some of their exchange rate and demand risk. The disadvantage for Dell is the lack of responsiveness this adds to their system. A customer has no expectation of zero flow time, so they know as they enter the transaction that they must wait for their PC. Shipping from one of the production facilities adds to the delay, which is highly visible on Dell’s or the package carrier’s web site. The shipping costs might also be a concern for some customers, but the value to shipping cost ratio is so high that these costs seem like small potatoes in comparison to the total invoice. 7. Consider a firm such as Ford, with more than 150 facilities worldwide. List the pros and cons of having many facilities and why it may or may not be suitable for the automobile industry. Automakers often use a multiplant strategy to create server facilities. These server facilities provide product for the market where they are located, thereby taking

[Type text] advantage of tax incentives, local content requirements, tariff barriers, and high logistics costs. This can be a good strategy if market demand exists for your product; when demand drops, the producer is left with expensive excess capacity. If the facilities are flexible, production of popular models can continue to prepare product for export. If facilities are inflexible or all sales are flat, then the producer must bear the cost or shed assets.

CHAPTER SEVEN Discussion Questions 1. What role does forecasting play in the supply chain of a build-to-order manufacturer such as Dell? Although Dell builds to order, they obtain PC components in anticipation of customer orders and therefore they rely on forecasting. This forecast is used to predict future demand, which determines the quantity of each component needed to assemble a PC and the plant capacity required to perform the assembly.

[Type text] 2. How could Dell use collaborative forecasting with its suppliers to improve its supply chain? Collaborative forecasting requires all supply chain partners to share information regarding parameters that might affect demand, such as the timing and magnitude of promotions. Dell could share with their components suppliers all of the promotions, e.g., holiday, back-to-school, etc., they have planned. These suppliers could, in turn, notify their suppliers of discrete components that a spike in demand is anticipated. These demand forecasts for end items determine the demand for components and coupled with knowledge of fabrication times, allows all members of the supply chain to provide the right quantity at the right time to their customers. 3. What role does forecasting play in the supply chain of a mail order firm such as LL Bean? LL Bean has historically operated almost exclusively in a make-to-stock mode and with very few exceptions, stocked products that did not go out of style as rapidly as many other clothing and accessory lines. A pre-worldwide web existence would have relied on communication with manufacturers about what products might be featured on the front of their catalog. The lead times involved in printing and distributing the catalog and producing the product line were such that elaborate planning and forecasting tools were not required. A quick visit to the web site demonstrates that this is changing; the featured products on the web site can be changed daily or programmed to rotate each time the web page is refreshed. LL Bean and their supply chain, including the logistics component, are well aware of the demand forecast and can all receive sales data as orders are placed. LL Bean probably has an extranet to communicate sales data with suppliers and allows customers to create accounts to manage purchases, wish lists, and track orders.

4. What systematic and random components would you expect in demand for chocolates? Systematic components are level, the current deseasonalized demand; trend, the rate of growth or decline in demand for the next period; and seasonality, the predictable seasonal fluctuations in demand. The demand for chocolates is probably highly seasonal, one would expect demand to spike for certain holidays such as Valentine’s Day, Halloween, and Christmas. 5. Why should a manager be suspicious if a forecaster claims to forecast historical demand without any forecast error? The primary difficulty with such a claim is that forecasts are always wrong, hence, an estimate of error should be provided with the forecast. Given a set of data, it is possible to create a forecasting model that is 100% accurate, but such a model

[Type text] would contain ridiculous cubic, quartic, and possibly higher-order terms. The model would work only on that data. 6. Give examples of products that display seasonality of demand. Products that display seasonality include, heating oil, electricity, natural gas, wrapping paper, school supplies, sporting goods (summer, winter, etc.), facial tissues, beverages (coffee, beer, iced tea, etc.), ice cream, pizza delivery, and tax preparation services. All products display some form of seasonality if you look at them in a global perspective. 7. What is the problem if a manager uses last year’s sales data instead of last year’s demand to forecast demand for the coming year? Last year’s sales data is fine as long as there were no stock outs. If an item is not on the shelf or is explicitly indicated as being sold out, the manager may be blissfully unaware of customer demand that existed but was not expressed. Also, if there were special promotions last year that are not planned for the following year, the data must be adjusted to accommodate this factor. 8. How do static and adaptive forecasting methods differ? Static methods assume that the estimates of level, trend, and seasonality within the systematic component do not vary as new demand is observed. Once these parameters are estimated, there is no need to adjust them and they can be used for all future forecasts. In adaptive forecasting, the estimates of level, trend, and seasonality are updated after each demand observation, that is, as data are collected, they are incorporated into the forecasting process. Adaptive methods allow a forecaster to react (or overreact) to recent developments. Should a disruptive technology affect demand, the adaptive forecast will respond immediately, albeit dragging several historical data points along for the ride. The static approach would not take this new data into account and presumably the forecasts would suffer. We would like to think that a forecaster using an invalid static method would recognize its futility in light of a paradigm shift, but painful personal experience suggests otherwise.

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CHAPTER EIGHT Discussion Questions 1. What are some industries in which aggregate planning would be particularly important? Aggregate planning is useful in many types of manufacturing and services. Manufacturers include furniture, all durable goods, consumer electronics, textiles, motor vehicles, and aircraft, Service industries might be restaurants and other hospitality providers like hotels and motels. 2. What are the characteristics of these industries that make them good candidates for aggregate planning?

[Type text] Aggregate planning is most useful in industries characterized by relatively long lead times and finite amounts of capacity. The end products or services provided in these industries are composed of inputs that are often provided by other businesses that must perform some fabrication. 3. What are the main differences between the aggregate planning strategies? The three pure aggregate planning strategies are the chase strategy, time flexibility from workforce or capacity strategy, and the level strategy. The primary difference among the three strategies is the lever, that is, the parameter that is manipulated to achieve equality of supply and demand over the aggregate planning period. The first chase strategy uses capacity, in the form of machine or personnel capacity, as the lever. By chasing demand on a period-by-period basis, the level of inventory is very low throughout the supply change and the work force is in a constant state of flux, which can increase management costs. The second chase strategy is time flexibility from workforce or capacity, using utilization as the level. This strategy, like the chase plan before it, results in low levels of inventory throughout the supply chain. It avoids the layoff problem of its predecessor but still requires a flexible workforce and may also result in low machine utilization. The third strategy is to maintain a constant output rate throughout the aggregate planning period, which stands in stark contract to the first two strategies. If demand is highly variable, this plan will result in periods marked by backorders or stock outs and other periods when the supply chain carries a high level of inventory. There is no true synchronization of demand with supply in this strategy, although over the entire aggregate planning period the planner will achieve a match. 4. What types of industries or situations are best suited to the chase strategy? The flexibility strategy? The level strategy? The chase strategy should be used when the cost of carrying inventory is very high and the costs to change levels of machine and labor capacity are low. Industries with these characteristics include aircraft and other high dollar products and producers of highly perishable products. The flexibility strategy should be used when inventory carrying costs are relatively high, machine capacity is relatively inexpensive, and the work force cannot be adjusted on short notice. This strategy works in the automotive sector, durable goods, and consumer electronics. The level strategy works well when inventory carrying and backlog costs are relatively low. The consumer goods industry has a cost structure that lends itself well to the level strategy.

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5. What are the major cost categories needed as inputs for aggregate planning? The major cost categories needed as inputs for aggregate planning are production costs and inventory costs. Production costs include labor costs of regular and overtime, costs of subcontracting production, costs of changing capacity by hiring or laying off workforce and increasing or reducing machine capacity. Inventory costs include the cost of having too much (storage costs per period) and too little (backorder or stockout costs). 6. How does the availability of subcontracting affect the aggregate planning problem? Subcontracting provides another variable that the aggregate planner may manipulate to match supply with demand. A fortunate planner may be able to plan production using a chase strategy from a macro view with production segmented such that internal operations are run using a level strategy with a subcontractor absorbing the variability in demand. 7. If a company currently employs the chase strategy and the cost of training increases dramatically, how might this change the company’s aggregate planning strategy? As training costs increase, it becomes more expensive to vary the level of workforce, perhaps to the point of making a chase strategy cost-prohibitive. If a chase strategy is taken off the table, then the aggregate planner should familiarize himself with a level strategy, time flexibility strategy, or some happy combination of the two. 8. How can aggregate planning be used in an environment of high demand uncertainty? High demand uncertainty creates difficulties for the forecasting input to aggregate planning. Based on experience any aggregate planner knows that an aggregate plan developed for an 18 month planning period will not be 100% accurate and that the last few months in the plan may have gross errors in the demand forecast. As those months roll towards the present, the planner must update the plan. In an environment with high demand uncertainty, the planner must update plans regularly, communicate more frequently with suppliers and all others providing inputs to the plan, and recognize that plans several months into the future are little more than toner on paper.

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CHAPTER NINE Discussion Questions 1. What are some obstacles to creating a flexible workforce? What are the benefits? A flexible workforce possesses the ability to learn new tasks or switch tasks without significantly disrupting production, to expand (or contract) capacity via over or idle time, hiring and firing of seasonal workers, or subcontracting, and to work different schedules. A number of factors influence a producer’s ability to realize a flexible workforce: restrictive labor agreements and work rules, a tight labor market, the education level, culture, or organizational culture of the work force, the complexity of the tasks, the proprietary nature of the production process, and restrictions imposed by other members of the supply chain. A flexible workforce opens the supply chain up to a wider range of alternatives when trying to match supply with demand. If subcontracting or temporary workers can be deployed, then a firm can function at a steady base rate and use the subs to buffer periods of high demand.

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2. Discuss why subcontractors can often offer products and services to a company more cheaply than if the company produced them themselves? The subcontractor can offer services more cheaply for a number of reasons. In many cases, the subcontractor is a specialist in the area and is more flexible, hence cheaper. If a subcontractor is performing similar work for a number of clients, they can take advantage of the zero-sum nature of business competition. By aggregating orders from a number of clients, the subcontractor is able to satisfy peaks in demand from some of their clients because other standard clients will be experiencing valleys in demand. If subcontracting occurs because a firm is at capacity, the subcontractor (that is not overcapacity) can handle the production more cheaply simply because is expensive to operate a system at excess capacity. 3. In what industries would you tend to see dual facility types (some facilities focusing on only one type of product and others able to produce a wide variety)? In what industries would this be relatively rare? Why? Any industry where a lucrative product requires both unique labor skills and production facilities is a prime candidate for a dual facility operation. The healthcare industry is one example of a dual facility type; many large hospital chains have focused operations for trauma, heart, ob/gyn, and other specialties. Other industries with dual facility types include the legal profession, hospitality, construction, and many others. Industries where dual facility types are rare include tobacco products, alcoholic beverages, sawmills, and chemicals. The dividing point among these industries is the continuous flow nature of the nondual producers. If processing requirements dictate that the product stream must visit the same steps of a process in the same sequence, then the higher volume and low process flexibility combination results in dedicated production facilities that simply can’t have a broad product range. 4. Discuss how you would set up a collaboration mechanism for the enterprises in a supply chain. Collaboration mechanisms in a supply chain should begin with the initial partnering process as the supply chain is being established. All parties in the chain must be aligned and dedicated to the success of the entire chain. Trust and open communication are of primary importance; there should be a myriad of formal and informal communication channels open among all parties. If constancy of purpose is ever in question, each firm might devote some resources towards equitable “chain incentives” such that behaviors that benefit the entire supply chain are recognized and rewarded. The incentives, communication, and trust should be established at all levels of every chain member. Company leadership should provide for highly visible evidence of these activities on their level and among cross-business supply chain teams.

[Type text] 5. What are some product lines that use common parts across many products? What are the advantages of doing this? There are many producers, both manufacturing and service, that use common parts across many products. Some of these product lines include the food industry, construction, furniture, soap, plastics, perfumes, computer and office equipment, automotive, motorcycles, bicycles, airframe, and most back-office operations in the service industries. The use of common parts (and services) lowers costs and enables producers to meet variability in demand. Part commonality absorbs variability in disaggregated demand from period to period since the aggregated demand is inherently less variable. The common parts may be produced or acquired at a more constant rate and stocked at a lower inventory level while maintaining a higher customer service level. 6. Discuss how a company can get marketing and operations to work together with the common goal of coordinating supply and demand to maximize profitability. Marketing and operations often find themselves at cross purposes; as the authors note, marketing often has incentives based on revenue, whereas operations has incentives based on cost. The cachet of new products, service guarantees, copromotions, and other marketing vehicles is quite often lost on members of the organization that must fulfill promises made by their friends in marketing. As with all collaborations, open communication is a must on a near-constant basis. Regular planning meetings must include full cross-functional participation and critical information must be shared as sales and operations occur. Having common performance measures is another way to get these two groups to work together for the common good of the company. Holding both groups responsible for Customer service, accuracy, on time delivery and quality and rewarding them jointly for achieving these goals will greatly increase their willingness to work together. 7. How can a firm use pricing to change demand patterns? A change in price, one of marketing’s Four P’s, will change demand assuming that there is some elasticity in demand. A firm can shift demand from a popular product or time to a less-popular product or what is traditionally an off-peak demand period by lowering prices. A firm can collect data on the impact of price changes on demand and use the correlation as an input into supply chain aggregate planning. In the absence of such coordination, it is virtually guaranteed that supply chain partners will face demand levels they had not anticipated and will be unable to satisfy. The increase in demand results from a combination of a) market growth, b) stealing share, and c) forward buying. The first two increase demand for the product and the third robs sales from the future. 8. Why would a firm want to offer pricing promotions in its peak-demand periods?

[Type text] If we assume that a pricing promotion serves to increase demand, then there are a couple of reasons a firm may offer pricing promotions during peak demand periods. Even at peak demand, the firm may have excess capacity and could meet this demand. The nature of the product and supply chain may be such that a promotion today results in an order that both the supply chain and customer recognize will be filled in the future, perhaps during an anticipated low demand period. If a firm produces a product that is at the end of its life cycle, there may be incentive to exhaust accumulated materials and labor skills that are dedicated to its production. Finally, a firm may be practicing a form of predatory pricing if it senses that a competitor, teetering on the brink of extinction, is starved for sales. 9. Why would a firm want to offer pricing promotions during its low-demand periods? Pricing promotions during low-demand periods should serve to increase demand and sales. The increase in demand results from a combination of the following three factors: Market growth – sales may be realized from customers that were not considering this product at the higher price. Stealing share – sales may be realized from customers that were considering a competitors product. Forward buying – sales may be stolen from the future by customers that feel that price may rise in the future.

CHAPTER TEN Discussion Questions 1. Consider a supermarket deciding on the size of its replenishment order from Proctor & Gamble. What costs should it take into account when making this decision? The main cost categories for the supermarket’s inventory policy are material costs, ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for the goods themselves. Ordering costs, also called procurement costs, are incurred by requesting the goods from the supplier and are fixed in the sense that they do not vary with the size of the order. Examples of such fixed costs are the labor required to place the order, handle the resultant paperwork and the transportation fee to ship the order. The holding cost is the cost to carry one unit in inventory for a specified period of time, usually one year. This cost is variable and includes the cost of capital and all of the costs associated with physically storing inventory – shrinkage, spoilage or obsolescence, insurance, the cost of capital, the cost of the warehouse space, etc. 2. Discuss how various costs for the supermarket change as it decreases the lot size ordered from Proctor & Gamble.

[Type text] As the lot size ordered from the supplier decreases, the holding cost (variable with respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same, but the annual ordering cost will rise since the total number of orders each year must increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but will stay the same on an annual basis since total annual demand hasn’t changed. The exception to this occurs if the supplier has a price break for an order size above a certain threshold; in this case the cost of the goods might increase if the reduced order size is not sufficient to trigger a substantial per unit discount. 3. As demand at the supermarket chain grows, how would you expect the cycle inventory measured in days of inventory to change? Explain. As the demand at the supermarket chain grows, we would expect the cycle inventory as measured in days of inventory to also increase, although the increase in cycle inventory is only 40% of the increase in demand. This is because the relationship between the optimal lot size Q* and the annual demand D is 2DS . Since D is under the radical, its doubling to 2D does not translate to a Q* = hC jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a 1.4Q* order. 4. The manager at the supermarket wants to decrease the lot size without increasing the costs he incurs. What actions can he take to achieve his objective? One action would be to simply decrease the lot size and let the robust nature of the EOQ model work its magic. The total cost curve on either side of the optimal order quantity, the Q*, is relatively flat, so movements in either direction have little impact on total annual procurement and carrying costs. If greater cuts in lot size are desired, the manager can aggregate multiple products in a single order. Recall that the EOQ model is based on a one-product-at-a-time assumption; if multiple products are aggregated, then the fixed procurement cost is spread over all of the items and dramatic lot size reductions are possible. If the same products are being ordered by another supermarket in the same chain (or at least by stores that are willing to cooperate) the combined orders can be delivered by a single truck making multiple stops, thereby reducing transportation expense. Other techniques that should be deployed when aggregating across product lines include advanced shipping notices and RFID tags that will make inventory tracking and warehouse management simpler. 5. When are quantity discounts justified in a supply chain? Quantity discounts are justified in a supply chain as long as they are the fruits of a coordinated supply chain and maximize total supply chain profits. For commodity products for which price is set by the market, manufacturers with large fixed costs per lot can use lot size-based quantity discounts to maximize total supply chain profits.

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6. What is the difference between lot size-based and volume-based quantity discounts? Lot size discounts are based on the quantity purchased per lot, not the rate of purchase. Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging retailers to increase the size of each lot. Lot size-based discounts make sense only when the manufacturer incurs a very high fixed cost per order. For commodity products for which price is set by the market, manufacturers with large fixed costs per lot can use lot size-based quantity discounts to maximize total supply chain profits. Volume discounts are based on the rate of purchase or volume purchased per specified time period. Volume-based discounts are compatible with small lots that reduce the cycle inventory. If the manufacturer does not incur a very high fixed cost per order, it is better for the supply chain to have volume-based discounts. For products for which a firm has market power, volume-based discounts can be used to achieve coordination in the supply chain and maximize supply chain profits. 7. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What impact do trade promotions have on the supply chain? How should trade promotions be structured to maximize their impact while minimizing the additional cost they impose on the supply chain? Manufacturers use trade promotions to offer a discounted price and a time period over which the discount is effective. The goal of manufacturers such as Kraft and Sara Lee is to influence retailers to act in a way that helps the manufacturer achieve its objectives. These objectives may include increased sales, a shifting of inventory from manufacturer to retailer, and defense against the competition. Trade promotions may cause a retailer to pass through some or all of the promotion to customers to spur sales, which increases sales for the entire supply chain. What happens more frequently in practice is that retailers may choose to pass through very little of the promotion to customers, purchase in greater quantities, and hold this cheaper inventory in greater quantities. This action increases both cycle inventory and flow times within the supply chain. Trade promotions should be structured such that a retailer’s optimal response benefits the entire supply chain, i.e., retailers limit their forward buying and pass along more of the discount to end customers. If the manufacturer has accumulated excessive inventory, then a trade promotion may provide sufficient incentive to the buyer to forward buy, thus drawing inventories down to an appropriate level. The manufacturer may be able to smooth demand by shifting it to a period of anticipated low demand with a trade promotion. Research has shown that trade promotions by the manufacturer are effective for products with high deal elasticity that ensures high pass-through (passing the discount on to the consumer) and high holding costs that ensure low forward buying, paper goods being the poster child for this combination. Trade promotions

[Type text] are also more effective with strong brands relative to weak brands and may make sense as a competitive response. 8. Why is it appropriate to include only the incremental cost when estimating the holding and order cost for a firm? The cycle inventory models discussed in the chapter are robust; thus incremental (variable) costs per lot size are more important than costs that are fixed with respect to lot size. The labor component of procurement or setup costs may be salaried; therefore changes in lot size do not impact this component.

Case note: Delivery strategy at Moon chem. Refer pgno 355 1. What is the annual cost of MoonChem’s strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory? MoonChem’s customer profile appears in Table 10-4 and is reproduced below: Customer Type Small Medium Large

Number of Customers 12 6 2

Consumption (Pounds per Month) 1,000 5,000 12,000

Each truck has a fixed capacity of 40,000 pounds and costs MoonChem $400 per delivery. The Small customers use only 12,000 pounds per year, so a 40,000 truckload represents better than a three year supply! Total policy cost is obtained using a Q=40,000, an S=$400, and an hC = (25%)($1).

[Type text] SD hCQ + Q 2 $400(12, 000) (25%)($1)40, 000 TCSmall = + = $5,120 40, 000 2 $400(60, 000) (25%)($1)40, 000 TCMedium = + = $5, 600 40, 000 2 $400(144, 000) (25%)($1)40, 000 TCLarge = + = $6, 440 40, 000 2 TC =

Factoring in the number of each class of customers: $5,120 ×12 + $5, 600 × 6 + $6, 440 × 2 = $107,920 2. Consider different delivery options and evaluate the cost of each. What delivery option do you recommend for MoonChem? MoonChem has the option of scheduling multiple deliveries on a single truck with a base charge of $350 for the truck and $50 for each delivery the truck makes; truck capacity remains at 40,000 pounds. Three alternatives that students might consider include creating a “supergroup” of all customer deliveries on a single truck, creating three groups consisting of customers within each class, and creating two groups consisting of one large, three medium, and six small customers each. Costs for each of these alternatives are examined in turn. Alternative 1: The Supergroup The supergroup approach has a total annual demand of 792,000 pounds of the base chemical and would incur a shipping cost of $350+20($50)=$1350. The optimal order frequency is: n = *

=

∑

k i =1

Di hCi

2S *

144, 000($1)(25%) + 360, 000($1)(25%) + (288, 000)($1)(25%) 2($1350)

= 8.56 This number of shipments per year requires a truck capable of holding far more than 40,000 pounds; dividing 792,000 pounds by the 40,000 pound truck capacity sets the number of orders per year at 19.8. Each truck will hold 144,000/19.8=7,273 pounds for the small customers; 360,000/19.8=18,182 pounds for the medium customers, and 288,000/19.8=14,545 pounds for the large customers to be divided equally among the number of customers in each size range.

[Type text] Cycle inventory across all customers in each class is half of the order quantity and results in annual holding costs of $909, $2273, and $1818 for small, medium, and large respectively ($5,000 total). The annual ordering cost of this policy is (19.8 orders)($1350/order) = $26,730. Total plan cost is $5,000+$26,730=$31,730. Alternative 2: Separate groups for the Small, Medium, and Large customers nSmall = *

=

∑

k i =1

Di hCi

2S *

144, 000($1)(25%) 2($950)

= 4.35 nMedium = *

=

∑

k i =1

Di hCi

2S *

360, 000($1)(25%) 2($650)

= 8.32 nLarge = *

=

∑

k i =1

Di hCi

2S *

288, 000($1)(25%) 2($450)

= 8.94 The optimal number of shipments for the Medium customers requires a capacity greater than 40,000 per truck, so dividing 360,000 pounds by 40,000 pounds/truck indicates that 9 orders per year is practical. The actual order sizes for each class and the resultant holding and ordering costs are shown in the table: Class Small Medium Large

Order Size 33,082 40,000 32,199

Holding Cost $4,135 $5,000 $4,025

Ordering Cost $4,135 $5,850 $4,025

The total plan cost is $27,170 Alternative 3: Two groups with 6 Small, 3 Medium, and 1 Large customer each Each group has an annual demand of 396,000 and an ordering cost S=$850.

[Type text]

n = *

=

∑

k i =1

Di hCi

2S *

72, 000($1)(25%) + 180, 000($1)(25%) + (144, 000)($1)(25%) 2($850)

= 7.63 This ordering frequency exceeds truck capacity; dividing group demand by 40,000 pounds per truck gives 9.9 orders annually. Plan specifics appear in the table: Class Small Medium Large

Order Size 7,273 18,182 14,545

Holding Cost $909 $2,273 $1,818

Ordering Cost $850(9.9)(2) = $16,830

The total plan cost is $26,830 Alternative 3 is $340 cheaper than Alternative 2 and both are over $4,000 cheaper than Alternative 1.

3. How does your recommendation impact consignment inventory for MoonChem? The consignment inventory drops significantly from its initial levels. The current system, with each customer ordering in lots of 40,000 pounds has a cycle inventory of 20,000 pounds for each of the 20 sites, resulting in a system-wide cycle inventory of 400,000 pounds! Alternative 1 has a cycle inventory of 40,000/2 = 20,000 pounds Alternative 2 has a cycle inventory of (33,082+40,000+32,199)/2=52,641 pounds Alternative 3 has a cycle inventory of (40,000/2)*2 = 40,000 pounds

[Type text]

CHAPTER ELEVEN Discussion Questions 1. What is the role of safety inventory in the supply chain? Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period. As such, it tends to have a negative impact on supply chain cost but a positive impact on supply chain responsiveness. Safety inventory is carried because product demand and lead time are uncertain and a product shortage may result if actual demand during lead time exceeds the forecast amount. 2. Explain how a reduction in lead time can help a supply chain reduce safety inventory without hurting product availability. A reduction in lead time reduces supply chain safety inventory according to equations 11.2 through 11.4. The reorder point is driven by the demand during lead time, the standard deviation of demand during lead time, and the customer service level, the latter two combining to form the safety stock. If lead time falls, the standard deviation of demand during lead time also falls, resulting in less safety stock. Taking an intuitive (and extreme) approach, if lead time approached zero there would be no need for safety (or any) stock since customer orders could be filled instantaneously.

[Type text] 3. What are the pros and cons of the various measures of product availability? The common measures of product availability discussed in this chapter are product fill rate, order fill rate, and cycle service level (CSL). Product fill rate is the fraction of product demand that is satisfied from product in inventory and should be measured over specified amounts of demand rather than time. Fill rate provides an accurate picture of the number of customers that receive their single-product orders. Order fill rate is the fraction of orders that are filled from available inventory and should be measured over a specified number of orders rather than time. In the multiproduct case, poor performance on one item can doom the order fill rate to an extremely low score while the other products would have achieved very high fill rates. Cycle service level is the fraction of replenishment cycles that end with all the customer demand being met. Cycle service levels tend to be lower than the other two metrics; a firm could maintain a cycle service level of 0% but have a 99% product fill rate. 4. Describe the two types of ordering policies and the impact that each of them has on safety inventory. The two types of ordering policies discussed in the text are continuous review and periodic review. Continuous review requires that inventory levels be monitored constantly with an order for a lot size of Q placed when the inventory level drops as low as the reorder point. Since the level of inventory is known continuously, the level of safety inventory can be low; an order will be placed the minute the reorder point is reached. Periodic review requires less vigilance; the inventory level is measured at regular time intervals and an order is placed to raise the inventory level to a specified threshold. Under this system the level of inventory is known once a period and merely estimated until the next count. More safety inventory must be carried under a periodic review system to guard against a surge in demand. 5. What is the impact of supply uncertainty on safety inventory? The required safety inventory increases with an increase in the standard deviation of periodic demand. The standard deviation of periodic demand is a function of the variance in the lead time and the variance in the demand. Anything that causes supply to be more deterministic will minimize the need for safety inventory. 6. Why can a Home Depot with a few large stores provide a higher level of product availability with lower inventories than a hardware store chain such as Tru-Value, with many small stores? Home Depot benefits from substitution and from aggregation. Many of the products Home Depot carries are not aggressively branded in the eyes of the do-it-yourselfer.

[Type text] This class of customers wants to perform a simple home repair or improvement and is less concerned about a specific manufacturer than about getting all the supplies in one trip (although I should note that in my experience there is no such thing as a single trip to Home Depot for any project). Home Depot also benefits from aggregation; the large box store draws customers from a wider area and what one part of the customer base doesn’t need this month, the other part does. The highs and lows tend to cancel, thus stabilizing demand within each season. 7. Why is Amazon.com able to provide a large variety of books and music with less safety inventory than a bookstore chain selling through retail stores? Amazon is able to provide a large variety of books and music with less safety inventory through the power of aggregation. By holding best-selling items in geographically dispersed warehouses, Amazon can hold less inventory and still meet customer demand. Equations 11.12 through 11.16 illustrate the savings possible through aggregation versus a multiple location retail design. Intuitively, many small retail stores would each have their own safety inventory for their customer base and most of this safety inventory would languish on the shelves. If one site experienced a surge in demand, a stockout would result. A large centralized supply would need less safety inventory as the demand variances might cancel each other, e.g., high demand from one region is offset by low demand from another. Only if many regions had unanticipated high demand would the central supply be exhausted. 8. In the 1980s, paint was sold by color and size in paint retail stores. Today paint is mixed at the paint store according to the color desired. Discuss what, if any, impact this change has on safety inventories in the supply chain. The practice of adding pigmentation in the retail store is a classic example of postponement; paint stores can mix any color into a solid white base and produce exactly what the customer wants. This change has greatly reduced the amount of safety inventory required as the paint store must now stock far fewer product lines. The reduction in safety inventory has simultaneously reduced safety inventory storage costs and increased responsiveness. 9. A new technology allows books to be printed in ten minutes. Borders has decided to purchase these machines for each store. They must decide which books to carry in stock and which books to print on demand using this technology. Do you recommend it for best-sellers or for other books? Why? If Borders must carry stock after purchasing this machine, they should carry items with a steady demand, bestsellers and the like. The fringe books that are rarely purchased would best be left to the 10 minute process which is effectively instantaneous production. The books with low demand would be too expensive to stock for sporadic demand; they would need only one of each, but the breadth of the

[Type text] product line would be overwhelming and prohibitively expensive to carry from month to month.

CHAPTER TWELVE Discussion Questions 1. Consider two products with the same cost but different margins. Which product should have a higher level of product availability? Why? The product with the higher margin should be stocked at a higher level of availability than the product with the lower margin. The product with the higher margin will have a higher Cu, which is the cost of understocking. The cost of understocking is the sale price less the cost and may be thought of by the supplier as profit foregone. A higher cost of understocking results in a higher critical fractile, so the optimal cycle service level will be higher, which will yield a higher availability. 2. Consider two products with the same margin carried by a retail store. Any leftover units of one product are worthless. Leftover units of the other product can be sold to outlet stores. Which product should have a higher level of availability? Why? The product with the higher salvage value should be stocked at a higher level of availability than those with the lower salvage value. The product with the higher salvage value will have a lower Co, which is the cost of overstocking. The cost of overstocking is the sale price less the salvage value. A lower cost of overstocking results in a higher critical fractile, so the optimal cycle service level will be higher, which will yield a higher availability.

[Type text] 3. A firm improves its forecast accuracy using better marketing intelligence. What impact will this have on supply chain inventories and profitability? Why? Improved forecast accuracy should result in a closer match between supply and demand, resulting in improved profitability. An improved match will result in lower levels of unplanned carryover inventory and shortages at the end of planning periods. The improved match will lower the expected costs of having too much or too little inventory. 4. How can postponement of product differentiation be used to improve supply chain profitability? Postponement refers to the delay of product differentiation until closer to the sale of the product. Postponement allows producers to leverage two features common to forecasts: forecasts with shorter time horizons tend to be more accurate than those with longer time horizons; and aggregate forecasts tend to be more accurate than forecasts for individual items/models. More accurate forecasts allow for a better match of supply and demand, thereby lowering mismatch costs and increasing profitability as discussed in the previous question. 5. Mattel has historically allowed toy retailers to place two orders for the holiday shopping season. Mattel is considering allowing retailers to place only one order. What impact will this have on retailer orders? What impact will this have on supply chain profits? Mattel needs to abandon this approach to supply chain management. Under the two-order system, retailers could place an order, assess market demand, and place a second order that takes advantage of the short time horizon and improved knowledge about market demand. The single-order system will require a lesseducated guess about demand that will occur further in the future. The single-order system has a much higher risk of a gross mismatch between supply and demand, resulting in excessive stock-out situations (lost sales) and fire sales at the end of the season. Supply chain profits will decline if the ordering system is changed to a single-order system. 6. Discuss how an expensive supplier with short lead times who is used as a backup for a low cost supplier with long lead times can result in higher profits than using only the low-cost supplier. The two suppliers can be deployed so that the customer has the opportunity to place two (or more) orders during each demand cycle. The low-cost supplier with long lead times should receive the first order from the customer. As demand is realized, the customer can refine their demand forecast. If the forecast is overly optimistic, the excess inventory can be disposed for its salvage value. The salvage value should be the same regardless of supplier, but thanks to the lower purchase price, the cost of overstocking is much lower.

[Type text] The second order can be placed at a later time and can be used to match demand as closely as the production situation permits. It may be possible to use the second order to fill only firm customer demand that was not met by the order from the slow, low-cost supplier. Even if this is not the case, the second order gives the customer the ability to match supply and demand while taking advantage of each supplier’s strength.

CHAPTER THIRTEEN Discussion Questions 1. What modes of transportation are best suited for large, low-value shipments? Why? Rail and water transportation modes are best suited for large, low-value shipments. The price structure of the business make rail and water the modes of choice if lowvalue, large, heavy, or high-density items need to be transported. Air, package carriers, and trucks would not have the infrastructure required to accommodate large items; roads and bridges would be damaged and the storage capacity of the carriers is insufficient. 2. Why is it important to account for congestion when pricing the use of transportation infrastructure? Infrastructure often requires government ownership and is not something that can be increased in capacity in the short term. If congestion is not factored in to the price structure for infrastructure, then demand for the resources will exceed capacity and major delays will occur. Pricing may be used to force users to internalize the marginal impact of their choices, thus alleviating some of the demand during peak periods. 3. Wal-Mart designs its networks so that a DC supports several large retail stores. Explain how the company can use such a network to reduce transportation costs while replenishing inventories more frequently.

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A distribution center that supports several large retail stores can reduce supply chain costs in four ways: 1) Inbound shipments to the DC achieve economies of scale because each supplier sends a large shipment; 2) The outbound transportation costs for a DC can be low because it serves retail locations nearby; and very large inbound shipments that match retail demand can be cross-docked at the DC, which saves both 3) storage and 4) material-handling costs. A DC also can replenish retail inventories more frequently; the DC breaks bulk from manufacturers on one side of the warehouse and sends it to retail locations on the outbound side. Since retail demands are aggregated at the DC level, the amount of inventory actually stored at the DC is very low and as Little’s Law indicates, the time between replenishments is low also. 4. Compare the transportation costs for an e-business such as Amazon.com and a retailer such as Home Depot when selling home-improvement materials. The primary difference between these retailers is that Home Depot does not incur any outbound transportation cost for residential customers while Amazon faces such charges. Home Depot has substantial inbound transportation charges but is able to offload the outbound transportation cost to the vast majority of their customers. Amazon must use high cost package carriers for much of its product line although they are able to avoid inbound transportation costs for items that are drop shipped. For items that are held in one of their warehouses, Amazon must pay both inbound and outbound. 5. What transportation challenges does Peapod face? Compare transportation costs at online grocers and supermarket chains. Peapod faces the burden of expensive outbound transportation costs and must account for congestion in the delivery area. Unlike traditional grocers who don’t deliver their products, Peapod must deliver items in their fleet of climate-controlled trucks. These trucks must be scheduled with pricing incentives offered for peak and off-peak delivery times. Customers are keenly aware of the transportation component of their purchases and Peapod can use pricing incentives to spur their customers towards higher order amounts. Both Peapod and traditional grocers must pay the inbound transportation costs of their wares; there would appear to be no great advantage gained by either approach unless one vendor has such substantial market share as to gain price concessions that they other can’t negotiate. 6. Do you expect aggregation of inventory at one location to be more effective when a company such as Dell sells computers or when a company such as Amazon.com sells books? Explain by considering transportation and inventory costs. Inventory aggregation is a good idea when inventory and facility costs form a large fraction of a supply chain’s total costs. Inventory aggregation is useful for products

[Type text] with a large value to weight ratio and for products with high demand uncertainty. Both factors allow aggregation to work to Dell’s advantage, while Amazon reaps less of a reward. Dell benefits from aggregation because personal computers have an extremely high value to weight ratio; the demand for new items is uncertain, and Moore’s Law makes holding excessive inventory an extremely unattractive proposition. Amazon benefits from aggregation when inventory costs are examined, but is hurt by increased transportation costs. Most items that Amazon sells have low value to weight ratios and Amazon must ship them via package carrier, which is expensive. Amazon saves money on storage costs since they choose to stock more popular titles and allow other entities to hold items with more variable demand. 7. Discuss key drivers that may be used to tailor transportation. How does tailoring help? Tailored transportation is the term for use of different transportation networks and modes based on customer and product characteristics. Tailoring transportation allows firms to achieve cost and responsiveness targets that are appropriate for the supply chain. The key drivers are density and distance, customer size, and product demand and value. These drivers can be viewed as guide for ownership of Transportation options based on customer density and distance are summarized in the table and present cost and responsiveness tradeoffs for the supply chain. Short distance Medium distance Long distance High Private fleet with Cross-dock with Cross-dock with density milk runs milk runs milk runs Medium Third-party milk LTL carrier LTL or package density runs carrier Third-party milk LTL or package Package carrier Low density runs or LTL carrier carrier Customer size and location dictate whether a supplier should use a TL or LTL carrier or milk runs. Very large customers can be supplied using a TL carrier, whereas smaller customers can use LTL carriers or milk runs. The authors discuss a customer-partitioning procedure for combining smaller customers’ shipments with larger customers in order to achieve responsiveness and cost targets. Product demand and value determine whether aggregation strategies will benefit the supply chain. The best combinations are shown in the table: Product High Value Low Value Type High Disaggregate cycle inventory but Disaggregate all inventories demand aggregate safety inventory. Use an and use inexpensive mode of inexpensive mode of transportation transportation for for replenishing cycle inventory and a replenishment. fast mode when replenishing safety

[Type text] inventory. Low demand

Aggregate all inventories. If needed, use fast mode of transportation for filling customer orders.

Aggregate only safety inventory. Use inexpensive mode of transportation for replenishing cycle inventory.

CHAPTER SIXTEEN Discussion Questions 1. What processes within each macro process are best suited to being enabled by IT? What processes are least suited? The macro processes in a supply chain are customer relationship management (CRM), internal supply chain management (ISCM), and supplier relationship management (SRM). Taken collectively, these macro processes span the entire supply chain. CRM processes focus on the downstream interactions between the enterprise and its customers. The key processes under CRM are marketing, selling, and order management, and of these three, the creative sub-processes of the marketing and selling processes are least suited to IT enablement. The best suited processes for IT enablement are pricing and profitability calculations, sales force automation, and order configuration and tracking. Within order management, virtually all processes reap the benefits of information technology. ISCM processes focus on internal operations within the enterprise and include strategic planning, demand planning, supply planning, fulfillment, and field service. The use of IT to facilitate ISCM sub-processes is presented in glowing terms in separate chapters in this text. Huge gains in efficiency and responsiveness have been achieved via the application of IT to all aspects of ISCM. SRM processes focus on upstream interaction between the enterprise and its suppliers and includes the sub-processes of design collaboration, sourcing, negotiating, buying, and supply collaboration. The authors indicate in chapter 14 that sourcing-related IT has had the most ups and downs of any supply chain software sector, with the primary problems being loss of flexibility and the requirement of collaboration. Electronic marketplaces once flourished but have

[Type text] since withered. This is not to say that IT does not play a role in SRM processes; in fact, all areas are supported by IT software. 2. What are the key advantages that best-of-breed software companies provide? The competitive arena in CRM, ISCM, and SRM can be parsed into best-of-breed winners, ERP players, and best-of-breed startups. Best of breed companies provide a valuable service to all sectors by defining functionality and providing market leadership. For the CRM macro process, Siebel was the sole remaining best of breed provider as the book went to press, but it has since been acquired by Oracle as predicted by the authors. The ISCM and SRM macro process sectors have had best of breed providers that have long since yielded market leadership to ERP vendors. 3. What are the key advantages that large software companies, such as the ERP players, provide? ERP’s popularity in the 1990s drove the most successful companies to become the largest enterprise software companies. Their size provides a wealth of resources and collective experience that can be brought to bear on a client’s issues. The major advantage that ERP players have relative to best-of-breed providers is the inherent ability to integrate across the three macro processes of CRM, ISCM, and SRM, often through the transaction management foundation. 4. What types of industries would be most likely to choose a best of breed approach to their IT systems? What types would be more likely to choose a single large integrated solution? Established firms that have strong CIO leadership and see the supply chain as encompassing the entirety of the three macro processes would probably be more inclined to select a large integrated solution. Well-respected CIO leadership would be essential in promoting and managing such a project. A firm that is mature in this supply chain is fertile ground for an integrated solution. Firms that have recently merged or integrated vertically may have a more selfcentered perspective on the supply chain and might skew towards a best-of-breed approach. These firms might start their IT enablement with a focus on ISCM and then seek to work either end of the supply chain with an SRM or CRM best-ofbreed implementation. Firms closer to either end of the supply chain; e.g., an extractor of raw materials that sells to a few fabricators or a turnkey service operation that spends most of their efforts dealing with customers might choose a system tailored to their end of the supply chain. 5. Discuss why the high tech industry has been the leader in adopting supply chain IT systems. The high tech industry has been the leader in adopting supply chain IT systems because of the mindset of the decision-makers in this sector. The high tech workforce tends to be early adopters of new technologies; they understand there is a risk associated with adoption but are willing to assume the risk and proceed. High

[Type text] tech corporate cultures lend themselves to such ventures; there is little resistance to change because survival in this sector depends on it. 6. Are manufacturers better candidates for IT enablement than service organizations? Why or why not? From a supply chain perspective, manufacturers overall are better candidates for IT enablement than service organizations, although both can derive considerable benefit. The tangible, standard (or modular) nature of the output affords manufacturing this advantage. Next on the spectrum are back office service processes which can be completely automated using information technology. These back office processes can be a component of either a manufacturing or service organization or could be stand-alone organization, e.g., medical transcription, claims processing, payment centers, etc. This is not to say that a pure service cannot reap the rewards of IT enablement; Pixar Studios, Peapod, and Prudential Insurance are three companies just from the P’s that owe a great deal of their success to information technology.

CHAPTER SEVENTEEN Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a supply chain? The bullwhip effect refers to the fluctuation in orders along the length of the supply chain as orders move from retailers to wholesalers to manufacturers to suppliers. The bullwhip effect relates directly to the lack of coordination (demand information flows) within the supply chain. Each supply chain member has a different idea of what demand is, and the demand estimates are grossly distorted and exaggerated as the supply chain partner is distanced from the customer. 2. What is the impact of lack of coordination on the performance of a supply chain? The impact of lack of coordination is degradation of responsiveness and poor cost performance for all supply chain members. As the bullwhip effect rears its ugly head, supply chain partners find themselves with excessive inventory followed by stockouts and backorders. The fluctuations in inventory result in increased holding costs and lost sales, which in turn spike transportation and material handling costs. Ultimately, the struggle with cost and responsiveness hurts the relationships among supply chain partners as they seek to explain their lack of performance. 3. In what way can improper incentives lead to a lack of coordination in a supply chain? What countermeasures can be used to offset this effect? Incentive obstacles occur in situations when different participants in the supply chain are motivated by self interest.

[Type text] Incentives that focus only on the local impact of an action result in decisions being made that achieve a local optimum but can avoid a global (supply chain) optimum. All supply chain partners must agree on global performance measures and structure rewards such that members are appropriately motivated. Sales force incentives also are responsible for counterproductive supply chain behavior. Commissions that are based on a single short time frame can be gamed by the sales force to maximize commission but these actions inadvertently increase demand variability and exert pressure on the supply chain. Commissions should be structured to provide incentives to consistently sell large volumes of product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the orders placed by the downstream stage? How should firms within a supply chain communicate to facilitate coordination? If each stage of a supply chain views its demand as the orders placed by their downstream counterpart, the bullwhip effect is realized by the supply chain. Each member develops a forecast that is based on something other than the true customer demand and hilarity ensues. Supply chain members should share point-of-sale (POS) data so that all members are aware of the true customer demand for product. The beauty of data sharing requirements is that only aggregate POS data must be shared to mitigate the bullwhip effect; there is no need to share detailed POS data. 5. What factors lead to a batching of orders within a supply chain? How does this affect coordination? What actions can minimize large batches and improve coordination? Order batching is caused by a number of different factors. One mechanism is the price structure of TL and LTL shipment quantities; there is incentive to wait a while to make sure that a TL shipment is achieved. A customer’s natural tendency to wait for a milestone, either real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last or first day of the month, etc., just because that’s when they always have or because that event reminds them to order. Order batching also occurs because customers are aware of an impending price reduction and want to take advantage of it. Batching adversely affects supply chain coordination because the supply chain will be starved for flow, then overwhelmed with demand. A supply chain can reconfigure their transportation and distribution system to allow for shipments to multiple customers on a single truck to achieve TL quantities. The chain can also assign (or encourage) days for placing orders and move from lot-size based to volume based quantity discounts (or abandon discounts and promotions altogether). 6. How do trade promotions and price fluctuations affect coordination in a supply chain? What pricing and promotion policies can facilitate coordination?

[Type text]

Trade promotions and price fluctuations make supply chain coordination more difficult. Customers seek to purchase goods for less and engage in forward buying which creates spikes in demand that may exceed capacity. All parties would benefit if the supply chain used every day low pricing (EDLP) to mitigate forward buying and allow procurement, production, and logistics to function at a steadier pace. If price incentives must be offered, the chain is better served by implementing a volume-based quantity discount plan instead of a lot size based quantity discount, i.e., providing incentives to purchase large quantities over a long period of time, perhaps a year. 7. How is the building of strategic partnerships and trust valuable within a supply chain? Cooperation and trust within the supply chain help improve performance for the following reasons: When stages trust each other, they are more likely to take the other party’s objectives into consideration when making decisions, thereby facilitating win-win situations. Action-oriented managerial levers to achieve coordination become easier to implement and the supply chain becomes more agile. An increase in supply chain productivity results, either by elimination of duplicated effort or by allocating effort to the appropriate stage. Detailed sales and production information is shared; this allows the supply chain to coordinate production and distribution decisions. 8. What issues must be considered when designing a supply chain relationship to improve the chances of developing cooperation and trust? The issues that supply chain partners must consider when designing their chain include assessing the value of the relationship, the operational roles and decision rights for each, the execution of binding contracts, and establishment of conflict resolution mechanisms. The value of the relationship is assessed by identifying the mutual benefits that it provides and the costs and contributions of each party. The mix of effort and benefit for all parties should be equitable. The roles and decision rights take into account the interdependence between the parties; the nirvana of interdependence is reciprocal interdependence, where parties come together and exchange information and inputs in both directions. This requires more effort than sequential interdependence but the payoff is increased supply chain surplus. Managers can help promote trust by creating contracts that encourage negotiation as unplanned contingencies arise since complete information and consideration of all future contingencies is impossible. The primary contacts from each side are an important starting point in developing a healthy relationship.

[Type text] Effective contract-resolution mechanisms can significantly strengthen any supply chain relationship. Such mechanisms allow parties the opportunity to communicate and work through their differences, in the process building greater trust. 9. What issues must be considered when managing a supply chain relationship to improve the chances of developing cooperation and trust? The following issues merit attention when management endeavors to improve the chances of success in supply chain partnership: The presence of flexibility, trust, and commitment in both parties helps a supply chain relationship succeed. In particular, commitment of top management on both sides is crucial for success. Good organizational arrangements, especially for information sharing and conflict resolution, improve chances for success. Mechanisms that make the actions of each party and resulting outcomes visible help avoid conflicts and resolve disputes. The more fairly the stronger partner teats the weaker, vulnerable partner, the stronger the supply chain relationship tends to be. 10. What are the different CPFR scenarios and how do they benefit supply chain partners? Collaborative planning, forecasting, and replenishment (CPFR) is defined as a business practice that combines the intelligence of multiple partners in the planning and fulfillment of customer demand. In order to be successful, the two parties must have synchronized their data and established standards for exchanging the information. The four scenarios that sellers and buyers can collaborate along include: • Retail event collaboration – the identification of specific SKUs that will be involved in sales promotions and sharing of information regarding the timing, duration, pricing, advertising, and display tactics to be deployed. The benefit of retail event collaborations is a reduction in stockouts, excess inventory and unplanned logistics costs. • DC replenishment collaboration – the forecasting of DC withdrawals or demand from the DC to the manufacturer is converted to a stream of orders that are locked in over a specified time horizon. A successful DC replenishment collaboration reduces production costs at the manufacturer and inventory and stockouts at the retailer. • Store replenishment collaboration – the forecasting of store-level orders that are committed over a specific time horizon. Such a collaboration results in greater visibility of sales for the manufacturer, improved replenishment accuracy and product availability, and reduced inventories. • Collaborative assortment planning – the forecasting (collaborative interpretation) of industry trends, macroeconomic factors, and customer tastes for seasonal goods. This forecast is converted into a planned purchase order at the style/color/size level that is used to produce sample products for

[Type text] a fashion event before final merchandising decisions are made. The manufacturer benefits from this collaboration by having more lead time to purchase raw materials and plan capacity.