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
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.
5 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.
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
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,
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 Wal-Mart.
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
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
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
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 co-located 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
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?
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 cross-functional 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 More Responsive More Efficient
Facilities Multiple Plants Flexible Plants
Single Plant Dedicated Plant
Inventory Higher Inventory Lower Inventory
Transportation Higher Speed Lower Speed
Information Accurate
Real Time Transmission
Less Accurate
Batched Transmission Sourcing Responsive supplier Efficient supplier
Pricing Differential Pricing 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,
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 C O N V E N I E N C E S T O R E C H A I N A T T E M P T S T O B E R E S P O N S I V E A N D P R O V I D E C U S T O M E R S W H A T T H E Y N E E D , W H E N T H E Y N E E D I T , W H E R E T H E Y N E E D I T . W H A T A R E S O M E D I F F E R E N T W A Y S T H A T A C O N V E N I E N C E S T O R E S U P P L Y C H A I N C A N B E R E S P O N S I V E ? W H A T A R E S O M E R I S K S I N E A C H C A S E ?
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 . S E V E N - E L E V E N ' S S U P P L Y C H A I N S T R A T E G Y I N J A P A N C A N B E D E S C R I B E D A S
A T T E M P T I N G T O M I C R O - M A T C H S U P P L Y A N D D E M A N D U S I N G R A P I D
R E P L E N I S H M E N T . W H A T A R E S O M E R I S K S A S S O C I A T E D W I T H T H I S C H O I C E ? 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. W H A T H A S S E V E N - E L E V E N D O N E I N I T S C H O I C E O F F A C I L I T Y L O C A T I O N , I N V E N T O R Y M A N A G E M E N T , T R A N S P O R T A T I O N , A N D I N F O R M A T I O N
I N F R A S T R U C T U R E T O D E V E L O P C A P A B I L I T I E S T H A T S U P P O R T I T S S U P P L Y C H A I N S T R A T E G Y I N J A P A N ?
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. S E V E N - E L E V E N D O E S N O T A L L O W D I R E C T S T O R E D E L I V E R Y I N J A P A N , W I T H A L L P R O D U C T S F L O W I N G T H R O U G H I T S D I S T R I B U T I O N C E N T E R . W H A T B E N E F I T D O E S S E V E N - E L E V E N D E R I V E F R O M T H I S P O L I C Y ? W H E N I S D I R E C T S T O R E D E L I V E R Y M O R E A P P R O P R I A T E ?
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 . W H A T D O Y O U T H I N K A B O U T T H E 7 D R E A M C O N C E P T F O R S E V E N - E L E V E N J A P A N ? F R O M A S U P P L Y C H A I N P E R S P E C T I V E I S I T L I K E L Y T O B E M O R E S U C C E S S F U L I N J A P A N O R T H E U N I T E D S T A T E S ? W H Y ?
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. S E V E N - E L E V E N I S A T T E M P T I N G T O D U P L I C A T E T H E I R S U C C E S S F U L J A P A N E S E S U P P L Y C H A I N S T R U C T U R E I N T H E U N I T E D S T A T E S W I T H T H E I N T R O D U C T I O N O F
C D C S . W H A T A R E T H E P R O S A N D C O N S O F T H I S A P P R O A C H ? K E E P I N M I N D T H A T S T O R E S A R E A L S O R E P L E N I S H E D B Y W H O L E S A L E R S A N D D S D B Y
M A N U F A C T U R E R S .
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. T H E U N I T E D S T A T E S H A S F O O D S E R V I C E D I S T R I B U T O R S L I K E M C L A N E T H A T A L S O R E P L E N I S H C O N V E N I E N C E S T O R E S . W H A T A R E T H E P R O S A N D C O N S T O H A V I N G A D I S T R I B U T O R R E P L E N I S H C O N V E N I E N C E S T O R E S V E R S U S A C O M P A N Y L I K E S E V E N - E L E V E N M A N A G I N G I T S O W N D I S T R I B U T I O N F U N C T I O N ?
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?
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.
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 in-transit 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 per-household 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?
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
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
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?
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
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.
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
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.
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?
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.
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.
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.
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 non-dual 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.
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, co-promotions, 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.
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.
