Chapter 1: Introduction to supply chain

CASE 1: For its server business, Dell builds to order; that is, a customer order initiates manufacturing
at Dell. For the sale of servers, Dell does not have a separate retailer, distributor, or wholesaler in the
supply chain. Dell also sells consumer products such as PCs and tablets through retailers such as
Walmart, which carry Dell products in inventory. This supply chain thus contains an extra stage (the
retailer), compared with the direct sales model used by Dell for servers. In the case of other retail
stores, the supply chain may also contain a wholesaler or distributor between the store and the
manufacturer.

Case 2: Retailing in the United States is largely consolidated, with large chains buying consumer goods
from most manufacturers. This consolidation gives retailers sufficient scale that the introduction of an
intermediary such as a distributor does little to reduce costs—and may actually increase costs because
of an additional transaction. In contrast, India has millions of small retail outlets. The small size of
Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent
replenishment—an order can be compared with the weekly grocery shopping for a family in the United
States. The only way for a manufacturer to keep transportation costs low is to bring full truckloads of
product close to the market and then distribute locally using “milk runs” with smaller vehicles.

Case3: Gateway lost share price because they did not have finished goods in their retail stores but it
would only be used to give customer information about the different computers. Whereas apple got
a significant profit while keeping a finished goods inventory in the stores.

Q1. Why did Gateway choose not to carry any finished-product inventory at its retail stores? Why did
Apple choose to carry inventory at its stores?

Answer: Since, the products were manufactures to order for gateway that is why they didn’t keep
their inventories in stores.

Whereas, Apple had finished inventory in stores to improve their responsiveness.

Q2. What are the characteristics of products that are most suitable to be carried in finished-goods
inventory? What characterizes products that are best manufactured to order?

Answer: It depends on product, if the finished good has a more variety and it involves a lot of
customization like a designer suit or modular furniture then it should be a part of finished goods
inventory. But if the product is less customizable or the variety is limited then it can be the part of
finished goods inventory.

Q3. Is a direct selling supply chain without retail stores always less expensive than a supply chain with
retail stores?

Answer: It depends on the dispersion of customers and the Amount of orders, if both are high than it
can lead to increase in transportation cost. But generally, it is cheaper with respect to retail stores.

Case 4: In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to
be highly responsive to changing trends with affordable prices. Whereas design-to-sales cycle times
in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle
times of four to six weeks. This speed allows Zara to introduce new designs every week and to change
75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display
match customer preferences much more closely than do those of the competition. The result is that
Zara sells most of its products at full price and has about half the markdowns in its stores compared
with the competition. Zara manufactures its apparel using a combination of flexible and quick sources
in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel
manufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the
manufacturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain
demand are sourced out of Europe, whereas products that are more predictable are sourced from its
Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house
production occur after the sales season starts. This compares with less than 20 percent production
after the start of a sales season for a typical retailer. This responsiveness, along with the
postponement of decisions until after trends are known, allow Zara to reduce inventories and forecast
error. Zara has also invested heavily in information technology to ensure that the latest sales data are
available to drive replenishment and production decisions. In 2012, Inditex distributed to stores all
over the world from eight distribution centres located in Spain. The group claimed an average delivery
time of 24 to 36 hours for European stores and up to a maximum of 48 hours for stores in America or
Asia from the time the order was received in the distribution centre (DC) to the time it was delivered
to the stores. Shipments from the DCs to stores were made several times a week. This allowed store
inventory to closely match customer demand.

1. What advantage does Zara gain against the competition by having a very responsive supply chain?

2. Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing? Why
has Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much
cheaper?

3. Why does Zara source products with uncertain demand from local manufacturers and products with
predictable demand from Asian manufacturers?

4. What advantage does Zara gain from replenishing its stores multiple times a week compared with
a less frequent schedule?

5. Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail
sales?

Case 4: Toyota: a global auto manufacturer Toyota Motor Corporation is Japan’s Toyota auto
manufacturer and has experienced significant growth in global sales over the past two decades. A key
issue facing Toyota is the design of its global production and distribution network. Part of Toyota’s
global strategy is to open factories in every market it serves. Toyota must decide what the production
capability of each of the factories will be, as this has a significant impact on the desired distribution
system. At one extreme, each plant can be equipped only for local production. At the other extreme,
each plant is capable of supplying every market. Before 1996, Toyota used specialized local factories
for each market. After the Asian financial crisis in 1996–97, Toyota redesigned its plants so it could
also export to markets that remain strong when the local market weakens. Toyota calls this strategy
“global complementation.” Whether to be global or local is also an issue for Toyota’s parts plants and
product design. Should parts plants be built for local production or should there be a few parts plants
globally that supply multiple assembly plants? Toyota has worked hard to increase commonality in
parts used around the globe. Although this has helped the company lower costs and improve parts
availability, common parts caused significant difficulty when one of the parts had to be recalled. In
2009, Toyota had to recall about 12 million cars using common parts across North America, Europe,
and Asia, causing significant damage to the brand as well as to the finances.

1 • Understanding the Supply Chain

Any global manufacturer like Toyota must address the following questions regarding the configuration
and capability of the supply chain:

1. Where should the plants be located, and what degree of flexibility should be built into each? What
capacity should each plant have?

2. Should plants be able to produce for all markets or only for specific contingency markets?

3. How should markets be allocated to plants and how frequently should this allocation be revised?

4. How should the investment in flexibility be valued?

Case 5: Amazon

1. Why is Amazon building more warehouses as it grows? How many warehouses should it have, and
where should they be located?

2. Should Amazon stock every product it sells?

3. What advantage can bricks-and-mortar players derive from setting up an online channel? How
should they use the two channels to gain maximum advantage?

4. What advantages and disadvantages does the online channel enjoy in the sale of shoes and diapers
relative to a retail store?

5. For what products does the online channel offer the greater advantage relative to retail stores?
What characterizes these products?

Case 6:

After selling for decades from its department stores, Macy’s has made a big push into\ omnichannel
retailing, allowing customers to have a seamless experience between shopping online or at a store.
Customers can browse online and then experience the product at a store or order online after seeing
a product at the store. Omni-channel is not just about ordering, however; it is also about fulfilment.
Orders placed on any channel have access to Macy’s entire assortment. By 2012, Macy’s had equipped
292 Macy’s stores to fulfil online orders or orders from other stores that were sold out of a particular
item. If customers desire, orders placed online can be picked up at select stores and items purchased
online can be returned to stores.

Any omni-channel retailer must address the following questions:

1. Should online orders be filled from stores or fulfilment centres?

2. How should store inventories be managed in an omni-channel setting?

3. Should returns be kept at a store or sent to a fulfilment center?

1. What is a supply chain?

Answer: The term supply chain conjures up images of product or supply moving from suppliers to
manufacturers to distributors to retailers to customers along a chain.

The primary purpose of any supply chain is to satisfy customer needs and, in the process, generate
profit for itself.

It is called a supply chain network also as at one point of time there are sometimes more than 1 stake
holder involved for example there might be more than 1 supplier supplying the raw material to P&G
at a time for detergent manufacturing.

2. Objective of a supply chain: To maximize the supplier surplus

The value (also known as supply chain surplus) a supply chain generates is the difference between
what the value of the final product is to the customer and the costs the entire supply chain incurs in
filling the customer’s request.

Supply Chain Surplus = Customer Value - Supply Chain Cost

 The difference between the value of the product and its price remains with the customer as consumer
surplus.

Customer Surplus = Customer Value - Cost paid by the customer

The difference between the revenue generated from the customer and the overall cost across the
supply chain is known as supply chain profitability.

Supply chain profitability= Cost paid by the customer - supply chain cost

The difference between the supply chain surplus and the customer surplus is the supply chain
profitability.

Supply chain success should be measured in terms of supply chain surplus and not in terms of the
profits at an individual stage.

Decision phases in the supply chain

1. Supply chain strategy or design: During this phase, a company decides

 The chain’s configuration will be, how resources will be allocated, and what processes each stage
will perform.
 whether to outsource or perform a supply chain function in-house,
 the location and capacities of production and warehousing facilities,
 the products to be manufactured or stored at various locations,
 the modes of transportation,
 the type of information system to be use.

2. Supply chain planning:

 Forecast for the coming year of demand and costs and prices in different markets.
 Make decisions regarding which markets will be supplied from which locations,
 the subcontracting of manufacturing,
 the inventory policies to be followed, and
 the timing and size of marketing and price promotions.

3. Supply chain operation:

 The goal of supply chain operations is to handle incoming customer orders in the best possible
manner.
 firms allocate inventory or production to individual orders
 set a date by which an order is to be filled
 generate pick lists at a warehouse
 locate an order to a particular shipping mode and shipment,
 set delivery schedules of trucks
 place replenishment order

Process views of a supply chain

A cycle view of the supply chain clearly defines the processes involved and the owners of each process.
This view is useful when considering operational decisions because it specifies the roles and
responsibilities of each member of the supply chain and the desired outcome for each process.

The intermediate between stages between two stakeholders of the supply chain is a cycle process.
Each cycle process consists of 6 sub processes which is more or less same for all the different cycles.

The only difference which might occur would be in the terms of demand for each stake holder as in
customer order the cycle demand is independent whereas in other successive cycles demand are
dependent. Also, the no. of buyers may decrease as we go from end to start of the cycle and the
number of order may increase.

1. Push/Pull type view: With pull processes, execution is initiated in response to a customer order.
With push processes, execution is initiated in anticipation of customer orders based on a forecast.
A supply chain is generally a mixture of pull and push view. Because the phase between retailer
and the customer is the pull cycle whereas retailer try to capture fill his shelf as per the customer
demand and from supplier to distribution centre or retailer it is a push process as in that case the
demand is forecasted by the manufacturer.

All push processes in the supply chain are performed in anticipation of customer
demand, whereas all pull processes are performed in response to customer demand. For
push processes, a manager must plan the level of activity, be it production, transportation,
or any other planned activity. For pull processes, a manager must plan the level of available
capacity and inventory, but not the actual amount to be executed.
Example can be paint industry, before 1990s the paint pigments were mixed in large industries
to get the desired colour and the quantity of the paint of a particular in that case was
forecasted therefore the colour mixing was in push face.
But after 1990s the colours were mixed in the retailer shop itself to generate the colour as per
the customer need. Thus, it was then shifted to pull process from the push process.

Supply chain macro processes in a firm

1. Customer relationship management (CRM): All processes at the interface between the firm
and its customers
2. Internal Supply Chain management (ISCM): All processes that are internal to the firm
3. Supplier relationship management (SRM): All processes at the interface between the firm
and its suppliers

Marketing is in charge of the CRM macro process, manufacturing handles the ISCM macro
process, and purchasing oversees the SRM macro process.