Module II: Understanding the Logistics

and Supply Chain

• Topics Covered:
• Introduction to supply chain
• Supply chain links
• Role of logistics in supply chain
• Drivers and metrics in supply chain
• Designing the supply chain network
• Online sales and distribution network
• Factors influencing the network design

1
Introduction to supply chain

• The supply chain encompasses all activities involved in the production and
delivery of a product or service, from raw material extraction to final delivery
to the consumer.

• It includes suppliers, manufacturers, distributors, retailers, and end

customers. Effective supply chain management ensures the seamless flow of
goods, services, information, and finances.

2
 Typical Supply Chains
Typical Supply Chain for a Manufacturer

Supplier

Supplier

Supplier
}Storage Mfg. Storage Dist. Retailer Customer

Typical Supply Chain for a Service Provider

Supplier

Supplier
} Storage Service Customer

The more steps in the chain the more inventory

carried and the longer it takes to move through the
3
chain
SCM

4
Stages of the Supply Chain
1.Supplier: The origin point of the raw materials or components needed for
production. Suppliers provide the necessary inputs to the manufacturer.
2.Manufacturer: The entity that transforms raw materials or components
into finished products. This stage involves production and assembly
processes.
3.Distributor: The intermediary that manages the storage and transportation
of finished products from the manufacturer to the retailer. Distributors
often handle large quantities of goods and ensure they reach various retail
locations efficiently.
4.Retailer: The endpoint of the supply chain where products are sold to
consumers. Retailers can be physical stores or online platforms.
5.Shopper: The final consumer who purchases and uses the product.

5
Flows in the Supply Chain
• Product Flow: This represents the physical movement of goods from the supplier
to the shopper. It flows in one direction from the supplier through the
manufacturer, distributor, retailer, and finally to the shopper.

• Information Flow: This represents the exchange of information between different

stages of the supply chain. Information about demand, inventory levels, order
status, and delivery schedules flows back and forth between the entities. Efficient
information flow ensures better coordination and decision-making.

• Finances Flow: This represents the movement of financial resources through the
supply chain. Payments for goods and services move from the shopper to the
retailer, then to the distributor, manufacturer, and finally to the supplier. Financial
information also flows in the opposite direction, with each stage managing its
costs and revenues.

6
Cont..
•Supplier to Manufacturer: Suppliers provide raw materials or
components to manufacturers. Information about order requirements
and financial transactions are communicated.
•Manufacturer to Distributor: Manufacturers produce finished goods
and send them to distributors. Information about production
schedules, inventory levels, and financial details are shared.
•Distributor to Retailer: Distributors store and transport goods to
retailers. Information about delivery schedules and payment terms are
exchanged.
•Retailer to Shopper: Retailers sell products to shoppers. Information
about product availability and customer preferences is gathered, and
financial transactions are completed.

7
8
Basics
• Demand
• Definition: Demand refers to the quantity of a good or service that
consumers are willing and able to purchase at various price levels,
during a given period of time.

• Supply
• Definition: Supply refers to the quantity of a good or service that
producers are willing and able to offer for sale at various price levels,
during a given period of time.

9
Cont..
- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream Downstream

Aims to Match Supply and Demand,

profitably for products and services

-
SUPPLY SIDE DEMAND SIDE
achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits
10
Supply Chain Stages

A typical supply chain may involve a variety of stages, including the following:
• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material suppliers

• Each stage in a supply chain is connected through the flow of products, information, and
funds. These flows often occur in both directions and may be managed by one of the stages or
an intermediary.
• Each stage in the supply chain does not necessarily need to be present in every supply chain.
The appropriate design of the supply chain depends on both the customer’s needs and the
roles played by the stages involved.
11
Objective of a Supply Chain

• The primary objective of every supply chain is to maximize the overall value generated.
• This value is also known as the supply chain surplus, which is defined as the difference
between the value of the final product to the customer and the costs incurred by the
entire supply chain in fulfilling the customer’s request.
• Supply Chain Surplus Formula
• Supply Chain Surplus=Customer Value−Supply Chain Cost
• Customer Value: The perceived worth of the final product to the customer, estimated by
the maximum amount the customer is willing to pay for it.
• Supply Chain Cost: The total cost incurred by all stages of the supply chain in producing
and delivering the product to the customer.

12
Need for Supply Chain Management
• Improve operations efficiency
• Increasing levels of outsourcing
• Competitive pressures – lower prices and costs
• Increasing globalization – suppliers & customers
• Complexity of supply chains (international)
• Manage inventories ($$) – keep on-hand as low as possible

13
•Customer Order Cycle
•Participants: Customer and Retailer
•Steps:
1.Customer places an order.
2.Retailer fulfills and delivers the order to the customer.
•Replenishment Cycle
•Participants: Retailer and Distributor
•Steps:
1.Retailer places an order for inventory.
2.Distributor fulfills and delivers the order to the retailer.
•Manufacturing Cycle
•Participants: Distributor and Manufacturer
•Steps:
1.Distributor places an order with the manufacturer.
2.Manufacturer produces, fulfills, and delivers the order to the distributor.
•Procurement Cycle
•Participants: Manufacturer and Supplier
•Steps:
1.Manufacturer places an order for raw materials/components.
2.Supplier fulfills and delivers the order to the manufacturer.
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Cycle View of Supply Chains
Customer
Customer
Order Cycle
Retailer
Any cycle
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Logistics vs Supply Chain Management

Aspect Logistics Supply Chain Management (SCM)

Definition Efficient flow and storage of goods and info Management of entire production flow

Transportation, warehousing, inventory, Includes logistics, sourcing, procurement,

Scope
delivery production, and customer service

Objective Timely delivery of goods Optimize the entire supply chain

Overall supply chain efficiency and

Focus Efficiency in movement and storage
effectiveness

Time Horizon Short-term, operational Short-term and long-term, strategic

Transportation, warehousing, inventory, Sourcing, procurement, production,

Components
distribution logistics, forecasting, customer service

Strategic Importance Operational necessity Strategic and competitive advantage

Integration Often standalone function Highly integrated with various functions

16
 Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Evolution of Material handling

Packaging
Supply Chain Finished goods inventory Supply Chain
Supply Chain
Management Distribution planning
Physical
Distribution
Management
Management

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

17
 Traditional Scope of the Supply Chain
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Internal supply chain

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Supply chain links

• Each link in the supply chain is

interconnected, and the performance
of one link affects the entire chain.
Effective supply chain management
involves coordinating and optimizing
these links to improve efficiency,
reduce costs, and enhance customer
satisfaction.
• Understanding the roles and
importance of each link helps in
designing a resilient and responsive
supply chain.

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Suppliers
• Role: Provide raw materials, components, or services needed to produce goods.
• Activities: Sourcing, procurement, and delivery of inputs to manufacturers.
• Importance: Quality and reliability of suppliers directly impact the quality of the
final product and the efficiency of the supply chain.
Manufacturers
• Role: Convert raw materials or components into finished products.
• Activities: Production planning, manufacturing, quality control, and packaging.
• Importance: Efficient manufacturing processes ensure timely production and cost
management, affecting overall supply chain performance.
Warehouses
• Role: Store finished goods and raw materials at various points in the supply chain.
• Activities: Receiving, storing, inventory management, and shipping.
• Importance: Proper warehousing ensures that products are available when
needed, reducing lead times and improving customer satisfaction.

20
Distributors
• Role: Act as intermediaries between manufacturers and retailers or directly to customers.
• Activities: Transportation, warehousing, order fulfillment, and delivery.
• Importance: Distributors help in expanding market reach and ensuring products are available at multiple
locations, thus enhancing accessibility for customers.
Retailers
• Role: Sell products directly to end consumers.
• Activities: Inventory management, merchandising, sales, and customer service.
• Importance: Retailers are the final link in the supply chain and play a crucial role in customer satisfaction
and market feedback.
Customers
• Role: End users of the products.
• Activities: Purchasing, using, and providing feedback on products.
• Importance: Customers drive demand and influence all upstream activities in the supply chain through
their purchasing decisions and feedback.
• Interconnections and Flow
• Physical Flow: Movement of goods from suppliers to manufacturers, then to warehouses, distributors,
retailers, and finally to customers.
• Information Flow: Data exchange regarding demand forecasts, inventory levels, order status, and
customer feedback, flowing both upstream and downstream.
• Financial Flow: Movement of payments from customers to retailers, then to distributors, manufacturers,
and suppliers, and financial information such as credit terms and payment schedules. 21
Supply Chain Link

22
Supply chain links can
• Improve customer service
• Decrease inventory
• Optimize production
• Reduce cost
• Manage materials

23
 Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

The push/pull view of supply chains divides the supply chain

processes into two categories: push processes and pull Customer
processes, based on whether they are initiated in anticipation Order Arrives
of customer orders (push) or in response to customer orders
(pull).
Push-Pull boundary 24
Push and Pull Processes

• Push Processes
• Definition: Processes that are performed in anticipation of customer orders.
• Activities: Procurement, manufacturing, and replenishment cycles.
• Characteristics:
• Forecast-Driven: Activities are based on demand forecasts and predictions.
• Inventory Management: Products are produced and held in inventory to meet expected demand.
• Lead Time: Typically longer lead times as production and procurement are planned in advance.
• Risk: Risk of overproduction and holding excess inventory if forecasts are inaccurate.
• Pull Processes
• Definition: Processes that are initiated by actual customer orders.
• Activities: Customer order cycle.
• Characteristics:
• Demand-Driven: Activities are triggered by actual customer orders.
• Just-in-Time: Products are produced and delivered in response to specific customer demands.
• Customization: Greater ability to customize products to individual customer needs.
• Efficiency: Reduces the risk of excess inventory and associated costs.

25
Role of logistics in supply chain

• Logistics plays a crucial role within the broader

framework of supply chain management (SCM).
• It ensures that goods and services are efficiently
transported and stored from the point of origin to the
point of consumption.

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cont,
1.Transportation Management:
1. Movement of Goods: Logistics is responsible for the physical movement of goods from
suppliers to manufacturers, between production facilities, and from manufacturers to
distributors and retailers.
2. Mode Selection: Deciding the most efficient and cost-effective transportation modes (e.g.,
air, sea, rail, road).
2.Warehousing and Storage:
1. Storage Solutions: Managing warehousing facilities to store raw materials, work-in-progress,
and finished goods.
2. Inventory Control: Ensuring optimal inventory levels to meet demand without overstocking
or understocking.
3.Inventory Management:
1. Stock Levels: Monitoring and managing inventory to ensure products are available when
needed.
2. Order Fulfillment: Picking, packing, and shipping orders accurately and efficiently.

27
Importance of Logistics in Supply Chain
Management
1.Efficiency and Cost Reduction:
By optimizing transportation, warehousing, and inventory management, logistics helps reduce
costs and improve overall efficiency in the supply chain.
2.Speed and Responsiveness:
Efficient logistics operations enable quicker response times to market demands and customer
orders, enhancing service levels.
3.Flexibility and Agility:
Logistics provides the flexibility to adapt to changes in demand, supply disruptions, and other
unforeseen events, ensuring the supply chain remains resilient.
4.Integration and Coordination:
Effective logistics integrates and coordinates activities across the supply chain, ensuring smooth
and seamless operations from suppliers to end consumers.
5.Competitive Advantage:
Superior logistics capabilities can provide a competitive advantage by ensuring timely delivery,
reducing costs, and enhancing customer satisfaction.

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• Logistics Supply Chain:
• Sourcing: This is the starting point, where raw materials or components are
sourced from suppliers.
• Inbound Storage/Transportation: The movement and storage of raw
materials or components into the company's facilities.
• Operation: This includes the processing, manufacturing, or assembly
operations that transform raw materials into finished products.
• Outbound Storage/Transportation: The movement and storage of finished
products from the company to distribution points.
• Customer Distribution: The final stage, where finished products are
distributed to customers.
Logistics supply chain
transportation

transportation
Operation

distribution
sourcing

Customer
outbound
Storage/
Inbound

Storage/
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• Logistics plays a critical role in the supply
chain by ensuring that products are
efficiently moved from suppliers to
customers.
• Logistics integrates these components to
optimize the flow of goods, information,
and finances across the supply chain, aiming
to reduce costs, improve efficiency, and
enhance customer satisfaction.
• Effective logistics management is crucial
for the overall performance and
competitiveness of the supply chain.

30
 Customer Service
•Function: Ensures that customer needs and expectations are met.
•Importance: Critical for maintaining customer satisfaction and loyalty.

Inventory Planning
•Function: Manages inventory levels to balance supply and demand.
•Importance: Helps avoid stockouts and overstock situations, reducing carrying costs.

Packaging
•Function: Ensures products are properly packaged for protection during transit.
•Importance: Minimizes damage and loss, ensuring products arrive in good condition.

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Transportation
•Function: Moves products between different locations in the supply chain.
•Importance: Affects delivery speed, cost, and reliability.

•Procurement
•Function: Acquires the necessary raw materials, components, or products.
•Importance: Ensures a steady supply of inputs for production or resale.

•Warehousing
•Function: Stores products at various points in the supply chain.
•Importance: Provides buffer stock to meet demand fluctuations and ensures timely
availability of products.

•Information System
•Function: Manages data related to logistics activities, such as inventory levels, order
status, and shipment tracking.
•Importance: Enhances visibility and coordination across the supply chain.

•Order Processing
•Function: Handles the receipt, processing, and fulfillment of customer orders.
•Importance: Ensures accuracy and efficiency in fulfilling customer orders.

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Supply Chain Drivers and Metrics
33
IMPELLERS OF SUPPLY CHAIN

• Empowered Customer

• Developments in Information Technology Tools

• Globalization

34
 Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
SC Drivers Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

35
Drivers
• Logistical Drivers: Facilities, inventory, and transportation directly
impact the physical flow of goods.

• Cross-Functional Drivers: Information, sourcing, and pricing influence

the coordination and strategy across the supply chain.

• Supply Chain Structure: Balancing these drivers determines the

overall performance, aligning with the competitive strategy to achieve
business goals.

36
Logistical Drivers
• Facilities
• Definition: Physical locations where products are manufactured, stored, and distributed.
• Impact:
• Efficiency: Centralized facilities may reduce costs but increase lead times.
• Responsiveness: Decentralized facilities may improve response times but increase costs.
• Inventory
• Definition: Raw materials, work-in-progress, and finished goods held by the supply chain.
• Impact:
• Efficiency: Holding minimal inventory reduces costs.
• Responsiveness: Higher inventory levels ensure product availability and faster fulfillment.
• Transportation
• Definition: Movement of products between different stages of the supply chain.
• Impact:
• Efficiency: Bulk transportation reduces costs but may be slower.
• Responsiveness: Faster transportation methods improve delivery times but increase costs. 37
Cross-Functional Drivers

• Information
• Definition: Data and analysis concerning inventory levels, demand forecasts, order status, etc.
• Impact:
• Efficiency: Accurate information reduces uncertainties and optimizes inventory and production
planning.
• Responsiveness: Real-time information enhances decision-making and quick response to changes.
• Sourcing
• Definition: Selection and management of suppliers.
• Impact:
• Efficiency: Fewer suppliers and long-term contracts may reduce costs.
• Responsiveness: Diverse supplier base ensures flexibility and reduces risk.
• Pricing
• Definition: The pricing strategy for products and services.
• Impact:
• Efficiency: Competitive pricing attracts more customers but may lower margins.
• Responsiveness: Flexible pricing strategies can respond to market demands and inventory levels.
38
Facilities:
• The actual physical locations in the supply chain network where
product is stored, assembled, or fabricated.
• Two major types: Production sites & storage sites.
• Decisions regarding the role, location, capacity, and flexibility of
facilities have a significant impact on the supply chain’s performance.
• For example, in 2013, Amazon increased the number of warehousing
facilities located close to customers to improve its responsiveness.

39
Inventory:
• encompasses all raw materials, work in process, and finished goods within a supply chain.
• Changing inventory policies can dramatically alter the supply chain’s efficiency and
responsiveness.
• For example, W.W. Grainger makes itself responsive by stocking large amounts of
inventory & satisfying customer demand from stock even though the high inventory
levels reduce efficiency. Such a practice makes sense for Grainger because its products
hold their value for a long time.
• A strategy using high inventory levels can be dangerous in the fashion apparel business,
though, in which inventory loses value relatively quickly with changing seasons and
trends. (*shorten new product & replenishment lead times)

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Transportation:
• Moving inventory from point to point in the supply chain.
• Transportation choices (modes) have a large impact on supply chain
responsiveness & efficiency.
• For example, a mail-order catalog company can use a faster mode of
transportation such as FedEx to ship products, thus making its supply chain more
responsive— but also less efficient, given the high costs associated with using
FedEx.
• McMaster-Carr and W.W. Grainger, however, have structured their supply chains
to provide next-day service to most of their customers using ground
transportation. They are providing a high level of responsiveness at lower cost.

41
Information:
• Consists of data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the supply chain.
• Information is potentially the biggest driver of performance in the supply
chain because it directly affects each of the other drivers.
• For example, Seven-Eleven Japan has used information to better match
supply and demand while achieving production and distribution
economies. The result is a high level of responsiveness to customer
demand while production and replenishment costs are lowered.

42
Sourcing:
• who will perform a particular supply chain activity
• Sourcing decisions affect both the responsiveness and efficiency of a
supply chain.
• After Motorola outsourced much of its production to contract
manufacturers in China, for instance, it saw its efficiency improve but
its responsiveness suffer because of the long lead times. To make up
for the drop in responsiveness, Motorola started flying in some of its
cell phones from China even though this choice increased
transportation cost.
43
Pricing:
• Determines how much a firm will charge for the goods and services
that it makes available in the supply chain.
• Pricing affects the behavior of the buyer of the good or service, thus
affecting demand and supply chain performance.
• For example, if a transportation company varies its charges based on
the lead time provided by the customers, it is likely that customers
who value efficiency will order early and customers who value
responsiveness will be willing to wait and order just before they need
a product transported.
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Facilities

Role in the supply chain

• the “where” of the supply chain

• manufacturing or storage (warehouses)

Role in the competitive strategy

• economies of scale (efficiency priority)

• larger number of smaller facilities (responsiveness priority)

45
Components of Facilities Decisions

Location
• centralization (efficiency) vs. decentralization (responsiveness)
• other factors to consider (e.g., proximity to customers)

Capacity (flexibility versus efficiency)

Manufacturing methodology (product focused versus process focused)

Warehousing methodology (SKU storage, job lot storage, cross-docking)

Overall trade-off: Responsiveness versus efficiency

46
 Facility related metrics

• Capacity • Processing/setup/down/idle time

• Utilization • Quality losses
• Production cost per unit • Average production batch size
• Theoretical flow/cycle time of • Production service level
production
• Actual average flow
• Flow time efficiency
• Product variety
Inventory

Role in the supply chain

Role in the competitive strategy

Components of inventory decisions

48
Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness

Impact on

• material flow time: time elapsed between when material enters the supply chain to when it exits the
supply chain
• throughput
• rate at which sales to end consumers occur
• I = DT (Little’s Law)
• I = inventory; D = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply chain

49
Inventory: Role in Competitive Strategy
• If responsiveness is a strategic competitive priority, a firm can locate larger amounts of
inventory closer to customers
• If cost is more important, inventory can be reduced to make the firm more efficient
• Trade-off
• Example – Nordstrom (customer service 115Y)

50
 Components of Inventory Decisions

Overall trade-off:
Cycle inventory Safety inventory Seasonal inventory Responsiveness
versus efficiency
• Average amount of • inventory held in • inventory built up to
inventory used to case demand counter predictable
satisfy demand exceeds variability in
between shipments expectations demand
• Depends on lot size • costs of carrying too • cost of carrying
much inventory additional inventory
versus cost of losing versus cost of
sales flexible production
 Inventory related metrics

Products with more

Average
Cash-to-cash cycle than a specified
Average inventory Inventory turns replenishment
time number of days of
batch size
inventory

Fill rate Fraction of time out

Average safety
Seasonal inventory (order/demands of stock (Zero Obsolete inventory
inventory
met on time) inventory)
Transportation

Role in the supply chain

Role in the competitive strategy

Components of transportation decisions

53
Role in the Supply Chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

Also affects inventory and facilities

54
Role in the Competitive Strategy
If responsiveness is a strategic competitive priority, then faster transportation modes
can provide greater responsiveness to customers who are willing to pay for it

Can also use slower transportation modes for customers whose priority is price (cost)

Can also consider both inventory and transportation to find the right balance

Example: Blue Nile (online retailer of diamonds)

55
Components of
Transportation Decisions
Mode of transportation:

• air, road, rail, ship, pipeline, electronic transportation

• vary in cost, speed, size of shipment, flexibility

Route and network selection

• route: path along which a product is shipped

• network: collection of locations and routes

In-house or outsource

Overall trade-off: Responsiveness versus efficiency

56
Transportation related metrics
• Average inbound transportation cost
• Average incoming shipment size
• Average inbound transportation cost per shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per shipment
• Fraction transported by mode

57
Information

Role in the supply chain

Role in the competitive strategy

Components of information decisions

58
Role in the Supply Chain
• The connection between the various stages in the supply chain – allows coordination
between stages
• Crucial to daily operation of each stage in a supply chain – e.g., production scheduling,
inventory levels

59
Role in the Competitive Strategy
• Allows supply chain to become more efficient and more responsive at the same time
(reduces the need for a trade-off)
• Information technology
• What information is most valuable?
• Example:
• Andersen Windows (Mfg. of residential wood windows)
• Sunsweet Growers (Dried fruit producers)

60
Components of Information Decisions
• Push (MRP) versus pull (demand information transmitted quickly throughout the supply
chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
• EDI
• Internet
• ERP systems
• Supply Chain Management software
• RFID
• Overall trade-off: Responsiveness versus efficiency
61
Information related metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Seasonal factors
• Variance from plan
• Ratio of demand variability to order variability

62
Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions

63
Role in the Supply Chain
• Set of business processes required to purchase goods and services in a supply chain
• Supplier selection, single vs. multiple suppliers, contract negotiation

64
Role in the Competitive Strategy
• Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions- improving efficiency and responsiveness

65
Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply chain profits

66
Sourcing related metrics
• Days payable outstanding
• Average purchase price
• Range of purchase price
• Average purchase quantity
• Fraction of on time deliveries
• Supply quality
• Supply lead time
• Supplier reliability

67
Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions

68
Role in the Supply Chain
• Pricing determines the amount to charge customers in a supply chain
• Pricing strategies can be used to match demand and supply

69
Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies to improve efficiency and responsiveness
• Low price and low product availability; vary prices by response times
• Example : Amazon.com

70
Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits

71
Pricing related metrics
• Profit margin
• Days sales outstanding
• Incremental fixed cost per unit
• Incremental variable cost per unit
• Average sales price
• Average order size
• Range of sale price
• Range of periodic sales

72
 • Increasing variety of products
Obstacles to • Decreasing product life cycles
• Increasingly demanding customers
Achieving • Fragmentation of supply chain ownership

Strategic Fit • Globalization

• Difficulty executing new strategies

73
 • Distribution – the steps taken to move
and store a product from the supplier
Distribution stage to the customer stage in a supply
chain
Network
• Drives profitability by directly affecting
Design in the supply chain cost and the customer
Supply value
• Choice of distribution network can
Chain achieve supply chain objectives from low
cost to high responsiveness

74
Factors influencing Distribution Network Design

Distribution network performance evaluated along two

dimensions
1. Value provided to the customer
2. Cost of meeting customer needs

Evaluate the impact on customer service and cost for

different distribution network options
Profitability of the delivery network determined by revenue
from met customer needs and network costs
 • Elements of customer service
influenced by network
structure:
Factors • Response time
influencing • Product variety
• Product availability
Distribution • Customer experience
Network • Time to market
• Order visibility
Design • Returnability

76
Response time is the amount of time it takes for a customer to receive an order.

Product variety is the number of different products or configurations that are offered by the distribution network.

Product availability is the probability of having a product in stock when a customer order arrives.

Customer experience includes the ease with which customers can place and receive orders and the extent to which this
experience is customized. It also includes purely experiential aspects, such as the possibility of getting a cup of coffee
and the value that the sales staff provides

77
Time to market is the time it takes to bring a new product
to the market.

Order visibility is the ability of customers to track their

orders from placement to delivery.

Returnability is the ease with which a customer can

return unsatisfactory merchandise and the ability of the
network to handle such returns.

78
 Supply chain costs affected by network
structure:

Inventories Transportation Facilities Information

79
Desired Response Time and Number
of Facilities

80
Transportation Costs and Number of
Facilities

81
Inventory Costs and Number of
Facilities

82
Facility Costs and Number of
Facilities

83
Logistics Cost, Response Time, and
Number of Facilities

84
Design Options for a Distribution Network

• Distribution network choices from the manufacturer to the end consumer (or) customer
• Two key decisions

• Will product be delivered to the customer location or picked up from a prearranged

site?
• Will product flow through an intermediary (or intermediate location)?

85
Manufacturer Storage with Direct Shipping

86
 Manufacturer Storage with Direct Performance Characteristics
of Manufacturer Storage with
Shipping Network Direct Shipping Network

Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of aggregation are highest for low-
demand, high-value items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation Higher transportation costs because of increased distance and disaggregate
shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving on handling costs if
manufacturer can manage small shipments or ship from production line.

Information Significant investment in information infrastructure to integrate manufacturer

and retailer.

87
 Manufacturer Storage with Direct [Continued]
Shipping Network

Service Factor Performance

Response time Long response time of one to two weeks because of increased distance and two stages for
order processing. Response time may vary by product, thus complicating receiving.

Product variety Easy to provide a high level of variety.

Product availability Easy to provide a high level of product availability because of aggregation at manufacturer.

Customer experience Good in terms of home delivery but can suffer if order from several manufacturers is sent as
partial shipments.
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service perspective.
Returnability Expensive and difficult to implement.

88
Manufacturer storage with direct shipping
and in-transit merge

89
 Table : Performance
In-Transit Merge (1 of 2) Characteristics of In-Transit
Merge

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-
shipping.
Facilities and Handling costs higher than drop-shipping at carrier;
handling receiving costs lower at customer.
Information Investment is somewhat higher than for drop-
shipping.
90
In-Transit Merge (2 of 2)

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer Better than drop-shipping because only a single delivery is
experience received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
91
Distributor Storage with Carrier Delivery

92
Distributor Storage with Carrier Table Performance
Characteristics of Distributor
Delivery (1 of 2) Storage with Carrier Delivery

Cost Factor Performance

Inventory Higher than manufacturer storage. Difference is not
large for faster-moving items but can be large for very
slow-moving items.
Transportation Lower than manufacturer storage. Reduction is highest
for faster-moving items.
Facilities and Somewhat higher than manufacturer storage. The
handling difference can be large for very-slow-moving items.

Information Simpler infrastructure compared to manufacturer

storage.
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 Distributor Storage with Carrier
Delivery (2 of 2)

SERVICE FACTOR PERFORMANCE

Response time Faster than manufacturer storage.

Product variety Lower than manufacturer storage.

Product availability Higher cost to provide the same level of availability as manufacturer storage.

Customer experience Better than manufacturer storage with drop-shipping.

Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.

Returnability Easier than manufacturer storage.

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Distributor Storage with Last Mile Delivery

95
Distributor Storage with Last Mile
Delivery (1 of 2)

Cost Factor Performance

Inventory Higher than distributor storage with package carrier
delivery.
Transportation Very high cost given minimal scale economies. Higher
than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery, but
lower than a chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.
96
 Distributor Storage with Last Mile
Delivery (2 of 2)

Service Factor Performance

Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail
stores.
Product availability More expensive to provide availability than any other option except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier delivery.
Order visibility Less of an issue and easier to implement than manufacturer storage or distributor storage
with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and more expensive than a retail
network.

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Manufacturer or Distributor Storage with
Customer Pickup

98
Manufacturer or Distributor Storage Table Performance
Characteristics of Network
with Customer Pickup (1 of 2) with Customer Pickup Sites

Cost Factor Performance

Inventory Can match any other option, depending on the location of
inventory.
Transportation Lower than the use of package carriers, especially if using
an existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built.
Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.

Information Significant investment in infrastructure required.

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 Manufacturer or Distributor Storage
with Customer Pickup (2 of 2)

Service Factor Performance

Response time Similar to package carrier delivery with manufacturer or distributor storage. Same-
day pickup is possible for items stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery. Experience is
sensitive to capability of pickup location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.

100
Retail Storage with Customer Pickup

101
 Retail Storage with Customer Pickup Table Performance Characteristics
of Retail Storage with Customer
(1 of 2) Pickup Sites

Cost Factor Performance

Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling cost at
the pickup site can be significant for online and phone
orders.
Information Some investment in infrastructure required for online and
phone orders.

102
 Retail Storage with Customer Pickup
(2 of 2)

Service Factor Performance

Response time Same-day (immediate) pickup possible for items stored locally at pickup site.

Product variety Lower than all other options.

Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative experience
by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone orders.

Returnability Easier than other options because retail store can provide a substitute.
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 104

Comparative Performance of Delivery Network Designs (1 of 2)

Rank of Delivery Network Designs
Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
104
Storage with Storage Storage with Storage with Storage with Distributor
Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Delivery Pickup
Response 1 4 4 3 2 4
time
Product 4 1 1 2 3 1
variety
Product 4 1 1 2 3 1
availability
Customer Varies From 1 4 3 2 1 5
experience to 5
Time to market 4 1 1 2 3 1

Order visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Key: 1 corresponds to the best performance and 6 the worst performance.

 105

Comparative Performance of Delivery Network Designs (2

of 2)
105

Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/

Storage with Storage Storage with Storage with Storage with Distributor
Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Delivery Pickup
Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility and 6 1 2 3 4 5
handling
Information 1 4 4 3 2 5

Key: 1 corresponds to the best performance and 6 the worst performance.

Delivery Networks for Different Product/ Customer
Characteristics (1 of 2)
Table 4-8 Performance of Delivery Networks for Different Product/Customer Characteristics

Distributor Manufacturer/
Retail Manufacturer Manufacturer Distributor
Storage with Distributor
Storage with Storage Storage with Storage with
Blank Package Storage with
Customer with Direct In-Transit Last-Mile
Carrier Customer
Pickup Shipping Merge Delivery
Delivery Pickup

High-demand +2 −2 −1 0 +1 −1
product

Medium- +1 −1 0 +1 0 0
demand
product

Low-demand −1 +1 0 +1 −1 +1
Product

106
Delivery Networks for
Different Product/ • Key: +2 = very suitable; +1 = somewhat suitable; 0 =
Customer Characteristics (2 neutral; −1 = somewhat unsuitable; −2 = very unsuitable.
of 2)

Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/

Storage with Storage Storage with Storage with Storage with Distributor
Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Delivery Pickup

Very-low-demand −2 +2 +1 0 −2 +1
product

High product value −1 +2 +1 +1 0 +2

Quick desired response +2 -2 −2 −1 +1 -2

High product variety −1 +2 0 +1 0 +2

Low customer effort −2 +1 +2 +2 +2 −1

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 Online Sales

Online sales refer to the process of selling products or services over the
internet. This can involve a variety of platforms, including company websites,
third-party marketplaces like Amazon and eBay, and social media platforms.
• Key Features:
1.Convenience: Customers can shop from anywhere and at any time.
2.Variety: Access to a wide range of products from different sellers.
3.Comparison: Easy comparison of products and prices.
4.Personalization: Targeted recommendations based on browsing and
purchase history.
5.Payment Options: Multiple payment methods including credit/debit cards,
digital wallets, and BNPL (Buy Now, Pay Later) services.

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 1.Competition: High competition due to low
entry barriers.

2.Logistics: Efficient and timely delivery

management.
Online Sales
Challenges 3.Returns: Handling product returns and
customer service.
4.Security: Ensuring secure transactions and
protecting customer data.

109
 • Omni-channel retailing is a multi-channel sales approach
that provides the customer with an integrated shopping
experience. The customer can be shopping online from a
desktop or mobile device, or in a brick-and-mortar store,
and the experience will be seamless.

• Key Features:
Omni- 1.Unified Experience: Consistent customer experience
across all channels.
Channel 2.Integration: Synchronization of inventory, customer data,
and promotions across channels.
Retailing 3.Flexibility: Options like buy online, pick up in-store
(BOPIS), and return in-store.
4.Customer-Centric: Focus on enhancing customer
satisfaction and engagement.
5.Data Utilization: Leveraging data from all channels to
personalize marketing and improve customer service.

110
 1.Technology Integration: Ensuring seamless
integration of different systems and
platforms.
Omni- 2.Inventory Management: Real-time
Channel inventory visibility across all channels.
Retailing 3.Cost: Higher operational costs due to
multiple channels.
Challenges 4.Consistency: Maintaining consistent pricing,
branding, and customer service across
channels.

111
Alternatives in
Omni-Channel
Retailing

112
Alternatives in Omni-Channel Retailing (1 of 3)

• Traditional Retail
• Face-to-face interaction
• Customer leaves with product
• Many facilities close to customers
• High level of inventory
• Low transportation costs

113
Alternatives in Omni-Channel Retailing (2 of 3)

• Showrooms
• Face-to-face interaction
• Product ordered for later pickup
• Low level of inventory
• Smaller facilities
• More transportation and information infrastructure than traditional retail

114
Alternatives in Omni-Channel Retailing (3 of 3)

• Online Information + Home Delivery

• Aggregation of inventories
• Few locations
• High transportation costs
• Online Information + Pickup
• Reduces outbound transportation costs
• Customer must travel to pickup location

115
Performance of Channels (1 of 3)

• Response time to customers

• Picking up physical products faster than other channels
• Online channel may be fastest for information goods
• Product variety
• Easier to offer larger selection remotely
• Product availability
• Aggregating inventory improves product availability

116
Performance of Channels (2 of 3)

• Customer experience
• Channels have complementarity strengths
• Faster time to market
• Online/showrooms are quicker than retailing
• Order Visibility
• Critical for showrooms or online
• Automatic in retail

117
Performance of Channels (3 of 3)

• Returnability
• Easier with physical locations
• Proportion of returns likely to be higher when information exchange is
remote
• Direct Sales to Customers
• Manufacturers can use remote information exchange for direct access to
customers
• Efficient Funds Transfer
• Internet and smartphones

118
Performance of Channels in Terms of Cost (1 of 2)

• Inventory
• Lower inventory levels if customers will wait
• Postpone variety until after the customer order is received
• Facilities
• Costs related to the physical facilities in a network
• Costs associated with the operations in these facilities

119
Performance of Channels in Terms of Cost (2 of 2)

• Transportation
• Lower cost of “transporting” information goods in digital form
• For nondigital, aggregating inventories increases outbound transportation
• Information
• Investment higher for channels that provide information remotely

120
Relative Costs for Omni-Channel Table Relative Costs for
Omni-Channel Alternatives
Alternatives

Blank Traditional Showrooms + Online Online

Retail Home Information + Home Information +
Delivery Delivery Pickup

Inventory High Low - Medium Low Low - Medium

Facilities High Medium Low Low - Medium
Transportation by Low High High Medium
retailer
Transportation High High Low Medium
by customer
Information Low High High High
121
Framework for Omni-Channel Retailing (1 of 4)

• Product characteristics and customer needs influence choice of channel

• Product dimensions
• Demand uncertainty
• Value
• Information complexity
• Customer dimensions
• Willingness to pay
▪ Price conscious/service conscious

122
Framework for Omni-Channel Table Product Demand
Uncertainty and Omni-Channel
Retailing (2 of 4) Retailing

Blank Predictable Demand Unpredictable Demand Product

Product
Traditional Retail Compete on price Compete on service for high
information complexity products
Showrooms Not suitable Compete on price and variety
for high information complexity
products
Online Information + Compete on service Compete on price and variety
Home Delivery
Online Information + Compete on ability to More competitive on price than
Pickup provide service at a lower home delivery option
price
123
 Framework for Omni-Channel Table Product Value and
Omni-Channel Retailing
Retailing (3 of 4)

BLANK LOW VALUE PRODUCT HIGH VALUE PRODUCT

Traditional Retail Compete on price for predictable Compete on service for products with uncertain
demand products demand and high information complexity

Showrooms Compete on high variety at reasonable Compete on price for

price for high information complexity customizable, high information
Products complexity products
Online Information + Home Compete on service Compete on price and variety
Delivery
Online Information + Pickup Compete on ability to provide service at More competitive on price than
a home delivery option
lower price

124
Framework for Omni-Channel Table Product Information
Complexity and Omni-Channel
Retailing (4 of 4) Retailing

High Information Complexity

Blank Low Information Complexity Product
Product

Traditional Retail Compete on price for predictable Compete on service for uncertain
demand products demand products

Showrooms Not suitable Compete on price for uncertain

demand products

Online Information + Compete on price for uncertain Compete on service in terms

Home Delivery demand products of variety and availability for
uncertain demand products

Online Information + Compete on price for uncertain A slightly cheaper option to

Pickup demand products compete on service in terms
of variety and availability for
uncertain demand products

125
The Role of Network Design

• Network design decisions

• How many manufacturing plants, production lines, distribution centers, cross-
docking facilities?
• Where should facilities be located?
• How much capacity at each facility?
• Which products?
• What markets?
• Revisit design decisions after market changes, mergers, or factor cost changes

126
Factors Influencing Network Design Decisions

• Strategic Factors
• Competitive Factors
• Positive externalities
• Locating to split the market
• Political Factors
• Infrastructure Factors
• Customer Response Time and Service Level
• Total Logistics Cost
• Macroeconomic Factors
• Tariffs and tax incentives
• Exchange-rate and demand risk

127
Framework for Network Design Decisions (1 of
4)
• Maximize the overall profitability of the supply chain network while providing
customers with the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
• to decide on locations and capacities
• to assign current demand to facilities and identify transportation lanes

128
Framework
for Network
Design
Decisions

129
Framework for Network Design Decisions (2 of
4)
• Phase I: Define a Supply Chain Strategy/Design
• Clear definition of the firm’s competitive strategy
• Forecast the likely evolution of global competition
• Identify constraints on available capital
• Determine broad supply strategy

130
Framework for Network Design Decisions (3 of
4)
• Phase II: Define the Regional Facility Configuration
• Forecast of the demand by country or region
• Identify fixed and variable costs, economies of scale or scope
• Identify regional tariffs, requirements for local production, tax incentives, and
export or import restrictions
• Identify competitors
• Identify demand risk, exchange-rate risk, political risk

131
Framework for Network Design Decisions (4 of
4)
• Phase III: Select a Set of Desirable Potential Sites
• Hard infrastructure requirements
• Soft infrastructure requirements
• Phase IV: Location Choices and Market Allocation

132
Thank you

133