discussion 200 word

 After you have read the above resource, name a local business in your  community and describe how they could balance responsiveness and  efficiency to maximize how well the company’s supply chain serves its  market.  No national companies (Apple, Netflix, Amazon, Coke, Nike,  etc.) 

1

Chapter 1

Key Concepts
of Supply Chain
Management

After reading this chapter you will be able to

●● Appreciate what a supply chain is and what it does

●● Understand where your company fits in the supply chains
it participates in and the role it plays in those supply chains

●● Discuss ways to align your supply chain with your
business strategy

●● Start an intelligent conversation about the supply chain
management issues in your company

T
his book is organized to give you a solid grounding in the “nuts

and bolts” of supply chain management

.

The book explains the es-

sential concepts and practices and then shows examples of how to

put them to use. When you finish you will have a solid foundation in

supply chain management to work from.

The first three chapters give you a working understanding of the key

principles and business operations that drive any supply chain. The next

four chapters present the techniques, technologies, and metrics to use to

improve your internal operations and coordinate more effectively with

your customers and suppliers in the supply chains your company is a part of.

Chapter 7 presents specific ideas for using technologies such as social media

and real-time simulation gaming to promote supply chain collaboration.

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2 EssEntials of supply Chain Management

The last three chapters show you how to find supply chain oppor-

tunities and respond effectively to best capitalize on these opportunities.

Case studies are used to illustrate supply chain challenges and to present

solutions for those challenges. These case studies and their solutions

bring together the material presented in the rest of the book and show

how it applies to real-world business situations.

Supply chains encompass the companies and the business activities

needed to design, make, deliver, and use a product or service. Businesses

depend on their supply chains to provide them with what they need to

survive and thrive. Every business fits into one or more supply chains

and has a role to play in each of them.

The pace of change and the uncertainty about how markets will

evolve has made it increasingly important for companies to be aware

of the supply chains they participate in and to understand the roles that

they play. Those companies that learn how to build and participate in

strong supply chains will have a substantial competitive advantage in

their

markets.

Nothing Entirely New…Just a Significant Evolution

The practice of supply chain management is guided by some basic under-

lying concepts that have not changed much over the centuries. Several

hundred years ago, Napoleon made the remark, “An army marches on

its stomach.” Napoleon was a master strategist and a skillful general and

this remark shows that he clearly understood the importance of what we

would now call an efficient supply chain. Unless the soldiers are fed, the

army cannot move.

Along these same lines, there is another saying that goes, “Amateurs

talk strategy and professionals talk logistics.” People can discuss all sorts

of grand strategies and dashing maneuvers but none of that will be poss-

ible without first figuring out how to meet the day-to-day demands of

providing an army with fuel, spare parts, food, shelter, and ammunition.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 3

It is the seemingly mundane activities of the quartermaster and the sup-

ply sergeants that often determine an army’s success. This has many ana-

logies in business.

The term “supply chain management” arose in the late 1980s and

came into widespread use in the 1990s. Prior to that time, businesses

used terms such as “logistics” and “operations management” instead.

Here are some definitions of a supply chain:

• “A supply chain is the alignment of firms that bring products

or services to market.”—from Lambert, Stock, and Ellram.

(Lambert, Douglas M., James R. Stock, and Lisa M. Ellram,

1998, Fundamentals of Logistics Management, Boston, MA: Irwin/

McGraw-Hill, Chapter 14).

• “A supply chain consists of all stages involved, directly or indi-

rectly, in fulfilling a customer request. The supply chain not only

includes the manufacturer and suppliers, but also transporters,

warehouses, retailers, and customers themselves.”—from Chopra

and Meindl (Chopra, Sunil, and Peter Meindl, 2003, Supply

Chain, Second Edition, Upper Saddle River, NJ: Prentice-Hall,

Inc., Chapter 1).

• “A supply chain is a network of facilities and distribution op-

tions that performs the functions of procurement of materials,

transformation of these materials into intermediate and finished

products, and the distribution of these finished products to cus-

tomers.”—from Ganeshan and Harrison (Ganeshan, Ram, and

Terry P. Harrison, 1995, “An Introduction to Supply Chain

Management,” Department of Management Sciences and Infor-

mation Systems, 303 Beam Business Building, Penn State Uni-

versity, University Park, Pennsylvania).

If this is what a supply chain is then we can define supply chain

management as the things we do to influence the behavior of the supply

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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4 EssEntials of supply Chain Management

chain and get the results we want. Some definitions of supply chain

management are:

• “The systemic, strategic coordination of the traditional business

functions and the tactics across these business functions within

a particular company and across businesses within the supply

chain, for the purposes of improving the long-term perfor-

mance of the individual companies and the supply chain as a

whole.”—from Mentzer, DeWitt, Keebler, Min, Nix, Smith, and

Zacharia (Mentzer, John T., William DeWitt, James S. Keebler,

Soonhong Min, Nancy W. Nix, Carlo D. Smith, and Zach G.

Zacharia, 2001, “Defining Supply Chain Management,” Journal

of Business Logistics, Vol. 22, No. 2, p. 18).

• “Supply chain management is the coordination of production,

inventory, location, and transportation among the participants in

a supply chain to achieve the best mix of responsiveness and ef-

ficiency for the market being served.”—my own words.

There is a difference between the concept of supply chain manage-

ment and the traditional concept of logistics. Logistics typically refers to

activities that occur within the boundaries of a single organization and

supply chains refer to networks of companies that work together and

coordinate their actions to deliver a product to market. Also, traditional

logistics focuses its attention on activities such as procurement, distri-

bution, maintenance, and inventory management. Supply chain manage-

ment acknowledges all of traditional logistics and also includes activities

such as marketing, new product development, finance, and customer

service.

In the wider view of supply chain thinking, these additional activities

are now seen as part of the work needed to fulfill customer requests.

Supply chain management views the supply chain and the organizations

in it as a single entity. It brings a systems approach to understanding

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 5

and managing the different activities needed to coordinate the flow of

products and services to best serve the ultimate customer. This systems

approach provides the framework in which to best respond to busi-

ness requirements that otherwise would seem to be in conflict with

each other.

Taken individually, different supply chain requirements often have

conflicting needs. For instance, the requirement of maintaining high lev-

els of customer service calls for maintaining high levels of inventory, but

then the requirement to operate efficiently calls for reducing inventory

levels. It is only when these requirements are seen together as parts of

a larger picture that ways can be found to effectively balance their dif-

ferent demands.

Effective supply chain management requires simultaneous improve-

ments in both customer service levels and the internal operating ef-

ficiencies of the companies in the supply chain. Customer service at its

most basic level means consistently high order-fill rates, high on-time

delivery rates, and a very low rate of products returned by customers for

whatever reason. Internal efficiency for organizations in a supply chain

means that these organizations get an attractive rate of return on their

investments in inventory and other assets and that they find ways to

lower their operating and sales expenses.

There is a basic pattern to the practice of supply chain management.

Each supply chain has its own unique set of market demands and oper-

ating challenges and yet the issues remain essentially the same in every

case. Companies in any supply chain must make decisions individually

and collectively regarding their actions in five areas:

1. Production—What products does the market want? How much

of which products should be produced and by when? This

activity includes the creation of master production schedules

that take into account plant capacities, workload balancing,

quality control, and equipment maintenance.

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6 EssEntials of supply Chain Management

2. Inventory—What inventory should be stocked at each stage in a

supply chain? How much inventory should be held as raw mat-

erials, semifinished, or finished goods? The primary purpose of

inventory is to act as a buffer against uncertainty in the supply

chain. However, holding inventory can be expensive, so what

are the optimal inventory levels and reorder points?

3. Location—Where should facilities for production and inventory

storage be located? Where are the most cost efficient locations

for production and for storage of inventory? Should existing

facilities be used or new ones built? Once these decisions are

made they determine the possible paths available for product to

flow through for delivery to the final consumer.

4. Transportation—How should inventory be moved from one

supply chain location to another? Air-freight and truck delivery

are generally fast and reliable but they are expensive. Shipping

by sea or rail is much less expensive but usually involves longer

transit times and more uncertainty. This uncertainty must be

compensated for by stocking higher levels of inventory. When

is it better to use which mode of transportation?

5. Information—How much data should be collected and how

much information should be shared? Timely and accurate

information holds the promise of better coordination and bet-

ter decision making. With good information, people can make

effective decisions about what to produce and how much, about

where to locate inventory, and how best to transport it.

The sum of these decisions will define the capabilities and effective-

ness of a company’s supply chain. The things a company can do and the

ways that it can compete in its markets are all very much dependent on

the effectiveness of its supply chain. If a company’s strategy is to serve

a mass market and compete on the basis of price, it had better have a

supply chain that is optimized for low cost. If a company’s strategy is to

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 7

serve a market segment and compete on the basis of customer service

and convenience, it had better have a supply chain optimized for respon-

siveness. Who a company is and what it can do is shaped by its supply

chain and by the markets it serves.

How the Supply Chain Works

Two influential source books that define principles and practices of

supply chain management are The Goal (Goldratt, Eliyahu M., 1984,

The Goal, Great Barrington, MA: The North River Press Publishing

Corporation); and Supply Chain Management, Fourth Edition by Sunil

Chopra and Peter Meindl. The Goal explores the issues and provides

answers to the problem of optimizing operations in any business system,

whether it be manufacturing, mortgage loan processing, or supply chain

management. Supply Chain Management, Fourth Edition is an in-depth

presentation of the concepts and techniques of the profession. Much of

the material presented in this chapter and in the next two chapters can

be found in greater detail in these two books.

Alexander the Great based his strategies and campaigns on his
army’s unique capabilities and these were made possible by effec-
tive supply chain management.

in the spirit of the saying, “amateurs talk strategy and professionals
talk logistics,” let’s look at the campaigns of alexander the Great.
For those who think that his greatness was only due to his ability to
dream up bold moves and cut a dashing figure in the saddle, think
again. alexander was a master of supply chain management and
he could not have succeeded otherwise. the authors from Greek
and Roman times who recorded his deeds had little to say about
something so apparently unglamorous as how he secured supplies

In The Real WoRld

(Continued)

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8 EssEntials of supply Chain Management

for his army. Yet, from these same sources, many small details
can be pieced together to show the overall supply chain picture
and how alexander managed it. a modern historian, Donald Engels,
has investigated this topic in his book Alexander the Great and
the Logistics of the Macedonian Army (Engles, Donald W., 1978,
Alexander the Great and the Logistics of the Macedonian Army, los
angeles, Ca: University of California Press).

He begins by pointing out that given the conditions and the technol-
ogy that existed in alexander’s time, his strategy and tactics had to
be very closely tied to his ability to get supplies and to run a lean,
efficient organization. the only way to transport large amounts of
material over long distances was by oceangoing ships or by barges
on rivers and canals. Once away from rivers and seacoasts, an army
had to be able to live off the land over which it traveled. Diminishing
returns set in quickly when using pack animals and carts to haul
supplies, because the animals themselves had to eat and would
soon consume all the food and water they were hauling unless they
could graze along the way.

alexander’s army was able to achieve its brilliant successes
because it managed its supply chain so well. the army had a logis-
tics structure that was fundamentally different from other armies
of the time. in other armies the number of support people and
camp followers was often as large as the number of actual fight-
ing soldiers, because armies traveled with huge numbers of carts
and pack animals to carry their equipment and provisions, as well
as the people needed to tend them. in the Macedonian army the
use of carts was severely restricted. soldiers were trained to carry
their own equipment and provisions. Other contemporary armies
did not require their soldiers to carry such heavy burdens but they
paid for this because the resulting baggage trains reduced their
speed and mobility. the result of the Macedonian army’s logistics
structure was that it became the fastest, lightest, and most mobile
army of its time. it was capable of making lightning strikes against
an opponent, often before they were even aware of what was

In The Real WoRld (continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 9

happening. Because the army was able to move quickly and sud-
denly, alexander could use this capability to devise strategies and
employ tactics that allowed him to surprise and overwhelm enemies
that were numerically much larger.

the picture that emerges of how alexander managed his supply chain
is an interesting one. For instance, time and again the historical sourc-
es mention that before he entered a new territory, he would receive
the surrender of its ruler and arrange in advance with local officials for
the supplies his army would need. if a region did not surrender to him
in advance, alexander would not commit his entire army to a campaign
in that land. He would not risk putting his army in a situation where
it could be crippled or destroyed by a lack of provisions. instead, he
would gather intelligence about the routes, the resources, and the cli-
mate of the region and then set off with a small, light force to surprise
his opponent. the main army would remain behind at a well-stocked
base until alexander secured adequate supplies for it to follow.

Whenever the army set up a new base it looked for an area that
provided easy access to a navigable river or a seaport. then ships
would arrive from other parts of alexander’s empire, bringing in
large amounts of supplies. the army always stayed in its winter
camp until the first spring harvest of the new year so that food
supplies would be available. When it marched, it avoided dry or
uninhabited areas and moved through river valleys and populated
regions whenever possible so the horses could graze and the army
could requisition supplies along the route.

alexander had a deep understanding of the capabilities and limita-
tions of his supply chain. He learned well how to formulate strate-
gies and use tactics that built upon the unique strengths that his
logistics and supply chain capabilities gave him, and he wisely took
measures to compensate for the limitations of his supply chain.
His opponents often outnumbered him and were usually fighting
on their own home territory. Yet their advantages were undermined
by clumsy and inefficient supply chains that restricted their ability
to act and limited their options for opposing alexander’s moves.

In The Real WoRld (continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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10 EssEntials of supply Chain Management

The goal or mission of supply chain management can be defined

using Eli Goldratt’s words as “Increase throughput while simultaneous-

ly reducing both inventory and operating expense.” In this definition,

throughput refers to the rate at which sales to the end customer occur.

Depending on the market being served, sales or throughput occur for

different reasons. In some markets, customers value and will pay for high

levels of service. In other markets customers seek simply the lowest price

for an item.

As we saw in the previous section, there are five areas where com-

panies can make decisions that will define their supply chain capa-

bilities: production; inventory; location; transportation; and infor-

mation. Chopra and Meindl define the first four and I add the fifth as

performance drivers that can be managed to produce the capabilities

needed for a given supply chain.

Effective supply chain management calls first for an understanding

of each driver and how it operates. Each driver has the ability to directly

affect the supply chain and enable certain capabilities. The next step is

to develop an appreciation for the results that can be obtained by mix-

ing different combinations of these drivers. Let’s start by looking at the

drivers individually.

Production

Production refers to the capacity of a supply chain to make and store

products. The facilities of production are factories and warehouses.

The fundamental decision that managers face when making produc-

tion decisions is how to resolve the trade-off between responsiveness

and efficiency. If factories and warehouses are built with a lot of excess

capacity, they can be very flexible and respond quickly to wide swings

in product demand. Facilities where all or almost all capacity is being

used are not capable of responding easily to fluctuations in demand. On

the other hand, capacity costs money and excess capacity is idle capacity

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Key Concepts of supply Chain Management 11

not in use and not generating revenue. So the more excess capacity that

exists, the less efficient the operation becomes.

Factories can be built to accommodate one of two approaches to

manufacturing:

1. Product Focus—A factory that takes a product focus performs the

range of different operations required to make a given product

line from fabrication of different product parts to assembly of

these parts.

2. Functional Focus—A functional approach concentrates on

performing just a few operations such as only making a

select group of parts or only doing assembly. These functions

can be applied to making many different kinds of products.

A product approach tends to result in developing expertise about

a given set of products at the expense of expertise about any particu-

lar function. A functional approach results in expertise about particular

functions instead of expertise in a given product. Companies need to

decide which approach or what mix of these two approaches will give

them the capability and expertise they need to best respond to customer

demands.

As with factories, warehouses too can be built to accommodate

different approaches. There are three main approaches to use in ware-

housing:

1. Stock Keeping Unit (SKU) Storage—In this traditional approach,

all of a given type of product is stored together. This is an ef-

ficient and easy to understand way to store products.

2. Job Lot Storage—In this approach, all the different products re-

lated to the needs of a certain type of customer or related to

the needs of a particular job are stored together. This allows for

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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12 EssEntials of supply Chain Management

an efficient picking and packing operation but usually requires

more storage space than the traditional SKU storage approach.

3. Crossdocking—An approach that was pioneered by Wal-Mart

in its drive to increase efficiencies in its supply chain. In this

approach, product is not actually warehoused in the facility.

Instead the facility is used to house a process where trucks

from suppliers arrive and unload large quantities of differ-

ent products. These large lots are then broken down into

smaller lots. Smaller lots of different products are recom-

bined according to the needs of the day and quickly loaded

onto outbound trucks that deliver the products to their final

destinations.

Inventory

Inventory is spread throughout the supply chain and includes every-

thing from raw material to work in process to finished goods that are

held by the manufacturers, distributors, and retailers in a supply chain.

Again, managers must decide where they want to position themselves

in the trade-off between responsiveness and efficiency. Holding large

amounts of inventory allows a company or an entire supply chain to

be very responsive to fluctuations in customer demand. However, the

creation and storage of inventory is a cost and to achieve high levels of

efficiency, the cost of inventory should be kept as low as possible.

There are three basic decisions to make regarding the creation and

holding of inventory:

1. Cycle Inventory—This is the amount of inventory needed to

satisfy demand for the product in the period between purchases

of the product. Companies tend to produce and to purchase

in large lots in order to gain the advantages that economies of

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 13

scale can bring. However, with large lots also come increased

carrying costs. Carrying costs come from the cost to store,

handle, and insure the inventory. Managers face the tradeoff

between the reduced cost of ordering and better prices offered

by purchasing product in large lots and the increased carry-

ing cost of the cycle inventory that comes with purchasing in

large lots.

2. Safety Inventory—Inventory that is held as a buffer against un-

certainty. If demand forecasting could be done with perfect

accuracy, then the only inventory that would be needed would

be cycle inventory. But since every forecast has some degree of

uncertainty in it, we cover that uncertainty to a greater or lesser

degree by holding additional inventory in case demand is sud-

denly greater than anticipated. The tradeoff here is to weigh the

costs of carrying extra inventory against the costs of losing sales

due to insufficient inventory.

3. Seasonal Inventory—This is inventory that is built up in

anticipation of predictable increases in demand that occur

at certain times of the year. For example, it is predictable

that demand for antifreeze will increase in the winter. If a

company that makes antifreeze has a fixed production rate

that is expensive to change, then it will try to manufacture

product at a steady rate all year long and build up inventory

during periods of low demand to cover for periods of high

demand that will exceed its production rate. The alternative

to building up seasonal inventory is to invest in flexible

manufacturing facilities that can quickly change their rates

of production of different products to respond to increases in

demand. In this case, the tradeoff is between the cost of car-

rying seasonal inventory and the cost of having more flexible

production capabilities.

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14 EssEntials of supply Chain Management

Location

Location refers to the geographical site of supply chain facilities. It also

includes the decisions related to which activities should be performed

in each facility. The responsiveness versus efficiency tradeoff here is

the decision whether to centralize activities in fewer locations to gain

economies of scale and efficiency, or to decentralize activities in many

locations close to customers and suppliers in order for operations to be

more responsive.

When making location decisions, managers need to consider a range

of factors that relate to a given location including the cost of facilities,

the cost of labor, skills available in the workforce, infrastructure condi-

tions, taxes and tariffs, and proximity to suppliers and customers. Loca-

tion decisions tend to be very strategic decisions because they commit

large amounts of money to long-term plans.

Location decisions have strong impacts on the cost and performance

characteristics of a supply chain. Once the size, number, and location of

facilities are determined, that also defines the number of possible paths

through which products can flow on the way to the final customer.

Location decisions reflect a company’s basic strategy for building and

delivering its products to

market.

Transportation

This refers to the movement of everything from raw material to

finished goods between different facilities in a supply chain. In trans-

portation the tradeoff between responsiveness and efficiency is mani-

fested in the choice of transport mode. Fast modes of transport such

as airplanes are very responsive but also more costly. Slower modes

such as ship and rail are very cost efficient but not as responsive. Since

transportation costs can be as much as a third of the operating cost of

a supply chain, decisions made here are very important.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 15

There are six basic modes of transport that a company can choose

from:

1. Ship—which is very cost efficient but also the slowest mode of

transport. It is limited to use between locations that are situated

next to navigable waterways and facilities such as harbors and

canals.

2. Rail—which is also very cost efficient but can be slow. This

mode is also restricted to use between locations that are served

by rail lines.

3. Pipelines—which can be very efficient but are restricted to

commodities that are liquids or gases such as water, oil, and

natural gas.

4. Trucks—which are a relatively quick and very flexible mode

of transport. Trucks can go almost anywhere. The cost of this

mode is prone to fluctuations though, as the cost of fuel fluc-

tuates and the condition of roads varies.

5. Airplanes—which are a very fast mode of transport and are very

responsive. This is also the most expensive mode, and it is some-

what limited by the availability of appropriate airport facilities.

6. Electronic Transport—which is the fastest mode of transport

and is very flexible and cost efficient. However, it can only

be used for movement of certain types of products such as

electric energy, data, and products composed of data such as

music, pictures, and text. Someday technology that allows us

to convert matter to energy and back to matter again may

completely rewrite the theory and practice of supply chain

management (“beam me up, Scotty…”).

Given these different modes of transportation and the location of

the facilities in a supply chain, managers need to design routes and

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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16 EssEntials of supply Chain Management

networks for moving products. A route is the path through which

products move, and networks are composed of the collection of

the paths and facilities connected by those paths. As a general rule,

the higher the value of a product (such as electronic components or

pharmaceuticals), the more its transport network should emphasize

responsiveness, and the lower the value of a product (such as bulk

commodities like grain or lumber), the more its network should

emphasize efficiency.

Information

Information is the basis upon which to make decisions regarding the

other four supply chain drivers. It is the connection between all of

the activities and operations in a supply chain. To the extent that this

connection is a strong one (i.e., the data is accurate, timely, and com-

plete), the companies in a supply chain will each be able to make good

decisions for their own operations. This will also tend to maximize the

profitability of the supply chain as a whole. That is the way that stock

markets or other free markets work and supply chains have many of the

same dynamics as markets.

Information is used for two purposes in any supply chain:

1. Coordinating daily activities related to the functioning of the

other four supply chain drivers: production; inventory; location;

and transportation. The companies in a supply chain use avail-

able data on product supply and demand to decide on weekly

production schedules, inventory levels, transportation routes,

and stocking locations.

2. Forecasting and planning to anticipate and meet future de-

mands. Available information is used to make tactical

forecasts to guide the setting of monthly and quarterly pro-

duction schedules and timetables. Information is also used

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 17

The Five Major
Supply Chain Drivers

Each market or group of customers has a specific set of needs. the
supply chains that serve different markets need to respond effec-
tively to these needs. some markets demand and will pay for high
levels of responsiveness. Other markets require their supply chains
to focus more on efficiency. the overall effect of the decisions
made concerning each driver will determine how well the supply
chain serves its market and how profitable it is for the participants
in that supply chain.

TIps & TechnIques

for strategic forecasts to guide decisions about whether to

build new facilities, enter a new market, or exit an existing

market.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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18 EssEntials of supply Chain Management

Wal-Mart is a company shaped by its supply chain and the efficiency
of its supply chain has made it a leader in the markets it serves.

sam Walton decided to build a company that would serve a mass
market and compete on the basis of price. He did this by creating
one of the world’s most efficient supply chains. the structure and
operations of this company have been defined by the need to lower
its costs and increase its productivity so that it could pass these sav-
ings on to its customers in the form of lower prices. the techniques
that Wal-Mart pioneered are now being widely adopted by its com-
petitors and by other companies serving entirely different markets.

Wal-Mart introduced concepts that are now industry standards.
Many of these concepts come directly from the way the company

execuTIve InsIghT

Within an individual company the tradeoff between responsiveness

and efficiency involves weighing the benefits that good information can

provide against the cost of acquiring that information. Abundant, accu-

rate information can enable very efficient operating decisions and better

forecasts but the cost of building and installing systems to deliver this

information can be very high.

Within the supply chain as a whole, the responsiveness versus ef-

ficiency tradeoff that companies make is one of deciding how much

information to share with the other companies and how much

information to keep private. The more information about product sup-

ply, customer demand, market forecasts, and production schedules that

companies share with each other, the more responsive everyone can be.

Balancing this openness however, are the concerns that each company

has about revealing information that could be used against it by a com-

petitor. The potential costs associated with increased competition can

hurt the profitability of a company.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 19

builds and operates its supply chain. let’s look at four such
concepts:

1 the strategy of expanding around distribution centers (DCs)

2 Using electronic data interchange (EDi) with suppliers

3 the “big box” store format

4 “Everyday low prices”

the strategy of expanding around DCs is central to the way Wal-
Mart enters a new geographical market. the company looks for
areas that can support a group of new stores, not just a single
new store. it then builds a new DC at a central location in the area
and opens its first store at the same time. the DC is the supply
chain bridgehead into the new territory. it supports the opening of
more new stores in the area at a very low additional cost. those
savings are passed along to the customers.

the use of EDi with suppliers provides the company two substantial
benefits. First of all this cuts the transaction costs associated with
the ordering of products and the paying of invoices. Ordering prod-
ucts and paying invoices are, for the most part, well-defined and
routine processes that can be made very productive and efficient
through EDi. the second benefit is that these electronic links with
suppliers allow Wal-Mart a high degree of control and coordination
in the scheduling and receiving of product deliveries. this helps to
ensure a steady flow of the right products at the right time, deliv-
ered to the right DCs, by all Wal-Mart suppliers.

the “big box” store format allows Wal-Mart to, in effect, combine a
store and a warehouse in a single facility and get great operating effi-
ciencies from doing so. the big box is big enough to hold large amounts
of inventory like a warehouse. and since this inventory is being held at
the same location where the customer buys it, there is no delay or cost
that would otherwise be associated with moving products from ware-
house to store. again, these savings are passed along to the customer.

execuTIve InsIghT (continued)

(Continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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20 EssEntials of supply Chain Management

“Everyday low prices” are a way of doing two things. the first thing is
to tell its price-conscious customers that they will always get the best
price. they need not look elsewhere or wait for special sales. the effect
of this message to customers helps Wal-Mart do the second thing,
which is to accurately forecast product sales. By eliminating special
sales and assuring customers of low prices, it smoothes out demand
swings, making demand more steady and predictable. this way stores
are more likely to have what customers want when they want it.

taken individually, these four concepts are each useful but their
real power comes from being used in connection with each other.
they combine to form a supply chain that drives a self-reinforcing
business process. Each concept builds on the strengths of the oth-
ers to create a powerful business model for a company that has
grown to become a dominant player in its markets.

there seem to be some similarities between Wal-Mart and alexander
the Great. Both developed very effective supply chains that were
central to their success.

execuTIve InsIghT (continued)

The Evolving Structure of Supply Chains

The participants in a supply chain are continuously making decisions

that affect how they manage the five supply chain drivers. Each organi-

zation tries to maximize its performance in dealing with these drivers

through a combination of outsourcing, partnering, and in-house exper-

tise. In the fast-moving markets of our present economy, a company

usually will focus on what it considers to be its core competencies in

supply chain management and outsource the rest.

This was not always the case though. In the slower-moving mass

markets of the industrial age it was common for successful companies to

attempt to own much of their supply chain. That was known as vertical

integration. The aim of vertical integration was to gain maximum ef-

ficiency through economies of scale (see Exhibit 1.1).

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 21

Old Supply Chains Versus New
Vertically integrated companies serving slow-moving mass markets
once attempted to own much of their supply chains. today’s fast-
moving markets require more flexible and responsive supply chains.

ExHiBit 1.1

Raw Materials
Company

Vertical
integration
has given way
to “ virtual
integration.”

Companies
now focus on
their core
competencies,
and partner
with other
companies to
create supply
chains for
fast-moving
markets.

Transportation
Company

Manufacturing
Company

Independent
Distributor

Independent
Retailer

Fragmented
Fast-Moving

Markets

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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22 EssEntials of supply Chain Management

In the first half of the 1900s, Ford Motor Company owned much

of what it needed to feed its car factories. It owned and operated iron

mines that extracted iron ore, steel mills that turned the ore into steel

products, plants that made component car parts, and assembly plants that

turned out finished cars. In addition, they owned farms where they grew

flax to make into linen car tops and forests that they logged and sawmills

where they cut the timber into lumber for making wooden car parts.

Ford’s famous River Rouge Plant was a monument to vertical integra-

tion—iron ore went in at one end and cars came out at the other end.

Henry Ford in his 1926 autobiography, Today and Tomorrow, boasted that

his company could take in iron ore from the mine and put out a car 81

hours later (Ford, Henry, 1926, Today and Tomorrow, Portland, Oregon:

Productivity Press, Inc.).

This was a profitable way of doing business in the more predictable,

one-size-fits-all industrial economy that existed in the early 1900s. Ford

and other businesses churned out mass amounts of basic products. But

as the markets grew and customers became more particular about the

kind of products they wanted, this model began to break down. It could

not be responsive enough or produce the variety of products that were

being demanded. For instance, when Henry Ford was asked about the

number of different colors a customer could request, he said, “They can

have any color they want as long as it’s black.” In the 1920s Ford’s market

share was more than 50 percent, but by the 1940s it had fallen to below

20 percent. Focusing on efficiency at the expense of being responsive to

customer desires was no longer a successful business model.

Globalization, highly competitive markets, and the rapid pace of

technological change are now driving the development of supply chains

where multiple companies work together, each company focusing on

the activities that it does best. Mining companies focus on mining,

timber companies focus on logging and making lumber, and manu-

facturing companies focus on different types of manufacturing from

making component parts to doing final assembly. This way people in

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Key Concepts of supply Chain Management 23

each company can keep up with rapid rates of change and keep learning

the new skills needed to compete in their particular businesses.

Where companies once routinely ran their own warehouses or op-

erated their own fleets of trucks, they now have to consider whether

those operations are really a core competency or whether it is more cost

effective to outsource those operations to other companies that make

logistics the center of their business. To achieve high levels of operating

efficiency and to keep up with continuing changes in technology, com-

panies need to focus on their core competencies. It requires this kind of

focus to stay competitive.

Instead of vertical integration, companies now practice “virtual

integration.” Companies find other companies whom they can work

with to perform the activities called for in their supply chains. How

a company defines its core competencies and how it positions itself

in the supply chains it serves is one of the most important decisions it

can make.

Participants in the Supply Chain

In its simplest form, a supply chain is composed of a company and the

suppliers and customers of that company. This is the basic group of

participants who create a simple supply chain. Extended supply chains

contain three additional types of participants. First there is the sup-

plier’s supplier or the ultimate supplier at the beginning of an extended

supply chain. Then there is the customer’s customer or ultimate cus-

tomer at the end of an extended supply chain. Finally there is a whole

category of companies who are service providers to other companies

in the supply chain. These are companies who supply services in logis-

tics, finance, marketing, and information technology.

In any given supply chain there is some combination of companies

who perform different functions. There are companies who are pro-

ducers, distributors or wholesalers, retailers, and companies or individuals

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24 EssEntials of supply Chain Management

who are the customers, the final consumers of a product. Supporting

these companies there will be other companies that are service providers

that provide a range of needed services.

Producers

Producers or manufacturers are organizations that make a product. This

includes companies that are producers of raw materials and companies

that are producers of finished goods. Producers of raw materials are or-

ganizations that mine for minerals, drill for oil and gas, and cut timber.

It also includes organizations that farm the land, raise animals, or catch

seafood. Producers of finished goods use the raw materials and sub-

assemblies made by other producers to create their products.

Producers can create products that are intangible items such as mu-

sic, entertainment, software, or designs. A product can also be a service

such as mowing a lawn, cleaning an office, performing surgery, or teach-

ing a skill. In many instances the producers of tangible, industrial prod-

ucts are moving to areas of the world where labor is less costly. Producers

in the developed world of North America, Europe, and parts of Asia are

increasingly producers of intangible items and services.

Distributors

Distributors are companies that take inventory in bulk from producers

and deliver a bundle of related product lines to customers. Distributors

are also known as wholesalers. They typically sell to other businesses

and they sell products in larger quantities than an individual consumer

would usually buy. Distributors buffer the producers from fluctuations

in product demand by stocking inventory and doing much of the sales

work to find and service customers. For the customer, distributors fulfill

the “Time and Place” function—they deliver products when and where

the customer wants them.

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Key Concepts of supply Chain Management 25

A distributor is typically an organization that takes ownership of

significant inventories of products that they buy from producers and sell

to consumers. In addition to product promotion and sales, other func-

tions the distributor performs are inventory management, warehouse

operations, and product transportation, as well as customer support and

post-sales service. A distributor can also be an organization that only

brokers a product between the producer and the customer, and never

takes ownership of that product. This kind of distributor performs main-

ly the functions of product promotion and sales. In both of these cases,

as the needs of customers evolve and the range of available products

changes, the distributor is the agent that continually tracks customer

needs and matches them with products available.

Retailers

Retailers stock inventory and sell in smaller quantities to the general

public. This organization also closely tracks the preferences and de-

mands of the customers that it sells to. It advertises to its customers and

often uses some combination of price, product selection, service, and

convenience as the primary draw to attract customers for the products it

sells. Discount department stores attract customers using price and wide

product selection. Upscale specialty stores offer a unique line of prod-

ucts and high levels of service. Fast food restaurants use convenience and

low prices as their draw.

Customers

Customers or consumers are any organization that purchases and uses a

product. A customer organization may purchase a product in order to

incorporate it into another product that they in turn sell to other cus-

tomers. Or a customer may be the final end user of a product who buys

the product in order to consume it.

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26 EssEntials of supply Chain Management

Service Providers

These are organizations that provide services to producers, distributors,

retailers, and customers. Service providers have developed special ex-

pertise and skills that focus on a particular activity needed by a supply

chain. Because of this, they are able to perform these services more ef-

fectively and at a better price than producers, distributors, retailers, or

consumers could do on their own.

Some common service providers in any supply chain are pro-

viders of transportation services and warehousing services. These are

trucking companies and public warehouse companies and they are

known as logistics providers. Financial service providers deliver ser-

vices such as making loans, doing credit analysis, and collecting on

past due invoices. These are banks, credit rating companies, and col-

lection agencies. Some service providers deliver market research and

advertising, while others provide product design, engineering services,

legal services, and management advice. Still other service providers

offer information technology and data collection services. All of these

service providers are integrated to a greater or lesser degree into the

ongoing operations of the producers, distributors, retailers, and con-

sumers in the supply chain.

Supply chains are composed of repeating sets of participants that

fall into one or more of these categories. Over time the needs of the

supply chain as a whole remain fairly stable. What changes is the mix

of participants in the supply chain and the roles that each participant

plays. In some supply chains, there are few service providers because the

other participants perform these services on their own. In other supply

chains very efficient providers of specialized services have evolved and

the other participants outsource work to these service providers instead

of doing it themselves. Examples of supply chain structure are shown in

Exhibit 1.2.

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Key Concepts of supply Chain Management 27

Supply Chain Structure

ExHiBit 1.2

Supplier

Ultimate
Supplier

Ultimate
CustomerSupplier Company

Service
Provider

Product
Designer

Raw
Material
Producer

Manufacturer Distributor Retailer
Retail

Customer

Logistics
Provider

Finance
Provider

Business
Customer

Market
Research

Customer

CustomerCompany

Aligning the Supply Chain with Business Strategy

A company’s supply chain is an integral part of its approach to the markets

it serves. The supply chain needs to respond to market requirements

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28 EssEntials of supply Chain Management

and do so in a way that supports the company’s business strategy. The

business strategy a company employs starts with the needs of the cus-

tomers that the company serves or will serve. Depending on the needs of

its customers, a company’s supply chain must deliver the appropriate mix

of responsiveness and efficiency. A company whose supply chain allows

it to more efficiently meet the needs of its customers will gain market

share at the expense of other companies in that market and also will be

more profitable.

For example, let’s consider two companies and the needs that their

supply chains must respond to. The two companies are 7-Eleven and

Sam’s Club, which is a part of Wal-Mart. The customers who shop at

convenience stores like 7-Eleven have a different set of needs and pref-

erences from those who shop at a discount warehouse like Sam’s Club.

The 7-Eleven customer is looking for convenience and not the lowest

price. That customer is often in a hurry, and prefers that the store be

nearby and have enough variety of products so that they can pick up

small amounts of common household or food items that they need

immediately. Sam’s Club customers are looking for the lowest price.

They are not in a hurry and are willing to drive some distance and buy

large quantities of limited numbers of items in order to get the lowest

price possible.

Clearly the supply chain for 7-Eleven needs to emphasize re-

sponsiveness. That group of customers expects convenience and will

pay for it. On the other hand, the Sam’s Club supply chain needs to

focus tightly on efficiency. The Sam’s Club customer is very price

conscious and the supply chain needs to find every opportunity to

reduce costs so that these savings can be passed on to the customers.

Both of these companies’ supply chains are well aligned with their

business strategies and because of this they are each successful in their

markets.

There are three steps to use in aligning your supply chain with

your business strategy. The first step is to understand the markets that

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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Key Concepts of supply Chain Management 29

your company serves. The second step is to define the strengths or

core competencies of your company and the role the company can

or could play in serving its markets. The last step is to develop the

needed supply chain capabilities to support the roles your company

has chosen.

Understand the Markets Your Company Serves

Begin by asking questions about your customers. What kind of cus-

tomer does your company serve? What kind of customer does your

customer sell to? What kind of supply chain is your company a part of ?

The answers to these questions will tell you what supply chains your

company serves and whether your supply chain needs to emphasize

responsiveness or efficiency. Chopra and Meindl have defined the fol-

lowing attributes that help to clarify requirements for the customers you

serve. These attributes are:

• The quantity of the product needed in each lot—Do your customers

want small amounts of products or will they buy large quan-

tities? A customer at a convenience store or a drug store buys in

small quantities. A customer of a discount warehouse club, such

as Sam’s Club, buys in large quantities.

• The response time that customers are willing to tolerate—Do your

customers buy on short notice and expect quick service or is a

longer lead time acceptable? Customers of a fast food restaurant

certainly buy on short notice and expect quick service. Cus-

tomers buying custom machinery would plan the purchase in

advance and expect some lead time before the product could be

delivered.

• The variety of products needed—Are customers looking for a nar-

row and well-defined bundle of products or are they looking for

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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30 EssEntials of supply Chain Management

a wide selection of different kinds of products? Customers of a

fashion boutique expect a narrowly defined group of products.

Customers of a “big box” discount store like Wal-Mart expect a

wide variety of products to be available.

• The service level required—Do customers expect all products to be

available for immediate delivery or will they accept partial deliv-

eries of products and longer lead times? Customers of a music

store expect to get the CD they are looking for immediately or

they will go elsewhere. Customers who order a custom-built new

machine tool expect to wait a while before delivery.

• The price of the product—How much are customers willing to

pay? Some customers will pay more for convenience or high

levels of service and other customers look to buy based on the

lowest price they can get.

• The desired rate of innovation in the product—How fast are new

products introduced and how long before existing products be-

come obsolete? In products such as electronics and computers,

customers expect a high rate of innovation. In other products,

such as house paint, customers do not desire such a high rate of

innovation.

Define Core Competencies of Your Company

The next step is to define the role that your company plays or wants

to play in these supply chains. What kind of supply chain participant is

your company? Is your company a producer, a distributor, a retailer, or

a service provider? What does your company do to enable the supply

chains that it is part of? What are the core competencies of your com-

pany? How does your company make money? The answers to these

questions tell you what roles in a supply chain will be the best fit for

your company.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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Key Concepts of supply Chain Management 31

Be aware that your company can serve multiple markets and partici-

pate in multiple supply chains. A company like W.W. Grainger serves sev-

eral different markets. It sells maintenance, repair, and operating (MRO)

supplies to large national account customers such as Ford and Boeing

and it also sells these supplies to small businesses and building contrac-

tors. These two different markets have different requirements as meas-

ured by the above customer attributes.

When you are serving multiple market segments, your company will

need to look for ways to leverage its core competencies. Parts of these

supply chains may be unique to the market segment they serve, while

other parts can be combined to achieve economies of scale. For example,

if manufacturing is a core competency for a company, it can build a

range of different products in common production facilities. Then dif-

ferent inventory and transportation options can be used to deliver the

products to customers in different market segments.

Develop Needed Supply Chain Capabilities

Once you know what kind of markets your company serves and the

role your company does or will play in the supply chains of these mar-

kets, then you can take this last step, which is to develop the supply

chain capabilities needed to support the roles your company plays. This

development is guided by the decisions made about the five supply

chain drivers. Each of these drivers can be developed and managed to

emphasize responsiveness or efficiency depending on the business re-

quirements.

1. Production—This driver can be made very responsive by build-

ing factories that have a lot of excess capacity and that use

flexible manufacturing techniques to produce a wide range

of items. To be even more responsive, a company could do

their production in many smaller plants that are close to major

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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32 EssEntials of supply Chain Management

groups of customers so that delivery times would be shorter. If

efficiency is desirable, then a company can build factories with

very little excess capacity and have the factories optimized for

producing a limited range of items. Further efficiency could be

gained by centralizing production in large central plants to get

better economies of scale.

2. Inventory—Responsiveness here can be had by stocking high

levels of inventory for a wide range of products. Additional

responsiveness can be gained by stocking products at many

locations so as to have the inventory close to customers and

available to them immediately. Efficiency in inventory manage-

ment would call for reducing inventory levels of all items and

especially of items that do not sell as frequently. Also, economies

of scale and cost savings could be obtained by stocking inven-

tory in only a few central locations.

3. Location—A location approach that emphasizes responsiveness

would be one where a company opens up many locations to

be physically close to its customer base. For example, McDon-

ald’s has used location to be very responsive to its customers by

opening up lots of stores in its high-volume markets. Efficiency

can be achieved by operating from only a few locations and

centralizing activities in common locations. An example of this

is the way Dell Computers serves large geographical markets

from only a few central locations that perform a wide range of

activities.

4. Transportation—Responsiveness can be achieved by a trans-

portation mode that is fast and flexible. Many companies that

sell products through catalogs or over the Internet are able to

provide high levels of responsiveness by using transportation

to deliver their products, often within 24 hours. FedEx and

UPS are two companies that can provide very responsive

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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Key Concepts of supply Chain Management 33

transportation services. Efficiency can be emphasized by trans-

porting products in larger batches and doing it less often. The

use of transportation modes such as ship, rail, and pipelines can

be very efficient. Transportation can be made more efficient if it

is originated out of a central hub facility instead of from many

branch locations.

5. Information—The power of this driver grows stronger each

year as the technology for collecting and sharing information

becomes more widespread, easier to use, and less expensive.

Information, much like money, is a very useful commodity

because it can be applied directly to enhance the perfor-

mance of the other four supply chain drivers. High levels of

responsiveness can be achieved when companies collect and

share accurate and timely data generated by the operations of

the other four drivers. The supply chains that serve the elec-

tronics markets are some of the most responsive in the world.

Companies in these supply chains, from manufacturers to

distributors to the big retail stores collect and share data

about customer demand, production schedules, and inven-

tory levels.

Where efficiency is more the focus, less information about fewer

activities can be collected. Companies may also elect to share less infor-

mation among themselves so as not to risk having that information used

against them. Please note, however, that these information efficiencies

are only efficiencies in the short term and they become less efficient

over time because the cost of information continues to drop and the cost

of the other four drivers usually continues to rise. Over the longer term,

those companies and supply chains that learn how to maximize the use

of information to get optimal performance from the other drivers will

gain the most market share and be the most profitable.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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34 EssEntials of supply Chain Management

Three Steps to Align
Supply Chain and Business Strategy

TIps & TechnIques

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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Key Concepts of supply Chain Management 35

Professor Sunil Chopra is a keen observer of the ways that sup-
ply chains respond over time to changes in their economic and
regulatory environments and to shifts in technology and cus-
tomer demands. In an interview, Professor Chopra shared some
of his observations.

“look at a company’s products and how they’re being changed by
advances in technology,” he said. “For instance, Dell’s build-to-
order business model and its practice of selling directly to custom-
ers are not so valuable anymore because people don’t customize
their computer purchases very much anymore.”

People used to buy mostly desktop PCs, but now sales of laptops
surpass PCs, and people don’t feel the need to customize their
laptops the way they did with their PCs. “so Dell now is saying they
will ship from stock instead of their traditional model, which was to
build-to-order-and-ship customized PCs.”

and Professor Chopra points out that Dell is also restructuring its
retail channels. Dell not only sells direct, but also sells through
retailers such as Wal-Mart for standard low-end PCs. On a $500
machine the shipping expense is a significant part of the total cost,
so it’s better to sell low-end PCs through a local retailer like Wal-Mart

apple, on the other hand, has a different strategy, according to
Professor Chopra. “they make the user interface the customized
part of their product while their hardware is a commodity. their
hardware is standard and it’s the apps that run on the hardware
that customize the product.”

Unlike Dell, apple has only about 15 basic product models, and this
enables them to have a simple hardware supply chain. apple adds
value to the hardware it sells by designing a user interface (Ui) that
customers find very attractive. so they are willing to pay premium
prices for what would otherwise be commodity hardware because
they want the Ui that apple puts on its hardware.

execuTIve InsIghT

(Continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
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36 EssEntials of supply Chain Management

However, one of the challenges that this business model creates
for apple is that they need to have a big hit product every few years
in order to keep ahead of their competitors who come out with close
copies of the apple products and offer them for sale at lower prices.
For instance, just as Google’s android is starting to cut into sales
of apple’s iPhone, apple comes out with a compelling new product
in the iPad. “iPad is doing well now,” said Chopra, “but they have
to come up with another big hit product in another couple of years
as competitors learn to copy the iPad.”

He also pointed out how regulations such as the current tax struc-
ture on internet sales channels like the one Dell uses can influ-
ence and even distort supply chain structures. Dell is not taxed on
out-of-state sales. so that causes them to remain centralized and
keep using an internet direct-sales channel when, if they had to pay
out-of-state sales taxes, they would otherwise move to a decentral-
ized model. if the regulations and tax structures related to internet
sales change, then Dell’s supply chain structure will also change.

supply chains are becoming so efficient and customer preferences
change so quickly that profit margins are relentlessly squeezed.
Companies need to find ways to cut their fixed costs of producing
products. and they cannot risk getting too invested in a business
model that emphasizes either low-cost efficiency or high-cost
responsiveness. Efficiency and responsiveness are two ends of a
continuum, and companies need to be flexible enough to reposition
themselves on that continuum quickly when markets shift.

Professor Chopra observes that the question of efficiency versus
responsiveness can be addressed like an investment portfolio
question. if you are concentrated at either end of the spectrum you
are in a risky position because the world will probably change sud-
denly and your company might not be able to adjust fast enough to
keep pace.

How do you position your company or your portfolio of business
to best fit the markets you serve? some portion of your business

execuTIve InsIghT (continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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Key Concepts of supply Chain Management 37

must be responsive, so you move that part near to your custom-
ers, and another part of your business must be efficient so you
position it offshore in low-cost-labor countries. in Dell’s case the
server market is still a market that values a lot of customization
so that is the part they make responsive and Dell does server
assembly onshore near its customers. But customers no longer
value customization in PCs and laptops so they have outsourced
that part of their business to emphasize efficiency and that work
is now done offshore.

and this leads to another issue that Professor Chopra pointed out.
as markets and the supply chains that serve them get more and
more efficient and fluid, the middle class in developed countries
tends to get hollowed out. “if you are a highly skilled worker in a
developed nation, then your services are sought after and you can
leverage the low-cost labor of workers in developing nations to build
products you design,” said Chopra. But this also displaces large
numbers of low- and medium-skilled workers in developed coun-
tries, as jobs once performed by them are sent offshore to be done
by low-cost workers in developing nations.

From the 1990s through the first decade of this century, wages in
developed countries have polarized. there are some who have seen
their incomes increase dramatically as they leveraged the low-cost
labor available in developing nations. and a lot of middle class work-
ers in developed nations have seen their wages drop significantly
because their work is now being done elsewhere. “this produces
greater value for the world as a whole, but now the question is how
are we going to distribute that value in order to maintain a broad
middle class in the developed countries?”

Professor Sunil Chopra is the iBM Distinguished Professor of
Operations Management at northwestern University’s Kellogg
school of Management. He has co-authored the books Managing
Business Process Flows and Supply Chain Management: Strategy,
Planning, and Operation, 4th Edition.

execuTIve InsIghT (continued)

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
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38 EssEntials of supply Chain Management

Chapter Summary

A supply chain is composed of all the companies involved in the design,

production, and delivery of a product to market. Supply chain manage-

ment is the coordination of production, inventory, location, and trans-

portation among the participants in a supply chain to achieve the best

mix of responsiveness and efficiency for the market being served. The

goal of supply chain management is to increase sales of goods and ser-

vices to the final, end-use customer while at the same time reducing

both inventory and operating expenses.

The business model of vertical integration that came out of the in-

dustrial economy has given way to “virtual integration” of companies in

a supply chain. Each company now focuses on its core competencies and

partners with other companies that have complementary capabilities for

the design and delivery of products to market. Companies must focus on

improvements in their core competencies in order to keep up with the

fast pace of market and technological change in today’s economy.

To succeed in the competitive markets that make up today’s economy,

companies must learn to align their supply chains with the demands

of the markets they serve. Supply chain performance is now a distinct

competitive advantage for companies who excel in this area. One of the

largest companies in North America is a testament to the power of effec-

tive supply chain management. Wal-Mart has grown steadily over the last

several decades and much, if not most, of its success is directly related to

its evolving capabilities to continually improve its supply chain.

Hugos, Michael H.. Essentials of Supply Chain Management, John Wiley & Sons, Incorporated, 2011. ProQuest Ebook
Central, http://ebookcentral.proquest.com/lib/broward-ebooks/detail.action?docID=697991.
Created from broward-ebooks on 2023-01-10 20:01:46.

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