1. SUPPLY CHAIN MANAGEMENT
CHAPTER 8
SUPPLY CHAIN MANAGEMENT
CLASSROOM OPENER
GREAT BUSINESS DECISIONS – Michael Dell Decides to Sell PCs Directly to Consumers and Built-to-Order
Michael Dell decided that to be successful in the PC business and to gain a significant competitive advantage he would bypass the dealer channel through which personal computers were being sold. Dell developed and deployed their own channel for manufacturing and selling PCs. This personal channel eliminated the reseller markups and large inventory expenses and allowed Dell to operate with lower costs than anyone in the industry, which led to higher profit margins.
Michael Dell understood that consumers were getting smarter and that customer service abilities were becoming more sophisticated. Beginning with telephone sales, and then moving to Internet sales, Dell bypassed retailers and targeted corporate accounts. Dell understood that tailoring products to meet specific requirements of large accounts could be accomplished not only more cheaply, but also more effectively without an intermediary.
Dell boasts sales of $12.3 billion and is the world’s number one direct-sales computer vendor. The company’s Web site currently generates over half of its orders. Everybody in the industry is trying to imitate Dell’s strategy.

2. Chapter Eight Overview
SECTION 8.1 – SUPPLY CHAIN FUNDAMENTALS
Basics of Supply Chain
Information Technology’s Role in the Supply Chain
Supply Chain Management Success Factors
SCM Success Stories
SECTION 8.2 – APPLYING A SUPPLY CHAIN DESIGN
Using Information Technology to Drive the Supply Chain
Facilities Driver
Inventory Driver
Transportation Driver
Information Driver
Applying a Supply Chain Design
Future Supply Chain Trends
Companies that excel in supply chain operations perform better in almost every financial measure of success, according to a report from Boston-based AMR Research Inc. When supply chain excellence improves operations, companies experience a 5 percent higher profit margin, 15 percent less inventory, 17 percent stronger “perfect order” ratings, and 35 percent shorter cycle times than their competitors.
“The basis of competition for winning companies in today’s economy is supply chain superiority,” said Kevin O’Marah, vice president of research at AMR Research. “These companies understand that value chain performance translates to productivity and market-share leadership. They also understand that supply chain leadership means more than just low costs and efficiency: It requires a superior ability to shape and respond to shifts in demand with innovative products and services.”

3. SUPPLY CHAIN FUNDAMENTALS
SECTION 8.1
SUPPLY CHAIN FUNDAMENTALS

4. LEARNING OUTCOMES
List and describe the components of a typical supply chain
Define the relationship between decision making and supply chain management
Identify the factors driving supply chain management
Summarize the best practices for implementing a successful supply chain management system
8.1 List and describe the components of a typical supply chain
The components of a typical supply chain include:
Supplier’s supplier, Supplier, Manufacturer, Distributor, Retailer, Customer, Customer’s Customer
8.2 Define the relationship between decision making and supply chain management
SCM enhances decision making. Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively. SCM systems provide dynamic holistic views of organizations. Users can “drill down” into detailed analyses of supply chain activities in a process analogous to DSS. Without SCM systems, organizations would be unable to make accurate and timely decisions regarding their supply chain.
8.3 Identify the factors driving supply chain management
Although people have been talking about the integrated supply chain for a long time, it has only been recently that advances in information technology have made it possible to bring the idea to life and truly integrate the supply chain. Visibility, consumer behavior, competition, and speed are a few of the changes resulting from advances in information technology that are driving supply chains
8.4 Summarize the best practices for implementing a successful supply chain management system
The following are the SCM industry best practices:
Make the sale to suppliers - A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties.
Wean employees off traditional business practices - If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way around using the software.
Ensure the SCM system supports the organizational goals - Be sure to select SCM software that supports organizational goals and strategies
Deploy in Incremental phases and measure and communicate success - Designing the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach – implementing everything at once – fails 90 percent of the time.
Be future oriented - An SCM system, like all systems, must scale to meet future demands.

5. BASICS OF SUPPLY CHAIN
The average company spends nearly half of every dollar that it earns on production
In the past, companies focused primarily on manufacturing and quality improvements to influence their supply chains
This chapter takes a look at extending an organization through SCM and discusses:
The reasons for SCM’s explosive growth
Using SCM to enhance decision making
SCM success factors
Traditional SCM thinking involved “I buy from my suppliers, I sell to my customers.”
Today, organizations are quickly realizing the tremendous value they can gain from having visibility throughout their supply chain
Knowing immediately what is transacting at the customer end of the supply chain, instead of waiting days or weeks for this information to flow upstream, allows the organization to react immediately
Best Buy checks inventory levels at each of its 750 stores across North America as often as every half-hour

6. BASICS OF SUPPLY CHAIN The supply chain has three main links:
Materials flow from suppliers and their “upstream” suppliers at all levels
Transformation of materials into semifinished and finished products through the organization’s own production process
Distribution of products to customers and their “downstream” customers at all levels
Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively
SCM has significantly improved companies’ forecasting abilities over the last few years
Businesses today have access to modeling and simulation tools, algorithms, and applications that can combine information from multiple sources to build forecasts for days, weeks, and months in advance

7. BASICS OF SUPPLY CHAIN
Organizations must embrace technologies that can effectively manage supply chains
CLASSROOM EXERCISE
Supply Chaining
Break your students into groups and ask them to design a supply chain for an organization of their choice
Ask your students to try to choose an organization that is currently experiencing supply chain issues, perhaps an organization where the student has had recent issues, such as not receiving an order, receiving an incorrect order, or receiving someone else's order
Be sure to have them list the names of the suppliers, manufacturers, distributors, retailers, and customers
Ask the students to identify one or two areas where the organization can improve its supply chain
Have each group present their supply chains to the class along with their recommendations for improvement

8. BASICS OF SUPPLY CHAIN
Best Buy checks inventory levels at each of its 750 stores in North America as often as every half-hour with its SCM system, taking much of the guesswork out of inventory replenishment
Supply chain management improves ways for companies to find the raw components they need to make a product or service, manufacture that product or service, and deliver it to customers
Plan – This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers.
Source – Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships.
Make – This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity.
Deliver – This step is commonly referred to as logistics. Logistics is the set of processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments.
Return – This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products.

9. INFORMATION TECHNOLOGY’S ROLE IN THE SUPPLY CHAIN
IT’s primary role is to create integrations or tight process and information linkages between functions within a firm
Considerable evidence shows that this type of supply chain integration results in superior supply chain capabilities and profits.
CLASSROOM EXERCISE
Near Beer Supply Chain Game
This is an excellent exercise for students who are just learning about the supply chain.

10. INFORMATION TECHNOLOGY’S ROLE IN THE SUPPLY CHAIN
Factors Driving SCM
Information technology – only recently have advances in IT made it possible to bring the idea of a truly integrated supply chain to life
Visibility – more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstrated
Consumer behavior – companies must respond to demanding customers through supply chain enhancements
Competition – increased competition makes any organization that is ignoring its supply chain at risk of becoming obsolete
Speed – as the pace of business increases through electronic media, an organization's supply chain must respond efficiently, accurately, and quickly

11. Visibility
Supply chain visibility – the ability to view all areas up and down the supply chain
Bullwhip effect – occurs when distorted product demand information passes from one entity to the next throughout the supply chain
Visibility – more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstrated
Supply chain visibility allows organizations to eliminate the bullwhip effect
To explain the bullwhip effect to your students discuss a product that demand does not change, such as diapers. The need for diapers is constant, it does not increase at Christmas or in the summer, diapers are in demand all year long. The number of newborn babies determines diaper demand, and that number is constant.
Retailers order diapers from distributors when their inventory level falls below a certain level, they might order a few extra just to be safe
Distributors order diapers from manufacturers when their inventory level falls below a certain level, they might order a few extra just to be safe
Manufacturers order diapers from suppliers when their inventory level falls below a certain level, they might order a few extra just to be safe
Eventually the one or two extra boxes ordered from a few retailers becomes several thousand boxes for the manufacturer. This is the bullwhip effect, a small ripple at one end makes a large wave at the other end of the whip.

12. Consumer Behavior
Companies can respond faster and more effectively to consumer demands through supply chain enhances
Demand planning software – generates demand forecasts using statistical tools and forecasting techniques
Once an organization understands customer demand and its effect on the supply chain it can begin to estimate the impact that its supply chain will have on its customers and ultimately the organizations performance

13. Competition
Supply chain planning (SCP) software– uses advanced mathematical algorithms to improve the flow and efficiency of the supply chain
Supply chain execution (SCE) software – automates the different steps and stages of the supply chain
SCP and SCE both increase a company’s ability to compete
SCP depends entirely on information for its accuracy
SCE can be as simple as electronically routing orders from a manufacturer to a supplier

14. Competition SCP and SCE in the supply chain
Ask your students to determine the different types of information flows that would be represented in an SCP system
Ask your students to determine the different types of payment flows that would be represented in an SCE system

15. Speed Why is information speed critical in a supply chain?
If the information arrives three dates late, chances are high that managers have already made decisions based on current information that might have been inaccurate
Information timeliness is critical
IT is an enabler of information timeliness
CLASSROOM EXERCISE
Designing a Digital Dashboard for an SCM System
Digital dashboards offer an effective and efficient way to view enterprisewide information at near real-time. According to Nucleus Research, there is a direct correlation between use of digital dashboards and a company’s return on investment (ROI), hence all executives should be using or pushing the development of digital dashboards to monitor and analyze organizational operations.
Break your students into groups and ask them to develop a digital dashboard for the CEO of a transportation company. Be sure your students have addressed all of the following in their digital dashboard:
Inventory
Materials
Demand/Supply
Sales
Supplier’s supplier
Supplier
Manufacturer
Distributor
Retailer
Customer
Customer’s Customer

16. SUPPLY CHAIN MANAGEMENT SUCCESS FACTORS
The seven principles highlighted in the figure run counter to previous built-in functional thinking of how companies organize, operate, and serve customers
Dell computers offers one of the best examples of an extremely successful SCM system
Dell’s highly efficient build-to-order business model enabled it to deliver customized computer systems quickly
The U.S. government has even sent individuals to study Dell’s supply chain when determining ways to supply troops during wars
If your students find themselves in the position of implementing an SCM, be sure they study Dell as an example of exactly what to do when building and implementing an SCM system

17. SUPPLY CHAIN MANAGEMENT SUCCESS FACTORS
SCM industry best practices include:
Make the sale to suppliers
Wean employees off traditional business practices
Ensure the SCM system supports the organizational goals
Deploy in incremental phases and measure and communicate success
Be future oriented
Studying industry best practices is an excellent way to improve SCM implementation success
A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated to build, develop, and implement. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties
If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way to continue performing their job without using the software
Be sure to select SCM software that supports organizational goals and strategies
Designing the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach – implementing everything all at once – fails 90 percent of the time
An SCM system, like all systems, must scale to meet future demands

18. SCM SUCCESS STORIES
Top reasons why more and more executives are turning to SCM to manage their extended enterprises
The role of SCM is evolving, and it is not uncommon for suppliers to be involved in product development and for distributors to act as consultants in brand marketing
CLASSROOM EXERCISE
SCM Again
Break your students into groups and ask them to identify how each of the “Top reasons executives are using SCM to manage extended enterprises” in the Figure is supported by an SCM system
For example, how does SCM help an organization control costs and save costs?
Ans: Organizations gain visibility into their supply chains through an SCM system. This allows them to identify such things as inefficient and ineffective business process. Fixing these processes helps the organization control costs and save money.
The answers to these questions will vary, and the goal of the activity is for students to understand the many different benefits an organization can gain through an SCM system

19. SCM SUCCESS STORIES
Numerous decision support systems (DSSs) are being built to assist decision makers in the design and operation of integrated supply chains
DSSs allow managers to examine performance and relationships over the supply chain and among:
Suppliers
Manufacturers
Distributors
Other factors that optimize supply chain performance
Discuss the Apple computer example
Apple Computer initially distributed its business operations over 16 legacy applications
Apple quickly realized that it needed a new business model centered around an integrated supply chain to drive performance efficiencies
Apple devised an implementation strategy that focused on specific SCM functions including finance, sales, distribution, and manufacturing
The new business model included:
Build-to-order and configure-to-order manufacturing capabilities (similar to Dell)
Web-enabled configure-to-order order entry and order status
Real-time credit card authorization
Available-to-promise and rules-based allocations
Integration to advanced planning systems

20. SCM SUCCESS STORIES CLASSROOM EXERCISE Driving SCM
Break your students into groups and ask them to research each of the above companies and how they are using SCM to drive their business operations
Have your students present their findings to the class

21. OPENING CASE QUESTIONS Dell’s Famous Supply Chain
How might Dell use each of the five basic SCM components?
How had Dell influenced visibility, consumer behavior, competition, and speed though the use of IT in its supply chain?
Explain the seven principles of SCM in reference to Dell’s business model
1. How might Dell use each of the five basic SCM components?
Student answers to this question will vary. Potential answers include:
Plan – This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers. Dell must plan how it wants to handle its supply chain – efficiently or effectively.
Source – Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships. Dell will need to choose partners who have the same innovative mindset and are capable of keeping up with Dells fast pace.
Make – This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity. Dell needs to ensure all of its computers are of the highest quality – quality issues in the PC market will kill a PC manufacturer.
Deliver – This step is commonly referred to as logistics. Logistics is the set processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments. This step is critical to Dell since it does not have a distributor to deliver its products.
Return – This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products. Since Dell does no have any distributors it must make the return process as easy as possible for customers.
2. How had Dell influenced visibility, consumer behavior, competition, and speed though the use of IT in its supply chain?
Dell is one of the fasted companies on the planet due to information technology. Dell only holds 72 hours worth of inventory in its supply chain, hence it must have tremendous supply chain visibility. It must be able to anticipate consumer behavior to ensure its supply chain can meet forecasted demands. Dell’s competition is working hard to catch-up.
3. Explain the seven principles of SCM in reference to Dell’s business model.
Students should take the principles of how to build a Dell-like supply chain and compare them to the following:
Segment customers by service needs, regardless of industry, and then tailor services to those particular segments.
Customize the logistics network and focus intensively on the service requirements and on the profitability of the preidentified customer segments
Listen to signals of market demand and plan accordingly.
Differentiate products closer to the customer, since companies can no longer afford to hold inventory to compensate for poor demand forecasting.
Strategically manage courses of supply, by working with key suppliers to reduce overall costs of owning materials and services.
Develop a supply chain information technology strategy that supports different levels of decision making.
Adopt performance evaluation measures that apply to every link in the supply chain and measure true profitability at every stage.

22. APPLYING A SUPPLY CHAIN DESIGN
SECTION 8.2
APPLYING A SUPPLY CHAIN DESIGN
CLASSROOM OPENER
Nike – Running Back on Track
It drives Vice President Roland Wolfram crazy that while the rest of the world knows his company for its swooshbuckling marketing and its association with the world's most famous athletes, the IT world thinks of Nike as the company that screwed up its supply chain—specifically, the i2 demand-planning engine that, in 2000, spat out orders for thousands more Air Garnett sneakers than the market had appetite for and called for thousands fewer Air Jordans than were needed.
Too many Air Garnetts. Too few Air Jordans. Nike lost money, time and a measure of pride when its demand-planning software led it astray. How did it recover? Patience, perseverance and, most important, an understanding of what it was trying to accomplish in the first place
Wolfram calls the i2 problem—a software glitch that cost Nike more than $100 million in lost sales, depressed its stock price by 20 percent, triggered a flurry of class-action lawsuits, and caused its chairman, president and CEO, Phil Knight, to lament famously, "This is what you get for $400 million, huh?"—a "speed bump." Some speed bump. In the athletic footwear business, only Nike, with a 32 percent worldwide market share (almost double Adidas, its nearest rival) and a $20 billion market cap that's more than the rest of the manufacturers and retailers in the industry combined, could afford to talk about $100 million like that.
But there was a lesson too for people who do, in fact, follow "this sort of thing," specifically CIOs. The lesson of Nike's failure and subsequent rebound lies in the fact that it had a business plan that was widely understood and accepted at every level of the company. Given that, and the resiliency it afforded the company, in the end the i2 failure turned out to be, indeed, just a "speed bump."

23. LEARNING OUTCOMES
List and describe the four drivers of supply chain management
Explain supply chain management strategies focused on efficiency
Explain supply chain management strategies focused on effectiveness
8.5 List and describe the four drivers of supply chain management
Facilities – processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility. Inventory – offsets discrepancies between supply and demand. Transportation – moves inventories between the different stages in the supply chain. Information – an organization must decide how and what information it wants to share with its supply chain partners.
8.6 Explain supply chain management strategies focused on efficiency
Supply chain management strategies focusing on efficiency are most concerned with using the supply chain to drive down costs. For example, an efficient SCM will use a centralized warehouse, inexpensive transportation methods, and freely share lots of information in a push strategy with its supply chain partners.
8.7 Explain supply chain management strategies focused on effectiveness
Supply chain management strategies focusing on effectiveness are most concerned with using the supply chain to increase customer satisfaction. For example, an effective SCM will have many decentralized warehouses close to its customers, excess capacity at its facilities to meet wide swings in demand, use fast and expensive shipping methods, and selectively share information using a pull strategy with its supply chain partners.

24. USING IT TO DRIVE THE SUPPLY CHAIN
The four primary drivers of supply chain management
Facilities
Inventory
Transportation
Information
Organizations use these four drivers to support either a supply chain strategy focusing on efficiency or a supply chain strategy focusing on effectiveness
It might be beneficial to review efficiency and effectiveness since this section requires the students to have a solid understanding of efficiency and effectiveness
Efficiency IT metrics – measures the performance of the IT system including throughput, speed, availability, etc.
Effectiveness IT metrics – measure the impact IT has on business processes and activities including customer satisfaction, conversion rates, sell-through increases, etc.
Organizations use the four primary drivers to support their supply chain strategy
Facilities – processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility
Inventory – offsets discrepancies between supply and demand
Transportation – moves inventories between the different stages in the supply chain
Information – an organization must decide how and what information it wants to share with its supply chain partners

25. USING IT TO DRIVE THE SUPPLY CHAIN
Analyzing the design of a supply chain in terms of efficiency and effectiveness

26. FACILITIES DRIVER
Facility – processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility
Three primary facilities components
Location
Capacity
Operational design
Discuss the Toyota example as an organization that uses its facilities driver to focus on effectiveness
Toyota is an example of a company that stresses effectiveness in its facilities. Toyota’s goal is to open a facility in every major market where it does business. These local facilities protect the company from currency fluctuations and trade barriers and thus are more effective for Toyota’s customers

27. FACILITIES 1: Location
Location efficiency – centralize the location to gain economies of scale, which increases efficiency
Location effectiveness – decentralize the locations to be closer to the customers, which increases effectiveness
Efficiency
A company can gain economies of scale when it centralizes it facilities
It is cheaper for a company to maintain one large facility then several small facilities
However, the goods are farther from the customers and it might take longer and be more difficult to deliver the goods in a timely fashion
Effectiveness
It costs more to have many facilities located closer to customers, however the company can deliver goods with relative ease and in a timely fashion
Ask your students if they can think of any other facilities factors that might influence the efficiency or effectiveness of a company’s supply chain
Facility costs
Land costs
Employee expenses
Exchange rates
Tax effects

28. FACILITIES 2: Capacity
Capacity efficiency – minimal excess capacity with the ability to produce only what is required
Capacity effectiveness – large amounts of excess capacity which can handle wide swings in demand
Efficiency
A company can save money by building a facility that is only big enough to handle production requirements
Effectiveness
By spending more money and building in a lot of extra capacity, an organization can be prepared to handle unexpected future events
Ask your students if they can think of any other capacity factors that might influence the efficiency or effectiveness of a company’s supply chain
Energy costs
Bigger facilities indicates more employees
Technology devices typically decrease in size, will the facility need the extra capacity if the manufacturing equipment becomes smaller, or will it be able to produce more in smaller spaces in the future?

29. FACILITIES 3: Operational Design
Operational design efficiency – product focus design allows the facility to become highly efficient at producing one single product, increasing efficiency
Operational design effectiveness – functional focus design allows the facility to perform a specific function on many different types of products, increasing effectiveness
Efficiency
If a company chooses a product focus design, it is anticipating that the facility will produce only a certain type of product
All operations, including fabrication and assembly, will focus on developing a single type of product
The facility becomes highly efficient in producing a single product
Effectiveness
If a company chooses a functional focus design, the facility will perform a specific function (e.g., fabrication only or assembly only) on many different products
The facility becomes more effective since it can use a single process on many different types of products

30. FACILITIES DRIVER
The facilities driver’s effect on efficiency and effectiveness

31. INVENTORY DRIVER
Inventory – offsets discrepancies between supply and demand
Inventory management and control software – provides control and visibility to the status of individual items maintained in inventory
Two primary inventory components
Cycle inventory
Safety inventory
Discuss the Dillard’s example as an organization that uses its inventory driver to increase effectiveness
Dillard’s department store’s competitive strategy is to appeal to higher-end customers who are willing to pay a premium to obtain products immediately. Dillard’s carries large amounts of inventory to ensure products are always available for its customers. In return, its customers are willing to pay extra for their products.

32. INVENTORY 1: Cycle Inventory
Cycle inventory – the average amount of inventory held to satisfy customer demands between inventory deliveries
Cycle inventory efficiency – holding small amounts of inventory and receiving orders weekly or even daily
Cycle inventory effectiveness – holding large amounts of inventory and receiving inventory deliveries only once a month
Efficiency
A company can save money by not maintaining a lot of inventory
Receiving inventory every day, or every week, allows a company to operate without the need for large amounts of inventory storage space
Effectiveness
A company spends money by maintaining large amounts of inventory, but they are better able to provide immediate goods and services to their customers (more effective)

33. INVENTORY 2: Safety Inventory
Safety inventory – extra inventory held in the event demand exceeds supply
Safety inventory efficiency – holding small amounts of safety inventory
Safety inventory effectiveness – holding large amounts of safety inventory
Efficiency
A company can save money by not maintaining a lot of safety inventory
This company runs the risk of losing customers if it runs out of goods during Christmas and Easter
Effectiveness
A company spends money by maintaining large amounts of excess safety inventory
However, this company is better able to fulfill its customers’ needs during busy seasons such as Christmas and Easter

34. INVENTORY DRIVER
Inventory driver’s effect on efficiency and effectiveness

35. TRANSPORTATION DRIVER
Transportation – moves inventories between the different stages in the supply chain
Two primary inventory components
Method of transportation
Transportation route
Discuss the FedEx example as an organization that uses its transportation driver to increase effectiveness
FedEx’s entire business strategy focuses on its customers’ need for highly effective transportation methods. Any company that uses FedEx to transport a package is focusing primarily on a safe and timely delivery and not on the cost of delivery. Many businesses even locate their facilities near FedEx hubs so that they can quickly transport inventory overnight to their customers.

36. TRANSPORTATION 1: Method of Transportation
Global inventory management system – provides the ability to locate, track, and predict the movement of every component or material anywhere upstream or downstream in the supply chain
Method of transportation efficiency
Method of transportation effectiveness
Method of transportation efficiency– choosing an inexpensive method of transportation increases efficiency, but also typically increases delivery time
Method of transportation effectiveness – choosing an expensive method of transportation to ensure speedy delivery increases effectiveness
The six primary transportation methods include: truck, rail, ship, air, pipeline, and electronic
Efficiency
A company can save money by shipping goods inexpensively
However, this usually causes the shipment to take longer
It is cheaper to send a package by boat then it is to send it by plane
Effectiveness
It costs a company money to ship goods quickly

37. TRANSPORTATION 2: Transportation Route
Transportation planning software – tracks and analyzes the movement of materials and products to ensure the delivery of materials and finished goods at the right time, the right place, and the lowest cost
Distribution management software – coordinates the process of transporting materials from a manufacturer to distribution centers to the final customer
Transportation route efficiency
Transportation route effectiveness
Transportation route efficiency– a company can save money by shipping its products to a distributor that ships the products to its customers
Transportation route effectiveness – a company can ship its products directly to its customers
Efficiency
A company can save money by shipping products to a local distributor
Effectiveness
A company can ship its products directly to its customers

38. TRANSPORTATION DRIVER
Transportation driver’s effect on efficiency and effectiveness

39. INFORMATION DRIVER
Information – an organization must decide how and what information it wants to share with its supply chain partners
Two primary information components
Information sharing
Push verses pull strategy
CLASSROOM EXERCISE
Analyzing Listerine’s Supply Chain
Break your students into groups and ask them to review Closing Case One: Listerine’s Journey. Inform your students that they are working for Listerine and need to perform a risk assessment of the supply chain. In other words, they need to determine all areas and potential threats that make the supply chain vulnerable. For example,
An unusually bad season in Australia causes the eucalyptus harvest to fall short of expectation production levels, which causes the price to skyrocket
The factory in Lititz, Pennsylvania, is destroyed by a fire
One of its transportation ships sinks
A hurricane causes one of its transportation ships to be delayed

40. INFORMATION 1: Information Sharing
Information sharing efficiency – freely share lots of information to increase the speed and decrease the costs of supply chain processing
Information sharing effectiveness – share only selected information with certain individuals, which will decrease the speed and increase the costs of supply chain processing
Efficiency
A company can save money by sharing information with everyone involved in the supply chain
For example, if a company posts its inventory list in a location where everyone on the Internet can access it – then all kinds of companies can bid on the inventory goods
Effectiveness
It costs a company to be selective on what types of information it shares with its different partners
It takes time and money to safeguard information, which is what the company would have to do to ensure it didn’t get into the wrong hands

41. INFORMATION 2: Push vs. Pull Information Strategy
Pull information strategy (efficiency) – supply chain partners are responsible for pulling all relevant information
Pull technology – pulls information
Push information strategy effectiveness – organization takes on the responsibility to push information out to its supply chain partners
Push technology – sends information
Efficiency
Pull strategy
A company can save money by asking its partners to incur the expense and responsibility of pulling supply chain information from the organization’s systems
Effectiveness
Push strategy
A company will have to incur the expense and responsibility of pushing supply chain information out to its supply chain partners

42. INFORMATION DRIVER
Information driver’s effect on efficiency and effectiveness

43. APPLYING A SUPPLY CHAIN DESIGN
Wal-Mart’s supply chain management strategy emphasizes efficiency, but also maintains adequate levels of effectiveness
Facilities focus – Efficiency
Inventory focus – Efficiency
Transportation focus – Effectiveness
Information focus - Efficiency
Facilities focus
Maintains few warehouses
Inventory focus
Ships directly to its stores from the manufacturer
Transportation focus
Maintains its own fleet of trucks
Information focus
Invests heavily in technology and the flow of information through its entire supply chain
Although Wal-Mart has spent a lot of money on its supply chain and uses a push information sharing strategy – its overall information focus is on using information to enable the company to maintain small amounts of inventory (efficiency)
Wal-Mart uses its supply chain to operate its business in a just-in-time fashion

44. APPLYING A SUPPLY CHAIN DESIGN
Wal-Mart’s supply chain management drivers

45. FUTURE SUPPLY CHAIN TRENDS
Fastest growing SCM components
Supply chain event management (SCEM)
Selling chain management
Collaborative engineering
Collaborative demand planning
Supply chain event management (SCEM) – enables an organization to react quickly to resolve supply chain issues
Selling chain management – applies technology to the activities in the order life cycle from inquiry to sale
Collaborative engineering – allows an organization to reduce the costs required during the design process of a product
Collaborative demand planning – helps organizations reduce their investment in inventory, while improving customer satisfaction through product availability
The functionality in supply chain management systems is becoming more and more sophisticated as supply chain management matures
The future stages of SCM will incorporate more functions such as marketing, customer service, and product development
It will also use more advanced communication methods, adoption of more user friendly decision support systems, and availability of shared information to all participants in the supply chain

46. OPENING CASE QUESTIONS Dell’s Famous Supply Chain
Identify the four primary drivers of SCM and explain how Dell uses each one to gain efficiency or effectiveness in its supply chain
Choose one of the fast growth SCM components and explain how Dell can use it to increase business operations
What is RFID and how could Dell use the technology to improve its supply chain?
4. Identify the four primary drivers of SCM and explain how Dell uses each one to gain efficiency or effectiveness in its supply chain.
Facilities – processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility. Dell strategically places its facilities next to parcel delivery companies so it can ship items in and out more quickly. This allows the company to be extremely efficient in terms of facilities.
Inventory – offsets discrepancies between supply and demand. Dell only carriers 24 hours worth of inventory in its entire supply chain. This allows the company to be extremely efficient, but could cause problems with effectiveness if natural disasters or human relation problems occur.
Transportation – moves inventories between the different stages in the supply chain. Dell focuses on effectiveness by using the fastest methods of transportation available.
Information – an organization must decide how and what information it wants to share with its supply chain partners. Dell openly shares information with all of its partners, it has to in order to maintain only 24 hours worth of inventory. This focuses on efficiency.
5. Choose one of the fast growth SCM components and explain how Dell can use it to increase business operations.
Supply chain event management (SCEM) - Enables an organization to react more quickly to resolve supply chain issues. SCEM software increases real-time information sharing among supply chain partners and decreases their response time to unplanned events. Dell can use SCEM to discover the benefits of real-time supply chain monitoring.
Selling chain management - Applies technology to the activities in the order life cycle from inquiry to sale. Dell can use selling chain management to provide additional CRM to its customers during the sales process. The PC business is tough and Dell has a lot of competition. Building a reputation for outstanding customer relationships is one way that Dell could create a competitive advantage over its customers.
Collaborative engineering - Allows an organization to reduce the cost and time required during the design process of a product. Dell can collaborate with all of its supply chain partners to create more efficient and effective business processes throughout the supply chain.
Collaborative demand planning - Helps organizations reduce their investment in inventory, while improving customer satisfaction through product availability. Dell can collaborate with all of its supply chain partners to create more efficient and effective business processes throughout the supply chain.
6. What is RFID and how could Dell use the technology to improve its supply chain?
Radio frequency identification (RFID) technologies use active or passive tags in the form of chips or smart labels that can store unique identifiers and relay this information to electronic readers. RFID tags contain a microchip and an antenna, and typically work by transmitting a serial number via radio waves to an electronic reader, which confirms the identity of a person or object bearing the tag. Dell can add RFID tags to every product and shipping box. At every step of the item’s journey, a reader scans one of the tags and updates the information on the server. Dell can observe sales patterns in real time and make swift decisions about production, ordering, and pricing. Integrating RFID in the supply chain will help Dell achieve greater efficiency and effectiveness through the use of real-time information.

47. CLOSING CASE ONE BudNet
How can an SCM system help a distributor such as Anheuser-Busch make its supply chain more effective and efficient?
SCM is experiencing explosive growth. Explain why this statement is true using BudNet as an example
Evaluate BudNet’s effect on each of the five factors that are driving SCM success
List and describe the components of a typical supply chain along with its ability to help Budweiser make effective decisions
1. How can an SCM system help a distributor such as Anheuser-Busch make its supply chain more effective and efficient?
An SCM system can help make a distributor more effective by tracking, monitoring, and analyzing inventory throughout the entire supply chain. An SCM system can trigger the production of a product for a manufacturer, determine where to transport the finished product through a specific distribution company to a particular supplier, and can even recommend the optimal location for the product at the supplier’s store. A good SCM system will know exactly when a customer purchases a product from a supplier, and will automatically request product replacement from the manufacturer. This drives efficiency and effectiveness since inventory levels throughout the entire supply chain can be operated by just-in-time.
2. SCM is experiencing explosive growth. Explain why this statement is true using BudNet as an example.
An SCM can help an organization:
Control costs and improve saving
Improve productivity
Reduce inventory
Improve visibility
Reduce process cycle times
Improve quality
Maintain and gain a competitive advantage
3. Evaluate BudNet’s effect on each of the five factors that are driving SCM success.
There are five factors that are contributing to the explosive growth of SCM. (1) IT, (2) Visibility, (3) Consumer behavior, (4) Competition, (5) Speed. BudNet is using these factors to control quality, improve productivity, and ultimately increase revenues. Anheuser-Busch uses BudNet to constantly adjust production levels, fine-tune marketing campaigns, change marketing strategies, design promotions to suit the ethnic makeup of its markets, detect rivals and competition, and define product placement and pricing strategies.
4. List and describe the components of a typical supply chain along with its ability to help Budweiser make effective decisions.
Plan – This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers. Dell must plan how it wants to handle its supply chain – efficiently or effectively.
Source – Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships. Dell will need to choose partners who have the same innovative mindset and are capable of keeping up with Dells fast pace.
Make – This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity. Dell needs to ensure all of its computers are of the highest quality – quality issues in the PC market will kill a PC manufacturer.
Deliver – This step is commonly referred to as logistics. Logistics is the set processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments. This step is critical to Dell since it does not have a distributor to deliver its products.
Return – This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products. Since Dell does no have any distributors it must make the return process as easy as possible for customers.
As Budweiser evolves into an extended organization, the roles of supply chain participants are changing. Budweiser’s suppliers might be involved in product development and its distributors might act as consultants in brand marketing. The notion of virtually seamless information links within and between organizations is an essential element of integrated supply chains.

48. CLOSING CASE TWO Listerine’s Journey
Summarize SCM and describe Warner-Lambert’s supply chain strategy. Diagram the SCM components
Detail Warner-Lambert’s facilities strategy
Detail Warner-Lambert’s inventory strategy
1. Summarize SCM and describe Warner-Lambert’s supply chain strategy. Diagram the SCM components.
The supply chain consists of all parties involved, directly or indirectly, in the procurement of a product or raw material. Supply chain management (SCM) involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability.
2. Detail Warner-Lambert’s facilities strategy.
Supply chain facility strategy processes or transforms inventory into another product, or it stores the inventory before shipping it to the next facility. The three primary facilities components include location, capacity, and operational design. Warner-Lambert’s facility strategy includes:
Location efficiency – centralize the location to gain economies of scale, which increases efficiency
Capacity effectiveness – large amounts of excess capacity which can handle wide swings in demand
Operational design efficiency – product focus design allows the facility to become highly efficient at producing one single product, increasing efficiency
3. Detail Warner-Lambert’s inventory strategy.
Inventory offsets discrepancies between supply and demand. The two primary inventory components include cycle inventory and safety inventory. Warner-Lambert’s inventory strategy includes:
Cycle inventory effectiveness – holding large amounts of inventory and receiving inventory deliveries only once a month
Safety inventory effectiveness – holding large amounts of safety inventory

49. CLOSING CASE TWO Listerine’s Journey
What would happen to Warner-Lambert’s business if a natural disaster in Saudi Arabia depletes its natural gas resources?
Assess the impact to Warner-Lambert’s business if the majority of the eucalyptus crop was destroyed in a natural disaster
Detail Warner-Lambert’s information strategy
4. What would happen to Warner-Lambert’s business if a natural disaster in Saudi Arabia depletes its natural gas resources?
A natural disaster in Saudi Arabia which depletes its natural gas would cause problems in Warner-Lambert’s supply chain. Without the natural gas that yields the synthetic alcohol, Listerine would be unable to deliver its 43-proof punch. Unless it could quickly find another vendor of the natural gas or if it had a large safety inventory, the production of Listerine would come to a complete stop.
5. Assess the impact to Warner-Lambert’s business if the majority of the eucalyptus crop was destroyed in a natural disaster.
A natural disaster which destroyed all of the eucalyptus crop would be devastating to Warner-Lambert’s business and would cause many problems in its supply chain. The price of eucalyptus would skyrocket causing unforeseen increases in costs throughout the supply chain. Unless it could quickly find an alternative ingredient to eucalyptus, the production of Listerine would come to a complete stop.
6. Detail Warner-Lambert’s information strategy.
An organization must decide how and what information it wants to share with its supply chain partners. The two primary information components include information sharing and push vs. pull strategy. The case did not discuss in detail Warner-Lambert’s information strategy, but if it focused on efficiency it would:
Information sharing efficiency – freely share lots of information to increase the speed and decrease the costs of supply chain processing
Pull information strategy (efficiency) – supply chain partners are responsible for pulling all relevant information

50. CLOSING CASE THREE Levi’s
How did Levi Strauss achieve business success through the use of supply chain management?
What might have happened to Levi’s if its top executives had not supported investments in SCM?
David Bergen, Levi’s CIO, put together a cross-functional team of key managers from IT, finance, and sales to transform Levi’s systems to meet Wal-Mart’s requirements. Analyze the relationships between these three business areas and SCM systems. How can an SCM system help support these three critical business areas?
1. How did Levi Strauss achieve business success through the use of supply chain management?
Levi’s used its SCM system to decreased the power of its buyers, increased its own supplier power, increased switching costs to reduce the threat of substitute products or services, created entry barriers thereby reducing the threat of new entrants, and increased efficiencies while seeking a competitive advantage through cost leadership.
2. What might have happened to Levi’s if its top executives had not supported investments in SCM?
One of the main factors that brought Levi’s back from the dead was its ability to sell jeans in Wal-Mart. Wal-Mart demands that all partners have up-to-date SCM systems that can easily integrate with Wal-Mart’s systems. If Levi’s top executives did not have the foresight to view selling jeans at Wal-Mart as a competitive advantage, then chances are the company would not have made a strong comeback in the highly competitive clothing market. Although Levi’s was in the process of upgrading its systems, it was going to take over five years to implement. This was simply too long. Levi’s had no choice but to spend the money to upgrade its SCM system if it wanted to do business with Wal-Mart.
3. David Bergen, Levi’s CIO, put together a cross-functional team of key managers from IT, finance, and sales to transform Levi’s systems to meet Wal-Mart’s requirements. Analyze the relationships between these three business areas and SCM systems. How can an SCM system help support these three critical business areas?
Business personnel and IT personnel must work together for an organization to succeed. If Levi’s failed to include IT personnel, finance personnel, or sales personnel in the cross-functional team, it would have had a difficult time achieving a successful system transformation. All managers in all areas of the company will need to use the SCM system to make strategic decisions.

51. CLOSING CASE THREE Levi’s
Describe the five basic SCM components in reference to Wal-Mart’s business model
Explain RFID and provide an example of how Levi’s could use the technology to increase its business operations
4. Describe the five basic SCM components in reference to Wal-Mart’s business model.
Plan – This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers. Dell must plan how it wants to handle its supply chain – efficiently or effectively.
Source – Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships. Dell will need to choose partners who have the same innovative mindset and are capable of keeping up with Dells fast pace.
Make – This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity. Dell needs to ensure all of its computers are of the highest quality – quality issues in the PC market will kill a PC manufacturer.
Deliver – This step is commonly referred to as logistics. Logistics is the set processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments. This step is critical to Dell since it does not have a distributor to deliver its products.
Return – This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products. Since Dell does no have any distributors it must make the return process as easy as possible for customers.
Wal-Mart plans each of the above components into and throughout its supply chain. Since Wal-Mart is essentially a distributor and does not manufacture anything itself, it must be able to plan, source, make, deliver, and return everything it distributes from its manufacturers.
5. Explain RFID and provide an example of how Levi’s could use the technology to increase its business operations.
Radio frequency identification (RFID) technologies use active or passive tags in the form of chips or smart labels that can store unique identifiers and relay this information to electronic readers. RFID tags contain a microchip and an antenna, and typically work by transmitting a serial number via radio waves to an electronic reader, which confirms the identity of a person or object bearing the tag. Levi’s can add RFID tags to every product and shipping box. At every step of the item’s journey, a reader scans one of the tags and updates the information on the server. Levi’s can observe sales patterns in real time and make swift decisions about production, ordering, and pricing. Integrating RFID in the supply chain will help Levi’s achieve greater efficiency and effectiveness through the use of real-time information.