Chapter 1 Understanding the Supply Chain
LO 1.1 Discuss the goal of a supply chain and explain the impact of supply chain decisions
on the success of a firm.
The goal of a supply chain should be to grow overall supply chain surplus. Supply chain
surplus is the difference between the value generated for the customer and the total cost
incurred across all stages of the supply chain. A focus on the supply chain surplus increases
the size of the overall pie for all members of the supply chain. Supply chain decisions have a
large impact on the success or failure of each firm because they significantly influence both
the revenue generated and the cost incurred. Successful supply chains manage flows of
product, information, and funds to provide a high level of product availability to the customer
while keeping costs low.
The functioning of a supply chain involves three key flows – information, product, and funds.
The three flows in a supply chain:
The objective of every supply chain should be to maximize the net value generated. For any
supply chain, there is only one source of revenue: the customer.
Supply Chain Surplus = Customer Value - Supply Chain Cost
Customer Surplus + Supply Chain Profitability
- Consumer value is the maximum amount the consumer is willing to pay for the
product.
- Supply chain cost is the costs the supply chain incurs in filling the consumer’s
request.
Effective supply chain management involves the management of supply chain assets and
product, information, and fund flows to grow the total supply chain surplus. A growth in
supply chain surplus increases the size of the total pie, allowing contributing members of the
supply chain to benefit.
The supply chain surplus argument implies that as retailing in India begins to consolidate, the
role of distributors will diminish.
A supply chain is dynamic, there is constant flow of information, product, and funds.
LO 1.2 Define the three key supply chain decision phases and explain the significance of
each one.
, 1. Supply chain strategy/ design
Relate to supply chain configuration, define the constraints for planning decisions.
Have a long-term impact that lasts for several years, expensive to reverse.
2. Supply chain planning
Define the constraints for operational decisions. Cover a period of a few months to a
year and include decisions regarding production plans, subcontracting, and
promotions over that period.
3. Supply chain operation
Operational decisions span from minutes to days and include sequencing production
and filling specific orders, less uncertainty because of short time horizon.
LO 1.3 Describe the cycle and push/pull views along with the macro processes of a supply
chain.
Cycle view: The processes in a supply chain are divided into a series of cycles, each
performed at the interface between two successive stages of the supply chain.
All supply chain processes can be broken down into the following four process cycles:
Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle
Supply chain process cycles:
Subprocesses in each supply chain process cycle:
Supplier stage markets product buyer stage places order supplier stage receives order
supplier stage supplies order buyer stage receives supply buyer returns reverse
flows to supplier or third party.
Push/pull view: The processes in a supply chain are divided into two categories, depending
on whether they are executed in response to a customer order or in anticipation of customer
orders. Pull processes are initiated by a customer order, whereas push processes are
initiated and performed in anticipation of customer orders.
Push
, - Execution is initiated in anticipation of customer orders based on a forecast.
- Referred to as speculative processes because they respond to speculated (or
forecasted), rather than actual, demand.
- Operate in an uncertain environment because customer demand is not yet known.
Pull
- Execution is initiated in response to a customer order.
- Referred to as reactive processes because they react to customer demand.
- Operate in a predictable environment where customer demand is known.
The cycle view divides processes into cycles, each performed at the interface between two
successive stages of a supply chain. Each cycle starts with an order placed by one stage of
the supply chain and ends when the order is received from the supplier stage. A push/pull
view of a supply chain characterizes processes based on their timing relative to that of a
customer order. Pull processes are performed in response to a customer order, whereas
push processes are performed in anticipation of customer orders.
The push/pull boundary in a supply chain separates push processes from pull processes.
Push/ pull view of the supply chain:
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1. Customer relationship
management (CRM)
All processes at the interface between the firm and its customers that work to
generate, receive, and track customer orders.
2. Internal supply chain management (ISCM)
All processes that are internal to the firm and work to plan for and fulfill customer
orders.
, 3. Supplier relationship management (SRM)
All processes at the interface between the firm and its suppliers that work to evaluate
and select suppliers and then source goods and services from them.
Observe that all three macro processes are aimed at serving the same customer. For a
supply chain to be successful, it is crucial that the three macro processes are well integrated.
In many firms, marketing oversees the CRM macro process, manufacturing handles the
ISCM macro process, and purchasing oversees the SRM macro process—with little
communication among them.
LO 1.4 Identify important issues and decisions to be addressed in a supply chain.
At a strategic level, a supply chain designer must decide whether to build a responsive sup-
ply chain like Zara or focus on lower costs. A decision must be made on the location and
capacity of each facility and whether it will be dedicated or flexible in terms of the products it
produces and markets it serves. The designer must decide whether products will be sold
directly to customers, through distributors like Grainger, or through brick-and-mortar retailers
like Macy’s. If opting for omni-channel retail, the designer must decide which facilities will
fulfill different customer orders. The planner must then decide on the production levels at
each production site and inventory levels at each DC and retail store. As customer orders
arrive, the operations manager must decide how each order will be fulfilled given the
available inventory and production schedule. The goal when making all these decisions is to
maximize the supply chain surplus.
LO 1.5 Develop skills that employers have identified as critical to success in the workplace.
Skills learned in this book will be of great use no matter what path students choose to follow.
The book is developed with the premise that good strategic decisions cannot be made
without access to relevant analytics, and all analytics should be designed to support decision
making. As a result, students will develop critical thinking, the ability to formulate and analyze
problems, and support their recommendations with analytics that uses data literacy and
computing skills.
Chapter 2 Achieving Strategic Fit in a Supply Chain
LO 2.1 Explain why achieving strategic fit is critical to a company’s overall success.
Strategic fit requires that both the competitive and supply chain strategies of a company have
aligned goals. Strategic fit requires that all functions within a firm and stages in the supply
chain target the same goal—one that is consistent with customer needs. A lack of strategic fit
between the competitive and supply chain strategies can result in the supply chain taking
actions that are not consistent with customer needs, leading to a reduction in supply chain
surplus and a decrease in supply chain profitability.
A company’s competitive strategy defines, relative to its competitors, the set of customer
needs that it seeks to satisfy through its products and services.
The competitive strategy is defined based on how the customer prioritizes product cost,
delivery time, variety, and quality, it is based on its customers’ priorities.
To execute a company’s competitive strategy, all these functions play a role, and each must
develop its own strategy. Here, strategy refers to what each process or function will try to do
particularly well.
Both the competitive and supply chain strategies of a company must have aligned goals.
The value chain in a company:
