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Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm.

Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm.

1. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm.

2. Identify the three key supply chain decision phases and explain the significance of each one.

3. Describe the cycle and push/pull views of a supply chain.

4. Classify the supply chain macro processes in a firm.

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by a third party. The distributor, in turn, is stocked by the manufacturer (say, Procter & Gamble [P&G] in this case). The P&G manufacturing plant receives raw material from a variety of sup- pliers, which may themselves have been supplied by lower-tier suppliers. For example, packag- ing material may come from Pactiv Corporation, whereas Pactiv receives raw materials to manufacture the packaging from other suppliers. This supply chain is illustrated in Figure 1-1, with the arrows corresponding to the direction of physical product flow.

A supply chain is dynamic and involves the constant flow of information, product, and funds among different stages. In our example, Walmart provides the product, as well as pric- ing and availability information, to the customer. The customer transfers funds to Walmart. Walmart conveys point-of-sales data and replenishment orders to the warehouse or distribu- tor, which transfers the replenishment order via trucks back to the store. Walmart transfers funds to the distributor after the replenishment. The distributor also provides pricing infor- mation and sends delivery schedules to Walmart. Walmart may send back packaging mate-

supply chain. In another example, when a customer makes a purchase online from Amazon, the supply

chain includes, among others, the customer, Amazon’s website, the Amazon warehouse, and all of Amazon’s suppliers and their suppliers. The website provides the customer with information regarding pricing, product variety, and product availability. After making a product choice, the customer enters the order information and pays for the product. The customer may later return

order information to fill the request. That process involves an additional flow of information, product, and funds among various stages of the supply chain.

These examples illustrate that the customer is an integral part of the supply chain. In fact, the primary purpose of any supply chain is to satisfy customer needs and, in the process, generate profit for itself. The term supply chain conjures up images of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. This is certainly part of the supply chain, but it is also important to visualize information, funds, and product flows along both directions of this chain. The term supply chain may also imply that only one player is involved at each stage. In reality, a manufacturer may receive material from several sup- pliers and then supply several distributors. Thus, most supply chains are actually networks. It may be more accurate to use the term supply network or supply web to describe the structure of most supply chains, as shown in Figure 1-2.


Walmart or Third Party DC

P&G or Other Manufacturer

Timber Company

Paper Manufacturer

Pactiv Corporation

Chemical Manufacturer

Plastic Producer

FIGURE 1-1 Stages of a Detergent Supply Chain

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A typical supply chain may involve a variety of stages, including the following:

Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary. Each stage in Figure 1-2 need not be present in a supply chain. As discussed in Chapter 4, the appropriate design of the supply chain depends on both the customer’s needs and the roles played by the stages involved. For example, Dell has two supply chain structures that it uses to serve its customers. For its server business, Dell builds to order; that is, a customer order initiates manufacturing at Dell. For the sale of servers, Dell does not have a separate retailer, distributor, or wholesaler in the supply chain. Dell also sells consumer products such as PCs and tablets through retailers such as Walmart, which carry Dell products in inventory. This supply chain thus contains an extra stage (the retailer), compared with the direct sales model used by Dell for servers. In the case of other retail stores, the supply chain may also contain a wholesaler or distributor between the store and the manufacturer.


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

Supply Chain Surplus = Customer Value – Supply Chain Cost

The value of the final product may vary for each customer and can be estimated by the maximum amount the customer is willing to pay for it. The difference between the value of the product and its price remains with the customer as consumer surplus. The rest of the supply chain surplus becomes supply chain profitability, the difference between the revenue generated from

Supplier Distributor Retailer CustomerManufacturer

Supplier Distributor Retailer CustomerManufacturer

Supplier Distributor Retailer CustomerManufacturer

FIGURE 1-2 Supply Chain Stages

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the customer and the overall cost across the supply chain. For example, a customer purchasing a wireless router from Best Buy pays $60, which represents the revenue the supply chain receives. Customers who purchase the router clearly value it at or above $60. Thus, part of the supply chain surplus is left with the customer as consumer surplus. The rest stays with the supply chain as profit. Best Buy and other stages of the supply chain incur costs to convey information, produce components, store them, transport them, transfer funds, and so on. The difference between the $60 that the customer paid and the sum of costs incurred across all stages by the supply chain to produce and distribute the router represents the supply chain profitability: the total profit to be shared across all supply chain stages and intermediaries. The higher the supply chain profitability, the more successful the supply chain. For most profit-making supply chains, the supply chain

terms of supply chain surplus and not in terms of the profits at an individual stage. (In subsequent chapters, we see that a focus on profitability at individual stages may lead to a reduction in overall supply chain surplus.) A focus on growing the supply chain surplus pushes all members of the supply chain toward growing the size of the overall pie.

Having defined the success of a supply chain in terms of supply chain surplus, the next logical step is to look for sources of value, revenue, and cost. For any supply chain, there is only one source of revenue: the customer. The value obtained by a customer purchasing detergent at Walmart depends on several factors, including the functionality of the detergent, how far the customer must travel to Walmart, and the likelihood of finding the detergent in stock. The cus- tomer is the only one providing positive cash flow for the Walmart supply chain. All other cash flows are simply fund exchanges that occur within the supply chain, given that different stages have different owners. When Walmart pays its supplier, it is taking a portion of the funds the customer provides and passing that money on to the supplier. All flows of information, product, or funds generate costs within the supply chain. Thus, the appropriate management of these flows is a key to supply chain success. Effective supply chain management involves the manage- ment 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 con- tributing members of the supply chain to benefit.

In this book, we have a strong focus on analyzing all supply chain decisions in terms of their impact on the supply chain surplus. These decisions and their impact can vary for a wide variety of reasons. For instance, consider the difference in the supply chain structure for fast-

much smaller role in this supply chain compared with their Indian counterparts. We argue that the difference in supply chain structure can be explained by the impact a distributor has on the supply chain surplus in the two countries.

goods from most manufacturers. This consolidation gives retailers sufficient scale that the intro- duction of an intermediary such as a distributor does little to reduce costs—and may actually increase costs because of an additional transaction. In contrast, India has millions of small retail outlets. The small size of Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent replenishment—an order can be compared with the weekly grocery shopping

low is to bring full truckloads of product close to the market and then distribute locally using “milk runs” with smaller vehicles. The presence of an intermediary that can receive a full truck- load shipment, break bulk, and then make smaller deliveries to the retailers is crucial if trans-

everything from cooking oil to soaps and detergents made by a variety of manufacturers. Besides the convenience provided by one-stop shopping, distributors in India are also able to reduce transportation costs for outbound delivery to the retailer by aggregating products across multiple manufacturers during the delivery runs. Distributors in India also handle collections, because their cost of collection is significantly lower than that of each manufacturer collecting

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from retailers on its own would be. Thus, the important role of distributors in India can be explained by the growth in supply chain surplus that results from their presence. The supply chain surplus argument implies that as retailing in India begins to consolidate, the role of dis- tributors will diminish.


There is a close connection between the design and management of supply chain flows (product,

Japan are examples of companies that have built their success on superior design, planning, and operation of their supply chain. In contrast, the failure of many online businesses, such as Web- van, can be attributed to weaknesses in their supply chain design and planning. The rise and subsequent fall of the bookstore chain Borders illustrates how a failure to adapt its supply chain to a changing environment and customer expectations hurt its performance. Dell Computer is another example of a company that had to revise its supply chain design in response to changing technology and customer needs. We discuss these examples later in this section.

Walmart has been a leader at using supply chain design, planning, and operation to achieve success. From its beginning, the company invested heavily in transportation and information infrastructure to facilitate the effective flow of goods and information. Walmart designed its sup- ply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost-effective manner. Frequent replenishment allows stores to match supply and demand more effectively than the competition. Walmart has been a leader in sharing infor- mation and collaborating with suppliers to bring down costs and improve product availability. The results are impressive. In its 2013 annual report, the company reported a net income of about $17 billion on revenues of about $469 billion. These are dramatic results for a company that reached annual sales of only $1 billion in 1980. The growth in sales represents an annual com- pounded growth rate of more than 20 percent.

design, planning, and operation to drive growth and profitability. It has used a very responsive replenishment system along with an outstanding information system to ensure that products are available when and where customers need them. Its responsiveness allows it to change the mer- chandising mix at each store by time of day to precisely match customer demand. As a result, the company has grown from sales of 1 billion yen in 1974 to almost 1.9 trillion yen in 2013, with profits in 2013 totaling 222 billion yen.

The failure of many online businesses, such as Webvan and Kozmo, can be attributed to their inability to design appropriate supply chains or manage supply chain flows effectively.

could not compete with traditional supermarket supply chains in terms of cost. Traditional super- market chains bring product to a supermarket close to the consumer using full truckloads, result- ing in very low transportation costs. They turn their inventory relatively quickly and let the customer perform most of the picking activity in the store. In contrast, Webvan turned its inven- tory marginally faster than supermarkets but incurred much higher transportation costs for home delivery, as well as high labor costs to pick customer orders. The result was a company that folded in 2001, within two years of a very successful initial public offering.

As the experience of Borders illustrates, a failure to adapt supply chains to a changing environment can significantly hurt performance. Borders, along with Barnes & Noble, domi- nated the selling of books and music in the 1990s by implementing the superstore concept. Compared with small local bookstores that dominated the industry prior to that, Borders was able to offer greater variety (about 100,000 titles at superstores, relative to fewer than 10,000 titles at a local bookstore) to customers at a lower cost by aggregating operations in large stores. This allowed the company to achieve higher inventory turns than local bookstores with lower

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