Supply Chain Management: Strategy,

Planning, and Operation

Eighth Edition
Supply chain performance

Chapter 2
Achieving Strategic Fit in
a Supply Chain

Chapter 3
Supply Chain Drivers
and Financial
Performance

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Learning Objectives
• Competitive and supply chain strategies
• Strategic fit
• Drivers of supply chain performance

2.1 Explain why achieving strategic fit is critical to a

company’s overall success.
2.2 Describe how a company achieves strategic fit between
its supply chain strategy and its competitive strategy.

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Learning Objectives (1 of 3)
3.1 Identify the major drivers of supply chain performance
and their impact on financial performance.
3.2 Discuss the role of facilities in creating strategic fit and
its impact on financial performance.
3.3 Discuss the role of inventory in creating strategic fit and
its impact on financial performance.

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Competitive and Supply Chain
Strategies
• Competitive strategy defines the set of customer needs a
company seeks to satisfy through its products and services.
• Product development strategy specifies the portfolio of new
products that the company will try to develop.
• Marketing and sales strategy specifies how the market will be
segmented and product positioned, priced, and promoted.
• Supply chain strategy determines the nature of material
procurement, transportation of materials, manufacture of product or
creation of service, distribution of product, follow-up service,
whether processes will be in-house or outsourced.
• All functional strategies must support one another and the
competitive strategy.

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The Value Chain

Figure 2-1 The Value Chain in a Company

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Achieving Strategic Fit (1 of 2)
• Strategic fit—competitive and supply chain strategies
have aligned goals
• A company may fail because of a lack of strategic fit or
because its overall supply chain design, processes, and
resources do not provide the capabilities to support the
desired strategy.

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Achieving Strategic Fit (2 of 2)
1. The competitive strategy and all functional strategies
must fit together to form a coordinated overall strategy.
Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy
goal.
2. The various functions in a company must appropriately
structure their processes and resources to be able to
execute these strategies successfully.
3. The design of the overall supply chain and the role of
each stage must be aligned to support the supply chain
strategy.

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Summary of Learning Objective 1
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 unhappy
customers, a reduction in supply chain surplus, and a
decrease in supply chain profitability.

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How Is Strategic Fit Achieved?
1. Understanding the customer and supply chain
uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit

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Step 1: Understanding the Customer
and Supply Chain Uncertainty (1 of 2)
• Quantity of product needed in each lot
• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product

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Step 1: Understanding the Customer
and Supply Chain Uncertainty (2 of 2)
• Demand uncertainty—uncertainty of customer demand
for a product
• Implied demand uncertainty—resulting uncertainty for
only the portion of the demand that the supply chain plans
to satisfy based on the attributes the customer desires

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Customer Needs and Implied Demand
Uncertainty
Table 2-1 Impact of Customer Needs on Implied Demand Uncertainty

Customer Need Causes Implied Demand Uncertainty to …

Range of quantity required Increase because a wider range of the quantity
increases required implies greater variance in demand
Response time decreases Increase because there is less time in which to react
to orders
Variety of products required Increase because demand per product becomes
increases less predictable
Required service level increases Increase because the firm must handle unusual
surges in demand
Rate of innovation increases Increase because new products tend to have more
uncertain demand
Number of channels through Increase because customer demand per channel
which product may be acquired becomes less predictable
increases

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Implied Uncertainty and Other
Attributes (1 of 2)
1. Products with uncertain demand are often less mature
and have less direct competition. As a result, margins
tend to be high.
2. Forecasting is more accurate when demand has less
uncertainty.
3. Increased implied demand uncertainty leads to
increased difficulty in matching supply with demand. For
a given product, this dynamic can lead to either a
stockout or an oversupply situation.
4. Markdowns are high for products with greater implied
demand uncertainty because oversupply often results.
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Implied Uncertainty and Other
Attributes (2 of 2)
Table 2-2 Correlation Between Implied Demand Uncertainty
and Other Attributes
Blank

Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season-end markdown 0% 10% to 25%

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Impact of Supply Source Capability
Table 2-3 Impact of Supply Source Capability on Supply
Uncertainty

Supply Source Capability Causes Supply Uncertainty to...

Frequent breakdowns Increase

Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

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Implied Uncertainty (Demand and
Supply) Spectrum

Figure 2-2 The Implied Uncertainty (Demand and Supply)

Spectrum

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Step 2: Understanding Supply Chain
Capabilities (1 of 2)
• How does the firm best meet demand?
• Supply chain responsiveness is the ability to
– Respond to wide ranges of quantities demanded
– Meet short lead times
– Handle a large variety of products
– Build highly innovative products
– Meet a high service level
– Handle supply uncertainty

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Step 2: Understanding Supply Chain
Capabilities (2 of 2)
• Responsiveness comes at a cost
• The cost-responsiveness efficient frontier curve
shows the lowest possible cost across all firms for a
given level of responsiveness
• Given the tradeoff between cost and responsiveness, a
key strategic choice for any supply chain is the level of
responsiveness it seeks to provide and to achieve that
level at the lowest possible cost

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Cost-Responsiveness Efficient
Frontier

Figure 2-3 Cost-Responsiveness Efficient Frontier

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Responsiveness Spectrum

Figure 2-4 The Responsiveness Spectrum

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Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness is
consistent with the implied uncertainty
• Assign roles to different stages of the supply chain that
ensure the appropriate level of responsiveness
• Ensure that all functions maintain consistent strategies
that support the competitive strategy

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Zone of Strategic Fit

Figure 2-5 Finding the Zone of Strategic Fit

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Roles and Allocations

Figure 2-6 Different Roles and Allocations of Implied Uncertainty for a

Given Level of Supply Chain Responsiveness
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Low-Cost and Responsive Supply
Chains
Table 2-4 Comparison of Low-Cost and Responsive Supply Chains
Blank

Low-Cost Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Product design Maximize performance at a minimum
postponement of product
strategy product cost
differentiation
Lower margins because price is a Higher margins because price is
Pricing strategy
prime customer driver not a prime customer driver
Maintain capacity flexibility to
Manufacturing
Lower costs through high utilization buffer against demand/supply
strategy
uncertainty
Maintain buffer inventory to deal
Inventory strategy Minimize inventory to lower cost
with demand/supply uncertainty
Reduce, but not at the expense of Reduce aggressively, even if the
Lead-time strategy
costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality
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Tailoring the Supply Chain
• Achieve strategic fit while serving many customer segments with
a variety of products across multiple channels
• Tailor to low implied uncertainty with low-cost options (e.g., IKE
A), high implied uncertainty with responsive options (e.g.,
7-Eleven Japan), or a combination of both low and high implied
uncertainty customer-product combinations (e.g., Zara and
Amazon)
• Requires sharing operations for some links in the supply chain,
while having separate operations for other links, to reduce the
cost of serving customers and provide appropriate level of
responsiveness to each segment

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Changes over Product Life Cycle (1 of 2)
• Beginning stages
1. Demand is very uncertain, and supply may be
unpredictable.
2. Margins are often high, and time is crucial to gaining
sales.
3. Product availability is crucial to capturing the market.
4. Cost is often a secondary consideration.

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Changes over Product Life Cycle (2 of 2)
• Later stages
1. Demand has become more certain, and supply is
predictable.
2. Margins are lower because of an increase in
competitive pressure.
3. Price becomes a significant factor in customer choice.

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Summary of Learning Objective 2
To achieve strategic fit, a company must first understand the
needs of the customers being served and the capabilities of
all supply sources. Both the needs and the capabilities
should be used to identify the implied uncertainty that the
supply chain must absorb. The second step is to understand
the supply chain’s capabilities in terms of cost and
responsiveness. The key to strategic fit is ensuring that
supply chain responsiveness is consistent with customer
needs, supply capabilities, and the resulting implied
uncertainty. Tailoring the supply chain is essential to
achieving strategic fit when supplying a wide variety of
customers with many products through different channels.

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Supply Chain Levers
• Five basic levers to deal with uncertainty:
– Capacity, combination of excess capacity and flexible
capacity
– Inventory, one of the most common levers used in
practice to deal with uncertainty
– Time, combination of speedy supply and the
willingness of customers to wait
– Information, appropriate information can help a supply
chain reduce uncertainty
– Price, prices of products and services that vary over
time can help a supply chain deal with uncertainty

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Supply Chain Uncertainty

Figure 2-7 Five Key Levers to Deal with Supply Chain

Uncertainty
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Summary of Learning Objective 3
The implied uncertainty that a supply chain needs to
absorb depends on the needs of the customer segment(s)
targeted. Capacity, inventory, time, information, and price
are the five levers that a supply chain can use to deal with
this uncertainty. Investing more in one lever generally
allows the supply chain to invest less in one or more of the
other levers. To achieve strategic fit, a supply chain must
find the right balance between investments in the five
levers to effectively serve the target customer segment(s).

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Expanding Strategic Scope (1 of 2)
• Scope of strategic fit—the functions within the firm and
stages across the supply chain that devise an integrated
strategy with an aligned objective.
• A narrow scope or the different functions each making
independent decisions to optimize local performance can
minimize local cost, but may result in conflicts between
functions and a decrease in firm profits.
• Strategic scope must be expanded to align across all
functions within the firm as well with the firm’s competitive
strategy.

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Expanding Strategic Scope (2 of 2)
• Strategic scope should also extend beyond the firm to
include other stages in the supply chain such as between
the supplier and manufacturer and, potentially, between the
firm and other partnering firms.
• Benefits of expanding strategic scope include minimizing
local cost, minimizing functional cost, maximizing company
profit, and maximizing supply chain surplus.

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Summary of Learning Objective 4
The scope of strategic fit refers to the functions and stages
within a supply chain that coordinate strategy and target a
common goal. When the scope is narrow, individual
functions try to optimize their performance based on their
own goals. This practice often results in conflicting actions
that reduce the supply chain surplus. As the scope of
strategic fit is enlarged to include the entire supply chain,
actions are evaluated based on their impact on overall
supply chain performance, which helps increase supply
chain surplus.

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Supply Chain Management: Strategy,
Planning, and Operation
Eighth Edition

Chapter 3

Supply Chain Drivers

and Financial
Performance

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Learning Objectives (1 of 3)
3.1 Identify the major drivers of supply chain performance
and their impact on financial performance.
3.2 Discuss the role of facilities in creating strategic fit and
its impact on financial performance.
3.3 Discuss the role of inventory in creating strategic fit and
its impact on financial performance.

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Learning Objectives (2 of 3)
3.4 Discuss the role of transportation in creating strategic fit
and its impact on financial performance.
3.5 Discuss the role of information in creating strategic fit
and its impact on financial performance.
3.6 Discuss the role of sourcing in creating strategic fit and
its impact on financial performance.

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Learning Objectives (3 of 3)
3.7 Discuss the role of pricing in creating strategic fit and
its impact on financial performance.
3.8 Define the tradeoffs between supply chain driver costs
and responsiveness.
3.9 Describe key financial measures of firm performance
and link them to supply chain drivers.

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Framework for Supply Chain
Decisions (1 of 2)

Figure 3-1 Supply Chain Decision-Making Framework

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Framework for Supply Chain
Decisions (2 of 2)
• Logistical Drivers
– Facilities
– Inventory
– Transportation
• Cross-Functional Drivers
– Information
– Sourcing
– Pricing
• Interactions determine overall supply chain performance

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Summary of Learning Objective 1
The major drivers of supply chain performance are facilities,
inventory, transportation, information, sourcing, and pricing.
Each driver affects the balance between responsiveness and
efficiency and the resulting strategic fit. Thus, it is important
for supply chain designers to consider the tradeoffs involved
in order to structure the six drivers appropriately to achieve
strategic fit and good financial performance.

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Drivers of Supply Chain
Performance (1 of 2)
1. Facilities
– The physical locations in the supply chain network
where product is stored, assembled, or fabricated
2. Inventory
– All raw materials, work in process, and finished goods
within a supply chain
3. Transportation
– Moving inventory from point to point in the supply
chain

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Drivers of Supply Chain
Performance (2 of 2)
4. Information
– Data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers
throughout the supply chain
5. Sourcing
– Who will perform a particular supply chain activity
6. Pricing
– How much a firm will charge for the goods and
services that it makes available in the supply chain

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Facilities (1 of 5)
• Facilities: physical locations in the supply chain network
where products are transformed or stored
– Production sites
– Storage sites
• Role in the Supply Chain
– Increase responsiveness by increasing the number of
facilities, making them more flexible, or increasing
capacity

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Facilities (2 of 5)
– Tradeoffs between facility, inventory, and
transportation costs
▪ Increasing number of facilities increases facility and
inventory costs, decreases transportation costs and
reduces response time
▪ Increasing the flexibility or capacity of a facility
increases facility costs but decreases inventory
costs and response time

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Facilities (3 of 5)
• Components of Facilities Decisions
– Capability
▪ Flexible, dedicated, or a combination of the two
▪ Product focus or a functional focus
– Location
▪ Where a company will locate its facilities
▪ Centralize for economies of scale, decentralize for
responsiveness
▪ Consider macroeconomic factors, quality of workers, cost
of workers and facility, availability of infrastructure,
proximity to customers, location of other facilities, tax
effects
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Facilities (4 of 5)
– Capacity
▪ A facility’s capacity to perform its intended function
or functions
▪ Excess capacity—responsive, costly
▪ Little excess capacity—more efficient, less
responsive
– Demand Allocation
▪ Markets each facility will serve
▪ Revisited as conditions change

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Facilities (5 of 5)
– Facility-Related Metrics
▪ Revenue per dollar invested
▪ Processing cost per unit
▪ Overall equipment effectiveness (OEE)
▪ Volume contribution of top 20 percent SKUs
(Stock-Keeping Units) and customers

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Summary of Learning Objective 2
The major facility-related decisions include identifying the
number of facilities, the extent of flexibility, the level of
capacity, and the markets served by each facility. Increasing
the number of facilities, their flexibility, or their excess
capacity increases responsiveness but at higher costs. Key
facility-related metrics are revenue per dollar invested,
processing cost per unit, overall equipment effectiveness,
and volume contribution of top 20 percent SKUs/customers,.

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Inventory (1 of 3)
• Inventory: all raw materials, work in process, and finished
goods within a supply chain
• Role in the Supply Chain
– Mismatch between supply and demand
– Exploit economies of scale
– Reduce costs
– Improve product availability
– Affects assets, costs, responsiveness, material flow
time

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Inventory (2 of 3)
– Overall Tradeoff
▪ Increasing inventory generally makes the supply
chain more responsive
▪ A higher level of inventory facilitates a reduction in
production and transportation costs because of
improved economies of scale
▪ Inventory holding costs increase

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Inventory (3 of 3)
– Material flow time: the time that elapses between the
point at which material enters the supply chain to the
point at which it exits
– Throughput: the rate at which sales occur
– Little’s law

I = DT

where
I = inventory, T = flow time, D = throughput

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Components of Inventory
Decisions (1 of 3)
• Cycle Inventory
– Average amount of inventory used to satisfy demand
between supplier shipments
– Function of lot size decisions
• Safety Inventory
– Inventory held in case demand exceeds expectations
– Costs of carrying too much inventory versus cost of
losing sales

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Components of Inventory
Decisions (2 of 3)
• Seasonal Inventory
– Inventory built up to counter predictable variability in
demand
– Cost of carrying additional inventory versus cost of
flexible production
• Level of Product Availability
– The fraction of demand that is served on time in full
(OTIF) from product held in inventory
– Tradeoff between customer service and cost

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Components of Inventory
Decisions (3 of 3)
• Inventory-Related Metrics
– Days sales in inventory (DSI)
– Inventory turns
– Fill rate
– Products with more than a specified number of days of
inventory

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Summary of Learning Objective 3
The major inventory related decisions include identifying
the batch size, the safety inventory, the seasonal
inventory, and the level of product availability. Increasing
the safety inventory and level of product availability
increases responsiveness but also increases costs.
Increasing the batch size and seasonal inventory
increases holding costs but may decrease production,
transportation, and purchasing costs. Key
inventory-related metrics are days sales in inventory,
inventory turns, fill rate, and products with more than a
specified number of days of inventory.

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Transportation (1 of 4)
• Transportation: moving inventory from point to point in the
supply chain and can take the form of many combinations of
modes and routes
• Role in the Supply Chain
– Moves inventory between stages in the supply chain
– Affects responsiveness and costs
– Faster transportation is more expensive but allows for
greater responsiveness and affects inventory and facilities
– Allows a firm to adjust the location of its facilities and
inventory to find the right balance between responsiveness
and cost

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Transportation (2 of 4)
• Components of Transportation Decisions
– Design of transportation network
▪ Modes, locations, and routes
▪ Direct or with intermediate consolidation points
▪ One or multiple supply or demand points in a single
run

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Transportation (3 of 4)
– Choice of transportation mode
▪ Air, truck, rail, sea, and pipeline
▪ Information goods via the Internet
▪ Different speed, size of shipments, cost of shipping,
and flexibility

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Transportation (4 of 4)
– Transportation-Related Metrics
▪ Average inbound transportation cost per unit
▪ Average inbound transit time
▪ Average outbound transportation cost per unit
▪ Average outbound transit time

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Summary of Learning Objective 4
The major transportation-related decisions include
designing the transportation network and selecting the
transportation mode. Faster modes of transport are more
expensive but can improve responsiveness while helping
decrease inventory and facility costs. Key
transportation-related metrics are average inbound
transportation cost and average outbound transportation
cost per unit and average inbound and outbound transit
time.

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Information (1 of 3)
• Information: data and analysis concerning facilities,
inventory, transportation, costs, prices, and customers
throughout the supply chain, which provides management
an opportunity to impact responsiveness and cost
• Role in the Supply Chain
– Improve the utilization of supply chain assets and the
coordination of supply chain flows to increase
responsiveness and reduce cost
– Information is a key driver that can be used to provide
higher responsiveness while simultaneously improving
efficiency

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Information (2 of 3)
• Role in the Competitive Strategy
– Improves visibility of transactions and coordination of
decisions across the supply chain
– Right information can help a supply chain better meet
customer needs at lower cost
– More information increases complexity and cost of both
infrastructure and analysis exponentially while marginal
value diminishes
– Share the minimum amount of information required to
achieve coordination
– Examples: 7-Eleven and Walmart

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Information (3 of 3)

Figure 3-2 Information and Product Flows at 7-Eleven Japan

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Components of Information
Decisions (1 of 3)
• Demand Planning
– Demand planning: generating the best estimate of
future demand based on historical sales, planned
marketing and promotions, economy, competition, and
other factors
– Include estimation of forecast error
• Coordination and Information Sharing
– Supply chain coordination: all stages of a supply
chain work toward the objective of maximizing total
supply chain profitability based on shared information
– Critical for success
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Components of Information
Decisions (2 of 3)
• Sales and Operations Planning (S&OP)
– Sales and operations planning (S&O P): the process
of creating an overall supply plan (production and
inventories) to meet the anticipated level of demand
(sales)
– Can be used to plan supply chain needs and project
revenues and profits

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Components of Information
Decisions (3 of 3)
• Information-Related Metrics
– Forecast error
– Variance from plan

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Summary of Learning Objective 5
The major information-related decisions include coming
up with a demand plan as well as a sales & operations
plan that optimally matches supply and demand. It is
important that information is shared across the supply
chain to ensure that plans at different stages are
coordinated. Key information-related metrics are forecast
error and variance from plan.

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Sourcing (1 of 2)
• Sourcing: the choice of who will perform a particular supply
chain activity, such as production, storage, transportation,
or the management of information, which affects both
responsiveness and cost
• Role in the Supply Chain
– Sourcing: set of business processes required to
purchase goods and services
– Will tasks be performed by a source internal to the
company or a third party
– Should increase the size of the total surplus to be
shared across the supply chain

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Sourcing (2 of 2)
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they affect the
level of efficiency and responsiveness in a supply chain
– Outsource to responsive third parties if it is too
expensive to develop their own
– Keep responsive process in-house to maintain control

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Components of Sourcing
Decisions (1 of 3)
• In-House or Outsource
– Perform a task in-house or outsource it to a third party
– Outsource if it raises the supply chain surplus more
than the firm can on its own
– Keep function in-house if the third party cannot
increase the supply chain surplus or if the outsourcing
risk is significant

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Components of Sourcing
Decisions (2 of 3)
• Supplier Selection
– Number of suppliers, criteria for evaluation and
selection
• Procurement
– Procurement: process of obtaining goods and
services within a supply chain
– Goal is to decrease total cost of ownership and
increase supply chain surplus

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Components of Sourcing
Decisions (3 of 3)
• Sourcing-Related Metrics
– Days payable outstanding
– Average purchase price
– Supply quality
– Supply lead time
– Supplier reliability

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Summary of Learning Objective 6
The major sourcing-related decisions include deciding
whether an activity will be insourced or outsourced,
identifying key factors in supplier selection, and selecting
the supplier portfolio. Key sourcing-related metrics are
days payable outstanding, average purchase price, supply
quality, supply lead time, and supplier reliability.

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Pricing
• Pricing: determines how much a firm will charge
customers for the goods and services it makes available
in the supply chain
• Role in the Supply Chain
– Affects the supply chain level of responsiveness
required and the demand profile the supply chain
attempts to serve
– Pricing strategies can be used to match demand and
supply
– Objective should be to increase firm profit

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Components of Pricing
Decisions (1 of 3)
• Quantity Discounts
– The provider of the activity must decide how to price it
appropriately to reflect economies of scale in the
underlying process
• Everyday Low Pricing Versus High-Low Pricing
– Different pricing strategies lead to different demand profiles
that the supply chain must serve
• Pricing and Timing of Promotions
– Short-term price discounts such as promotions impact
demand and cost. Consider impact on profits when
planning timing and extent of discounts

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Components of Pricing
Decisions (2 of 3)
• Fixed Price Versus Menu Pricing
– If marginal supply chain costs or the value to the
customer vary significantly along some attribute, it is
often effective to have a pricing menu
– Can lead to customer behavior that has a negative
impact on profits

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Components of Pricing
Decisions (3 of 3)
• Pricing-Related Metrics
– Profit margin
– Average sale price

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Summary of Learning Objective 7
The major pricing-related decisions include deciding
whether the firm will offer quantity discounts, whether it
will offer everyday low pricing or prices that vary over
time, and whether it will offer a fixed price or a menu of
prices that vary along some dimension such as response
time. Pricing-related metrics are profit margin, average
sale price over time, and by channel.

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Tradeoffs Between Costs and
Responsiveness (1 of 7)

Figure 3-3 Relationship Between Desired Response Time

and Number of Facilities
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Tradeoffs Between Costs and
Responsiveness (2 of 7)

Figure 3-4 Relationship Between Number of Facilities and

Facility Costs
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Tradeoffs Between Costs and
Responsiveness (3 of 7)

Figure 3-5 Relationship Between Number of Storage

Facilities and Inventory Costs
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Tradeoffs Between Costs and
Responsiveness (4 of 7)
• Inbound transportation costs: costs incurred to bring
material into a facility
• Outbound transportation costs: costs of sending
material out of a facility
• Outbound transportation costs per unit tend to be higher
than inbound costs because inbound lot sizes are typically
larger

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Tradeoffs Between Costs and
Responsiveness (5 of 7)

Figure 3-6 Relationship Between Number of Facilities and

Transportation Costs
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Tradeoffs Between Costs and
Responsiveness (6 of 7)
• Total logistics costs: sum of facility, inventory, and
transportation costs
• Each firm should have at least the number of facilities
that minimizes total logistics cost
• A firm may increase the number of facilities beyond that
minimizing point to further reduce response time to
customers, but only if they are confident that it will
increase revenue in an amount greater than the increase
in costs for the additional facilities

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Tradeoffs Between Costs and
Responsiveness (7 of 7)

Figure 3-7 Variation in Logistics Costs and Response Time

with Number of Facilities
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Summary of Learning Objective 8
Building appropriate responsiveness in a supply chain
requires an understanding of the customer’s willingness to
pay as well as the impact on facility, inventory, and
transportation costs (total logistics costs). In general,
providing shorter response times requires a network with
more facilities, which increases facility and inventory costs
but can decrease transportation costs. The appropriate
network varies based on the products sold and the
customer needs being served.

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Financial Data for Costco and
Nordstrom (1 of 4)
Table 3-1 Selected Financial Data for Costco and Nordstrom
Inc. (in Millions)
Fiscal Year Costco Nordstrom Inc.
2023 2023
Total Revenue 242,290 14,693
Cost of Sales 212,586 9,303
Selling, General, and Administrative 21,590 4,855
Earnings Before Interest and Taxes 8,1114 251
Net Interest Expense Negative 373.

104
Income Before Tax 8,487 147
Income Tax Expense 2,195 13
Net Income 6,292 134

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Financial Data for Costco and
Nordstrom (2 of 4)
Table 3-1 [Continued]

Fiscal Year Costco Nordstrom Inc.

2023 2023
Blank Blank

Assets
Net Receivables 2,285 334
Inventory 16,651 1,888
Property, Plant, and Equipment (PP&E) 26,684 3,177
Total Assets 68,994 8,444
Blank Blank

Liabilities and Stockholder Equity

Accounts Payable 17,483 1,236
Total Stockholder Equity 25,058 848

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Financial Measures of
Performance (1 of 7)
• From a shareholder perspective, return on equity (ROE) is
the main summary measure of a firm’s performance

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Financial Measures of
Performance (2 of 7)
• Return on assets (ROA) measures the return earned on
each dollar invested by the firm in assets

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Financial Measures of
Performance (3 of 7)
• To measures not part of financial statements
– Markdowns: discounts required to convince
customers to buy excess inventory
– Lost sales: represent customer sales that did not
materialize because of the absence of products the
customer wanted to buy

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Financial Data for Costco and
Nordstrom (3 of 4)
Table 3-2 A Comparison of Financial Metrics for Costco and
Nordstrom Inc.

Metric Costco Nordstrom Inc.

ROE StartFraction 6,292 over 25,058 EndFraction equals 25.11 percent. StartFraction 134 over 848 EndFraction equals 15.80 percent.

ROA StartFraction 6,292 plus open parenthesis negative 373 close parenthesis times open parenthesis 1 minus 0.21 close parenthesis over 68,994 EndFraction equals 8.69 percent. StartFraction 134 plus 104 times open parenthesis 1 minus 0.21 close parenthesis over 8,444 EndFraction equals 2.56 percent.

Profit Margin
StartFraction 6,292 plus open parenthesis negative 373 close parenthesis times open parenthesis 1 minus 0.21 close parenthesis over 68,994 EndFraction equals 2.48 percent. StartFraction 134 plus 104 times open parenthesis 1 minus 0.21 close parenthesis over 8,444 EndFraction equals 1.47 percent.

Asset Turnover StartFraction 242,290 over 68,994 EndFraction equals 3.51. StartFraction 14,693 over 8,444 EndFraction equals 1.74.

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Financial Data for Costco and
Nordstrom (4 of 4)
Table 3-2 (Continued)

Metric Costco Nordstrom Inc.

APT StartFraction 212,586 over 17,483 EndFraction equals 12.16. StartFraction 9,303 over 1,236 EndFraction equals 7.53.

ART StartFraction 242,290 over 2,285 EndFraction equals 106.04. StartFraction 14,693 over 334 EndFraction equals 43.99.

INVT StartFraction 212,586 over 16,851 EndFraction equals 12.77. StartFraction 9,303 over 1,888 EndFraction equals 4.93.

PPET StartFraction 242,290 over 26,684 EndFraction equals 9.08. StartFraction 14,693 over 3,177 EndFraction equals 4.62.

C2C
Open square bracket minus StartFraction 1 over 12.16 EndFraction plus StartFraction 1 over 106.04 EndFraction plus StartFraction 1 over 12.77 EndFraction close square bracket times 365 equals negative 1.43 days. Open square bracket negative StartFraction 1 over 7.53 EndFraction plus StartFraction 1 over 43.99 EndFraction plus StartFraction 1 over 4.93 EndFraction close square bracket times 365 equals negative 33.88 days.

SG&A / Revenue StartFraction 21,590 over 242,290 EndFraction equals 8.91 percent. StartFraction 4,855 over 14,693 EndFraction equals 33.04 percent.

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Financial Measures of
Performance (4 of 7)
• ROA can be written as the product of two ratios – profit
margin and asset turnover

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Financial Measures of
Performance (5 of 7)
• Key components of asset turnover are accounts receivable
turnover (ART); inventory turnover (INVT); and property,
plant, and equipment turnover (PPET)

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Financial Measures of
Performance (6 of 7)
• An important ratio that defines financial leverage is
accounts payable turnover (APT)

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Financial Measures of
Performance (7 of 7)
• Cash-to-cash (C2C) cycle in days roughly measures the
average amount time (in days) from when cash enters the
process as cost to when it returns as collected revenue

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Selected Financial Metrics
Table 3-3 Selected Financial Metrics Across Industries,
2000–2012
Average Average Average Average
Operating C2C Cycle Inventory SG&A Cost/
Industry Margin (Days) Turns Revenue
Pharmaceutical 0.25 190.3 2.0 0.31
Medical device manufacturers 0.18 211.6 2.2 0.36
Consumer packaged goods 0.17 28.3 5.6 0.31
Food 0.16 37.4 6.2 0.23
Consumer electronics 0.12 9.3 43.8 0.14
Apparel 0.10 127.7 3.2 0.35
Chemical 0.09 78.1 5.3 0.09
Automotive 0.04 75.9 9.9 0.13

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Summary of Learning Objective 9
The key financial metrics of firm performance include return
on equity; return on assets; accounts on payable turnover;
profit margin; asset turnover; accounts receivable turnover;
inventory turns; property, plant, and equipment turns;
cash-to-cash cycle; and SG&A / revenue. Markdowns and
lost sales are two important financial measures of supply
chain performance that are not recorded in financial
statements. Supply chain strategy and performance have a
significant impact on financial metrics.

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CASE STUDY – 7 ELEVEN

Copyright © 2026, 2019, 2016 Pearson Education, Inc. All Rights Reserved
 The summary of the main contents from Chapter 2 (Achieving
Strategic Fit), specifically tailored to help you explain and link the
theory to the 7-Eleven Japan (SEJ) case study:

1. Competitive Strategy vs. Supply Chain Strategy

•Theory: A company’s Competitive Strategy defines the set of
customer needs it seeks to satisfy. The Supply Chain Strategy
specifies how the chain will support that goal (procurement,
transportation, etc.).
•Case Connection: 7-Eleven's competitive strategy is "convenience"
(providing what the customer needs, where, and when they need it).
Their supply chain strategy must focus on responsiveness (speed and
availability) rather than just low cost.

2. Understanding Strategic Fit

•Theory: Strategic fit means that both competitive and supply chain
strategies have aligned goals. A lack of fit leads to failure.
•Case Connection: SEJ succeeds because its supply chain is perfectly
aligned with its "convenience" promise. If SEJ tried to be the "cheapest"
(Efficiency), they would fail to be "convenient" (Responsiveness).
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 3. The Three Steps to Achieve Strategic Fit
To explain the SEJ success story, let’s go through these three steps:

Step 1: Understand Customer and Supply Chain Uncertainty

•Key Concept: Implicit Demand Uncertainty. This is the uncertainty
for only the portion of the demand that the supply chain plans to
satisfy.
•Case Application: SEJ faces high uncertainty because customers
expect fresh food (onigiri, bentos) to be available at all hours, but
these products have short shelf lives. If they don't have it, the
customer goes elsewhere.
Step 2: Understand Supply Chain Capabilities
•Key Concept: The Cost-Responsiveness Efficient Frontier.
There is always a trade-off. To be more responsive (faster), you must
usually incur higher costs.
•Case Application: SEJ chooses to be at the high end of the
Responsiveness Spectrum. They achieve this through:
• Facilities: High density of stores (Saturating an area).
• Transportation: Frequent deliveries (3 times/day).
• Information:Copyright
Real-time POS
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2019, 2016 shared with suppliers.
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Step 3: Achieve Strategic Fit

•Key Concept: The Zone of Strategic Fit. The more uncertain the
demand is, the more responsive the supply chain should be.
•Case Application: SEJ maps perfectly into the "Zone." They handle
high-uncertainty items (fresh food) with a high-responsiveness chain.

4. Expanding the Strategic Scope

•Theory: Strategic fit should not just be within one department (e.g.,
just the warehouse), but across the entire supply chain (suppliers,
distributors, retailers).
•Case Connection: SEJ uses Intercompany Scope. They don't just
optimize their own stores; they coordinate with suppliers and use
Centralized Distribution Centers (CDCs) to maximize Supply Chain
Surplus rather than just individual profit.

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 Các em nhìn vào biểu đồ
này, SEJ đã chọn một vị trí
Zone of Strategic Fit hoàn hảo trong 'Zone of
Strategic Fit'. Họ bán những
thứ rất khó dự báo và mau
hỏng như cơm nắm, bánh mì
(High Uncertainty). Để
không bị lỗ hay mất khách,
họ xây dựng một chuỗi cung
ứng giao hàng liên tục và
dùng máy POS cập nhật dữ
liệu từng giờ (High
Responsiveness). Nếu họ
chọn cách giao hàng chậm
để tiết kiệm tiền xe tải, họ sẽ
văng ra khỏi 'Zone' và thất
bại

Figure 2-5 Finding the Zone of Strategic Fit

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The "7-Eleven Paradox”

Why is SEJ's high transportation cost (3 deliveries a day)

considered a 'good' decision?

•Theory Answer: Because it increases Responsiveness.

•Outcome: It reduces Inventory Waste (expired food) and Lost
Sales (stockouts), which more than offsets the high shipping costs,
ultimately increasing the total Supply Chain Surplus.

Comparison: Japan vs. USA

•Why it works in Japan: High population density = low distance
between stores = lower cost for high responsiveness.
•The Struggle in the USA: Low density = high distance = the cost of
being "Responsive" like Japan becomes prohibitive. This explains
why the "Strategic Fit" in the US often shifts toward more Efficiency
(fewer deliveries).

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