DE LA SALLE UNIVERSITY-DASMARIÑAS

COLLEGE OF ENGINEERING, ARCHITECTURE, AND TECHNOLOGY

ENGINEERING DEPARTMENT
INDUSTRIAL ENGINEERING PROGRAM

Supply Chain Management

Module 1 - Understanding the Supply Chain

Materials from:
Supply Chain Management: Strategy, Planning, and Operation
Sunil Chopra
7th Ed, Boston : Pearson, 2019

Compiled by:
Reimon Gene Therence V. Doblon, PIE, ASEAN Engr
2nd Semester AY 2020-2021

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Module 1 - Understanding the
Supply Chain

Topic Learning Outcome:

TL01. Discuss the goal of a supply chain and explain the impact of
supply chain decisions on the success of a firm.
TL02. Identify the three key supply chain decision phases and explain the
significance of each one.
TL03. Classify the supply chain macro processes in a firm.

Module Outline:
• What is a Supply Chain?
• Decision Phases in a Supply Chain
• Process View of a Supply Chain
• The Importance of Supply Chain Flows
• Examples of Supply Chains

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What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a customer request
• Includes manufacturers, suppliers, transporters, warehouses, retailers, and
customers
• Within each company, the supply chain includes all functions involved in
fulfilling a customer request (product development, marketing, operations,
distribution, finance, customer service)
• Examples: Fig. 1.1 Detergent supply chain (Wal-Mart), Dell

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What is a Supply Chain?

• Customer is an integral part of the supply chain

• Includes movement of products from suppliers to manufacturers to
distributors, but also includes movement of information, funds, and
products in both directions
• Probably more accurate to use the term “supply network” or “supply web”
• Typical supply chain stages: customers, retailers, distributors, manufacturers,
suppliers (Fig. 1.2)
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

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Flows in a Supply Chain

Information

Product
Customer
Funds

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The Objective of a Supply Chain
• Maximize overall value created
• Supply chain value: difference between what the final
product is worth to the customer and the effort the
supply chain expends in filling the customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply chain)

• Example: Dell receives $2000 from a customer for a

computer (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $2000 and the sum of all of these costs
is the supply chain profit
• Supply chain profitability is total profit to be shared across
all stages of the supply chain
• Supply chain success should be measured by total supply
chain profitability, not profits at an individual stage

• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
• Supply chain management is the management of flows
between and among supply chain stages to maximize
total supply chain profitability
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 Decision Phases of a Supply Chain
1. Supply chain strategy or design
2. Supply chain planning
3. Supply chain operation

1. Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and
what processes each stage will perform
• Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty

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2. Supply Chain Planning

• Definition of a set of policies that govern short-term

operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year
• Planning decisions:
• Which markets will be supplied from which locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon

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 3. Supply Chain Operation

• Time horizon is weekly or daily

• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined
• Goal is to implement the operating policies as effectively
as possible
• Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an
order to a particular shipment, set delivery schedules,
place replenishment orders
• Much less uncertainty (short time horizon)

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Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided

into a series of cycles, each performed at the
interfaces between two successive supply chain
stages
• Push/pull view: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)

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Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier

• The supply chain is a concatenation of cycles with each cycle at the

interface of two successive stages in the supply chain. Each cycle involves
the customer stage placing an order and receiving it after it has been
supplied by the supplier stage.
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and the owners of each
process. Specifies the roles and responsibilities of each member and the
desired outcome of each process.
• One difference is in size of order. Second difference is in predictability of
orders - orders in the procurement cycle are predictable once
manufacturing planning has been done.
• This is the predominant view for ERP systems. It is a transaction level view
and clearly defines each process and its owner.
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Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives

• Supply chain processes fall into one of two

categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes from
pull processes

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Push/Pull View of
Supply Chain Processes

• Useful in considering strategic decisions relating to supply

chain design – more global view of how supply chain
processes relate to customer orders
• Can combine the push/pull and cycle views
• L.L. Bean (Figure 1.6)
• Dell (Figure 1.7)
• The relative proportion of push and pull processes can have
an impact on supply chain performance

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Supply Chain Macro Processes in
a Firm

• Supply chain processes discussed in the two views

can be classified into (Figure 1.8):
• Customer Relationship Management (CRM)
• Internal Supply Chain Management (ISCM)
• Supplier Relationship Management (SRM)
• Integration among the above three macro processes
is critical for effective and successful supply chain
management

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Examples of Supply Chains

• Gateway
• Zara
• McMaster Carr / W.W. Grainger
• Toyota
• Amazon

What are some key issues in these supply chains?

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Gateway and Apple: Two Different Journeys into Retailing
Gateway was founded in 1985 as a direct sales manufacturer of PCs with no retail footprint.
In 1996, Gateway was one of the first PC manufacturers to start selling PCs online. After
many years of selling its PCs without a retail infrastructure, Gateway introduced an
aggressive strategy of opening Gateway retail stores throughout the United States in the late
1990s. Its stores carried no finished-goods inventory and were primarily focused on helping
customers select the right configuration to purchase. All PCs were manufactured to order
and shipped to the customer from one of the assembly plants.
Initially, investors rewarded Gateway for this strategy and raised the stock price to more
than $80 per share in late 1999. However, this success did not last. By November 2002,
Gateway shares had dropped to less than $4, and Gateway was losing a significant amount
of money. By April 2004, Gateway had closed all its retail outlets and reduced the number of
configurations offered to customers. In August 2007, Gateway was purchased by Taiwan’s
Acer for a price of $710 million. By 2010, Gateway computers were sold through more than
20 different retail outlets including Best Buy and Costco. As you can imagine, this was quite a
transition for the company to experience.
In contrast, Apple has enjoyed tremendous success since it opened its first retail store in
2001. By 2010, Apple had more than 300 stores worldwide, and retail sales represented
about 15 percent of the company’s total net sales. Unlike Gateway, Apple has always carried
product inventory at its stores. Given its product designs, Apple has relatively little variety
that it carries in its stores. Each of its stores has a relatively high level of sales with its Regent
Street store in London reaching sales of 2,000 pounds per square foot in 2009. In the 2010
annual report, Apple listed retail sales totaling almost $10 billion, a growth of 47 percent
relative to the previous year.
The following questions highlight supply chain decisions that have a bearing on the differ-
ence between Apple’s and Gateway’s performance:
1. Why did Gateway choose not to carry any finished-product inventory at its retail
stores? Why did Apple choose to carry inventory at its stores?
2. Should a firm with an investment in retail stores carry any finished-goods
inventory? What are the characteristics of products that are most suitable to be
carried in finished-goods inventory? What characterizes products that are best
manufactured to order?
3. How does product variety affect the level of inventory a retail store must carry?
4. Is a direct selling supply chain without retail stores always less expensive than a
supply
5. chain with retail stores?
6. What factors explain the success of Apple retail and the failure of Gateway country
stores?

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Zara: Apparel Manufacturing and Retail
Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel
manufacturer and retailer. In 2009, Inditex reported sales of about 11 billion euros
from more than 4,700 retail out- lets in about 76 countries. In an industry in which
customer demand is fickle, Zara has grown rapidly with a strategy to be highly
responsive to changing trends with affordable prices. Whereas design-to-sales cycle
times in the apparel industry have traditionally averaged more than six months, Zara
has achieved cycle times of four to six weeks. This speed allows Zara to introduce
new designs every week and to change 75 percent of its merchandise display every
three to four weeks. Thus, Zara’s products on display match customer preferences
much more closely than the competition. The result is that Zara sells most of its
products at full price and has about half the markdowns in its stores compared to
the competition.
Zara manufactures its apparel using a combination of flexible and quick sources in
Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with
most apparel manufacturers, who have moved most of their manufacturing to Asia.
About 40 percent of the manufacturing capacity is owned by Inditex, with the rest
outsourced. Products with highly uncertain demand are sourced out of Europe,
whereas products that are more predictable are sourced from its Asian locations.
More than 40 percent of its finished-goods purchases and most of its in-house
production occur after the sales season starts. This compares with less than 20
percent production after the start of a sales season for a typical retailer. This
responsiveness and the postponement of decisions until after trends are known
allow Zara to reduce inventories and forecast error. Zara has also invested heavily in
information technology to ensure that the latest sales data are available to drive
replenishment and production decisions.
In 2009, Inditex distributed to stores all over the world from eight distribution
centers located in Spain. The group claimed an average delivery time of 24 hours for
European stores and up to a maximum of 48 hours for stores in America or Asia from
the time the order was
received in the distribution center (DC) to the time it was delivered to the stores.
Shipments from the DCs to stores were made several times a week. This allowed
store inventory to closely match customer demand.
The following questions raise supply chain issues that are central to Zara’s strategy
and success:
1. What advantage does Zara gain against the competition by having a very
responsive supply chain?
2. Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained manufacturing
capacity in Europe even though manufacturing in Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
4. What advantage does Zara gain from replenishing its stores multiple times a
week compared to a less frequent schedule? How does the frequency of
replenishment affect the design of its distribution system?
5. Do you think Zara’s responsive replenishment infrastructure is better suited
for online sales or retail sales?

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W.W. Grainger and McMaster-Carr: MRO Suppliers
W.W. Grainger and McMaster-Carr sell maintenance, repair, and
operations (MRO) products. Both companies have catalogs and Web
pages through which orders can be placed. W.W. Grainger also has
several hundred stores throughout the United States. Customers can
walk into a store, call in an order, or place it via the Web. W.W.
Grainger orders are either shipped to the customer or picked up by
the customer at one of its stores. McMaster-Carr, on the other hand,
ships almost all its orders (though a few customers near its DCs do
pick up their own orders). W.W. Grainger has nine DCs that both
replenish stores and fill customer orders. McMaster has five DCs
from which all orders are filled. Neither McMaster nor W.W. Grainger
manufactures any product. They primarily serve the role of a
distributor or retailer. Their success is largely linked to their supply
chain management ability.
Both firms offer several hundred thousand products to their
customers. Grainger stocks about 200,000 stock-keeping units (SKU),
whereas McMaster carries about 500,000. Grainger also provides
many other products that it does not stock direct from its suppliers.
Both firms face the following strategic and operational issues:
1. How many DCs should be built and where should they be
located?
2. How should product stocking be managed at the DCs? Should
all DCs carry all products?
3. What products should be carried in inventory and what
products should be left with the supplier to be shipped
directly in response to a customer order?
4. What products should W.W. Grainger carry at a store?
5. How should markets be allocated to DCs in terms of order
fulfillment? What should be done if an order cannot be
completely filled from a DC? Should there be specified backup
locations? How should they be selected?
6. How should replenishment of inventory be managed at the
various stocking locations?
7. How should Web orders be handled relative to the existing
business? Is it better to integrate the Web business with the
existing business or to set up separate distribution?
8. What transportation modes should be used for order
fulfillment and stock replenishment?

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Toyota: A Global Auto Manufacturer
Toyota Motor Corporation is Japan’s top auto manufacturer and has
experienced significant growth in global sales over the past two
decades. A key issue facing Toyota is the design of its global
production and distribution network. Part of Toyota’s global strategy
is to open factories in every market it serves. Toyota must decide
what the production capability of each of the factories will be, as this
has a significant impact on the desired distribution system. At one
extreme, each plant can be equipped only for local production. At the
other extreme, each plant is capable of supplying every market. Prior
to 1996, Toyota used specialized local factories for each market. After
the Asian financial crisis in 1996/1997, Toyota redesigned its plants
so that it could also export to markets that remain strong when the
local market weakens. Toyota calls this strategy “global
complementation.”
Whether to be global or local is also an issue for Toyota’s parts plants
and product design. Should parts plants be built for local production
or should there be few parts plants globally that supply multiple
assembly plants? Toyota has worked hard to increase commonality in
parts used around the globe. While this helped the company lower
costs and improve parts availability, common parts caused significant
difficulty when one of the parts had to be recalled. In 2009, Toyota
had to recall about 12 million cars using common parts across North
America, Europe and Asia causing significant damage to the brand as
well as the finances.
Any global manufacturer like Toyota must address the following
questions regarding the configuration and capability of the supply
chain:
1. Where should the plants be located and what degree of
flexibility should be built into each? What capacity should
each plant have?
2. Should plants be able to produce for all markets or only
specific contingency markets?
3. How should markets be allocated to plants and how
frequently should this allocation be revised?
4. What kind of flexibility should be built into the distribution
system?
5. How should this flexible investment be valued?
6. What actions may be taken during product design to facilitate
this flexibility?

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Amazon: Online Sales
Amazon sells books, music, and many other items over the Internet and is
one of the pioneers of online consumer sales. Amazon, based in Seattle,
Washington, started by filling all orders using books purchased from a
distributor in response to customer orders. As it grew, the company
added warehouses, allowing it to react more quickly to customer orders.
In 2009, Amazon had about 20 warehouses in the United States and
another 30 in the rest of the world. It uses the U.S. Postal Service and
other package carriers such as UPS and FedEx to send products to
customers. Outbound shipping-related costs at Amazon in 2009 were
almost $2 billion.
With the Kindle, Amazon has worked hard to increase sales of digital
books. As of 2009, Amazon offered more than 460,000 books in digital
form. The company has also added a significant amount of audio and
video content for sale in digital form.
Amazon has continued to expand the set of products that it sells online.
Besides books and music, Amazon has added many product categories
such as toys, apparel, electronics, jewelry, and shoes. In 2009, one of its
largest acquisitions was Zappos, a leader in online shoe sales. This
acquisition added a lot of product variety. According to the Amazon
annual report, this required creating 121,000 product descriptions and
uploading more than 2.2 million images to the Web site! In 2010, another
interesting acquisition by Amazon was [Link]. Unlike Zappos, this
acquisition added little variety but considerable shipping volumes.
Several questions arise concerning how Amazon is structured and the
product categories it continues to add:
1. Why is Amazon building more warehouses as it grows? How many
warehouses should it have and where should they be located?
2. What advantages does selling books via the Internet provide over
a traditional bookstore? Are there any disadvantages to selling via
the Internet?
3. Should Amazon stock every product it sells?
4. What advantage can bricks-and-mortar players derive from setting
up an online channel?
5. How should they use the two channels to gain maximum
advantage?
6. What advantages/disadvantages does the online channel enjoy in
the sale of shoes /diapers relative to a retail store?
7. For what products does the online channel offer the greater
advantage relative to retail stores? What characterizes these
products?

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Summary of Learning Objectives

• What are the cycle and push/pull views of a supply

chain?
• How can supply chain macro processes be
classified?
• What are the three key supply chain decision
phases and what is the significance of each?
• What is the goal of a supply chain and what is the
impact of supply chain decisions on the success of
the firm?

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