CHAPTER THREE
Discussion Questions
1. How could a grocery store use inventory to increase the responsiveness of the
company’s supply chain?
The logistical driver of inventory encompasses all raw materials, work in
process, and finished goods within a supply chain. A grocery store can be
more responsive in the eyes of its customers if it offers a broader variety of
SKUs and/or maintains a greater quantity of each SKU. A greater quantity of
each SKU is problematic for highly perishable items such as produce, meat,
and fish. For these items, a grocery store supply chain should be set up to
permit frequent orders so that freshness is ensured and a stockout situation
won’t exist for a significant length of time. A grocery store supply chain
should use historical demand patterns for seasonal items to relieve stress on all
members and provide customers with product during peak demand periods.
2. How could an auto manufacturer use transportation to increase the efficiency
of its supply chain?
Transportation, a logistical driver, entails moving inventory from point to
point in the supply chain. The trade-off in transportation is between the cost of
transportation and the speed at which product is transported. Slower modes of
transportation reduce cost, but could be a reasonable approach if suppliers are
co-located with the assembly operations. If the supply chain is designed in
such a way, and assembly operations are located with proximity to markets,
then the supply chain can be run cheaply without holding too much inventory
in transit. Efficiency can also be improved by aggregating multiple deliveries
or pickups on a single truck as done by Seven-Eleven. Transportation
efficiency can also be improved by including an intermediate cross-docking
location.
3. How could a bicycle manufacturer increase responsiveness through its
facilities?
Facilities, another logistical driver, are the actual physical locations in the
supply chain network where product is stored, assembled, or fabricated. A
facility that is designed to be flexible can respond quickly to market demands
by retooling to produce different models or products, whereas a dedicated
facility cannot. Locating a facility close to the market will increase
responsiveness at the cost of decreased economies of scale that might be
achieved with a centralized location. A facility that is under capacity will be
less responsive than a facility that is appropriately sized or has excess
capacity.
4. How could an industrial supplies distributor use information to increase its
responsiveness?
Information is a cross-functional driver and consists of data and analysis
concerning facilities, inventory, transportation, costs, prices, and customers
throughout the supply chain. Information serves as a connection among all
members of the supply chain and operates within each member to facilitate
internal operations. Accurate information can improve responsiveness by
helping an industrial supplier better match supply and demand. Information
that is gathered farther down the supply chain can be transmitted
instantaneously and accurately to the supplies distributor. Instead of waiting
for a human to call or FAX an order, the distributor can replenish inventory to
the necessary levels or provide what is needed to fill the order as it is realized.
For example, a link to planned maintenance schedules of its customers can
allow the distributor to ensure that parts are available in the right quantity at
the right time.
5. What are some industries in which products have proliferated and life cycles
have shortened? How have the supply chains in these industries adapted?
The authors cite the example of running shoes increasing from five styles in
the early 70s to almost 300 by the late 90s. Other products that have seen an
explosion in variety include personal electronics, beverages, snack and
prepared foods, entertainment, tires, and personal services.
Supply chains have leveraged information systems, recognized the need to
collaborate on product and process design, and supply chain execution. The
supply chain stance has shifted toward a partnership orientation from a focus
on price negotiations. Some supply chains have also changed product design
to decrease the number of parts (essentially reduced the running shoe to a
bottom and a top) and changed the production process to customize close to
the point of sale. Some startups have used 3D printing for running shoes to
provide completely customized shoes.
6. How can the full set of logistical and cross-functional drivers be used to create
strategic fit for a cell phone manufacturer targeting both time sensitive and
price conscious customers?
The logistical drivers, facilities, inventory, and transportation, and the cross-
functional drivers, information, sourcing, and pricing, must be used in concert
to achieve the appropriate balance of efficiency and responsiveness for the
supply chain to be successful. A cell phone manufacturer that wants to deliver
product both quickly and efficiently can make cost and time trade-offs among
these drivers to achieve their goals. These trade-offs across drivers afford
more flexibility but require constant vigilance as the trade-offs within each
driver change. In addition, some drivers may be altered more easily, for
example, order quantity and transportation media, than other drivers, for
example, location and sourcing.
The trade-offs within each driver are summarized in the table:
Driver More Responsive More Efficient
Facilities Multiple Plants Single Plant
Flexible Plants Dedicated Plant
Inventory Higher Inventory Lower Inventory
Transportation Higher Speed Lower Speed
Information Accurate Less Accurate
Real-Time Transmission Batched Transmission
Sourcing Responsive supplier Efficient supplier
Pricing Differential Pricing Everyday Low Pricing
7. On which supply chain drivers should a firm trying to shrink its cash-to-cash
cycle focus?
The overall cash-to-cash cycle time (or Days Working Capital) is the number
of days of working capital required for a company to operate:
Days Working Capital = (Days Inventory Outstanding + Days Sales
Outstanding) − Days Payable Outstanding
Where,
Days Inventory Outstanding (DIO) = Inventory / (Revenue / 365)
Days Sales Outstanding (DSO) = (Account Receivables / Revenue) / 365
Days Payable Outstanding (DPO) = (Account Payables / Revenue) / 365
The most important thing for a company to remember is that its DSO is its
supplier’s DPO—a change in one impacts the other. For example, it’s a common
practice for large companies to try to extend payables to improve the cash-to-cash
cycle. Some companies will move from using Sight Letters of Credit to Open
Account with 30 day payment terms or stretch their Open Account 30 day terms
out to 45 or 60 days. Though this will improve the company’s DPO ratio, it will
also affect their suppliers who will have to respond to a ballooning DSO.
Days Inventory Outstanding is the final component of the cash-to-cash cycle and
the most closely tied to the physical supply chain. Any given extended supply
chain is going to require some level of inventory to fulfill customer service levels,
keep manufacturing processes running, and buffer variability in the physical
world. When strategizing inventory, there are two critical questions that need to be
answered:
Where should inventory be held or stored in the extended supply chain?
What is the critical balancing point between necessary inventory and waste
that needs elimination?
8. Would you expect a brick-and-mortar retailer or an online retailer to have a
higher asset turnover? Which supply chain drivers impact asset turnover?
Although the initial response of most students will be an online retailer, we must
remind them that they need to look at the overall supply chain drivers and metrics
that affect asset turnover. They will confuse choice with availability when
comparing a brick-and-mortar retailer to an online retailer. Although true that an
online retailer can appear to have more choices for the shopper, the availability of
those choices still comes down to how much physical inventory does an online
retailer really has in stock. Remind them of experiences they have had with
ordering online to only receive an out-of-stock message when actually adding the
item to their “shopping cart”. Most studies have shown, that an online retailer, on
average has a slightly higher asset turnover, this advantage shrinks when it comes
to availability and response time.
An excellent example is the comparison of Costco and Amazon. Even though
Costco is a brick-and-mortar retailer, it achieves excellent asset turns because it
only sells a small variety of fast moving products through large stores. In contrast,
Amazon sells a wide variety of product, some of which is slow moving. As a
result, Costco’s asset turns are comparable or marginally better than Amazon’s.
A supply chain is an integrated entity that is a result of its facilities, inventory,
transportation, information, sourcing, and pricing and how these items function
together, all of these drivers impact asset turnover. The degree to which they
impact, relies in the overall strategy of the company in relationship to its
customers, suppliers, and financial ownership. In particular, facilities (through
PP&E) and inventory are the biggest components of assets.