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Tutorial

Supply Chain Management and Build-to-Order Systems

Content

T1.1 T1.2 T1.3 T1.4 T1.5

Basics of Supply Chains Types of Supply Chains Examples of Supply Chains Supply Chain Challenges Build-to-Order Production

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T1.1

Basics of Supply Chains

A supply chain is a concept describing the ow of materials, information, money, and services from raw material suppliers through factories and warehouses to the end customers. A supply chain also includes the organizations and processes that create and deliver these products, information, and services to the end customers. The term supply chain comes from a picture of how the partnering organizations are linked together. As shown in Figure T1.1, a simple linear supply chain links a company that processes milk (middle of the chain) with its suppliers (on the bottom) and its distributors and customers (on the top). The supply chain shown in Figure T1.1 is fairly simple. However, supply chains can be much more complex. Note that the supply chain shows both physical ows and the ow of information. Not shown is the ow of money, which usually goes in the direction opposite to the ow of the physical materials.

DOWNSTREAM

Customers

External distributors Retail grocers

Internal functions INTERNAL Milk producer Milk product processing

Packaged milk products

Packaging operation
tic s as er Pl tain n co

Tier one UPSTREAM

Dairy farm

Cardboard container manufacturer Cardboard

Label company

Labels

Ra w

d ar s bo ner d i ar C onta c

mi

lk

Plastic container manufacturer Chemicals

External suppliers

Tier two

Feed for cows

Paper mill

Chemical plant Raw materials

Wood

Figure T1.1 A simple chain for

a manufacturer. Note: Only representative processes are shown. (Source: Modied from
Reid and Sanders, 2002.)

Tier three Material flow Information flow

Lumber company

Chemical extraction plant

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T1.1 Basics of Supply Chains

SUPPLY CHAIN PARTS

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A supply chain can be broken into three major parts (components): upstream, internal, and downstream, as shown in Figure T1.1. The upstream supply chain. The upstream part of the supply chain includes the activities of a company (a milk producer, in our case), with its rst-tier suppliers and their connection to their suppliers (referred to as second-tier and third-tier suppliers). The supplier relationship can be extended several tiers, all the way to the origin of the material (e.g., mining ores, growing crops). In the upstream supply chain, the major activity is procurement. An examination of Figure T1.1 shows that several potential tiers of suppliers exist. Some processes, such as those required to provide raw milk, may have only one tier of suppliers. However, in many cases several tiers of suppliers exist, meaning that a supplier has one or more subsuppliers, and the subsupplier might have its own subsuppliers, and so on. For example, making cardboard containers involves three tiers: the cardboard container manufacturer (tier one), which gets its material from the paper mill (tier two), which gets its material from the lumber company (tier three). Some supply chains have up to a dozen tiers. The internal supply chain. The internal part of the supply chain includes all of the in-house processes used in transforming the inputs received from the suppliers into the organizations outputs. It extends from the time the inputs enter an organization to the time that the products go to distribution outside of the organization. The internal supply chain is mainly concerned with production management, manufacturing, and inventory control (e.g., processing and packaging in Figure T1.1). The downstream supply chain. The downstream part of the supply chain includes all of the activities involved in delivering the products to the nal customers. The downstream supply chain is directed at distribution, warehousing, transportation, and after-sale services (e.g., retail grocers in Figure T1.1). A companys supply chain involves an array of business processes that not only effectively transform raw items to nished goods or services, but also make those goods or services attractive to customers. The activities that add value to the companys goods or services are part of what is called the value chain, which we discuss in Tutorial 2.

MAJOR CONCEPTS AND DEFINITIONS

Initially, the concept of a supply chain refers to the ow of materials from their sources (suppliers) to the company, and then inside the company to places where they are needed. A demand chain, which describes the process of taking orders and delivering nished goods to meet the demand of customers, also is recognized. These two concepts are interrelated. The relationship is often described as push-pull. Goods and services are pushed along the supply chain ultimately to meet the requirements of an end consumer. In the demand chain, the demand from customers pulls goods and services from suppliers to the end consumer. Therefore, they are frequently combined under the single concept named the supply chain. (See en.wikipedia.org/wiki/supply_chain.) More Denitions. The following denitions are helpful for the study of this tutorial. Supply Chain Management. The function of supply chain management (SCM) is to plan, organize, and coordinate the activities along the supply chain. Today, the concept of SCM refers to a total systems approach to managing the entire supply chain. For an overview, see Stadtler (2005). SCM is usually supported by IT (see Hugos, 2006). E-Supply Chain. When a supply chain is managed electronically, usually with Web-based software, it is referred to as an e-supply chain. It should be noted that as the Internet becomes more pervasive and ubiquitous, the distinction between ITenabled supply chains and e-supply chains is rapidly diminishing. Most supply chains now involve a mix of Web-based and other information systems to ensure efciency and uninterrupted ows of goods and services in a timely manner. As this tutorial

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will show, improvements in supply chains frequently involve an attempt to convert them to e-supply chains, namely, to automate the information and nancial ows in the chain. Virtual Supply Chains. In recent times, many companies have redesigned their supply chains to outsource some part of their supply chain activities, often with the help of sophisticated, Web-based EC and IT support packages. Nike, for example, has outsourced much of the manufacture and distribution of its sporting apparel and sports shoes worldwide. It uses EC and IT systems to manage the order fulllment process without owning the manufacturing facilities, thereby allowing the company to focus on marketing, customer relationships, and new product development, for example. This is referred to as a virtual supply chain. SCM Software. SCM software refers to software that supports specific segments of the supply chain, especially in manufacturing, inventory control, scheduling, warehousing, and transportation. This software is designed to improve decision making regarding supply chain issues, optimization, and analysis. Importantly, SCM software offers better control of the storage and flow of goods and services along a supply chain. The Supply Chain Flows. There are typically three types of ows in the supply chain: materials, information, and nancial (money). In managing the supply chain, it is necessary to coordinate all of the ows among all of the parties involved in the chain. 1. Material ows. These are all physical products, raw materials, supplies, and so forth, that ow along the chain. The concept of material ows also includes reverse owsreturned products, recycled products, and disposal of materials or products. A supply chain thus involves a product life cycle approach, from dirt to dust. 2. Information ows. This includes all data related to demand, shipments, orders, returns, schedules, and changes in the data. It also includes customer feedback, ideas from suppliers to manufacturers, order ows, credit ows, information to customers, and so forth. 3. Financial ows. The nancial ows are all transfers of money, payments, credit card information and authorization, payment schedules, e-payments, and creditrelated data.
Flow in Service Industries. Note that in some service industries, there are limited or no physical ows of materials, but frequently there is ow of documents (hard and soft copies).The digitization of software, music, and so on results in a supply chain without physical ow. Notice, however, that in such a case, there are two types of information ow: one that replaces material ow (e.g., digitized software) and one that supports information (orders, billing, etc.). In managing supply chains, it is necessary to coordinate all of the aforementioned types of ows among all of the parties involved in the supply chain (see Sengupta et al., 2006).

T1.2

Types of Supply Chains

Supply chains come in all shapes and sizes and can be fairly complex. As shown in Figure T1.2, the supply chain for a car manufacturer includes hundreds of suppliers, dozens of manufacturing plants (for parts) and assembly plants (for cars), dealers, direct business customers (eets), wholesalers (some of which are virtual), customers, and support functions such as product engineering and purchasing. Notice that in this case, the chain is not strictly linear as it is in Figure T1.1. Some loops can be found in the process. In addition, sometimes the ow of information and even goods can be bidirectional. For example, not shown in this gure is the return of products (known as reverse logistics, or returns). For the automaker, for example, that would be cars returned to the dealers in the event of defects or recalls by the manufacturer.

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T1.2 Types of Supply Chains

Car Dealers Assembly Material Planning (19 plants) Vehicle scheduling Preproduction planning Components scheduling Planning/sequencing PARTS Manufacturing (57 plants) Engines Electrical/Fuel Handling Devices Glass Ship release Transmissions Components Group Plastics/ Trim Products Stamping Castings Electronics Climate Controls Request to buy Request to buy PURCHASING
an

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CARS Shipping Assembly Line Warehousing Receiving

Sales Operations

Product Engineering

New products and engineering changes

Allocated buildable orders

Shi p
PARTS

ases changes rele ineering ng de

Sourcing MATERIALS

an ce

ship

Suppliers (hundreds)

v Ad

notic

Figure T1.2 A complex supply chain for a car manufacturer.

Engin e

ering cha nge

s and ship releases

Many supply chains can be classied into four major categories: integrated maketo-stock, build-to-order, continuous replenishment, and channel assembly. If a company uses a build-to-order business model, for example, it will not be necessary to store nished products, but it will be necessary to warehouse raw materials and components. Therefore, it is clear that supply chains depend on the nature of the company, its business processes, and the product types and/or services that it offers. A brief description of these four types follows. Integrated Make-to-Stock. The integrated make-to-stock supply chain model focuses on tracking customer demand in real time, so that the production process can restock the nished-goods inventory efciently.This integration often is achieved through use of an information system that is fully integrated. Through application of such a system, an organization can receive real-time demand information that it can use to develop and modify production plans and schedules. Example 1. An example is major oil companies, such as Mobil, that place sensors in each tank at each gas station or retail outlet it serves. The sensors measure in real time the level of gas. Mobil can then use this information for shipment inventory and production scheduling decisions. Such information is integrated further down the supply chain to the procurement function, so that input materials can support the modied production plans and schedules. Example 2. Starbucks Coffee starbucks.com) uses several distribution channels. Starbucks not only sells coffee drinks and some food to consumers, but also sells beans and ground coffee to businesses such as airlines, supermarkets, department stores, and ice-cream makers. In addition, it sells through direct mail, including the Internet. Starbucks is successfully integrating all sources of demand and matching it with the supply by using Oracles automated information system for manufacturing (called GEMMS). The system handles distribution planning, manufacturing scheduling, and inventory control. The coordination of supply with multiple distribution channels

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requires timely and accurate information ows about demand, inventories, storage capacity, transportation scheduling, and more.The information systems are critical for doing all of these functions with maximum effectiveness and reasonable cost. Build-to-Order. Dell Computer is best known for its application of the build-toorder model. In this model, one begins the assembly of the customers order (from components) almost immediately upon receipt of the order. This requires careful management of the component inventories and delivery of needed supplies along the supply chain. One way to accomplish this is to use many common components across several production lines and in several locations. One of the primary benets of this type of supply chain model is the perception that each customer is receiving a personalized product. In addition, the customer receives it rapidly. This type of supply chain model supports the concept of mass customization.We describe this in more detail later in this tutorial. Continuous Replenishment. The idea of the continuous-replenishment supply chain model is to replenish the inventory constantly by working closely with suppliers and intermediaries. However, if the replenishment process involves many shipments, the cost could be too high, causing the supply chain to collapse. Therefore, tight integration is needed between the order-fulllment process and the production and acquisition processes. Real-time information about demand changes is required in order for the production process to maintain the desired replenishment schedules and levels. This model is most applicable to environments with stable demand patterns, as is usually the case with distribution of prescription medicines. The model requires intermediaries when large systems are involved. Channel Assembly. A slight modication to the build-to-order model is the channel-assembly supply chain model. In this model, the parts of the product are gathered and assembled as the product moves through the distribution channel. This is accomplished through strategic alliances with third-party logistics (3PL) rms. These services sometimes involve either the physical assembly of components and the making of nished products at a 3PL facility, or the collection of nished components for delivery to the customer. For example, a computer company could have items such as the monitor and the CPU shipped directly from its vendors to a 3PL facility, such as at FedEx or UPS. Therefore, the customers computer order would not come together until all items were placed on a vehicle for delivery by the 3PL. A channel assembly might have low or zero inventories when properly planned and coordinated, and can achieve a faster market response time; this is popular in the computer technology industry. The ow of goods, services, information, and nancial resources usually is designed not only to transform raw items to nished products and services effectively, but also to do so in an efcient manner. Several types of software are available to achieve this goal, as we will see later in the tutorial.

T1.3

Examples of Supply Chains

With more than 27,900 stores worldwide, 7-Eleven is one of the largest convenience store chains in the world (7-eleven.com, 2008). It has about 10,000 stores in Japan and almost 6,000 in the United States. 7-Eleven Japan is one of the most protable companies listed on the Tokyo stock exchange. It attributes its success primarily to its supply chain design and management ability. One of the key objectives of 7-Eleven Japan is to micro-match supply and demand by location, season, and time of day. To fulll this objective, 7-Eleven Japan opens new stores in target areas. This helps 7Eleven establish a strong presence, and it consolidates its warehousing and trans-

7-ELEVEN: A CONVENIENCE STORE

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portation functions. In addition, all stores are connected electronically to the head ofce, distribution centers (DCs), and suppliers. Orders are passed to the suppliers that package store-specic orders and deliver them to the DC. At the DC, all orders of like products from different suppliers are combined and delivered to the stores. 7-Eleven Japan has made an effort to have no direct store delivery from vendors to the stores. In the United States, 7-Eleven is taking a similar approach to the one used in Japan, except that a distributor delivers a large fraction of products to the stores, not the 7-Eleven DC. In Japan and the United States, 7-Eleven has invested a significant amount of money and effort in a retail information system. Data are collected by scanners and analyzed. The resulting information is then made available to headquarters and the stores for use in ordering, product assortment, and merchandising. Information systems play a key role in 7-Elevens ability to micro-match supply and demand. 7-Eleven has made clear choices in the design of its supply chain. Other convenience store chains have not always made the same choices. The following questions focus mainly on 7-Elevens supply chain choices and its key success factors.
Questions for the 7-Eleven Case
1. What factors inuence the decisions regarding the opening and closing of stores? Why does 7-Eleven choose to have a preponderance of its stores in a particular location? 2. Why does 7-Eleven Japan discourage direct store delivery from vendors and make an effort to move all products through combined DCs? How does the presence of the distributor delivering to the stores affect the performance of the delivery system in the United States? 3. Where are DCs located, and how many stores does each center serve? How are stores assigned to DCs? 4. What point-of-sales data do 7-Eleven gather, and what information is made available to store managers to assist them in their ordering and merchandising decisions? How should the information system be structured?

W.W. GRAINGER AND MCMASTER CARR: MRO SUPPLIERS WITH A DIFFERENT SUPPLY CHAIN STRATEGY

W.W. Grainger and McMaster Carr sell maintenance, repair, and operation (MRO) products mostly to businesses (B2B). Both companies have online catalogs as well as Web pages through which customers can place orders, and customers can also place their orders in the retail stores or over the telephone. Either W.W. Grainger ships orders to customers from their distribution centers (DCs), or customers can pick up their orders at one of the retail stores. McMaster Carr, on the other hand, ships all orders. W.W. Grainger has several DCs that replenish stores and ll customer orders; McMaster Carr has DCs from which it lls all orders. Both rms offer several hundred thousand products to their customers. Each rm stocks about 100,000 products; they obtain the rest from the supplier as needed. Both rms face the following strategic and operational issues.
1. How many DCs should a company have, and where should they be located? 2. How should product stocking be managed at the DCs? Should all DCs carry all products? If not, how are stocking decisions made? 3. Which products should be carried in inventory, and which products should be left with the suppliers? (They both buy from thousands of suppliers.) 4. How should markets be allocated to DCs in terms of order fulllment? What should be done if an order cannot be completely lled from a DC? Should specied backup locations be available? How should these be selected? 5. How should replenishment of inventory be managed at the various stocking locations? 6. 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?

Questions for the Grainger Case

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Toyota Motor Corporation is Japans top auto manufacturer. The company has experienced signicant growth in global sales over the last two decades. A key issue facing Toyota is the design of its global production and distribution network. Toyota must decide what the production capability of each of its factories will be because this has a signicant impact on the desired distribution system. Prior to 1996, Toyota used specialized local factories for each market. After the Asian nancial crisis from 1996 to 1997, Toyota redesigned its plants so that they could be shifted quickly in order to export to markets that remain strong. Toyota calls this strategy global complementation. For any global manufacturer such as Toyota, several questions arise regarding the conguration and capability of the supply chain.
1. Where should the plants be located, and what degree of exibility should be built into each one? What capacity should each plant have? 2. Should plants be able to produce for all markets or for only specic contingency markets? 3. How should markets be allocated to plants, and how frequently should this allocation be revised? 4. What kind of exibility should be built into the distribution system? 5. How should this exible investment be valued? 6. What actions can be taken during product design to facilitate this exibility?

TOYOTA: A GLOBAL AUTO MANUFACTURER

Questions for the Toyota Case

T1.4

Supply Chain Challenges

Supply chain challenges have been recognized in business, services, government, and the military for generations. The problems are most evident in complex or long supply chains and in cases where many business partners are involved. There are numerous examples of supply chain problems, such as companies that were unable to meet demand. Some of these companies paid substantial penalties, and others even went out of business. On the other hand, some world-class companies such as Wal-Mart, Federal Express, and Dell have supply chains with innovative ITenhanced applications. Problems along the supply chain can occur between business units within a single enterprise; they also can occur between (and among) enterprises. A major symptom of ineffective supply chains is poor customer service, which hinders people or businesses from getting products or services when and where needed or gives them poor-quality products. Other symptoms are high inventory costs, loss of revenues, and extra cost of expediting shipments.

REASONS FOR SUPPLY CHAIN PROBLEMS

The problems along the supply chain stem mainly from two sources: (1) uncertainties and (2) the need to coordinate several activities, internal units, and business partners. Here we will address several of the uncertainties that contribute to supply chain problems. Throughout the chapter, we will consider how IT can help enterprises improve supply chain coordination and reduce uncertainties. Actual demand for a product is inuenced by several factors such as competition, prices, weather conditions, technological developments, and customers general condence. These are external, usually uncontrollable, factors. ChevronTexaco overcame this uncertainty by measuring demand in real time and using a demand-driven production strategy. Other supply chain uncertainties include delivery times, which depend on many factors, ranging from production machine failures to road conditions and trafc jams that may interfere with shipments. Quality problems in materials and parts may also create production delays, which lead to supply chain problems. One of the major difculties in properly setting inventory levels in various parts of the supply chain is known as the bullwhip effect. The bullwhip effect refers to erratic changes in orders (along the) supply chain and is discussed in A Closer Look T1.1 and Chapter 11.

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A Closer Look
The Bullwhip Effect

T1.1
Myers Squibb in pharmaceuticals have experienced a similar phenomenon. Basically, demand variables can become magnied when viewed through the eyes of managers at each link in the supply chain. If each distinct entity makes ordering and inventory decisions with an eye to its own interest above those of the chain, stockpiling may be simultaneously occurring at as many as seven or eight locations along the supply chain. Study has shown that such hoarding has led in some cases to as many as 100 days worth of inventory that is waiting, just in case (versus 1020 days in the normal case). A 1998 industry study projected that $30 billion in savings could materialize in grocery industry supply chains alone by sharing information and collaborating. Thus, companies are trying to avoid the sting of the bullwhip as well as to solve other SCM problems.
Sources: Donovan (2002/2003) and Logic Tools (2006).

The bullwhip effect (as described in Chapter 8) refers to erratic shifts in orders up and down the supply chain. This effect was initially observed by Procter & Gamble (P&G) with its disposable diapers product (Pampers). While actual sales in retail stores were fairly stable and predictable, orders from distributors to the manufacturer, P&G, had wild swings, creating production and inventory problems. An investigation revealed that distributors orders were uctuating because of poor demand forecast, price uctuation, order batching, and rationing within the supply chain. These dysfunctions resulted in unnecessary and costly inventories in various locations along the supply chain, uctuations in P&G production levels as well as in orders to P&Gs suppliers, and ow of inaccurate information. Distorted information can lead to tremendous inefciencies, excessive inventories, poor customer service, lost revenues, ineffective shipments, and missed production schedules (Donovan, 2002/2003). The bullwhip effect is not unique to P&G, however. Firms ranging from Hewlett-Packard in the computer industry to Bristol-

TRUST AND COLLABORATION

Trust is vitally important in a collaboration relationship between suppliers and buyers in the supply chain. Trust involves a calculated process wherein an organization estimates the costs and/or the rewards of another party cheating or staying in the relationship. Because of the increase in the Internet-enabled supply chain, organizations are collaborating to a greater extent. For example, in the operation of e-marketplaces, trust between organizations could be an obstacle for the effective management of the supply chain. Trust has been linked not only to successful implementation of supply chain systems, but also to the ongoing operation of these systems. What are the factors leading to a trusting behavior in a supplierbuyer relationship? One of the factors is information sharing because it lets all of the rms in the supply chain know enough to be assured about other rms capabilities and intentions. Another factor that leads to trust in the supply chain is the prediction process, which is one partys ability to forecast the other partys behavior. Repeated interaction enables one party to interpret projected outcomes better for another party. A third factor that leads to trust is the perception of mutually sharing both the risks and the benets of the collaboration. The fourth factor involves determining the partys ability to meet its obligations. This factor is important as the two organizations will assess each others propensity to perform on the mutually agreed contract. Trust, risk perception, and relationship commitment all ultimately affect whether an organization continues in a cooperative electronic relationship. Managing a supply chain with international concerns adds many layers of complexity. The development of a supply chain strategy must include political concerns, currency risk, governmental concerns, production quality, and infrastructure issues. An excellent source of information on economic and political stability is the CIAs World Factbook at cia.gov/cia/publications/factbook/index.html. This topic is explored in Chapter 11. Make-or-buy decisions can be extremely complex. Make decisions involve manufacturing or developing a product internally, whereas buy decisions involve externally built products and services. Choosing between producing a product or service in-house or purchasing it from an outside source involves looking at the core competencies of

GLOBAL SUPPLY CHAIN MANAGEMENT ISSUES

OUTSOURCING: MAKEOR-BUY DECISIONS

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the organization, analyzing the costs of producing or acquiring, assessing the suitability of suppliers, examining the expertise within the organization, and examining the ability to inventory products. Activities that are outsourced are usually not part of the core competencies of the organization. Resources that are transferred to the outsourced company often include facilities, people, equipment, and nances. Because outsourcing transfers some of the organizations internal processes and resources to outside vendors, outsourcing decisions involve complex legal contracts, payment schedules, and service-level agreements. General Motors (GM) has spent two years planning for changes in its supply chain network. CIO and Vice President Ralph Szygenda stated that major supply chain redesign was needed because the whole process had to better accommodate globalization (Bacheldor, 2004). GM is truly a global company and therefore puts a lot of effort into outsourcing contracts on a global level. Outsourcing management involves the forecasting and prediction of cost trends, labor availability, expertise, and the ability to meet schedules (Gibson, 2005).

MULTIPLE SUPPLIERS STRATEGY

In an environment where there are many suppliers, organizations need a strategy to evaluate supplier products, services, and the approach they will use to decide which supplier is most appropriate. When supplies or products are commodities, organizations can play one supplier against another based on price. Long-term partnering relationships are usually not entered into for commodity products using a many-supplier strategy. However, when the product is not a commodity and there is clear differentiation, this strategy will depend on the uniqueness of the product and the proprietariness of the product or process used to manufacture the product. Having many suppliers tends to decrease risk and increase costs. Another challenge in managing the supply chain is the selection of vendors. A decision needs to be made regarding from whom to buy goods and services. There are three stages to the vendor selection process: (1) vender evaluation, (2) vendor development, and (3) vendor negotiation. Vendor evaluation involves finding potential vendors and determining the likelihood of their being good suppliers in the future. Vendor development assumes you will be working with a particular vendor and includes training, engineering and production help, infrastructure development, and procedures for information transfer. Negotiations focus on vendor quality, delivery, payment, and cost. Vendor selection must consider factors such as strategic fit, vendor competence, delivery capability, production process capability, financial strength, facilities and location, product selection, vendor quality, and product pricing. Because it is often difcult to forecast demand for products and services, it then becomes equally difcult to predict supply. Demand and supply mismatches are receiving increased visibility and coverage as businesses look for solutions. Demand and supply mismatches can lead to both short- and long-term loss in sales and market share, or to lower sales price due to markdowns of excess inventories, or can prevent the rm from capitalizing on strong market demand due to the unavailability of products. Mismatches can negatively impact the productivity and utilization of organizational assets, such as equipment over- or underutilization. Companies can end up with costly inventory balances and carrying costs. Reverse logistics is the process of continuously taking back products and/or packaging materials to avoid waste. Reverse logistics affects many components of the logistics process as well as the supply chain because companies are responsible for products after theyve been sold and after customers have disposed of them. Another aspect of reverse logistics is handling and disposition of damaged goods returned by the consumer. Reverse logistics programs can be costly for many organizations and can create difficulties in the management of the supply chain life cycle.

VENDOR SELECTION

DIFFICULTY IN FORECASTING DEMAND

COST OF REVERSE LOGISTICS

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T1.5

Build-to-Order Production
The concept of build-to-order means that you start to make a product (service) only after an order for it is placed. This concept is as old as commerce itself, and was the only method of production until the Industrial Revolution began. According to this concept, if you need a pair of shoes, you go to a shoemaker who takes the measurement. You negotiate quality, design, and price, and you make a down payment. The shoemaker buys the materials and makes a customized product for you. Customized products were expensive, and it took a long time to nish them. This changed with the coming of the Industrial Revolution. The Industrial Revolution started with the concept of dividing work into small parts. Such division of labor makes the work simpler, requiring less training for employees. It also allows for specialization. Different employees become experts in executing certain tasks. Because the work segments are simpler, it is easier to automate them. All of this reduces the prices to consumers, and demand increases. So the concept of build-to-market developed. To build-to-market, it was necessary to design standard products, produce them, store them, and then sell them.The creation of standard products by automation drove prices down still further, and demand accelerated. To meet the ever-increasing demand, the solution of mass production was created. According to the concept of mass production, a manufacturer produces large amounts of standard products at a very low cost, and then pushes (markets) them to consumers. With increased competition and the desire to sell in remote markets, it was necessary to create special marketing organizations to do the sales. This new model also required the creation of large factories, and nance, accounting, personnel, and other departments to keep track of the many new and specialized business activities. In mass production, the workers do not know who the customers are, and frequently do not care about customers needs or product quality. But the products are inexpensive, and their prices fuel demand, so the concept became a dominant one. Mass production also required inventory systems at various places in the supply chain, which were based on forecasted demand. If the forecasted demand was wrong, the inventories were incorrect: Either the inventories were insufcient to meet demand, or there was too much inventory at hand. As society became more afuent, the demand for customized products, especially cars, increased. To make sales, manufacturers had to meet this kind of demand. As long as the demand for customized product was small, there was no problem of meeting it. In purchasing a new car, for example, customers were asked to pay a premium and wait for a long time, and they were willing to do so. Slowly, the demand for customized products and services increased. In the 1970s, Burger King introduced the concept of having it your way, and manufacturers began looking for solutions for providing customized products in large quantities. This idea is the essence of mass customization. Such solutions were usually enhanced by some kind of information technologies (Pine and Gilmore, 1999). Later, Dell Computer introduced the idea of customized PCs.This customization strategy was so successful that many other industries also wanted to try mass customization. However, they found that it is not so easy to do so (Zipkin, 2001 and Agrawal et al., 2001). Using e-commerce can facilitate the use of customization and even the use of mass customization (Holweg and Pil, 2001).To understand this strategy, lets look rst at a comparison of mass production, also known as a push system, with mass customization, also known as a pull system, as shown in Figure T1.3. One important area in the supply chain is ordering. Using EC a customer can self-congure the desired product online. The order is received in seconds, and once it is veried and payment arranged, the order is sent electronically to the production oor. This saves processing time and money. For complex products, customers may collaborate in real time with the manufacturers designers, as is done at Cisco Systems.Again, time and money are saved, and errors are reduced due to better communication and collaboration. For example, for an implementation in the automotive industry, see A Closer Look T1.2.

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Tutorial 1 Supply Chain Management and Build-to-Order Systems

Conventional Push System Manufacturer/Assembler
Product to market Key: demand forecast Use mass production, inventories

EC-Based Pull System Customers

Orders can be customized (on-demand)

Manufacturer or retailer
Consult inventory of standard items only. Ship if available; otherwise transfer order

Wholesalers
Inventories

Retail distribution centers

Inventories

Transferring unfulfilled orders to distribution centers, or suppliers, if needed

Retail stores

Orders to production floors, suppliers, if needed to make products, ship to customers direct (or via intermediary)

Figure T1.3 Comparison of a push-based supply chain and a pull-based supply chain. (Drawn by E. Turban.)

Inventories, rush orders, push to customers

Customers

Other contributions of EC to mass customization are the following: the customers needs are visible to all partners in the order-fulllment chain (fewer delays, faster response time), inventories are reduced due to rapid communication, and digitizable products and services can be delivered electronically, at almost no additional cost. Another key area in mass customization is understanding what the customers want, and EC is also very helpful here (see Chapter 6 and Holweg and Pil, 2001). E-commerce can help in expediting the production changeover from one item to another.Also, since most mass production is based on assembly of standard components, EC can help make the production conguration in minutes, including the identication of the needed components and their location. Furthermore, a production schedule can be automatically generated, detailing deployment of all needed resources, including money. This is why many industries, and particularly the auto manufacturers, are planning to move to buildto-order using EC. As a result of this change in production methods, they are expecting huge cost reductions, shorter order-to-delivery time, and lower inventory costs. (See Exhibit 1 in Agrawal et al., 2001, and Holweg and Pil, 2001.) Mass customization on a large scale is not easy to attain (Zipkin, 2001 and Agrawal et al., 2001), but if properly performed, it may become the dominant model in many industries.

A Closer Look

T1.2
well, and then they make the cars they wish to sell. In some cases, certain cars are ultimately sold from stock at a loss when the market exhibits insufcient demand for a particular vehicle. The automakers have long operated under this build-to-stock environment, building cars that are carried as inventory during the outbound logistics process (ships, trucks, trains, and dealers lots). General Motors (GM) estimates that it holds as much as $40-billion worth of unsold vehicles in its distribution channels. Other automakers hold large amounts as well.

Selling Cars Online: Build-to-Order

The worlds automobile manufacturers are complex enterprises with thousands of suppliers and millions of customers. Their traditional channel for distributing cars has been the automobile dealer, who orders cars and then sells them from the lot. When a customer wants a particular feature or color (options), the customer might have to wait weeks or months until the pipeline of vehicles has that particular car on the production line. In the traditional system, the manufacturers conduct market research in order to estimate which features and options will sell

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References
Ford, GM, and Toyota, along with other automakers around the world, have announced plans to implement a build-to-order program, much like the Dell approach to building computers. These auto giants intend to transform themselves from build-tostock companies to build-to-order companies, thereby cutting inventory requirements in half, while at the same time giving customers the vehicle they want in a short period (e.g., 1 to 2 weeks). However, according to Weiner (2006) this transformation has so far been doomed to failure by rigid production processes, inexible product structures, the lack of integrated logistics processes, and inadequate networking of manufacturers, suppliers and customers. Only when a network of suppliers produce standard modules for cars using standardized processes and IT systems will the dream of a truly agile and responsive supply chain delivering build-to-customer-order capability be realized. As an example of this trend toward build-to-order mass customization in the new car market, Jaguar car buyers can build a dream car online. On Jaguars Web site (jaguar.com), consumers are able to custom congure their cars features and components, see

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it online, price it, and have it delivered to a nearby dealer. Using a virtual car on the Web site, customers can view in real time more than 1,250 possible exterior combinations out of several million, rotate the image 360 degrees, and see the price updated automatically with each selection of trim or accessories. After storing the car in a virtual garage, the customer can decide on the purchase and select a dealer at which to pick up the completed car. (Thus, conicts with the established dealer network channel are avoided.) The Web site helps primarily with the research processit is not a fully transactional site. The conguration, however, can be transmitted to the production oor, thereby reducing delivery time and contributing to increased customer satisfaction. Similar conguration systems are available from all of the major car manufacturers. Customers can electronically track the progress of the car, including visualization of the production process in the factory. Another similarly impressive Web site with similar functionality is hummer.com.
Sources: Compiled from jaguar.com (accessed June 2008), hummer.com (accessed June 2008), Weiner (2006), and Knowledge@Wharton (2005).

Glossary
Bullwhip effect Erratic shifts in orders up and down the supply chain. Demand chain The process of taking orders and delivering nished goods from suppliers to meet the demand of customers. E-supply chain A supply chain that is managed electronically, usually with Web technologies. Outsourcing Acquiring IS services from an external (outside) organization rather than through internal IS units. Reverse logistics (returns) A ow of material or nished goods back to the source; for example, the return of defective products by customers. SCM software Applications programs specically designed to improve decision making in segments of the supply chain. Supply chain Flow of materials, information, money, and services from raw material suppliers, through factories and warehouses, to the end customers; includes the organizations and processes involved. Supply chain management (SCM) The management of all of the activities along the supply chain, from suppliers, to internal logistics within a company, to distribution, to customers. This includes ordering, monitoring, and billing. Trust The psychological status of involved parties who are willing to pursue further interaction to achieve a planned goal. Virtual supply chain A supply chain executed by the partners in the virtual enterprise.

References
7-Eleven.com, 7-eleven.com/AboutUs/tabid/73/Default.aspx (accessed June 2008). Agrawal, M. T. V., et al., The False Promise of Mass Customization, McKinsey Quarterly, No. 3, 2001. Bacheldor, B., General Motors Takes Design Up a Notch, Information Week, February 23, 2004. Donovan, R. M., Supply Chain Management: Cracking the Bullwhip Effect, Material Handling Management, Director Issue, 2002/2003. Gibson, S., GM Pushes Outsourcing Envelope, Eweek, December 2005. Holweg, M., and F. Pil, Successful Build-to-Order Strategies Start with the Customer, MIT Sloan Management Journal, 43(1), Fall 2001, pp. 7483. Hugos, M., The Essentials of Supply Chain Management, 2nd ed., Hoboken, NJ: John Wiley and Sons, 2006. Knowledge@Wharton, Car Trouble: Should We Recall the U.S. Auto Industry? May 4, 2005, knowledge.wharton.upenn.edu/article.cfm?articleid=1183&CFID=69508139&CFTOKEN=20334258&jsessionid=9a3066 929f4951487158 (accessed June 2008). Logic tools, Is Better Forecasting a Solution to the Bullwhip Effect? 2006. logic-tools.com/resources/articles/bullwhip.html (accessed June 2008). Pine, B. J., and J. Gilmore, The Four Faces of Mass Customization, Harvard Business Review, JanuaryFebruary 1999. Reid, D., and N. Sanders, Operations Management. New York: John Wiley & Sons, 2002. Sengupta, K., D. R. Heiser, and L. S. Cook, Manufacturing and Service Supply Chain Performance: A Comparative Analysis, The Journal of Supply Chain Management, October 2006. Stadtler, H., Supply Chain Management and Advanced Planning: Basics, Overview, and Challenges, European Journal of Operational Research, 163(3), 2005. Weiner, M., The 5-Day Car: Ordered on MondayDelivered on Friday. Ilipt.org, February 28, 2006, fraunhofer.de/Images/magazine_22006_28_tcm6-64704.pdf (accessed June 2008). Zipkin, P., The Limits of Mass Customization, MIT Sloan Management Review, Spring 2001.