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SCM text book CHAPTER ONE

Discussion Questions & answers
1

Consider the purchase of a can of soda at a convenience store. Describe the

various stages in the supply chain and the different flows involved.
When a customer purchases a can of soda at a convenience store, his purchase
represents the end of a supply chains delivery of an item and the beginning of
information regarding his purchase flowing in the opposite direction.
The supply chain stages include customers, retailers, wholesalers/distributors,
manufacturers, and component/raw material suppliers. A customers purchase
moves product towards the customer and dollars and information towards the
retailer.
The retailer places an order from the wholesaler/distributor to replenish stock,
thereby moving information back up the supply chain while moving product
down the supply chain. As the order is filled, the retailer will move dollars back
up the supply chain.
The wholesaler/distributor transmits information and dollars to the manufacturer
who produces product and ships it down the supply chain to the wholesaler.
Finally (or initially, depending on your perspective) the manufacturer moves
orders (information) and dollars towards suppliers in exchange for material flow
into their production processes.

Why should a firm like Dell take into account total supply chain profitability
when making decisions?
Dell realizes that their ultimate success lies with the success of their supply chain
and its ability to generate supply chain surplus. If Dell was to view supply chain
operations as a zero sum game, they would lose their competitive edge as their
suppliers businesses struggled. Dells profit gained at the expense of their supply
chain partners would be short lived. Just as a physical chain is only as strong as its
weakest link, the supply chain can be successful only if all members cooperate
and focus on a global optimum rather than many local optima.

What are some strategic planning and operational decisions that must be made by
an apparel retailer like The Gap?
As The Gap plans supply chain strategy it must first consider the marketing
functions pricing plans in order to structure a supply chain consistent with these
plans. Strategic considerations such as the capacity of each supplier and assembly
operations, sourcing decisions and how logistics are to be handled are all part of
the design. The supply chain must also settle on communication channels and
frequencies.

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Supply chain planning takes the strategic decisions as a given and seeks to exploit
efficiencies in the chain to maximize supply chain surplus. The entire chain
should collaborate in forecasting and planning production to achieve a global
optimum. The forecasts should take into account planned promotions and known
seasonal fluctuations in demand.
The operational decision takes the plans as a given and makes day-to-day
decisions to process customer orders, allocate resources to certain customers,
trigger orders from supply chain members, and deliver product.
4

Consider the supply chain involved when a customer purchases a book at a

bookstore. Identify cycles in this supply chain and the location of the push/pull
boundary.
All supply chain processes can be broken down into four process cycles that
connect the five stages of the supply chain; the customer order cycle, the
replenishment cycle, the manufacturing cycle, and the procurement cycle.
The customer order cycle connects the customer with the retailer; this connection
is made as the book, perhaps Supply Chain Management by Chopra and Meindl,
is selected and paid for by the customer.
The replenishment cycle connects the retailer and the distributor and is triggered
by the retailers need to fill the empty shelf space with another copy of this tome.
The manufacturing cycle connects the distributor and the manufacturer. As
demand for the book is realized and distributors empty their warehouses, they
signal the manufacturer to print another million copies to fill their empty
warehouses.
Finally, the procurement cycle connects the manufacturer and the supplier. The
manufacturer requires raw material inputs of paper, ink, etc., to begin the
assembly process for another batch of Supply Chain Management.
The push/pull boundary exists where demand switches from reactive (pull) to
speculative (push) production. For most bookstore supply chains the push/pull
boundary is between the customer order cycle and the replenishment cycle. The
customer order pulls the book from the book store shelf but the initial production
of the book was triggered by a build order that moved materials along the supply
chain to the retail outlet.

Consider the supply chain involved when a customer orders a book from Amazon.
Identify the push/pull boundary and two processes each in the push and pull
phases.
In Amazons original operations design the push/pull boundary existed betwixt the
retailer (Amazon) and their distributor. Amazon ordered product from the
distributor and the customer order arrived. Today, Amazon has six warehouses

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where it stocks an inventory of items it is confident that will sell. In this scenario,
the push/pull boundary exists between the customer and the retailer.
Processes in the pull phase are the order fulfillment, shipping, customer returns,
and customer billing. Processes in the push phase are production, stock
replenishments, shipping, and payment.
6

In what way do supply chain flows affect the success or failure of a firm like
Amazon? List two supply chain decisions that have a significant impact on supply
chain profitability.
The success or failure of a company like Amazon is decided by the effective
function of its supply chain. The flow of products from publishers to distributors
to customers must be rapid and reliable in order to satisfy customers. The flow of
information back through the supply chain allows all members to coordinate
efforts. The flow of money allows all supply chain members to maintain
operations. Supply chain profitability is influenced by sourcing, promotion, and
fulfillment decisions.

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CHAPTER TWO
Discussion Questions
1. How would you characterize the competitive strategy of a high-end department
store chain such as Nordstrom? What are the key customer needs that Nordstrom
aims to fill?
The Nordstrom web site states the following. Over the years, the Nordstrom
family of employees built a thriving business on the principles of quality, value,
selection, and service. Today, Nordstrom is one of the nations leading fashion
retailers, offering a wide variety of high-quality apparel, shoes, and accessories
for men, women, and children at stores across the country. We remain committed
to the simple idea our company was founded on, earning our customers trust one
at a time.
Nordstrom fills customer needs for high quality fashion merchandise and
outstanding levels of customer service. Price is no object for the typical
Nordstrom shopper.
2. Where would you place the demand faced by Nordstrom on the implied demand
uncertainty spectrum? Why?
Implied demand uncertainty is demand uncertainty due to the portion of demand
that the supply chain is targeting, not the entire demand. A high-end department
store chain such as Nordstrom falls on the high end of the implied demand
uncertainty scale. The fashion items that Nordstrom stocks have extremely high
product margin, high forecast errors and stockout rates, and once the season is
over, these items are sold at deep discounts at their Nordstrom Rack outlet stores.
3. What level of responsiveness would be most appropriate for Nordstroms supply
chain? What should the supply chain be able to do particularly well?
Supply chain responsiveness takes many forms, including the ability to respond to
a wide range of quantities, meet short lead times, handle a large variety of
products, build innovative products, meet a high service level, and handle supply
uncertainty. The Nordstrom supply chain must be highly responsive in the areas of
handling highly innovative fashion products, customer response, and service
level; they are effective in supplying well-heeled customers with merchandise and
their return policy is legendary in the Pacific Northwest.
4. How can Nordstrom expand the scope of the strategic fit across the supply chain?
Scope of strategic fit refers to the functions within the firm and stages across the
supply chain that devise an integrated strategy with a shared objective. By
adopting an intercompany interfunctional scope strategy, Nordstrom will

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maximize supply chain surplus. Nordstrom can move in this direction by working
with their suppliers as if they are actually owned by Nordstrom. Rather than
viewing the supply chain as a zero-sum game of inventory cost minimization and
profit maximization, Nordstrom must recognize that spreading the wealth and
occasionally taking on more inventory than is optimal for them will result in
improved customer service. The intercompany interfunctional scope of strategic
fit requires more effort than the other approaches presented in this section;
Nordstrom must evaluate all aspects of their supply web.
5. Reconsider the previous four questions for other companies such as Amazon.com,
a supermarket chain, and auto manufacturer, and a discount retailer such as WalMart.
Amazon.com focuses on cost and flexibility by providing books, music and a
host of other household products at low prices. Customers place orders online
and expect to receive purchases in a number of days. Customer orders are
processed at central warehouses or are drop shipped from suppliers by mail or
common carrier. For the most part, the implied demand uncertainty for
Amazon.com is low as they cast such a wide net. Amazon.coms supply chain
must be responsive in terms of flexibility; they handle an incredibly diverse range
of products. Amazon.coms supply chain should be able to provide low prices
wide variety and reasonable delivery schedules for its customers. In every link of
the supply chain, Amazon.com must function on the cost-responsiveness efficient
frontier in order to support its competitive strategy.
A supermarket chain focuses on cost and quality, with some specialty chains
adding flexibility by carrying a broader range of products that may be targeted
towards customers interested in organic products or ethnic cuisine. Implied
demand uncertainty for a supermarket chain tends to be low; shoppers are
typically repeat customers and have a constant demand level. The supermarket
supply chain must be responsive by receiving produce quickly to ensure freshness
and have a high service level. Supermarket supply chains tend to be wellestablished and can improve strategic fit by emphasizing speed to maintain
freshness, hence perceived quality.
Auto manufacturers have extremely complicated supply chains that are
increasingly focused on flexibility and lean operations. Implied demand
uncertainty for auto manufacturers varies considerably by target market and
manufacturer. Automotive supply chains among the big three in the United States
have made great progress in the last decade and recognize that they must be
responsive from a time and flexibility standpoint.
Wal-Marts supply chain is obsessed with cost and is facilitated by a low implied
demand uncertainty, their impressive logistics system and their management
information systems. Their supply chain is able to respond quickly to fill a wide
variety of products to keep merchandise on Wal-Marts shelves. Wal-Marts level

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of coordination along the supply chain is excellent; it would be difficult to point
out areas where true intercompany interfunctional scope of strategic fit has not
been achieved. The sole supply chain criticism that surfaces is an occasional
report that suppliers feel as if supply chain surplus is not shared equitably.
6. Give arguments to support the statement that Wal-Mart has achieved very good
strategic fit between its competitive and supply chain strategies.
The best argument to support the statement that Wal-Mart has achieved very good
strategic fit is their success as a company. Competition today is supply chain
versus supply chain, not company versus company, so a companys partners in the
supply chain often determine the companys success. Wal-Marts strategic focus
on cost is evident in their competitive, product development, supply chain, and
marketing strategy. Their marketing strategy of advertising every day low prices
appeals to consumers and does not disrupt the supply chain by causing surges in
demand. Visiting one of their big box stores reveals low-priced merchandise, both
national and store brands, stacked from floor to ceiling without elaborate displays
or decoration. Wal-Marts logistics and information systems are famous for
coordinating their entire supply chain and allowing it to meet customer needs at
minimal cost.
7. What are some factors that influence implied uncertainty? How does the implied
uncertainty differ between an integrated steel mill that measures lead times in
months and requires large orders and a steel service center that promises 24-hour
lead times and sells orders of any size?
From a customer perspective, implied demand uncertainty increases when the
customers range of quantity required increases, lead times decrease, variety of
product increases, rate of innovation increases and required service levels
increase. We also see high implied uncertainty attributed with high product
margins, forecast errors above 40%, stockout rates above 10% and forced seasonend markdowns. On the supply side we see increased supply uncertainty when
the supply source has frequent breakdowns, unpredictable and low yields, poor
quality, limited supply capacity, and evolving production processes.
For the steel mill that requires large orders and has lead times measured in months
both the implied demand and supply uncertainty is less due to a better predictable
capability and a better defined schedule for production. Due to the increasing
number of sizes and the shorter response time associated with the steel service
center, implied uncertainty is high.
8. What is the difference in implied uncertainty faced by a convenience store chain
such as 7-Eleven, a supermarket chain, and a discount retailer such as Costco?
When customers go to a convenience store chain such as 7-Eleven, they go there
for the convenience of a nearby store and are not necessarily looking for the

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lowest price. Implied demand uncertainty would be high as customers are
looking for a variety of products and convenience versus cost and demand levels
are hard to predict.
A supermarket chain focuses on cost and quality, with some specialty chains
adding flexibility by carrying a broader range of products that may be targeted
towards customers interested in organic products or ethnic cuisine. Implied
demand uncertainty for a supermarket chain tends to be low; shoppers are
typically repeat customers and have a constant demand level. The supermarket
supply chain must be responsive by receiving produce quickly to ensure freshness
and have a high service level. Supermarket supply chains tend to be wellestablished and can improve strategic fit by emphasizing speed to maintain
freshness, hence perceived quality.
Low price is very important to customers of discount retailers such as Costco.
This customer is willing to tolerate less variety and even purchase very large
package sizes as long as the price is low. Customer demand can be more
predictable and supply side needs are large and fairly stable.
9. What are some problems that can arise when each stage of a supply chain focuses
solely on its own profits when making decisions? Identify some actions that can
help a retailer and a manufacturer work together to expand the scope of strategic
fit.
High inventories, poor quality, low customer service, increased returns are just a
number of problems that occur when each stage of a supply chain focuses solely
on its own profits. The trucking company requires full truck loads for delivery
forcing the retailer to carry more inventory than wanted or needed. The supplier
offers discounts to their buyers to maximize production but forcing the buyers to
purchase in larger quantities than desired. This concept was very prevalent during
the 1950s and 1960s as companies to minimize local costs and maximize their
own profits.
Today, retailers and manufacturers have the opportunity to plan promotions jointly
such as Wal-Mart and P&G. They can share sales information to determine
customer trends. Joint product development opportunities are being explored
throughout the supply chain between retailers, manufacturers and raw material
suppliers.

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CHAPTER THREE
Discussion Questions
1. How could a grocery store use inventory to increase the responsiveness of the
companys 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 like produce, meat, fish, etc. 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 wont 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 colocated 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.
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

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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.
5. Motorola has gone from manufacturing all its cell phones in-house to almost
completely outsourcing the manufacturing. What are the pros and cons of the two
approaches?
Sourcing is the set of business processes required to purchase foods and services.
These decisions are crucial because they affect the level of efficiency and
responsiveness that Motorola can achieve. The Motorola production system for
their line of pagers was hailed as a breakthrough in mass customization, so it was
somewhat surprising when Motorola outsourced cell phones.. Sourcing decisions
should be made based on the total supply chain surplus; if a third party can help
the chain achieve greater surplus, then the function is a prime candidate for
outsourcing. Motorola was willing to give up some control and possibly some of
its design talent and assembly expertise because it felt that the supplier could
provide product of an appropriate level of quality with the responsiveness
necessary. Products and services that are outsourced are rarely brought back inhouse and should never be tied too closely to the outsourcing partys core
competency.
6. How can a home delivery company like Peapod use pricing of its delivery
services to improve its profitability?
Pricing is the process by which a firm decides how much to charge customers for
its goods and services. Pricing affects the customer segments that choose to buy
the product as well as the customers expectations. Peapod can use everyday low
pricing of its products to ensure stability in the supply chain, but can influence
demand by varying the delivery charges. For example, by establishing a minimum
order amount of $50 and charging $10 to deliver an order under $75, Peapod
provides an incentive for a customer to pile on additional items to save on per unit
shipping. An order over $100 incurs a delivery fee of $7, which is the lowest
delivery charge for a residential customer.
Peapod also varies delivery charges by time of day; evening delivery times on
weekdays and morning deliveries on Sunday within narrow windows cost an extra
dollar, wider delivery windows are $1 less. The delivery latitude allows Peapods
delivery drivers to schedule more efficiently thereby increasing profitability.

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7. What are some industries in which products have proliferated and life cycles have
shortened? How has 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 towards a partnership orientation from a focus on
price negotiations.
8. How can the full set of logistical and cross-functional drivers be used to create
strategic fit for a PC manufacturer targeting both time sensitive and price
conscious customers?
The logistical drivers, facilities, inventory, and transportation, and the crossfunctional 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 PC 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, e.g., order quantity and transportation
media, than other drivers, e.g., location and sourcing.
The trade-offs within each driver are summarized in the table:
Driver
Facilities
Inventory
Transportation
Information
Sourcing
Pricing

More Responsive
Multiple Plants
Flexible Plants
Higher Inventory
Higher Speed
Accurate
Real Time Transmission
Responsive supplier
Differential Pricing

More Efficient
Single Plant
Dedicated Plant
Lower Inventory
Lower Speed
Less Accurate
Batched Transmission
Efficient supplier
Everyday Low Pricing

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Case Note: Seven-Eleven Japan Co. refer pg:

no 79
The goal of this case is to illustrate how a firm can be successful by structuring its supply
chain to support its supply chain strategy. Once Seven-Eleven Japan decided to provide
responsiveness by rapid replenishment, it then structured its facilities, inventory,
information, and distribution to support this choice. The case also brings up the question
of whether the same approach can work in the United States, especially given the greater
distances and lower store density.

Questions
1.

A C O N V E N I E N C E STO R E C H A I N AT T E M P TS TO B E R E S P O N S I V E A N D P ROV I D E
C U STO M E R S W H AT T H E Y N E E D , W H E N T H E Y N E E D I T, W H E R E T H E Y N E E D I T.
W H AT A R E S O M E D I F F E R E N T WAYS T H AT A C O N V E N I E N C E STO R E S U P P LY C H A I N
CA N B E R E S P O N S I V E ? W H AT A R E S O M E R I S KS I N E AC H CA S E ?

As responsiveness increases, the convenience store chain is exposed to greater

uncertainty. A convenience store chain can improve responsiveness to this uncertainty
using one of the following strategies, especially for fresh and fast foods:
Local capacity: The convenience store chain can provide local cooking capacity at the
stores and assemble foods almost on demand. Inventory would be stored as raw
material. This is seen at the U.S. fast food restaurant franchise Subway where dinner
and lunch sandwiches are assembled on demand. The main risk with this approach is
that capacity is decentralized, leading to poorer utilization.
Local inventory: Another approach is to have all inventory available at the store at all
times. This allows for the centralization of cooking capacity. The main risk is obsolete
inventory and the need for extra space.
Rapid replenishment: Another approach is to set up rapid replenishment and supply
the stores what they need and when they need it. This allows for centralization of
cooking capacity, low levels of inventory, but increases the cost of replenishment and
receiving.
2.

S E V E N - E L E V E N ' S S U P P LY C H A I N ST R AT E GY I N JA PA N CA N B E D E S C R I B E D A S
AT T E M P T I N G TO M I C RO - M ATC H S U P P LY A N D D E M A N D U S I N G R A P I D
R E P L E N I S H M E N T. W H AT A R E S O M E R I S KS A S S O C I AT E D W I T H T H I S C H O I C E ?

The main risk for Seven-Eleven is the potentially high cost of transportation and
receiving at stores. Micro-matching supply and demand using rapid replenishment
assumes that each store will repeat the same demand pattern on a daily basis. The
tour bus phenomenon, where a group of unanticipated customers comes to the
store and buys all of a type of product will cause difficulty for regular customers.
During such an event, the store will likely stock out and customers may visit the
next Seven-Eleven site down the block to make their purchases. Some of this

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demand may permanently shift, causing a local ripple; the replenishment may be
excessive at one site and insufficient at an adjacent site for the next cycle.
Another possible issue would result from delays in transportation; although
deliveries are scheduled for off-peak hours, a disruption in traffic flow will result
in low service levels for the next wave of demand.

3.

W H AT H A S S E V E N - E L E V E N D O N E I N I TS C H O I C E O F FAC I L I T Y LO CAT I O N ,
I N V E N TO RY M A N AG E M E N T, T R A N S P O RTAT I O N , A N D I N FO R M AT I O N
I N F R A ST RU C T U R E TO D E V E LO P CA PA B I L I T I E S T H AT S U P P O RT I TS S U P P LY C H A I N
ST R AT E GY I N JA PA N ?

All choices made by Seven-Eleven are structured to lower its transportation and
receiving costs. For example, its area dominance strategy of opening at least 50-60
stores in an area helps with marketing but also lowers the cost of replenishment. All
manufacturing facilities are centralized to get the maximum benefit of capacity
aggregation and also lower the inbound transportation cost from the manufacturer to
the distribution center (DC). Seven-Eleven also requires all suppliers to deliver to the
DC where products are sorted by temperature. This reduces the outbound
transportation cost because of aggregation of deliveries across multiple suppliers. It
also lowers the receiving cost. The information infrastructure is set up to allow store
managers to place orders based on analysis of consumption data. The information
infrastructure also facilitates the sorting of an order at the DC and receiving of the
order at the store. The key point to emphasize here is that most decisions by SevenEleven are structured to aggregate transportation and receiving to make both cheaper.
4.

S E V E N - E L E V E N D O E S N OT A L LOW D I R E C T STO R E D E L I V E RY I N JA PA N , W I T H A L L
P RO D U C TS F LOW I N G T H RO U G H I TS D I ST R I B U T I O N C E N T E R . W H AT B E N E F I T D O E S
S E V E N - E L E V E N D E R I V E F RO M T H I S P O L I C Y ? W H E N I S D I R E C T STO R E D E L I V E RY
M O R E A P P RO P R I AT E ?

Direct store delivery (DSD) would lower the utilization of the outbound trucks from
the Seven-Eleven DC. It would also increase the receiving costs at the stores because
of the increased deliveries. Thus, Seven-Eleven forces all suppliers to come in
through the DC. DSD is most appropriate when stores are large and nearly-full truck
load quantities are coming from a supplier to a store. This was the case, for example,
in large U.S. Home Depot stores. For smaller stores it is almost always beneficial to
have an intermediate aggregation point to lower the cost of freight. In fact, Home
Depot itself is setting up these intermediate facilities for its new stores that are often
smaller.
5.

W H AT D O YO U T H I N K A B O U T T H E 7 D R E A M C O N C E P T FO R S E V E N - E L E V E N JA PA N ?
F RO M A S U P P LY C H A I N P E R S P E C T I V E I S I T L I K E LY TO B E M O R E S U C C E S S F U L I N
JA PA N O R T H E U N I T E D STAT E S ? W H Y ?

7dream makes sense given that Japanese customers are happy to receive their
shipments at the local convenience store. From a logistics perspective, online
deliveries can piggy back on Seven-Elevens existing distribution network in Japan.
Deliveries from the online supplier can be brought to the DC where they are sorted
along with other deliveries destined for a store. This should increase the utilization of

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outbound transportation allowing Seven-Eleven to offer a lower cost alternative to
having a package carrier deliver the product at home. The primary negatives are that
7dream will use up storage space and require the store to be able to retrieve specific
packages for customers.
One can argue that the concept may be more successful in Japan given the existing
distribution network of Seven-Eleven and the frequency of visits by customers.
Online delivery is able to link with the existing network. The high visit frequency
ensures that packages are not occupying valuable store shelf space for a long time.
Also, the frequent visits ensure that the marginal cost to the customer of picking up at
a Japanese Seven-Eleven is small. This is less likely to be the case in the United
States.
6.

S E V E N - E L E V E N I S AT T E M P T I N G TO D U P L I CAT E T H E I R S U C C E S S F U L JA PA N E S E
S U P P LY C H A I N ST RU C T U R E I N T H E U N I T E D STAT E S W I T H T H E I N T RO D U C T I O N O F
C D C S . W H AT A R E T H E P RO S A N D C O N S O F T H I S A P P ROAC H ? K E E P I N M I N D T H AT
STO R E S A R E A LS O R E P L E N I S H E D BY W H O L E SA L E R S A N D D S D BY
M A N U FAC T U R E R S .

The difficulty of duplicating the Japan supply chain structure in the United States
follows primarily from the much lower density of U.S. Seven-Eleven stores. This is
compounded by the fact that Seven-Eleven stores are getting both direct store
deliveries as well as wholesaler deliveries to its stores. Setting up its own DCs does
not allow Seven-Eleven to get the same level of transportation aggregation as it gets
in Japan. Its own distribution system would help more if all wholesaler deliveries and
direct store deliveries were stopped and routed through the DC. Even then, having its
own distribution system would add much less value than in Japan given the lower
density of stores and larger distance between stores.
7.

T H E U N I T E D STAT E S H A S FO O D S E RV I C E D I ST R I B U TO R S L I K E M C L A N E T H AT A LS O
R E P L E N I S H C O N V E N I E N C E STO R E S . W H AT A R E T H E P RO S A N D C O N S TO H AV I N G
A D I ST R I B U TO R R E P L E N I S H C O N V E N I E N C E STO R E S V E R S U S A C O M PA N Y L I K E
S E V E N - E L E V E N M A N AG I N G I TS OW N D I ST R I B U T I O N F U N C T I O N ?

One can contend that a distributor brings much more value to the table in the United
States relative to Japan. Given the lower density of stores, a distributor is able to
aggregate deliveries across many competing stores. This allows a distributor to reach
levels of aggregation that cannot be achieved by a single chain such as Seven-Eleven.
The big disadvantage to having all deliveries done through a distributor is that SevenEleven is unable to exploit having a large number of stores. In fact, it may be argued that
going through the distributor has Seven-Eleven subsidize deliveries to competing smaller
chains that may also be using the same distributor.

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CHAPTER FOUR
Discussion Questions
1. What differences in the retail environment may justify the fact that the fastmoving consumer goods supply chain in India has far more distributors than in
the United States?
India is a land of shopkeepers selling to over a billion consumers. India is
becomingly increasingly Westernized, but it will be quite a while (if not forever)
before shopkeepers are supplanted by large retailers. The sheer volume of small
store owners requires a large number of distributors to service them. The younger
generation in India, particularly the IT rich areas of Bangalore and Chennai, have
far higher disposable income than the older generation and the rest of the country.
These young workers have very different retail habits and are causing changes in
Indias shopping and supply chain needs. Poor infrastructure, although not
entirely a retail concern, is another reason why India may need far more
distributors than in the U.S.
2. A specialty chemical company is considering expanding its operations into Brazil,
where five companies dominate the consumption of specialty chemicals. What
sort of distribution network should this company utilize?
If the expansion into Brazil is merely a sales operation, then distributor storage
with last mile delivery is the best network design. If the expanded operations
include manufacturing capabilities, then manufacturer storage with direct
shipping is a strong possibility. Given the nature of the product, package carrier
delivery is not an option and retail storage with customer pickup is out of the
question since this is a B2B scenario. In-transit merge would be an option only if
the manufacturer established a network of plants in Brazil, perhaps focused
factories relatively close to each customer.
The chemical company has only five customers to serve; it would not require too
large an investment in logistical infrastructure to effectively serve all five without
intervention by a distributor. Their short supply chain would be easier to
coordinate due to the stable demands and information sharing that is possible in a
B2B scenario.
3. A distributor has heard that one of the major manufacturers from which it buys is
considering going direct to the consumer. What can the distributor do about this?

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What advantages can it offer the manufacturer that the manufacturer is unlikely to
be able to reproduce?
The two supply network designs that the distributor can propose to counter the
manufacturers proposal are the distributor storage with package carrier delivery
and the distributor storage with last mile delivery. Both of these counter-proposals
offer higher order visibility for the customer while having simpler information
infrastructure than with manufacturer storage. The response time for both is
excellent, and the customer experience is also superior to the direct model. If the
manufacturer is trying to provide excellent customer service, the increased costs
in transportation and potentially higher levels of inventory may be acceptable
tradeoffs.
4. What types of distribution networks are typically best suited for commodity
items?
Commodity items are available from many sources and customers expect them to
be delivered quickly; if a supply chain cant be responsive, the customers will
move on to the next source. A distribution network designed for retail storage with
customer pickup achieves quick response for high demand, low variety products.
Other commodity products can be effectively distributed using distributor storage
with last-mile delivery, which is also suited for high demand, quick response
products.
5. What type of networks are best suited to highly differentiated products?
The networks that are best suited to highly differentiated products are the
manufacturer storage with direct shipping and the manufacturer storage with intransit merge. Both approaches have the ability to aggregate inventories and
postpone product customization, which would help support a wider variety of
products.
6. In the future, do you see the value added by distributors decreasing, increasing, or
staying about the same?
It is doubtful that value added by distributors will decrease over time; the nature
of competition in all areas would suggest that distributors that add less value
would be winnowed out. It is more likely that distributors will be asked to do
more or may volunteer to do so as a means of differentiating themselves from the
competition.
7. Why has e-business been more successful in the PC industry compared to the
grocery industry? In the future, how valuable is e-business likely to be in the PC
industry?

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The PC industry is selling a highly customized product that is purchased on a perhousehold basis, less routinely than the commodity products that make up
groceries. A company like Dell can leverage the Internet as a marketing and
distribution tool to advertise new capabilities and options before bricks and
mortar retailers can. Dell also removes whatever intimidation (or frustration)
factor might be experienced by conversing with in-store sales representatives.
Computers have a very high value to shipping cost ratio, so the increased shipping
costs when compared to a traditional store are negligible. Groceries have a much
lower ratio; although in-store shoppers are incurring costs to pick up their
groceries, those costs are hidden in comparison to the delivery charge on an
itemized bill from Peapod.
E-business will continue to be a valuable tool in the PC industry; none of the
advantages currently being enjoyed by Dell and Gateway are likely to change
significantly.
8. Is e-business likely to be more beneficial in the early part or the mature part of a
products life cycle? Why?
E-business is more likely to be more beneficial in the early part of a products life
cycle. E-business strengths include flexible pricing, promotions, and product
portfolios and greater speed in disseminating product information. Later in the life
cycle, a product is likely to be a commodity, which doesnt play to the strengths of
this channel.
9. Consider the sale of home improvement products at Home Depot or a chain of
hardware stores such as True Value. Who can extract the greatest benefit from
going online? Why?
Both entities and other hardware companies like Ace are already on-line. An
article titled Home Depots Self-Improvement Company Business and
Marketing by Eric Young in The Industry Standard, September 11, 2000,
indicates that Home Depot is the last major player to go on-line, but brings the
deepest pockets. Those of us that have stood in line with the contractors realize
that many of Home Depots items are ill-suited to a web enterprise and the
clientele is equally ill-suited. Contractor sales are such a significant portion of
Home Depots sales in comparison with the mix at True-Value, that it is likely that
True-Value will ultimately benefit more from an e-commerce division.
The article goes on to say,
Each chain is employing a slightly different e-commerce strategy. Whereas
Home Depot wants its site to replicate its merchandise mix, True Value limits the
number of items it offers online. For example, at True Value, Net shoppers won't
find products most people need in a hurry, such as toilet-tank fix-it kits. "You're
not going to wait three days to have it shipped so you can stop the water from
dripping into your neighbor's apartment," says Neil Hastie, CIO at
TrueValue.com.

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Ace Hardware, meanwhile, thinks bigger is better. Its site offers almost everything
in its stores, plus about 15,000 additional products. Ace's supplementary online
offerings are a windfall from its investment in OurHouse.com, a Web-based home
improvement site that handles Ace's online sales. The two companies split online
revenues. Ace joined forces with OurHouse to get a leg up in e-commerce. "We
didn't want to be left in the starting gate," says Ken Nichols, a retail operations
vice president for Ace.
Waiting in the wings is Lowe's, the nation's second-largest home improvement
chain. Like Home Depot, Lowe's wants to expand its online presence but is
approaching e-commerce slowly. Beginning in October, the retailer will offer a
wide selection in a limited number of categories, such as hand tools and
appliances. Lowe's will deliver Net orders directly to buyers or to the store closest
to the customer, again like Home Depot.
Meanwhile, Internet-only retailers are scrambling to win over customers, vowing
to compete against offline chains in price and selection. CornerHardware, for
example, says it currently has 125,000 products available -- three times the
number available at an average Home Depot store.
The pure Internet players acknowledge that they don't have the brand recognition
of Home Depot. But they hope to build their brands before Home Depot and the
other brick-and-mortar stores establish a strong online presence. Still, it's not clear
that any are benefiting from first-mover advantage. Already two Net pure-plays -Hardware.com and HomeWarehouse.com -- have gone under.
10. Amazon.com sells books, music, electronics, software, toys, and home
improvement products online. In which product category does e-business offer the
greatest advantage compared to a retail store chain? In which product category
does e-business offer the smallest advantage (or a potential cost disadvantage)
compared to a retail store chain? Why?
Amazons greatest e-business advantage comes from book sales; they are able to
list millions of book titles that a physical store cannot possibly carry on their
shelves. Cost advantages for Amazon are few and far between; the item price to
shipping cost ratio for books, music, and software is not as high as most
consumers would prefer. Amazon certainly has no cost advantage with music and
software. Both are readily sold over the Internet; it would behoove Amazon to
partner with another Seattle-area company to make this the norm. Electronics,
hardware, and even toys are products that most consumers would like to
experience before making a selection. Any cost advantage Amazon might have in
these sectors may be overshadowed by an inability to hold the item on-line.
11. Why should an e-business such as Amazon.com build more warehouses as its
sales volume grows?
Amazon initially tried to run their entire book business with no warehousing
facilities, instead relying on other distributors to carry their entire inventory. Next,
Amazon ran their business out of a single warehouse in Seattle and discovered it

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wasnt feasible; the trade-off of responsiveness and cost was causing excessive
delays in getting products to customers. Now Amazon uses a hybrid of these two
systems, carrying items that it knows will sell in its own warehouses and letting
others carry items that have greater demand uncertainty. As Amazons business
grows, it should continue to establish warehouses to spread its facilities closer to
pockets of new customers, thus achieving better levels of responsiveness while
still maintaining its cost advantage.

CHAPTER 5
Discussion Questions
1. How do the location and size of warehouses affect the performance of a firm such
as Amazon.com? What factors should Amazon.com take into account when
making this decision?
The location and size of Amazons warehouses have a direct bearing on how
responsive and efficient they can be. At one time Amazon ran their on-line
bookstore out of one warehouse in Seattle; this warehouse was small by todays
standards and was unable to keep up with peak demand. Amazon has since added
other geographically distributed warehouses that hold the items with steadier
demand. The dispersion of warehouses allows Amazon to ship from closer to the
customers and the stocking of items with more even demand allows for a higher
service level at a reasonable cost.
Amazon should consider what regions are underserved by the current network of
warehouses and where it is most economical to locate the next warehouse,
effectively balancing their efficiency and responsiveness with their strategy.
2. How do import duties and exchange rates affect the location decision in a supply
chain?
Tariffs refer to any duties that must be paid when products are moved across
international, state, or city boundaries. If a tariff is excessive, it provides a strong
disincentive to do business across borders with entities in that area. The classic
workaround to a high tariff is adding a location inside the area. Some regions have
developed trade agreements that limit or eliminate the tariff on goods.
Exchange rates specify how much one currency is worth in terms of another. As
one currency gains against another, it may be beneficial to add shift production to
the area using the devalued currency. This makes the goods more affordable for
the population. Companies with flexible production capabilities can shift some
production from area to area depending on the buying power of local markets.
3. What are different roles played by production facilities within a global network?
The different strategic roles for facilities in a global network are as follows:

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Offshore facility: low-cost facility for export production. This is strictly a

low-cost producer for an export market
Source facility: low-cost facility for global production. This facility is also
viewed as a low-cost provider, but provides output for the entire global
network.
Server facility: regional production facility This facility supplies the
market in the country where it is located
Contributor facility: regional production facility with development skills.
This facility serves the market where it is located but is also responsible
for customization that increases salability in that country.
Outpost facility: regional production facility built to gain local skills. This
facility plays the role of a server facility but more importantly, it obtains
access to knowledge or skills that exist in that region.
Lead facility: facility that leads in development and process technologies.
This facility creates new processes, technologies and products for the
entire network.

4. Amazon.com has built new warehouses as it has grown. How does this change
affect various cost and response times in the Amazon.com supply chain?
Logistics and facility costs incurred within a supply chain change as the number
of facilities, their location, and capacity allocation is changed. As Amazon has
added warehouses, their logistics, inventory and facility costs have changed. An
increased number of warehouses increases that fixed cost but can be exploited to
reduce transportation costs. These potentially fall if the warehouses are spread
throughout a distribution area, which increases responsiveness at a similar cost or
maintains responsiveness at a reduced cost. Inventory costs also change with an
increased number of warehouses; Amazon is holding more total inventory and can
take advantage of pooling to reduce quantities of some items.
5. McMaster-Carr sells maintenance, repair, and operations equipment from five
warehouses in the United States. WW Grainger sells products from more than 350
retail locations, supported by several warehouses. In both cases, customers place
orders using the Web or on the phone. Discuss the pros and cons of the two
strategies.
WW Grainger has the more responsive network; a customer with a critical repair
need can drive to a local retail location to pick up the necessary part. McMaster
Carrs network is less responsive; critical supplies would be scheduled for
overnight delivery in all likelihood. WW Grainger has the greater facility cost
since it has more locations, although the retail facilities provide a presence that
doubles as a marketing tool not enjoyed by McMaster Carr. McMaster Carrs
facility expense is much lower and their network model shifts the transportation
cost more fully to the customer. A WW Grainger customer travels the last mile to
pick up an order, but Grainger must ship from their warehouse to the retail
locations.

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6. Consider a firm such as Dell, with very few production facilities worldwide. List
the pros and cons of this approach and why it may or may not be suitable for the
computer industry.
The advantage for Dells network design is lower facility costs; they can locate in
just enough countries to avoid tariffs and mitigate some of their exchange rate and
demand risk. The disadvantage for Dell is the lack of responsiveness this adds to
their system. A customer has no expectation of zero flow time, so they know as
they enter the transaction that they must wait for their PC. Shipping from one of
the production facilities adds to the delay, which is highly visible on Dells or the
package carriers web site. The shipping costs might also be a concern for some
customers, but the value to shipping cost ratio is so high that these costs seem like
small potatoes in comparison to the total invoice.
7. Consider a firm such as Ford, with more than 150 facilities worldwide. List the
pros and cons of having many facilities and why it may or may not be suitable for
the automobile industry.
Automakers often use a multiplant strategy to create server facilities. These server
facilities provide product for the market where they are located, thereby taking
advantage of tax incentives, local content requirements, tariff barriers, and high
logistics costs. This can be a good strategy if market demand exists for your
product; when demand drops, the producer is left with expensive excess capacity.
If the facilities are flexible, production of popular models can continue to prepare
product for export. If facilities are inflexible or all sales are flat, then the producer
must bear the cost or shed assets.

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CHAPTER SEVEN
Discussion Questions
1. What role does forecasting play in the supply chain of a build-to-order
manufacturer such as Dell?
Although Dell builds to order, they obtain PC components in anticipation of
customer orders and therefore they rely on forecasting. This forecast is used to
predict future demand, which determines the quantity of each component needed
to assemble a PC and the plant capacity required to perform the assembly.
2. How could Dell use collaborative forecasting with its suppliers to improve its
supply chain?
Collaborative forecasting requires all supply chain partners to share information
regarding parameters that might affect demand, such as the timing and magnitude
of promotions. Dell could share with their components suppliers all of the
promotions, e.g., holiday, back-to-school, etc., they have planned. These suppliers
could, in turn, notify their suppliers of discrete components that a spike in demand
is anticipated. These demand forecasts for end items determine the demand for
components and coupled with knowledge of fabrication times, allows all members
of the supply chain to provide the right quantity at the right time to their
customers.
3. What role does forecasting play in the supply chain of a mail order firm such as
LL Bean?
LL Bean has historically operated almost exclusively in a make-to-stock mode
and with very few exceptions, stocked products that did not go out of style as
rapidly as many other clothing and accessory lines. A pre-worldwide web
existence would have relied on communication with manufacturers about what
products might be featured on the front of their catalog. The lead times involved
in printing and distributing the catalog and producing the product line were such
that elaborate planning and forecasting tools were not required. A quick visit to
the web site demonstrates that this is changing; the featured products on the web
site can be changed daily or programmed to rotate each time the web page is

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refreshed. LL Bean and their supply chain, including the logistics component, are
well aware of the demand forecast and can all receive sales data as orders are
placed. LL Bean probably has an extranet to communicate sales data with
suppliers and allows customers to create accounts to manage purchases, wish lists,
and track orders.

4. What systematic and random components would you expect in demand for
chocolates?
Systematic components are level, the current deseasonalized demand; trend, the
rate of growth or decline in demand for the next period; and seasonality, the
predictable seasonal fluctuations in demand. The demand for chocolates is
probably highly seasonal, one would expect demand to spike for certain holidays
such as Valentines Day, Halloween, and Christmas.
5. Why should a manager be suspicious if a forecaster claims to forecast historical
demand without any forecast error?
The primary difficulty with such a claim is that forecasts are always wrong,
hence, an estimate of error should be provided with the forecast. Given a set of
data, it is possible to create a forecasting model that is 100% accurate, but such a
model would contain ridiculous cubic, quartic, and possibly higher-order terms.
The model would work only on that data.
6. Give examples of products that display seasonality of demand.
Products that display seasonality include, heating oil, electricity, natural gas,
wrapping paper, school supplies, sporting goods (summer, winter, etc.), facial
tissues, beverages (coffee, beer, iced tea, etc.), ice cream, pizza delivery, and tax
preparation services. All products display some form of seasonality if you look at
them in a global perspective.
7. What is the problem if a manager uses last years sales data instead of last years
demand to forecast demand for the coming year?
Last years sales data is fine as long as there were no stock outs. If an item is not
on the shelf or is explicitly indicated as being sold out, the manager may be
blissfully unaware of customer demand that existed but was not expressed. Also,
if there were special promotions last year that are not planned for the following
year, the data must be adjusted to accommodate this factor.
8. How do static and adaptive forecasting methods differ?

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Static methods assume that the estimates of level, trend, and seasonality within
the systematic component do not vary as new demand is observed. Once these
parameters are estimated, there is no need to adjust them and they can be used for
all future forecasts. In adaptive forecasting, the estimates of level, trend, and
seasonality are updated after each demand observation, that is, as data are
collected, they are incorporated into the forecasting process. Adaptive methods
allow a forecaster to react (or overreact) to recent developments. Should a
disruptive technology affect demand, the adaptive forecast will respond
immediately, albeit dragging several historical data points along for the ride. The
static approach would not take this new data into account and presumably the
forecasts would suffer. We would like to think that a forecaster using an invalid
static method would recognize its futility in light of a paradigm shift, but painful
personal experience suggests otherwise.

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CHAPTER EIGHT
Discussion Questions
1. What are some industries in which aggregate planning would be particularly
important?
Aggregate planning is useful in many types of manufacturing and services.
Manufacturers include furniture, all durable goods, consumer electronics, textiles,
motor vehicles, and aircraft, Service industries might be restaurants and other
hospitality providers like hotels and motels.
2. What are the characteristics of these industries that make them good candidates
for aggregate planning?
Aggregate planning is most useful in industries characterized by relatively long
lead times and finite amounts of capacity. The end products or services provided
in these industries are composed of inputs that are often provided by other
businesses that must perform some fabrication.
3. What are the main differences between the aggregate planning strategies?
The three pure aggregate planning strategies are the chase strategy, time flexibility
from workforce or capacity strategy, and the level strategy. The primary
difference among the three strategies is the lever, that is, the parameter that is
manipulated to achieve equality of supply and demand over the aggregate
planning period.
The first chase strategy uses capacity, in the form of machine or personnel
capacity, as the lever. By chasing demand on a period-by-period basis, the level of
inventory is very low throughout the supply change and the work force is in a
constant state of flux, which can increase management costs.
The second chase strategy is time flexibility from workforce or capacity, using
utilization as the level. This strategy, like the chase plan before it, results in low
levels of inventory throughout the supply chain. It avoids the layoff problem of its

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predecessor but still requires a flexible workforce and may also result in low
machine utilization.
The third strategy is to maintain a constant output rate throughout the aggregate
planning period, which stands in stark contract to the first two strategies. If
demand is highly variable, this plan will result in periods marked by backorders or
stock outs and other periods when the supply chain carries a high level of
inventory. There is no true synchronization of demand with supply in this strategy,
although over the entire aggregate planning period the planner will achieve a
match.
4. What types of industries or situations are best suited to the chase strategy? The
flexibility strategy? The level strategy?
The chase strategy should be used when the cost of carrying inventory is very
high and the costs to change levels of machine and labor capacity are low.
Industries with these characteristics include aircraft and other high dollar products
and producers of highly perishable products.
The flexibility strategy should be used when inventory carrying costs are
relatively high, machine capacity is relatively inexpensive, and the work force
cannot be adjusted on short notice. This strategy works in the automotive sector,
durable goods, and consumer electronics.
The level strategy works well when inventory carrying and backlog costs are
relatively low. The consumer goods industry has a cost structure that lends itself
well to the level strategy.
5. What are the major cost categories needed as inputs for aggregate planning?
The major cost categories needed as inputs for aggregate planning are production
costs and inventory costs. Production costs include labor costs of regular and
overtime, costs of subcontracting production, costs of changing capacity by hiring
or laying off workforce and increasing or reducing machine capacity. Inventory
costs include the cost of having too much (storage costs per period) and too little
(backorder or stockout costs).
6. How does the availability of subcontracting affect the aggregate planning
problem?
Subcontracting provides another variable that the aggregate planner may
manipulate to match supply with demand. A fortunate planner may be able to plan
production using a chase strategy from a macro view with production segmented
such that internal operations are run using a level strategy with a subcontractor
absorbing the variability in demand.

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7. If a company currently employs the chase strategy and the cost of training
increases dramatically, how might this change the companys aggregate planning
strategy?
As training costs increase, it becomes more expensive to vary the level of
workforce, perhaps to the point of making a chase strategy cost-prohibitive. If a
chase strategy is taken off the table, then the aggregate planner should familiarize
himself with a level strategy, time flexibility strategy, or some happy combination
of the two.
8. How can aggregate planning be used in an environment of high demand
uncertainty?
High demand uncertainty creates difficulties for the forecasting input to aggregate
planning. Based on experience any aggregate planner knows that an aggregate
plan developed for an 18 month planning period will not be 100% accurate and
that the last few months in the plan may have gross errors in the demand forecast.
As those months roll towards the present, the planner must update the plan. In an
environment with high demand uncertainty, the planner must update plans
regularly, communicate more frequently with suppliers and all others providing
inputs to the plan, and recognize that plans several months into the future are little
more than toner on paper.

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CHAPTER NINE
Discussion Questions
1. What are some obstacles to creating a flexible workforce? What are the benefits?
A flexible workforce possesses the ability to learn new tasks or switch tasks
without significantly disrupting production, to expand (or contract) capacity via
over or idle time, hiring and firing of seasonal workers, or subcontracting, and to
work different schedules.
A number of factors influence a producers ability to realize a flexible workforce:
restrictive labor agreements and work rules, a tight labor market, the education
level, culture, or organizational culture of the work force, the complexity of the
tasks, the proprietary nature of the production process, and restrictions imposed
by other members of the supply chain.
A flexible workforce opens the supply chain up to a wider range of alternatives
when trying to match supply with demand. If subcontracting or temporary
workers can be deployed, then a firm can function at a steady base rate and use
the subs to buffer periods of high demand.
2. Discuss why subcontractors can often offer products and services to a company
more cheaply than if the company produced them themselves?
The subcontractor can offer services more cheaply for a number of reasons.
In many cases, the subcontractor is a specialist in the area and is more flexible,
hence cheaper. If a subcontractor is performing similar work for a number of
clients, they can take advantage of the zero-sum nature of business competition.
By aggregating orders from a number of clients, the subcontractor is able to
satisfy peaks in demand from some of their clients because other standard clients
will be experiencing valleys in demand. If subcontracting occurs because a firm
is at capacity, the subcontractor (that is not overcapacity) can handle the
production more cheaply simply because is expensive to operate a system at
excess capacity.

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3. In what industries would you tend to see dual facility types (some facilities
focusing on only one type of product and others able to produce a wide variety)?
In what industries would this be relatively rare? Why?
Any industry where a lucrative product requires both unique labor skills and
production facilities is a prime candidate for a dual facility operation. The
healthcare industry is one example of a dual facility type; many large hospital
chains have focused operations for trauma, heart, ob/gyn, and other specialties.
Other industries with dual facility types include the legal profession, hospitality,
construction, and many others. Industries where dual facility types are rare
include tobacco products, alcoholic beverages, sawmills, and chemicals.
The dividing point among these industries is the continuous flow nature of the
non-dual producers. If processing requirements dictate that the product stream
must visit the same steps of a process in the same sequence, then the higher
volume and low process flexibility combination results in dedicated production
facilities that simply cant have a broad product range.
4. Discuss how you would set up a collaboration mechanism for the enterprises in a
supply chain.
Collaboration mechanisms in a supply chain should begin with the initial
partnering process as the supply chain is being established. All parties in the chain
must be aligned and dedicated to the success of the entire chain. Trust and open
communication are of primary importance; there should be a myriad of formal
and informal communication channels open among all parties. If constancy of
purpose is ever in question, each firm might devote some resources towards
equitable chain incentives such that behaviors that benefit the entire supply
chain are recognized and rewarded. The incentives, communication, and trust
should be established at all levels of every chain member. Company leadership
should provide for highly visible evidence of these activities on their level and
among cross-business supply chain teams.
5. What are some product lines that use common parts across many products? What
are the advantages of doing this?
There are many producers, both manufacturing and service, that use common
parts across many products. Some of these product lines include the food industry,
construction, furniture, soap, plastics, perfumes, computer and office equipment,
automotive, motorcycles, bicycles, airframe, and most back-office operations in
the service industries.
The use of common parts (and services) lowers costs and enables producers to
meet variability in demand. Part commonality absorbs variability in disaggregated
demand from period to period since the aggregated demand is inherently less
variable. The common parts may be produced or acquired at a more constant rate

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and stocked at a lower inventory level while maintaining a higher customer
service level.
6. Discuss how a company can get marketing and operations to work together with
the common goal of coordinating supply and demand to maximize profitability.
Marketing and operations often find themselves at cross purposes; as the authors
note, marketing often has incentives based on revenue, whereas operations has
incentives based on cost. The cachet of new products, service guarantees, copromotions, and other marketing vehicles is quite often lost on members of the
organization that must fulfill promises made by their friends in marketing. As
with all collaborations, open communication is a must on a near-constant basis.
Regular planning meetings must include full cross-functional participation and
critical information must be shared as sales and operations occur. Having
common performance measures is another way to get these two groups to work
together for the common good of the company. Holding both groups responsible
for Customer service, accuracy, on time delivery and quality and rewarding them
jointly for achieving these goals will greatly increase their willingness to work
together.
7. How can a firm use pricing to change demand patterns?
A change in price, one of marketings Four Ps, will change demand assuming that
there is some elasticity in demand. A firm can shift demand from a popular
product or time to a less-popular product or what is traditionally an off-peak
demand period by lowering prices. A firm can collect data on the impact of price
changes on demand and use the correlation as an input into supply chain
aggregate planning. In the absence of such coordination, it is virtually guaranteed
that supply chain partners will face demand levels they had not anticipated and
will be unable to satisfy. The increase in demand results from a combination of a)
market growth, b) stealing share, and c) forward buying. The first two increase
demand for the product and the third robs sales from the future.
8. Why would a firm want to offer pricing promotions in its peak-demand periods?
If we assume that a pricing promotion serves to increase demand, then there are a
couple of reasons a firm may offer pricing promotions during peak demand
periods. Even at peak demand, the firm may have excess capacity and could meet
this demand. The nature of the product and supply chain may be such that a
promotion today results in an order that both the supply chain and customer
recognize will be filled in the future, perhaps during an anticipated low demand
period. If a firm produces a product that is at the end of its life cycle, there may be
incentive to exhaust accumulated materials and labor skills that are dedicated to
its production. Finally, a firm may be practicing a form of predatory pricing if it
senses that a competitor, teetering on the brink of extinction, is starved for sales.

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9. Why would a firm want to offer pricing promotions during its low-demand
periods?
Pricing promotions during low-demand periods should serve to increase demand
and sales. The increase in demand results from a combination of the following
three factors:
Market growth sales may be realized from customers that were not considering
this product at the higher price.
Stealing share sales may be realized from customers that were considering a
competitors product.
Forward buying sales may be stolen from the future by customers that feel that
price may rise in the future.

CHAPTER TEN
Discussion Questions
1. Consider a supermarket deciding on the size of its replenishment order from
Proctor & Gamble. What costs should it take into account when making this
decision?
The main cost categories for the supermarkets inventory policy are material
costs, ordering costs, and holding costs. Material cost is the money paid to Proctor
and Gamble for the goods themselves. Ordering costs, also called procurement
costs, are incurred by requesting the goods from the supplier and are fixed in the
sense that they do not vary with the size of the order. Examples of such fixed
costs are the labor required to place the order, handle the resultant paperwork and
the transportation fee to ship the order. The holding cost is the cost to carry one
unit in inventory for a specified period of time, usually one year. This cost is
variable and includes the cost of capital and all of the costs associated with
physically storing inventory shrinkage, spoilage or obsolescence, insurance, the
cost of capital, the cost of the warehouse space, etc.
2. Discuss how various costs for the supermarket change as it decreases the lot size
ordered from Proctor & Gamble.
As the lot size ordered from the supplier decreases, the holding cost (variable with
respect to lot size) decreases. As the lot size decreases, the ordering cost remains
the same, but the annual ordering cost will rise since the total number of orders
each year must increase. As the lot size decreases, the cost of the materials will
drop on a per-order basis but will stay the same on an annual basis since total
annual demand hasnt changed.
The exception to this occurs if the supplier has a price break for an order size
above a certain threshold; in this case the cost of the goods might increase if the
reduced order size is not sufficient to trigger a substantial per unit discount.

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3. As demand at the supermarket chain grows, how would you expect the cycle
inventory measured in days of inventory to change? Explain.
As the demand at the supermarket chain grows, we would expect the cycle
inventory as measured in days of inventory to also increase, although the increase
in cycle inventory is only 40% of the increase in demand. This is because the
relationship between the optimal lot size Q* and the annual demand D is
2DS
. Since D is under the radical, its doubling to 2D does not translate to
Q*
hC
a jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a 1.4Q* order.
4. The manager at the supermarket wants to decrease the lot size without increasing
the costs he incurs. What actions can he take to achieve his objective?
One action would be to simply decrease the lot size and let the robust nature of
the EOQ model work its magic. The total cost curve on either side of the optimal
order quantity, the Q*, is relatively flat, so movements in either direction have
little impact on total annual procurement and carrying costs.
If greater cuts in lot size are desired, the manager can aggregate multiple products
in a single order. Recall that the EOQ model is based on a one-product-at-a-time
assumption; if multiple products are aggregated, then the fixed procurement cost
is spread over all of the items and dramatic lot size reductions are possible. If the
same products are being ordered by another supermarket in the same chain (or at
least by stores that are willing to cooperate) the combined orders can be delivered
by a single truck making multiple stops, thereby reducing transportation expense.
Other techniques that should be deployed when aggregating across product lines
include advanced shipping notices and RFID tags that will make inventory
tracking and warehouse management simpler.
5. When are quantity discounts justified in a supply chain?
Quantity discounts are justified in a supply chain as long as they are the fruits of a
coordinated supply chain and maximize total supply chain profits. For commodity
products for which price is set by the market, manufacturers with large fixed costs
per lot can use lot size-based quantity discounts to maximize total supply chain
profits.
6. What is the difference between lot size-based and volume-based quantity
discounts?
Lot size discounts are based on the quantity purchased per lot, not the rate of
purchase. Lot size-based discounts tend to raise cycle inventory in the supply
chain by encouraging retailers to increase the size of each lot. Lot size-based
discounts make sense only when the manufacturer incurs a very high fixed cost
per order. For commodity products for which price is set by the market,

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manufacturers with large fixed costs per lot can use lot size-based quantity
discounts to maximize total supply chain profits.
Volume discounts are based on the rate of purchase or volume purchased per
specified time period. Volume-based discounts are compatible with small lots that
reduce the cycle inventory. If the manufacturer does not incur a very high fixed
cost per order, it is better for the supply chain to have volume-based discounts.
For products for which a firm has market power, volume-based discounts can be
used to achieve coordination in the supply chain and maximize supply chain
profits.
7. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What
impact do trade promotions have on the supply chain? How should trade
promotions be structured to maximize their impact while minimizing the
additional cost they impose on the supply chain?
Manufacturers use trade promotions to offer a discounted price and a time period
over which the discount is effective. The goal of manufacturers such as Kraft and
Sara Lee is to influence retailers to act in a way that helps the manufacturer
achieve its objectives. These objectives may include increased sales, a shifting of
inventory from manufacturer to retailer, and defense against the competition.
Trade promotions may cause a retailer to pass through some or all of the
promotion to customers to spur sales, which increases sales for the entire supply
chain. What happens more frequently in practice is that retailers may choose to
pass through very little of the promotion to customers, purchase in greater
quantities, and hold this cheaper inventory in greater quantities. This action
increases both cycle inventory and flow times within the supply chain.
Trade promotions should be structured such that a retailers optimal response
benefits the entire supply chain, i.e., retailers limit their forward buying and pass
along more of the discount to end customers. If the manufacturer has accumulated
excessive inventory, then a trade promotion may provide sufficient incentive to
the buyer to forward buy, thus drawing inventories down to an appropriate level.
The manufacturer may be able to smooth demand by shifting it to a period of
anticipated low demand with a trade promotion.
Research has shown that trade promotions by the manufacturer are effective for
products with high deal elasticity that ensures high pass-through (passing the
discount on to the consumer) and high holding costs that ensure low forward
buying, paper goods being the poster child for this combination. Trade promotions
are also more effective with strong brands relative to weak brands and may make
sense as a competitive response.
8. Why is it appropriate to include only the incremental cost when estimating the
holding and order cost for a firm?
The cycle inventory models discussed in the chapter are robust; thus incremental
(variable) costs per lot size are more important than costs that are fixed with

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respect to lot size. The labor component of procurement or setup costs may be
salaried; therefore changes in lot size do not impact this component.

Case note: Delivery strategy at Moon chem. Refer pgno 355

1. What is the annual cost of MoonChems strategy of sending full truckloads to
each customer in the Peoria region to replenish consignment inventory?
MoonChems customer profile appears in Table 10-4 and is reproduced below:
Customer
Type
Small
Medium
Large

Number of
Customers
12
6
2

Consumption
(Pounds per Month)
1,000
5,000
12,000

Each truck has a fixed capacity of 40,000 pounds and costs MoonChem $400 per
delivery. The Small customers use only 12,000 pounds per year, so a 40,000 truckload
represents better than a three year supply! Total policy cost is obtained using a Q=40,000,
an S=$400, and an hC = (25%)($1).
SD hCQ

Q
2
$400(12, 000) (25%)($1)40, 000
TCSmall

$5,120
40, 000
2
$400(60, 000) (25%)($1)40, 000
TCMedium

$5, 600
40, 000
2
$400(144, 000) (25%)($1)40, 000
TCLarge

$6, 440
40, 000
2
TC

Factoring in the number of each class of customers:

$5,120 12 $5, 600 6 $6, 440 2 $107,920
2. Consider different delivery options and evaluate the cost of each. What delivery
option do you recommend for MoonChem?

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MoonChem has the option of scheduling multiple deliveries on a single truck with
a base charge of $350 for the truck and $50 for each delivery the truck makes;
truck capacity remains at 40,000 pounds. Three alternatives that students might
consider include creating a supergroup of all customer deliveries on a single
truck, creating three groups consisting of customers within each class, and
creating two groups consisting of one large, three medium, and six small
customers each. Costs for each of these alternatives are examined in turn.
Alternative 1: The Supergroup
The supergroup approach has a total annual demand of 792,000 pounds of the
base chemical and would incur a shipping cost of $350+20($50)=$1350. The
optimal order frequency is:

n
*

k
i 1

Di hCi

2S *

144, 000($1)(25%) 360, 000($1)(25%) (288, 000)($1)(25%)

2($1350)

8.56
This number of shipments per year requires a truck capable of holding far more
than 40,000 pounds; dividing 792,000 pounds by the 40,000 pound truck capacity
sets the number of orders per year at 19.8.
Each truck will hold 144,000/19.8=7,273 pounds for the small customers;
360,000/19.8=18,182 pounds for the medium customers, and
288,000/19.8=14,545 pounds for the large customers to be divided equally among
the number of customers in each size range.
Cycle inventory across all customers in each class is half of the order quantity and
results in annual holding costs of $909, $2273, and $1818 for small, medium, and
large respectively ($5,000 total). The annual ordering cost of this policy is (19.8
orders)($1350/order) = $26,730.
Total plan cost is $5,000+$26,730=$31,730.
Alternative 2: Separate groups for the Small, Medium, and Large customers
nSmall
*

k
i 1

Di hCi

2S *

144, 000($1)(25%)
2($950)

4.35

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nMedium
*

k
i 1

Di hCi

2S *

360, 000($1)(25%)
2($650)

8.32
nLarge
*

k
i 1

Di hCi

2S *

288, 000($1)(25%)
2($450)

8.94
The optimal number of shipments for the Medium customers requires a capacity
greater than 40,000 per truck, so dividing 360,000 pounds by 40,000 pounds/truck
indicates that 9 orders per year is practical.
The actual order sizes for each class and the resultant holding and ordering costs
are shown in the table:
Class
Small
Medium
Large

Order Size
33,082
40,000
32,199

Holding Cost
$4,135
$5,000
$4,025

Ordering Cost
$4,135
$5,850
$4,025

The total plan cost is $27,170

Alternative 3: Two groups with 6 Small, 3 Medium, and 1 Large customer each
Each group has an annual demand of 396,000 and an ordering cost S=$850.
n
*

k
i 1

Di hCi

2S *

72, 000($1)(25%) 180, 000($1)(25%) (144, 000)($1)(25%)

2($850)

7.63
This ordering frequency exceeds truck capacity; dividing group demand by
40,000 pounds per truck gives 9.9 orders annually. Plan specifics appear in the
table:
Class
Small
Medium
Large

Order Size
7,273
18,182
14,545

Holding Cost
$909
$2,273
$1,818

Ordering Cost
$850(9.9)(2) =
$16,830

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The total plan cost is $26,830
Alternative 3 is $340 cheaper than Alternative 2 and both are over $4,000 cheaper
than Alternative 1.

3. How does your recommendation impact consignment inventory for MoonChem?

The consignment inventory drops significantly from its initial levels. The current
system, with each customer ordering in lots of 40,000 pounds has a cycle
inventory of 20,000 pounds for each of the 20 sites, resulting in a system-wide
cycle inventory of 400,000 pounds!
Alternative 1 has a cycle inventory of 40,000/2 = 20,000 pounds
Alternative 2 has a cycle inventory of (33,082+40,000+32,199)/2=52,641 pounds
Alternative 3 has a cycle inventory of (40,000/2)*2 = 40,000 pounds

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CHAPTER ELEVEN
Discussion Questions
1. What is the role of safety inventory in the supply chain?
Safety inventory is inventory carried to satisfy demand that exceeds the amount
forecasted for a given period. As such, it tends to have a negative impact on
supply chain cost but a positive impact on supply chain responsiveness. Safety
inventory is carried because product demand and lead time are uncertain and a
product shortage may result if actual demand during lead time exceeds the
forecast amount.
2. Explain how a reduction in lead time can help a supply chain reduce safety
inventory without hurting product availability.
A reduction in lead time reduces supply chain safety inventory according to
equations 11.2 through 11.4. The reorder point is driven by the demand during
lead time, the standard deviation of demand during lead time, and the customer
service level, the latter two combining to form the safety stock. If lead time falls,
the standard deviation of demand during lead time also falls, resulting in less
safety stock.
Taking an intuitive (and extreme) approach, if lead time approached zero there
would be no need for safety (or any) stock since customer orders could be filled
instantaneously.
3. What are the pros and cons of the various measures of product availability?
The common measures of product availability discussed in this chapter are
product fill rate, order fill rate, and cycle service level (CSL).
Product fill rate is the fraction of product demand that is satisfied from product
in inventory and should be measured over specified amounts of demand rather
than time. Fill rate provides an accurate picture of the number of customers that
receive their single-product orders.
Order fill rate is the fraction of orders that are filled from available inventory
and should be measured over a specified number of orders rather than time. In the
multiproduct case, poor performance on one item can doom the order fill rate to
an extremely low score while the other products would have achieved very high
fill rates.

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Cycle service level is the fraction of replenishment cycles that end with all the
customer demand being met. Cycle service levels tend to be lower than the other
two metrics; a firm could maintain a cycle service level of 0% but have a 99%
product fill rate.
4. Describe the two types of ordering policies and the impact that each of them has
on safety inventory.
The two types of ordering policies discussed in the text are continuous review and
periodic review. Continuous review requires that inventory levels be monitored
constantly with an order for a lot size of Q placed when the inventory level drops
as low as the reorder point. Since the level of inventory is known continuously,
the level of safety inventory can be low; an order will be placed the minute the
reorder point is reached.
Periodic review requires less vigilance; the inventory level is measured at regular
time intervals and an order is placed to raise the inventory level to a specified
threshold. Under this system the level of inventory is known once a period and
merely estimated until the next count. More safety inventory must be carried
under a periodic review system to guard against a surge in demand.
5. What is the impact of supply uncertainty on safety inventory?
The required safety inventory increases with an increase in the standard deviation
of periodic demand. The standard deviation of periodic demand is a function of
the variance in the lead time and the variance in the demand. Anything that causes
supply to be more deterministic will minimize the need for safety inventory.
6. Why can a Home Depot with a few large stores provide a higher level of product
availability with lower inventories than a hardware store chain such as Tru-Value,
with many small stores?
Home Depot benefits from substitution and from aggregation. Many of the
products Home Depot carries are not aggressively branded in the eyes of the doit-yourselfer. This class of customers wants to perform a simple home repair or
improvement and is less concerned about a specific manufacturer than about
getting all the supplies in one trip (although I should note that in my experience
there is no such thing as a single trip to Home Depot for any project).
Home Depot also benefits from aggregation; the large box store draws customers
from a wider area and what one part of the customer base doesnt need this
month, the other part does. The highs and lows tend to cancel, thus stabilizing
demand within each season.
7. Why is Amazon.com able to provide a large variety of books and music with less
safety inventory than a bookstore chain selling through retail stores?

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Amazon is able to provide a large variety of books and music with less safety
inventory through the power of aggregation. By holding best-selling items in
geographically dispersed warehouses, Amazon can hold less inventory and still
meet customer demand. Equations 11.12 through 11.16 illustrate the savings
possible through aggregation versus a multiple location retail design.
Intuitively, many small retail stores would each have their own safety inventory
for their customer base and most of this safety inventory would languish on the
shelves. If one site experienced a surge in demand, a stockout would result. A
large centralized supply would need less safety inventory as the demand variances
might cancel each other, e.g., high demand from one region is offset by low
demand from another. Only if many regions had unanticipated high demand
would the central supply be exhausted.
8. In the 1980s, paint was sold by color and size in paint retail stores. Today paint is
mixed at the paint store according to the color desired. Discuss what, if any,
impact this change has on safety inventories in the supply chain.
The practice of adding pigmentation in the retail store is a classic example of
postponement; paint stores can mix any color into a solid white base and produce
exactly what the customer wants. This change has greatly reduced the amount of
safety inventory required as the paint store must now stock far fewer product
lines. The reduction in safety inventory has simultaneously reduced safety
inventory storage costs and increased responsiveness.
9. A new technology allows books to be printed in ten minutes. Borders has decided
to purchase these machines for each store. They must decide which books to carry
in stock and which books to print on demand using this technology. Do you
recommend it for best-sellers or for other books? Why?
If Borders must carry stock after purchasing this machine, they should carry items
with a steady demand, bestsellers and the like. The fringe books that are rarely
purchased would best be left to the 10 minute process which is effectively
instantaneous production. The books with low demand would be too expensive to
stock for sporadic demand; they would need only one of each, but the breadth of
the product line would be overwhelming and prohibitively expensive to carry
from month to month.

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CHAPTER TWELVE
Discussion Questions
1. Consider two products with the same cost but different margins. Which product
should have a higher level of product availability? Why?
The product with the higher margin should be stocked at a higher level of
availability than the product with the lower margin. The product with the higher
margin will have a higher Cu, which is the cost of understocking. The cost of
understocking is the sale price less the cost and may be thought of by the supplier
as profit foregone. A higher cost of understocking results in a higher critical
fractile, so the optimal cycle service level will be higher, which will yield a higher
availability.
2. Consider two products with the same margin carried by a retail store. Any leftover
units of one product are worthless. Leftover units of the other product can be sold
to outlet stores. Which product should have a higher level of availability? Why?
The product with the higher salvage value should be stocked at a higher level of
availability than those with the lower salvage value. The product with the higher
salvage value will have a lower Co, which is the cost of overstocking. The cost of
overstocking is the sale price less the salvage value. A lower cost of overstocking
results in a higher critical fractile, so the optimal cycle service level will be
higher, which will yield a higher availability.
3. A firm improves its forecast accuracy using better marketing intelligence. What
impact will this have on supply chain inventories and profitability? Why?
Improved forecast accuracy should result in a closer match between supply and
demand, resulting in improved profitability. An improved match will result in
lower levels of unplanned carryover inventory and shortages at the end of
planning periods. The improved match will lower the expected costs of having too
much or too little inventory.
4. How can postponement of product differentiation be used to improve supply
chain profitability?

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Postponement refers to the delay of product differentiation until closer to the sale
of the product. Postponement allows producers to leverage two features common
to forecasts: forecasts with shorter time horizons tend to be more accurate than
those with longer time horizons; and aggregate forecasts tend to be more accurate
than forecasts for individual items/models. More accurate forecasts allow for a
better match of supply and demand, thereby lowering mismatch costs and
increasing profitability as discussed in the previous question.
5. Mattel has historically allowed toy retailers to place two orders for the holiday
shopping season. Mattel is considering allowing retailers to place only one order.
What impact will this have on retailer orders? What impact will this have on
supply chain profits?
Mattel needs to abandon this approach to supply chain management. Under the
two-order system, retailers could place an order, assess market demand, and place
a second order that takes advantage of the short time horizon and improved
knowledge about market demand. The single-order system will require a lesseducated guess about demand that will occur further in the future. The singleorder system has a much higher risk of a gross mismatch between supply and
demand, resulting in excessive stock-out situations (lost sales) and fire sales at the
end of the season. Supply chain profits will decline if the ordering system is
changed to a single-order system.
6. Discuss how an expensive supplier with short lead times who is used as a backup
for a low cost supplier with long lead times can result in higher profits than using
only the low-cost supplier.
The two suppliers can be deployed so that the customer has the opportunity to
place two (or more) orders during each demand cycle. The low-cost supplier with
long lead times should receive the first order from the customer. As demand is
realized, the customer can refine their demand forecast. If the forecast is overly
optimistic, the excess inventory can be disposed for its salvage value. The salvage
value should be the same regardless of supplier, but thanks to the lower purchase
price, the cost of overstocking is much lower.
The second order can be placed at a later time and can be used to match demand
as closely as the production situation permits. It may be possible to use the second
order to fill only firm customer demand that was not met by the order from the
slow, low-cost supplier. Even if this is not the case, the second order gives the
customer the ability to match supply and demand while taking advantage of each
suppliers strength.

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CHAPTER THIRTEEN
Discussion Questions
1. What modes of transportation are best suited for large, low-value shipments?
Why?
Rail and water transportation modes are best suited for large, low-value
shipments. The price structure of the business make rail and water the modes of
choice if low-value, large, heavy, or high-density items need to be transported.
Air, package carriers, and trucks would not have the infrastructure required to
accommodate large items; roads and bridges would be damaged and the storage
capacity of the carriers is insufficient.
2. Why is it important to account for congestion when pricing the use of
transportation infrastructure?
Infrastructure often requires government ownership and is not something that can
be increased in capacity in the short term. If congestion is not factored in to the
price structure for infrastructure, then demand for the resources will exceed
capacity and major delays will occur. Pricing may be used to force users to
internalize the marginal impact of their choices, thus alleviating some of the
demand during peak periods.
3. Wal-Mart designs its networks so that a DC supports several large retail stores.
Explain how the company can use such a network to reduce transportation costs
while replenishing inventories more frequently.
A distribution center that supports several large retail stores can reduce supply
chain costs in four ways: 1) Inbound shipments to the DC achieve economies of
scale because each supplier sends a large shipment; 2) The outbound
transportation costs for a DC can be low because it serves retail locations nearby;
and very large inbound shipments that match retail demand can be cross-docked
at the DC, which saves both 3) storage and 4) material-handling costs.
A DC also can replenish retail inventories more frequently; the DC breaks bulk
from manufacturers on one side of the warehouse and sends it to retail locations
on the outbound side. Since retail demands are aggregated at the DC level, the

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amount of inventory actually stored at the DC is very low and as Littles Law
indicates, the time between replenishments is low also.
4. Compare the transportation costs for an e-business such as Amazon.com and a
retailer such as Home Depot when selling home-improvement materials.
The primary difference between these retailers is that Home Depot does not incur
any outbound transportation cost for residential customers while Amazon faces
such charges. Home Depot has substantial inbound transportation charges but is
able to offload the outbound transportation cost to the vast majority of their
customers. Amazon must use high cost package carriers for much of its product
line although they are able to avoid inbound transportation costs for items that are
drop shipped. For items that are held in one of their warehouses, Amazon must
pay both inbound and outbound.
5. What transportation challenges does Peapod face? Compare transportation costs
at online grocers and supermarket chains.
Peapod faces the burden of expensive outbound transportation costs and must
account for congestion in the delivery area. Unlike traditional grocers who dont
deliver their products, Peapod must deliver items in their fleet of climatecontrolled trucks. These trucks must be scheduled with pricing incentives offered
for peak and off-peak delivery times. Customers are keenly aware of the
transportation component of their purchases and Peapod can use pricing
incentives to spur their customers towards higher order amounts.
Both Peapod and traditional grocers must pay the inbound transportation costs of
their wares; there would appear to be no great advantage gained by either
approach unless one vendor has such substantial market share as to gain price
concessions that they other cant negotiate.
6. Do you expect aggregation of inventory at one location to be more effective when
a company such as Dell sells computers or when a company such as Amazon.com
sells books? Explain by considering transportation and inventory costs.
Inventory aggregation is a good idea when inventory and facility costs form a
large fraction of a supply chains total costs. Inventory aggregation is useful for
products with a large value to weight ratio and for products with high demand
uncertainty. Both factors allow aggregation to work to Dells advantage, while
Amazon reaps less of a reward.
Dell benefits from aggregation because personal computers have an extremely
high value to weight ratio; the demand for new items is uncertain, and Moores
Law makes holding excessive inventory an extremely unattractive proposition.
Amazon benefits from aggregation when inventory costs are examined, but is hurt
by increased transportation costs. Most items that Amazon sells have low value to
weight ratios and Amazon must ship them via package carrier, which is

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expensive. Amazon saves money on storage costs since they choose to stock more
popular titles and allow other entities to hold items with more variable demand.
7. Discuss key drivers that may be used to tailor transportation. How does tailoring
help?
Tailored transportation is the term for use of different transportation networks and
modes based on customer and product characteristics. Tailoring transportation
allows firms to achieve cost and responsiveness targets that are appropriate for the
supply chain. The key drivers are density and distance, customer size, and product
demand and value. These drivers can be viewed as guide for ownership of
Transportation options based on customer density and distance are summarized in
the table and present cost and responsiveness tradeoffs for the supply chain.
Short distance
Medium distance
Long distance
High
Private fleet with
Cross-dock with
Cross-dock with
density
milk runs
milk runs
milk runs
Medium
Third-party milk
LTL carrier
LTL or package
density
runs
carrier
Low
Third-party milk
LTL or package
Package carrier
density
runs or LTL carrier carrier
Customer size and location dictate whether a supplier should use a TL or LTL
carrier or milk runs. Very large customers can be supplied using a TL carrier,
whereas smaller customers can use LTL carriers or milk runs. The authors discuss
a customer-partitioning procedure for combining smaller customers shipments
with larger customers in order to achieve responsiveness and cost targets.
Product demand and value determine whether aggregation strategies will benefit
the supply chain. The best combinations are shown in the table:
Product
High Value
Low Value
Type
Disaggregate cycle inventory but
aggregate safety inventory. Use an
Disaggregate all inventories
High
inexpensive mode of transportation
and use inexpensive mode
demand for replenishing cycle inventory and
of transportation for
a fast mode when replenishing safety replenishment.
inventory.
Aggregate only safety
Aggregate all inventories. If needed,
Low
inventory. Use inexpensive
use fast mode of transportation for
demand
mode of transportation for
filling customer orders.
replenishing cycle inventory.

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CHAPTER SIXTEEN
Discussion Questions
1. What processes within each macro process are best suited to being enabled by IT?
What processes are least suited?
The macro processes in a supply chain are customer relationship management
(CRM), internal supply chain management (ISCM), and supplier relationship
management (SRM). Taken collectively, these macro processes span the entire
supply chain.
CRM processes focus on the downstream interactions between the enterprise and
its customers. The key processes under CRM are marketing, selling, and order
management, and of these three, the creative sub-processes of the marketing and
selling processes are least suited to IT enablement. The best suited processes for
IT enablement are pricing and profitability calculations, sales force automation,
and order configuration and tracking. Within order management, virtually all
processes reap the benefits of information technology.
ISCM processes focus on internal operations within the enterprise and include
strategic planning, demand planning, supply planning, fulfillment, and field
service. The use of IT to facilitate ISCM sub-processes is presented in glowing
terms in separate chapters in this text. Huge gains in efficiency and
responsiveness have been achieved via the application of IT to all aspects of
ISCM.
SRM processes focus on upstream interaction between the enterprise and its
suppliers and includes the sub-processes of design collaboration, sourcing,
negotiating, buying, and supply collaboration. The authors indicate in chapter 14
that sourcing-related IT has had the most ups and downs of any supply chain
software sector, with the primary problems being loss of flexibility and the
requirement of collaboration. Electronic marketplaces once flourished but have
since withered. This is not to say that IT does not play a role in SRM processes; in
fact, all areas are supported by IT software.
2. What are the key advantages that best-of-breed software companies provide?
The competitive arena in CRM, ISCM, and SRM can be parsed into best-of-breed
winners, ERP players, and best-of-breed startups. Best of breed companies
provide a valuable service to all sectors by defining functionality and providing
market leadership. For the CRM macro process, Siebel was the sole remaining
best of breed provider as the book went to press, but it has since been acquired by

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Oracle as predicted by the authors. The ISCM and SRM macro process sectors
have had best of breed providers that have long since yielded market leadership to
ERP vendors.
3. What are the key advantages that large software companies, such as the ERP
players, provide?
ERPs popularity in the 1990s drove the most successful companies to become the
largest enterprise software companies. Their size provides a wealth of resources
and collective experience that can be brought to bear on a clients issues.
The major advantage that ERP players have relative to best-of-breed providers is
the inherent ability to integrate across the three macro processes of CRM, ISCM,
and SRM, often through the transaction management foundation.
4. What types of industries would be most likely to choose a best of breed approach
to their IT systems? What types would be more likely to choose a single large
integrated solution?
Established firms that have strong CIO leadership and see the supply chain as
encompassing the entirety of the three macro processes would probably be more
inclined to select a large integrated solution. Well-respected CIO leadership would
be essential in promoting and managing such a project. A firm that is mature in
this supply chain is fertile ground for an integrated solution.
Firms that have recently merged or integrated vertically may have a more selfcentered perspective on the supply chain and might skew towards a best-of-breed
approach. These firms might start their IT enablement with a focus on ISCM and
then seek to work either end of the supply chain with an SRM or CRM best-ofbreed implementation. Firms closer to either end of the supply chain; e.g., an
extractor of raw materials that sells to a few fabricators or a turnkey service
operation that spends most of their efforts dealing with customers might choose a
system tailored to their end of the supply chain.
5. Discuss why the high tech industry has been the leader in adopting supply chain
IT systems.
The high tech industry has been the leader in adopting supply chain IT systems
because of the mindset of the decision-makers in this sector. The high tech
workforce tends to be early adopters of new technologies; they understand there is
a risk associated with adoption but are willing to assume the risk and proceed.
High tech corporate cultures lend themselves to such ventures; there is little
resistance to change because survival in this sector depends on it.
6. Are manufacturers better candidates for IT enablement than service
organizations? Why or why not?
From a supply chain perspective, manufacturers overall are better candidates for
IT enablement than service organizations, although both can derive considerable
benefit. The tangible, standard (or modular) nature of the output affords
manufacturing this advantage. Next on the spectrum are back office service
processes which can be completely automated using information technology.

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These back office processes can be a component of either a manufacturing or
service organization or could be stand-alone organization, e.g., medical
transcription, claims processing, payment centers, etc. This is not to say that a
pure service cannot reap the rewards of IT enablement; Pixar Studios, Peapod,
and Prudential Insurance are three companies just from the Ps that owe a great
deal of their success to information technology.

CHAPTER SEVENTEEN
Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a
supply chain?
The bullwhip effect refers to the fluctuation in orders along the length of the
supply chain as orders move from retailers to wholesalers to manufacturers to
suppliers. The bullwhip effect relates directly to the lack of coordination (demand
information flows) within the supply chain. Each supply chain member has a
different idea of what demand is, and the demand estimates are grossly distorted
and exaggerated as the supply chain partner is distanced from the customer.
2. What is the impact of lack of coordination on the performance of a supply chain?
The impact of lack of coordination is degradation of responsiveness and poor cost
performance for all supply chain members. As the bullwhip effect rears its ugly
head, supply chain partners find themselves with excessive inventory followed by
stockouts and backorders. The fluctuations in inventory result in increased
holding costs and lost sales, which in turn spike transportation and material
handling costs. Ultimately, the struggle with cost and responsiveness hurts the
relationships among supply chain partners as they seek to explain their lack of
performance.
3. In what way can improper incentives lead to a lack of coordination in a supply
chain? What countermeasures can be used to offset this effect?
Incentive obstacles occur in situations when different participants in the supply
chain are motivated by self interest.
Incentives that focus only on the local impact of an action result in decisions
being made that achieve a local optimum but can avoid a global (supply chain)
optimum. All supply chain partners must agree on global performance measures
and structure rewards such that members are appropriately motivated.
Sales force incentives also are responsible for counterproductive supply chain
behavior. Commissions that are based on a single short time frame can be gamed
by the sales force to maximize commission but these actions inadvertently
increase demand variability and exert pressure on the supply chain. Commissions

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should be structured to provide incentives to consistently sell large volumes of
product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the
orders placed by the downstream stage? How should firms within a supply chain
communicate to facilitate coordination?
If each stage of a supply chain views its demand as the orders placed by their
downstream counterpart, the bullwhip effect is realized by the supply chain. Each
member develops a forecast that is based on something other than the true
customer demand and hilarity ensues. Supply chain members should share pointof-sale (POS) data so that all members are aware of the true customer demand for
product. The beauty of data sharing requirements is that only aggregate POS data
must be shared to mitigate the bullwhip effect; there is no need to share detailed
POS data.
5. What factors lead to a batching of orders within a supply chain? How does this
affect coordination? What actions can minimize large batches and improve
coordination?
Order batching is caused by a number of different factors. One mechanism is the
price structure of TL and LTL shipment quantities; there is incentive to wait a
while to make sure that a TL shipment is achieved. A customers natural tendency
to wait for a milestone, either real or perceived, can also cause batching.
Customers may wait until Friday, Monday, the last or first day of the month, etc.,
just because thats when they always have or because that event reminds them to
order. Order batching also occurs because customers are aware of an impending
price reduction and want to take advantage of it. Batching adversely affects
supply chain coordination because the supply chain will be starved for flow, then
overwhelmed with demand.
A supply chain can reconfigure their transportation and distribution system to
allow for shipments to multiple customers on a single truck to achieve TL
quantities. The chain can also assign (or encourage) days for placing orders and
move from lot-size based to volume based quantity discounts (or abandon
discounts and promotions altogether).
6. How do trade promotions and price fluctuations affect coordination in a supply
chain? What pricing and promotion policies can facilitate coordination?
Trade promotions and price fluctuations make supply chain coordination more
difficult. Customers seek to purchase goods for less and engage in forward buying
which creates spikes in demand that may exceed capacity. All parties would
benefit if the supply chain used every day low pricing (EDLP) to mitigate forward
buying and allow procurement, production, and logistics to function at a steadier

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pace. If price incentives must be offered, the chain is better served by
implementing a volume-based quantity discount plan instead of a lot size based
quantity discount, i.e., providing incentives to purchase large quantities over a
long period of time, perhaps a year.
7. How is the building of strategic partnerships and trust valuable within a supply
chain?
Cooperation and trust within the supply chain help improve performance for the
following reasons:
When stages trust each other, they are more likely to take the other partys
objectives into consideration when making decisions, thereby facilitating win-win
situations.
Action-oriented managerial levers to achieve coordination become easier to
implement and the supply chain becomes more agile.
An increase in supply chain productivity results, either by elimination of
duplicated effort or by allocating effort to the appropriate stage.
Detailed sales and production information is shared; this allows the supply chain
to coordinate production and distribution decisions.
8. What issues must be considered when designing a supply chain relationship to
improve the chances of developing cooperation and trust?
The issues that supply chain partners must consider when designing their chain
include assessing the value of the relationship, the operational roles and decision
rights for each, the execution of binding contracts, and establishment of conflict
resolution mechanisms.
The value of the relationship is assessed by identifying the mutual benefits that it
provides and the costs and contributions of each party. The mix of effort and
benefit for all parties should be equitable.
The roles and decision rights take into account the interdependence between the
parties; the nirvana of interdependence is reciprocal interdependence, where
parties come together and exchange information and inputs in both directions.
This requires more effort than sequential interdependence but the payoff is
increased supply chain surplus.
Managers can help promote trust by creating contracts that encourage negotiation
as unplanned contingencies arise since complete information and consideration of
all future contingencies is impossible. The primary contacts from each side are an
important starting point in developing a healthy relationship.
Effective contract-resolution mechanisms can significantly strengthen any supply
chain relationship. Such mechanisms allow parties the opportunity to
communicate and work through their differences, in the process building greater
trust.
9. What issues must be considered when managing a supply chain relationship to
improve the chances of developing cooperation and trust?

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The following issues merit attention when management endeavors to improve the
chances of success in supply chain partnership:
The presence of flexibility, trust, and commitment in both parties helps a supply
chain relationship succeed. In particular, commitment of top management on both
sides is crucial for success.
Good organizational arrangements, especially for information sharing and conflict
resolution, improve chances for success.
Mechanisms that make the actions of each party and resulting outcomes visible
help avoid conflicts and resolve disputes.
The more fairly the stronger partner teats the weaker, vulnerable partner, the
stronger the supply chain relationship tends to be.
10. What are the different CPFR scenarios and how do they benefit supply chain
partners?
Collaborative planning, forecasting, and replenishment (CPFR) is defined as a
business practice that combines the intelligence of multiple partners in the
planning and fulfillment of customer demand. In order to be successful, the two
parties must have synchronized their data and established standards for
exchanging the information.
The four scenarios that sellers and buyers can collaborate along include:
Retail event collaboration the identification of specific SKUs that will be
involved in sales promotions and sharing of information regarding the
timing, duration, pricing, advertising, and display tactics to be deployed.
The benefit of retail event collaborations is a reduction in stockouts,
excess inventory and unplanned logistics costs.
DC replenishment collaboration the forecasting of DC withdrawals or
demand from the DC to the manufacturer is converted to a stream of
orders that are locked in over a specified time horizon. A successful DC
replenishment collaboration reduces production costs at the manufacturer
and inventory and stockouts at the retailer.
Store replenishment collaboration the forecasting of store-level orders
that are committed over a specific time horizon. Such a collaboration
results in greater visibility of sales for the manufacturer, improved
replenishment accuracy and product availability, and reduced inventories.
Collaborative assortment planning the forecasting (collaborative
interpretation) of industry trends, macroeconomic factors, and customer
tastes for seasonal goods. This forecast is converted into a planned
purchase order at the style/color/size level that is used to produce sample
products for a fashion event before final merchandising decisions are
made. The manufacturer benefits from this collaboration by having more
lead time to purchase raw materials and plan capacity.