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Tutorial

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Supply Chain Management and Build-to-Order Systems
Content

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

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

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However. A supply chain also includes the organizations and processes that create and deliver these products. Note: Only representative processes are shown. and services to the end customers.1. and services from raw material suppliers through factories and warehouses to the end customers. money. The supply chain shown in Figure T1.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-148 W-148 Tutorial 1 Supply Chain Management and Build-to-Order Systems T1. supply chains can be much more complex. The term supply chain comes from a picture of how the partnering organizations are linked together. information. As shown in Figure T1. Note that the supply chain shows both physical flows and the flow of information. information.) Tier three Material flow Information flow Lumber company Chemical extraction plant .1 Basics of Supply Chains A supply chain is a concept describing the flow of materials. DOWNSTREAM Customers External distributors Retail grocers Internal functions INTERNAL Milk producer Milk product processing Packaged milk products Packaging operation tic s as er Pl tain n co Tier one UPSTREAM Dairy farm Cardboard container manufacturer Cardboard Label company Labels Ra w d ar s bo ner d i ar C onta c mi lk Plastic container manufacturer Chemicals External suppliers Tier two Feed for cows Paper mill Chemical plant Raw materials Wood Figure T1.1 is fairly simple.1 A simple chain for a manufacturer. 2002. (Source: Modified from Reid and Sanders. Not shown is the flow of money. a simple linear supply chain links a company that processes milk (middle of the chain) with its suppliers (on the bottom) and its distributors and customers (on the top). which usually goes in the direction opposite to the flow of the physical materials.

manufacturing. For example. The downstream part of the supply chain includes all of the activities involved in delivering the products to the final customers. As this tutorial . with its first-tier suppliers and their connection to their suppliers (referred to as second-tier and third-tier suppliers). • The upstream supply chain. and coordinate the activities along the supply chain. However.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-149 T1.g.) More Definitions. Therefore.g.” Goods and services are pushed along the supply chain ultimately to meet the requirements of an end consumer. The internal supply chain is mainly concerned with production management. (See en. which describes the process of taking orders and delivering finished goods to meet the demand of customers. the concept of SCM refers to a total systems approach to managing the entire supply chain. internal. transportation.1). retail grocers in Figure T1.org/wiki/supply_chain. In the upstream supply chain. but also make those goods or services attractive to customers. and after-sale services (e. The function of supply chain management (SCM) is to plan. organize. such as those required to provide raw milk. making cardboard containers involves three tiers: the cardboard container manufacturer (tier one). The relationship is often described as “push-pull. A company’s supply chain involves an array of business processes that not only effectively transform raw items to finished goods or services. For an overview. A demand chain. it is referred to as an e-supply chain. The downstream supply chain is directed at distribution. processing and packaging in Figure T1. Most supply chains now involve a mix of Web-based and other information systems to ensure efficiency and uninterrupted flows of goods and services in a timely manner. growing crops).. warehousing. the demand from customers pulls goods and services from suppliers to the end consumer. It extends from the time the inputs enter an organization to the time that the products go to distribution outside of the organization. mining ores. meaning that a supplier has one or more subsuppliers. and so on. which gets its material from the paper mill (tier two). 2006). • The downstream supply chain. and then inside the company to places where they are needed. also is recognized. the major activity is procurement. Some supply chains have up to a dozen tiers.1 shows that several potential tiers of suppliers exist. may have only one tier of suppliers. all the way to the origin of the material (e. SCM is usually supported by IT (see Hugos. in many cases several tiers of suppliers exist. the distinction between ITenabled supply chains and e-supply chains is rapidly diminishing. which we discuss in Tutorial 2. Supply Chain Management. usually with Web-based software. The supplier relationship can be extended several tiers.1. see Stadtler (2005). • The internal supply chain. Today. When a supply chain is managed electronically. These two concepts are interrelated. which gets its material from the lumber company (tier three).1). The following definitions are helpful for the study of this tutorial. An examination of Figure T1. In the demand chain. The upstream part of the supply chain includes the activities of a company (a milk producer. the concept of a supply chain refers to the flow of materials from their sources (suppliers) to the company. The activities that add value to the company’s goods or services are part of what is called the value chain. in our case). they are frequently combined under the single concept named the supply chain..wikipedia. Some processes. The internal part of the supply chain includes all of the in-house processes used in transforming the inputs received from the suppliers into the organization’s outputs. MAJOR CONCEPTS AND DEFINITIONS Initially. and the subsupplier might have its own subsuppliers.g. and downstream. E-Supply Chain. as shown in Figure T1.1 Basics of Supply Chains SUPPLY CHAIN PARTS W-149 A supply chain can be broken into three major parts (components): upstream. and inventory control (e. It should be noted that as the Internet becomes more pervasive and ubiquitous..

g. Virtual Supply Chains. music. payment schedules. or returns). has outsourced much of the manufacture and distribution of its sporting apparel and sports shoes worldwide. it is necessary to coordinate all of the flows among all of the parties involved in the chain. scheduling. T1. recycled products. customer relationships. but frequently there is flow of documents (hard and soft copies). orders. For the automaker. and so on results in a supply chain without physical flow. 3. SCM software offers better control of the storage and flow of goods and services along a supply chain. . shipments. direct business customers (fleets).2 Types of Supply Chains Supply chains come in all shapes and sizes and can be fairly complex. customers. There are typically three types of flows in the supply chain: materials.. This software is designed to improve decision making regarding supply chain issues. credit card information and authorization. inventory control. e-payments. from “dirt to dust. A supply chain thus involves a product life cycle approach. This includes all data related to demand. however. It uses EC and IT systems to manage the order fulfillment process without owning the manufacturing facilities. digitized software) and one that supports information (orders. credit flows. Note that in some service industries.). order flows. These are all physical products. and so forth. Information flows. Financial flows. and financial (money). improvements in supply chains frequently involve an attempt to convert them to e-supply chains. supplies. that in such a case. Notice. and new product development. In managing the supply chain. optimization.The digitization of software. namely. SCM software refers to software that supports specific segments of the supply chain. and disposal of materials or products. and so forth. to automate the information and financial flows in the chain. Web-based EC and IT support packages. etc. In recent times. it is necessary to coordinate all of the aforementioned types of flows among all of the parties involved in the supply chain (see Sengupta et al. schedules.. returns. 1. SCM Software. The financial flows are all transfers of money. Flow in Service Industries. In addition. and support functions such as product engineering and purchasing. sometimes the flow of information and even goods can be bidirectional.” 2. For example. Material flows. information. and creditrelated data. dozens of manufacturing plants (for parts) and assembly plants (for cars). the supply chain for a car manufacturer includes hundreds of suppliers. thereby allowing the company to focus on marketing. not shown in this figure is the return of products (known as reverse logistics. wholesalers (some of which are virtual). As shown in Figure T1.2. ideas from suppliers to manufacturers. dealers. and transportation. payments. and analysis.1. information to customers. especially in manufacturing. The Supply Chain Flows. Some loops can be found in the process. Importantly. for example. and changes in the data. Notice that in this case. billing. that flow along the chain. The concept of material flows also includes reverse flows—returned products. that would be cars returned to the dealers in the event of defects or recalls by the manufacturer. for example. 2006). there are two types of information flow: one that replaces material flow (e. This is referred to as a virtual supply chain. warehousing. raw materials. It also includes customer feedback. often with the help of sophisticated. many companies have redesigned their supply chains to outsource some part of their supply chain activities. for example. Nike.turban_tutor01_W147-W159-hr 30-01-2009 14:49 Page W-150 W-150 Tutorial 1 Supply Chain Management and Build-to-Order Systems will show. In managing supply chains. the chain is not strictly linear as it is in Figure T1. there are limited or no physical flows of materials.

A brief description of these four types follows. and channel assembly. The coordination of supply with multiple distribution channels . so that input materials can support the modified production plans and schedules. that place sensors in each tank at each gas station or retail outlet it serves. Starbucks not only sells coffee drinks and some food to consumers. The system handles distribution planning. its business processes. continuous replenishment.2 A complex supply chain for a car manufacturer. Example 1. and inventory control. Engin e ering cha nge s and ship releases Many supply chains can be classified into four major categories: integrated maketo-stock. Mobil can then use this information for shipment inventory and production scheduling decisions. for example. Such information is integrated further down the supply chain to the procurement function. In addition. Starbucks is successfully integrating all sources of demand and matching it with the supply by using Oracle’s automated information system for manufacturing (called GEMMS). it is clear that supply chains depend on the nature of the company. such as Mobil. but also sells beans and ground coffee to businesses such as airlines. Through application of such a system.com) uses several distribution channels. an organization can receive real-time demand information that it can use to develop and modify production plans and schedules. The integrated make-to-stock supply chain model focuses on tracking customer demand in real time. so that the production process can restock the finished-goods inventory efficiently. The sensors measure in real time the level of gas. build-to-order. and the product types and/or services that it offers. department stores. supermarkets. including the Internet. If a company uses a build-to-order business model. Example 2. Starbucks Coffee starbucks. and ice-cream makers. it will not be necessary to store finished products.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-151 T1. but it will be necessary to warehouse raw materials and components.This integration often is achieved through use of an information system that is fully integrated. Integrated Make-to-Stock.2 Types of Supply Chains Car Dealers Assembly Material Planning (19 plants) • Vehicle scheduling • Preproduction planning • Components scheduling • Planning/sequencing PARTS Manufacturing (57 plants) Engines Electrical/Fuel Handling Devices Glass Ship release Transmissions Components Group Plastics/ Trim Products Stamping Castings Electronics Climate Controls Request to buy Request to buy PURCHASING an W-151 CARS Shipping Assembly Line Warehousing Receiving Sales Operations Product Engineering New products and engineering changes Allocated buildable orders Shi p PARTS ases changes rele ineering ng de Sourcing MATERIALS an ce ship Suppliers (hundreds) v Ad notic e Figure T1. manufacturing scheduling. it sells through direct mail. An example is major oil companies. Therefore.

The idea of the continuous-replenishment supply chain model is to replenish the inventory constantly by working closely with suppliers and intermediaries. and more. this is popular in the computer technology industry. or the collection of finished components for delivery to the customer. It attributes its success primarily to its supply chain design and management ability. T1.3 Examples of Supply Chains With more than 27. 7-Eleven is one of the largest convenience store chains in the world (7-eleven. A slight modification to the build-to-order model is the channel-assembly supply chain model. A channel assembly might have low or zero inventories when properly planned and coordinated. Real-time information about demand changes is required in order for the production process to maintain the desired replenishment schedules and levels.The information systems are critical for doing all of these functions with maximum effectiveness and reasonable cost. such as at FedEx or UPS.We describe this in more detail later in this tutorial. tight integration is needed between the order-fulfillment process and the production and acquisition processes. 7-Eleven Japan opens new stores in target areas. To fulfill this objective. storage capacity. For example. Dell Computer is best known for its application of the build-toorder model. However. and it consolidates its warehousing and trans- 7-ELEVEN: A CONVENIENCE STORE . This is accomplished through strategic alliances with third-party logistics (3PL) firms. season. the parts of the product are gathered and assembled as the product moves through the distribution channel. This helps 7Eleven establish a strong presence. and time of day. 2008). the customer’s computer order would not come together until all items were placed on a vehicle for delivery by the 3PL. causing the supply chain to collapse. In this model.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-152 W-152 Tutorial 1 Supply Chain Management and Build-to-Order Systems requires timely and accurate information flows about demand. and financial resources usually is designed not only to transform raw items to finished products and services effectively. inventories. as we will see later in the tutorial. Continuous Replenishment. One of the primary benefits of this type of supply chain model is the perception that each customer is receiving a personalized product. Therefore. if the replenishment process involves many shipments. Several types of software are available to achieve this goal. These services sometimes involve either the physical assembly of components and the making of finished products at a 3PL facility. This type of supply chain model supports the concept of mass customization. a computer company could have items such as the monitor and the CPU shipped directly from its vendors to a 3PL facility. In this model. services. The flow of goods.000 in the United States. In addition. as is usually the case with distribution of prescription medicines. Channel Assembly.com. but also to do so in an efficient manner. information. One way to accomplish this is to use many common components across several production lines and in several locations. Build-to-Order. the customer receives it rapidly.900 stores worldwide. Therefore. One of the key objectives of 7-Eleven Japan is to micro-match supply and demand by location. and can achieve a faster market response time. the cost could be too high. one begins the assembly of the customer’s order (from components) almost immediately upon receipt of the order. transportation scheduling.000 stores in Japan and almost 6. This requires careful management of the component inventories and delivery of needed supplies along the supply chain. It has about 10. The model requires intermediaries when large systems are involved. 7-Eleven Japan is one of the most profitable companies listed on the Tokyo stock exchange. This model is most applicable to environments with stable demand patterns.

and merchandising. or customers can pick up their orders at one of the retail stores. and what information is made available to store managers to assist them in their ordering and merchandising decisions? How should the information system be structured? W. and where should they be located? 2. and operation (MRO) products mostly to businesses (B2B). how are stocking decisions made? 3. all stores are connected electronically to the head office. How should Web orders be handled relative to the existing business? Is it better to integrate the Web business with the existing business or to set up separate distribution? Questions for the Grainger Case . Both companies have online catalogs as well as Web pages through which customers can place orders.000 products. Where are DCs located. How should markets be allocated to DCs in terms of order fulfillment? What should be done if an order cannot be completely filled from a DC? Should specified backup locations be available? How should these be selected? 5. Either W. McMaster Carr.) 4.3 Examples of Supply Chains W-153 portation functions. Grainger and McMaster Carr sell maintenance. and how many stores does each center serve? How are stores assigned to DCs? 4. all orders of like products from different suppliers are combined and delivered to the stores. In addition. Questions for the 7-Eleven Case 1.W. product assortment. and which products should be left with the suppliers? (They both buy from thousands of suppliers. 7-Eleven has made clear choices in the design of its supply chain. In the United States. The following questions focus mainly on 7-Eleven’s supply chain choices and its key success factors. How should product stocking be managed at the DCs? Should all DCs carry all products? If not. 1. The resulting information is then made available to headquarters and the stores for use in ordering. not the 7-Eleven DC. and suppliers. Other convenience store chains have not always made the same choices. Why does 7-Eleven Japan discourage direct store delivery from vendors and make an effort to move all products through combined DCs? How does the presence of the distributor delivering to the stores affect the performance of the delivery system in the United States? 3.W. repair. distribution centers (DCs).turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-153 T1. What factors influence the decisions regarding the opening and closing of stores? Why does 7-Eleven choose to have a preponderance of its stores in a particular location? 2. Which products should be carried in inventory. At the DC. W. and customers can also place their orders in the retail stores or over the telephone. 7-Eleven Japan has made an effort to have no direct store delivery from vendors to the stores. Both firms offer several hundred thousand products to their customers. Each firm stocks about 100. How many DCs should a company have. Information systems play a key role in 7-Eleven’s ability to micro-match supply and demand. on the other hand. they obtain the rest from the supplier as needed. How should replenishment of inventory be managed at the various stocking locations? 6. Data are collected by scanners and analyzed. Grainger ships orders to customers from their distribution centers (DCs). 7-Eleven is taking a similar approach to the one used in Japan.W. GRAINGER AND MCMASTER CARR: MRO SUPPLIERS WITH A DIFFERENT SUPPLY CHAIN STRATEGY W. Grainger has several DCs that replenish stores and fill customer orders. Both firms face the following strategic and operational issues. Orders are passed to the suppliers that package store-specific orders and deliver them to the DC. McMaster Carr has DCs from which it fills all orders. 7-Eleven has invested a significant amount of money and effort in a retail information system. except that a distributor delivers a large fraction of products to the stores. What point-of-sales data do 7-Eleven gather. ships all orders.W. In Japan and the United States.

which hinders people or businesses from getting products or services when and where needed or gives them poor-quality products. Here we will address several of the uncertainties that contribute to supply chain problems. A major symptom of ineffective supply chains is poor customer service. The company has experienced significant growth in global sales over the last two decades. such as companies that were unable to meet demand. weather conditions. and business partners. . prices. 1. Problems along the supply chain can occur between business units within a single enterprise. REASONS FOR SUPPLY CHAIN PROBLEMS The problems along the supply chain stem mainly from two sources: (1) uncertainties and (2) the need to coordinate several activities. The problems are most evident in complex or long supply chains and in cases where many business partners are involved.4 Supply Chain Challenges Supply chain challenges have been recognized in business. Some of these companies paid substantial penalties. After the Asian financial crisis from 1996 to 1997. Other supply chain uncertainties include delivery times. Where should the plants be located. technological developments. On the other hand. A key issue facing Toyota is the design of its global production and distribution network. and others even went out of business. services. and Dell have supply chains with innovative ITenhanced applications. Actual demand for a product is influenced by several factors such as competition. and what degree of flexibility should be built into each one? What capacity should each plant have? 2. and customers’ general confidence. loss of revenues. internal units. How should markets be allocated to plants. Prior to 1996. and the military for generations. and extra cost of expediting shipments. Other symptoms are high inventory costs. which lead to supply chain problems. we will consider how IT can help enterprises improve supply chain coordination and reduce uncertainties. Toyota must decide what the production capability of each of its factories will be because this has a significant impact on the desired distribution system. What actions can be taken during product design to facilitate this flexibility? TOYOTA: A GLOBAL AUTO MANUFACTURER Questions for the Toyota Case T1. and how frequently should this allocation be revised? 4.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-154 W-154 Tutorial 1 Supply Chain Management and Build-to-Order Systems Toyota Motor Corporation is Japan’s top auto manufacturer. What kind of flexibility should be built into the distribution system? 5. There are numerous examples of supply chain problems. some world-class companies such as Wal-Mart. government. which depend on many factors. These are external. The bullwhip effect refers to erratic changes in orders (along the) supply chain and is discussed in A Closer Look T1. How should this flexible investment be valued? 6. Federal Express.” For any global manufacturer such as Toyota. Toyota used specialized local factories for each market. they also can occur between (and among) enterprises. several questions arise regarding the configuration and capability of the supply chain.1 and Chapter 11. Toyota redesigned its plants so that they could be shifted quickly in order to export to markets that remain strong. Should plants be able to produce for all markets or for only specific contingency markets? 3. Throughout the chapter. Quality problems in materials and parts may also create production delays. Toyota calls this strategy “global complementation. ranging from production machine failures to road conditions and traffic jams that may interfere with shipments. One of the major difficulties in properly setting inventory levels in various parts of the supply chain is known as the bullwhip effect. usually uncontrollable. ChevronTexaco overcame this uncertainty by measuring demand in real time and using a demand-driven production strategy. factors.

which is one party’s ability to forecast the other party’s behavior. stockpiling may be simultaneously occurring at as many as seven or eight locations along the supply chain. Choosing between producing a product or service in-house or purchasing it from an outside source involves looking at the core competencies of GLOBAL SUPPLY CHAIN MANAGEMENT ISSUES OUTSOURCING: MAKEOR-BUY DECISIONS . lost revenues. While actual sales in retail stores were fairly stable and predictable. Repeated interaction enables one party to interpret projected outcomes better for another party. fluctuations in P&G production levels as well as in orders to P&G’s suppliers. A 1998 industry study projected that $30 billion in savings could materialize in grocery industry supply chains alone by sharing information and collaborating. excessive inventories. An investigation revealed that distributors’ orders were fluctuating because of poor demand forecast. The fourth factor involves determining the party’s ability to meet its obligations. and infrastructure issues. P&G. Firms ranging from Hewlett-Packard in the computer industry to Bristol- TRUST AND COLLABORATION Trust is vitally important in a collaboration relationship between suppliers and buyers in the supply chain. Basically. If each distinct entity makes ordering and inventory decisions with an eye to its own interest above those of the chain. Managing a supply chain with international concerns adds many layers of complexity. creating production and inventory problems. For example. and flow of inaccurate information. The bullwhip effect (as described in Chapter 8) refers to erratic shifts in orders up and down the supply chain. This effect was initially observed by Procter & Gamble (P&G) with its disposable diapers product (Pampers). however. Distorted information can lead to tremendous inefficiencies. poor customer service. This topic is explored in Chapter 11. demand variables can become magnified when viewed through the eyes of managers at each link in the supply chain. had wild swings. Thus. Study has shown that such hoarding has led in some cases to as many as 100 days’ worth of inventory that is waiting. Sources: Donovan (2002/2003) and Logic Tools (2006). This factor is important as the two organizations will assess each other’s propensity to perform on the mutually agreed contract.4 Supply Chain Challenges W-155 A Closer Look The Bullwhip Effect T1. currency risk. Trust involves a calculated process wherein an organization estimates the costs and/or the rewards of another party cheating or staying in the relationship. in the operation of e-marketplaces. order batching. governmental concerns. A third factor that leads to trust is the perception of mutually sharing both the risks and the benefits of the collaboration. organizations are collaborating to a greater extent. What are the factors leading to a trusting behavior in a supplier–buyer relationship? One of the factors is information sharing because it lets all of the firms in the supply chain know enough to be assured about other firms’ capabilities and intentions. Trust has been linked not only to successful implementation of supply chain systems. and rationing within the supply chain. The development of a supply chain strategy must include political concerns. production quality. and relationship commitment all ultimately affect whether an organization continues in a cooperative electronic relationship. Make decisions involve manufacturing or developing a product internally.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-155 T1. Make-or-buy decisions can be extremely complex. trust between organizations could be an obstacle for the effective management of the supply chain. An excellent source of information on economic and political stability is the CIA’s World Factbook at cia. risk perception.html. These dysfunctions resulted in unnecessary and costly inventories in various locations along the supply chain. The bullwhip effect is not unique to P&G. “just in case” (versus 10–20 days in the normal case). but also to the ongoing operation of these systems.gov/cia/publications/factbook/index.1 Myers Squibb in pharmaceuticals have experienced a similar phenomenon. Another factor that leads to trust in the supply chain is the prediction process. price fluctuation. ineffective shipments. whereas buy decisions involve externally built products and services. companies are trying to avoid the “sting of the bullwhip” as well as to solve other SCM problems. Because of the increase in the Internet-enabled supply chain. orders from distributors to the manufacturer. 2002/2003). Trust. and missed production schedules (Donovan.

Vendor evaluation involves finding potential vendors and determining the likelihood of their being good suppliers in the future. When supplies or products are commodities. 2004). it then becomes equally difficult to predict supply.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-156 W-156 Tutorial 1 Supply Chain Management and Build-to-Order Systems the organization. engineering and production help. vendor competence.and long-term loss in sales and market share. production process capability. General Motors (GM) has spent two years planning for changes in its supply chain network. However. 2005). payment schedules. Resources that are transferred to the outsourced company often include facilities. facilities and location. and procedures for information transfer. Activities that are outsourced are usually not part of the core competencies of the organization. Having many suppliers tends to decrease risk and increase costs. delivery. this strategy will depend on the uniqueness of the product and the proprietariness of the product or process used to manufacture the product. Long-term partnering relationships are usually not entered into for commodity products using a many-supplier strategy. expertise. delivery capability. MULTIPLE SUPPLIERS STRATEGY In an environment where there are many suppliers. when the product is not a commodity and there is clear differentiation. There are three stages to the vendor selection process: (1) vender evaluation. Because outsourcing transfers some of the organization’s internal processes and resources to outside vendors. people. such as equipment over. Mismatches can negatively impact the productivity and utilization of organizational assets. Reverse logistics programs can be costly for many organizations and can create difficulties in the management of the supply chain life cycle. or to lower sales price due to markdowns of excess inventories. examining the expertise within the organization. Demand and supply mismatches are receiving increased visibility and coverage as businesses look for solutions. and the approach they will use to decide which supplier is most appropriate. and the ability to meet schedules (Gibson. vendor quality. labor availability. Another challenge in managing the supply chain is the selection of vendors. and service-level agreements. Another aspect of reverse logistics is handling and disposition of damaged goods returned by the consumer. payment. (2) vendor development. financial strength. infrastructure development. CIO and Vice President Ralph Szygenda stated that major supply chain redesign was needed because the whole process had to better accommodate globalization (Bacheldor. Outsourcing management involves the forecasting and prediction of cost trends. A decision needs to be made regarding from whom to buy goods and services. Vendor development assumes you will be working with a particular vendor and includes training. product selection. outsourcing decisions involve complex legal contracts. assessing the suitability of suppliers. or can prevent the firm from capitalizing on strong market demand due to the unavailability of products. and (3) vendor negotiation. and finances. Because it is often difficult to forecast demand for products and services. services. Vendor selection must consider factors such as strategic fit. analyzing the costs of producing or acquiring. Reverse logistics affects many components of the logistics process as well as the supply chain because companies are responsible for products after they’ve been sold and after customers have disposed of them. organizations can play one supplier against another based on price. VENDOR SELECTION DIFFICULTY IN FORECASTING DEMAND COST OF REVERSE LOGISTICS . Negotiations focus on vendor quality. and cost. and examining the ability to inventory products. equipment. Companies can end up with costly inventory balances and carrying costs. GM is truly a global company and therefore puts a lot of effort into outsourcing contracts on a global level. Demand and supply mismatches can lead to both short. Reverse logistics is the process of continuously taking back products and/or packaging materials to avoid waste. and product pricing. organizations need a strategy to evaluate supplier products.or underutilization.

personnel. and they were willing to do so. the workers do not know who the customers are.To understand this strategy. All of this reduces the prices to consumers. Different employees become experts in executing certain tasks. increased.. especially cars. According to the concept of mass production. as shown in Figure T1. design. you go to a shoemaker who takes the measurement. and then “pushes” (markets) them to consumers. If the forecasted demand was wrong. store them. It also allows for specialization. it was necessary to create special marketing organizations to do the sales. manufacturers had to meet this kind of demand. it was necessary to design standard products. the solution of mass production was created. and errors are reduced due to better communication and collaboration. To build-to-market. and demand accelerated. Later.This customization strategy was so successful that many other industries also wanted to try mass customization. and finance. time and money are saved. and once it is verified and payment arranged. Burger King introduced the concept of “having it your way. the inventories were incorrect: Either the inventories were insufficient to meet demand. Slowly. there was no problem of meeting it. 2001 and Agrawal et al. for an implementation in the automotive industry. Such division of labor makes the work simpler. However. This idea is the essence of mass customization. In mass production. To meet the ever-increasing demand. Using e-commerce can facilitate the use of customization and even the use of mass customization (Holweg and Pil. Customized products were expensive. also known as a pull system. and it took a long time to finish them.2. This changed with the coming of the Industrial Revolution. which were based on forecasted demand. As society became more affluent.The creation of standard products by automation drove prices down still further.3. According to this concept. 1999). In the 1970s. customers were asked to pay a premium and wait for a long time. the demand for customized products.5 Build-to-Order Production The concept of build-to-order means that you start to make a product (service) only after an order for it is placed. But the products are inexpensive. The Industrial Revolution started with the concept of dividing work into small parts. For example. You negotiate quality.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-157 T1. Dell Computer introduced the idea of customized PCs. To make sales. 2001). The shoemaker buys the materials and makes a customized product for you. Using EC a customer can self-configure the desired product online. One important area in the supply chain is ordering. produce them. Such solutions were usually enhanced by some kind of information technologies (Pine and Gilmore. As long as the demand for customized product was small. as is done at Cisco Systems. or there was too much inventory at hand. This saves processing time and money.5 Build-to-Order Production W-157 T1. Because the work segments are simpler. This concept is as old as commerce itself. The order is received in seconds. requiring less training for employees. if you need a pair of shoes. With increased competition and the desire to sell in remote markets. let’s look first at a comparison of mass production. customers may collaborate in real time with the manufacturer’s designers. and then sell them. with mass customization. the order is sent electronically to the production floor. 2001). .Again.” and manufacturers began looking for solutions for providing customized products in large quantities. In purchasing a new car. and their prices fuel demand. and other departments to keep track of the many new and specialized business activities. and price. a manufacturer produces large amounts of standard products at a very low cost. the demand for customized products and services increased. and frequently do not care about customers’ needs or product quality. and demand increases. So the concept of build-to-market developed. Mass production also required inventory systems at various places in the supply chain. For complex products. accounting. and you make a down payment. for example. they found that it is not so easy to do so (Zipkin. see A Closer Look T1. it is easier to automate them. also known as a push system. so the concept became a dominant one. and was the only method of production until the Industrial Revolution began. This new model also required the creation of large factories.

(See Exhibit 1 in Agrawal et al. a production schedule can be automatically generated. and lower inventory costs. Selling Cars Online: Build-to-Order The world’s automobile manufacturers are complex enterprises with thousands of suppliers and millions of customers. otherwise transfer order Wholesalers Inventories Retail distribution centers Inventories Transferring unfulfilled orders to distribution centers. 2001). certain cars are ultimately sold from stock at a loss when the market exhibits insufficient demand for a particular vehicle. EC can help make the production configuration in minutes. faster response time). building cars that are carried as inventory during the outbound logistics process (ships. and particularly the auto manufacturers. “push” to customers Customers Other contributions of EC to mass customization are the following: the customers’ needs are visible to all partners in the order-fulfillment chain (fewer delays. 2001 and Agrawal et al. since most mass production is based on assembly of standard components. When a customer wants a particular feature or color (“options”). who orders cars and then sells them from the lot.) Mass customization on a large scale is not easy to attain (Zipkin. are planning to move to buildto-order using EC. A Closer Look T1. if needed to make products. inventories are reduced due to rapid communication. In the traditional system. it may become the dominant model in many industries. ship to customers direct (or via intermediary) Figure T1. shorter order-to-delivery time. at almost no additional cost. suppliers. they are expecting huge cost reductions. (Drawn by E. E-commerce can help in expediting the production changeover from one item to another. Another key area in mass customization is understanding what the customers want.2 well. General Motors (GM) estimates that it holds as much as $40-billion worth of unsold vehicles in its distribution channels. As a result of this change in production methods. Furthermore.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-158 W-158 Tutorial 1 Supply Chain Management and Build-to-Order Systems Conventional Push System Manufacturer/Assembler Product to market Key: demand forecast Use mass production. inventories EC-Based Pull System Customers Orders can be customized (on-demand) Manufacturer or retailer Consult inventory of standard items only. including money. and EC is also very helpful here (see Chapter 6 and Holweg and Pil. the manufacturers conduct market research in order to estimate which features and options will sell . if needed Retail stores Orders to production floors. and dealers’ lots). This is why many industries. trains.) Inventories. and digitizable products and services can be delivered electronically. detailing deployment of all needed resources. including the identification of the needed components and their location.. rush orders. the customer might have to wait weeks or months until the “pipeline” of vehicles has that particular car on the production line.Also. Turban. but if properly performed. or suppliers. 2001. Other automakers hold large amounts as well. and then they make the cars they wish to sell. 2001. 2001). and Holweg and Pil. The automakers have long operated under this “build-to-stock” environment.. Their traditional channel for distributing cars has been the automobile dealer.3 Comparison of a push-based supply chain and a pull-based supply chain. Ship if available. trucks. In some cases.

(Thus. and see the price updated automatically with each selection of trim or accessories. V. Supply chain management (SCM) The management of all of the activities along the supply chain. thereby cutting inventory requirements in half. to distribution. Auto Industry?” May 4.” Eweek. “Is Better Forecasting a Solution to the Bullwhip Effect?” 2006. M. December 2005. Weiner (2006). “The 5-Day Car: Ordered on Monday—Delivered on Friday. thereby reducing delivery time and contributing to increased customer satisfaction. Operations Management. Sources: Compiled from jaguar. knowledge. SCM software Applications programs specifically designed to improve decision making in segments of the supply chain. S. Virtual supply chain A supply chain executed by the partners in the virtual enterprise. and L. Jaguar car buyers can build a dream car online.com). money. Hoboken.cfm?articleid=1183&CFID=69508139&CFTOKEN=20334258&jsessionid=9a3066 929f4951487158 (accessed June 2008). R. 2nd ed. S. “Supply Chain Management: Cracking the Bullwhip Effect.org. Pil. conflicts with the established dealer network channel are avoided. hummer. K..com (accessed June 2008). and F.turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-159 References Ford. . M.wharton. from suppliers. Customers can electronically track the progress of the car. Sengupta. Reverse logistics (returns) A flow of material or finished goods back to the source. B. Bacheldor.. Gilmore. Knowledge@Wharton. 2002/2003. consumers are able to custom configure their car’s features and components. Demand chain The process of taking orders and delivering finished goods from suppliers to meet the demand of customers. however. Glossary Bullwhip effect Erratic shifts in orders up and down the supply chain. Pine. This includes ordering. et al. “GM Pushes Outsourcing Envelope. Heiser. P. E-supply chain A supply chain that is managed electronically. the lack of integrated logistics processes. No. and N. 2001. 2002. Spring 2001.com/resources/articles/bullwhip. much like the Dell approach to building computers. As an example of this trend toward build-to-order mass customization in the new car market. 2006. price it. and services from raw material suppliers... M..” MIT Sloan Management Journal. October 2006. The Essentials of Supply Chain Management. “Manufacturing and Service Supply Chain Performance: A Comparative Analysis.. see W-159 it online.250 possible exterior combinations out of several million. suppliers and customers. Using a virtual car on the Web site.upenn. 163(3). the return of defective products by customers.com (accessed June 2008). These auto giants intend to transform themselves from build-tostock companies to build-to-order companies. Agrawal. to internal logistics within a company. February 23. 2004. “The Limits of Mass Customization. H.com/AboutUs/tabid/73/Default. Logic tools. and billing. Overview.html (accessed June 2008). Another similarly impressive Web site with similar functionality is hummer. can be transmitted to the production floor. and J. Outsourcing Acquiring IS services from an external (outside) organization rather than through internal IS units.edu/article. information. New York: John Wiley & Sons. M. and Challenges. February 28.” European Journal of Operational Research.pdf (accessed June 2008). Zipkin. customers can view in real time more than 1. rotate the image 360 degrees. usually with Web technologies.. “The False Promise of Mass Customization.. 1 to 2 weeks). Fall 2001. and inadequate networking of manufacturers. Weiner.” Only when a network of suppliers produce standard modules for cars using standardized processes and IT systems will the dream of a truly agile and responsive supply chain delivering build-to-customer-order capability be realized. D. “General Motors Takes Design Up a Notch. The configuration. according to Weiner (2006) this transformation has so far been “doomed to failure by rigid production processes. R..” Harvard Business Review.g.) The Web site helps primarily with the research process—it is not a fully transactional site. 7-eleven.” The Journal of Supply Chain Management. pp. 2005.” McKinsey Quarterly. M. and have it delivered to a nearby dealer. 2006. “Successful Build-to-Order Strategies Start with the Customer. through factories and warehouses. monitoring. T. 3.. Cook. After storing the car in a virtual garage.. GM.” Material Handling Management. ” Ilipt. 2005. Trust The psychological status of involved parties who are willing to pursue further interaction to achieve a planned goal. B.de/Images/magazine_22006_28_tcm6-64704.. for example. January–February 1999. and Knowledge@Wharton (2005). Stadtler. J. to customers. “The Four Faces of Mass Customization. References 7-Eleven. Donovan. “Car Trouble: Should We Recall the U. “Supply Chain Management and Advanced Planning: Basics. to the end customers.. Hugos.” MIT Sloan Management Review. while at the same time giving customers the vehicle they want in a short period (e. Director Issue. inflexible product structures.” Information Week. 74–83. have announced plans to implement a build-to-order program. logic-tools. Gibson.S. D. and Toyota. NJ: John Wiley and Sons. includes the organizations and processes involved. On Jaguar’s Web site (jaguar. Reid. the customer can decide on the purchase and select a dealer at which to pick up the completed car. fraunhofer.aspx (accessed June 2008).com. Supply chain Flow of materials. Holweg. However. 43(1). Sanders.. including visualization of the production process in the factory. Similar configuration systems are available from all of the major car manufacturers. along with other automakers around the world..com.

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