1/6/02 S.Chopra/Logistics Strategy with modifications by S.

DeLurgio 1
A Strategic Framework for Supply
Chain
Design (Strategy),
Planning (Policies),
and Operation (Implementation)
SUPPLY CHAI N MANAGEMENT
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CHAPTER 1
Understanding the Supply Chain
What is supply chain management?
A supply chain strategy framework
Seven Eleven Japan
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Traditional View: Logistics in the
Economy (1990, 1996)
Freight Transportation $352, $455 Billion
Inventory Expense $221, $311 Billion
Administrative Expense $27, $31 Billion
Logistics related activity 11%, 10.5% of GNP.
Source: Cass Logistics
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Traditional View: Logistics in the
Manufacturing Firm
Profit 4%
Logistics Cost 21%
Marketing Cost 27%
Manufacturing Cost 48%
Profit
Logistics
Cost
Marketing
Cost
Manufacturing
Cost
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Supply Chain Management: The
Magnitude in the Traditional View
Estimated that the grocery industry could save $30
billion (10% of operating cost by using effective
logistics and supply chain strategies
A typical box of cereal spends 104 days from factory to sale
A typical car spends 15 days from factory to dealership

Laura Ashley turns its inventory 10 times a year, five
times faster than 3 years ago
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Supply Chain Management: The True
Magnitude
Compaq estimates it lost $0.5 billion to $1 billion in
sales in 1995 because laptops were not available when
and where needed

When the 1 gig processor was introduced by AMD,
the price of the 800 meg processor dropped by 30%

P&G estimates it saved retail customers $65 million
by collaboration resulting in a better match of supply
and demand
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What is a supply chain?
Customer wants
detergent and goes
to Jewel
Jewel
Supermarket
Jewel or third
party DC
P&G or other
manufacturer
Plastic
Producer
Chemical
manufacturer
(e.g. Oil Company)
Tenneco
Packaging
Paper
Manufacturer
Timber
Industry
Chemical
manufacturer
(e.g. Oil Company)
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Flows in a Supply Chain
Customer
I nformation
Product
Funds
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Cycle View of Supply Chains
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
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Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
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PUSH VS. PULL
PUSH
MAKE OR PROVIDE
STOCK IN
ANTICIPATION OF
DEMAND
DRIVEN BY FORECASTS
NECESSARY WHEN
LEADTIMES ARE LONG

PULL
REPLENISHMENT IS
BASED ON CUSTOMER
DEMAND
EACH UNIT PLACES
DEMAND ON SUPPLIER
DESIRABLE WHEN
LEADTIMES ARE SHORT

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HISTORICAL
PUSH VS. PULL
PUSH
SYSTEM-WIDE INFO.
FORECASTS
CURRENT DEMAND
ON-HAND QUANTITIES
SOME FORM OF FAIR-
SHARE ALLOCATION
CENTRALIZED
ALLOCATION
PROFIT-ORIENTED
ALLOCATIONS
PULL
EACH UNIT PLACES
DEMAND ON DC
DC CAPACITY
INSUFFICIENT
SOME FORM OF
ALLOCATION SUCH AS
FCFS USED
RULE-BASED OR
POLITICALLY-
ORIENTED
ALLOCATIONS
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Examples of Supply Chains
Dell / Compaq
Toyota / GM / Ford
McMaster Carr / W.W. Grainger
Amazon / Borders / Barnes and Noble
Webvan / Peapod / Jewel


What are some key issues in these supply chains?
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What is Supply Chain Management?
Managing supply chain flows and assets, to maximize
supply chain PROFI T.
What is supply chain PROFI T?

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CHAPTER 2
SCM -STRATEGIC FIT
STEPS - UNDERSTANDING:
1. THE CUSTOMER-
IMPLIED DEMAND UNCERTAINTY
2. THE SUPPLY CHAIN-
RESPONSIVE VS. EFFICIENT
3. STRATEGIC FIT-
THE ZONE OF STRATEGIC FIT


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The Value Chain: Linking Supply Chain
and Business Strategy
New
Product
Development
Marketing
and
Sales
Operations Distribution Service
Finance, Accounting, I nformation Technology, Human Resources
Business Strategy
New Product
Strategy
Marketing
Strategy
Supply Chain Strategy
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Achieving Strategic Fit
Understanding the Customer
Lot size
Response time
Service level
Product variety
Price
Innovation
I mplied
Demand
Uncertainty
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Levels of Implied Demand Uncertainty
Low
High
Price
Responsiveness
Customer Need
Implied Demand Uncertainty
Detergent
Long lead time steel
High Fashion
Emergency steel
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SUPPLY CHAIN RESPONSIVENESS
WIDE RANGE OF QUANTITIES
MEET SHORT LEAD TIMES
HANDLE LARGE PRODUCT VARIETY
BUILD HIGHLY INNOVATIVE
PRODUCTS
MEET A VERY HIGH SERVICE LEVEL
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Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
High Low
Low
High
Responsiveness
Cost
DELL
BARILLA
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SUPPLY CHAINS
EFFICIENT VS. RESPONSIVE
GOAL: LOWEST COST
PRODUCT:MAX. PERF. AT
MIN COST
PRICING: LOWER PRICE
AND MARGIN
MANU: HIGH EFFICIENCY
INVENT: MIN. INVENTORY
LEADTIME: REDUCE
LEADTIME
SUPPLIERS: COST/QUALITY
TRANSPORTATION: COST

QUICK RESPONSE
ASSEMBE TO ORDER

HIGHER PRICE AND
MARGINS
FLEX. CAPACITY
MAINTAIN BUFFER
REDUCE EVEN WITH
HIGHER PRICE
SPEED, FLEX., QUALITY
QUICK& RESPONSIVIE
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Achieving Strategic Fit
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiveness
spectrum
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Achieving Strategic Fit with
Same Firm with Various Products
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiveness
spectrum
PRODUCT LINE A
CUSTOMER A
PRODUCT LINE A -
CUSTOMER B
PRODUCT LINE B
CUSTOMER B
PRODUCT LINE B
CUSTOMER A
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Achieving Strategic Fit
Product Life Cycle Progresses/Competition
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiveness
spectrum
INTRODUCTION
MATURING COMMODITY
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Strategic Scope
Suppliers
Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
VERY LOCAL OPTIMAL
BY OPERATION W/I
LOCAL OPTIMAL BY
FUNCTION
FUNCTIONALLY OPTIMAL
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Strategic Scope
GLOBALLY OPTIMAL STRATEGY
Suppliers
Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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CHAPTER 3
SUPPLY CHAIN DRIVERS
INVENTORY
TRANSPORTATION
FACILITIES
INFORMATION
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SUPPLY CHAIN DRIVERS
OBJECTIVES OF CHAP
IDENTIFY DRIVERS OF
PERFORMANCE
ROLE OF EACH IN CREATING
STRATEGIC FIT
IDENTIFY MAJOR OBSTACLES
TO SUCCESS
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Drivers of Supply Chain Performance

Efficiency
Responsiveness
I nventory Transportation Facilities I nformation
Supply chain structure
Drivers
Competitive Strategy
Supply Strategy
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Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation/
Bulk Shipments
Speed
Facilities Consolidation /
Dedicated
Proximity /
Flexibility
Information Information best suited for each
objective
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Supply Chain Decisions: Structuring
Drivers
Strategy
(Design)
Planning
(Policies)
Operation
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Major Obstacles to Achieving Fit
INCREASING VARIETY OF PRODUCTS
DECREASING PRODUCT LIFE CYCLES
INCREASINGLY DEMANDING CUSTOMER
FRAGMENTATION OF SUPPLY CHAIN
OWNERSHIP
GLOBALIZATION
DIFFICULTY EXECUTING NEW STRATEGIES
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Major Obstacles to Achieving Fit
Multiple owners / incentives in a supply chain



Increasing product variety / shrinking life cycles /
customer fragmentation

I ncreasing implied uncertainty
Local optimization and lack of global fit
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Dealing with Multiple Owners /
Local Optimization
Information Coordination

Contractual Coordination
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Dealing with Product Variety:
Mass Customization
Mass
Customization
High
High
Low
Low
Long
Short
L
e
a
d

T
i
m
e

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Fragmentation of Markets and
Product Variety
Are the requirements of all market segments served
identical?
Are the characteristics of all products identical?
Can a single supply chain structure be used for all
products / customers? No! A single supply chain
will fail different customers on efficiency or
responsiveness or both.
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Tailored Logistics
Each Logistically Distinct Business (LDB) will have
distinct requirements in terms of
Inventory
Transportation
Facility
Information
Key: How to gain efficiencies while tailoring logistics?
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Applying the Framework to e-
commerce: What is e-commerce?
Commerce transacted over the Internet
Is product information displayed on the Internet?
Is negotiation over the Internet?
Is the order placed over the Internet?
Is the order tracked over the Internet?
Is the order fulfilled over the Internet?
Is payment transacted over the Internet?
Customer involvement in transactions over the Internet!
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Existing Channels for Commerce
Product information
Physical stores, EDI, catalogs, face to face,
Negotiation
Face to face, phone, fax, sealed bids,
Order placement
Physical store, EDI, phone, fax, face to face,
Order tracking
EDI, phone, fax,
Order fulfillment
Customer pick up, physical delivery



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Revenue Impact of E-Commerce
Length of supply chain
Product information
Time to market
Negotiating prices and contract terms
Order placement and tracking
Order fulfillment
Payment
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Cost Impact of E-Commerce
Facility costs
Site and processing cost
Inventory costs
Cycle, Safety, Seasonal inventory
Transportation costs
Inbound and outbound costs
Information sharing
Coordination
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Seven Eleven Japan
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Seven Eleven - Number of Stores
0
1000
2000
3000
4000
5000
6000
85 86 87 88 89 90 91 92 93 94
Number of Stores
1999: 8,027
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Seven Eleven - Net Sales
0
200
400
600
800
1000
1200
1400
85 86 87 88 89 90 91 92 93 94
Net Sales
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Seven Eleven - Pre tax Profit
0
10
20
30
40
50
60
70
80
90
100
85 86 87 88 89 90 91 92 93 94
Profit
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Seven Eleven - Inventory (days)
0
2
4
6
8
10
12
14
85 86 87 88 89 90 91 92 93 94
Inventory
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Japanese Images of Seven Eleven
Convenient
Cheerful and lively stores
Many ready made dinner items I buy
Famous for its great boxed lunch and dinner
On weekends, when I was single, I went to buy lunch
and dinner
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Key Product Categories
Processed Foods: 50 %
Fresh Foods: 30 %
Non Foods: 20 %
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Store Description
Average size = 100 sq. m. = 1,000 sq. ft. (about 1/3 of
typical US store)
Average sales = 700,000 Yen (about twice average
US store)
SKUs offered in store: Over 3,000 (change by time of
day, day of week, season)
Virtually no storage space
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Supply chain Objective
Micro matching of supply and demand (by location,
time of day, day of week, season)
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Facilities Strategy
Have many outlets, at convenient locations, close to
where customers can walk
When they locate in a place they blanket the area with
stores; stores open in clusters with corresponding
DCs
844 stores in the Tokyo region; Seven Eleven has
5,523 stores in 21 prefectures

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Information Strategy
Quick access to up to date information (as contrasts
with data)
High speed data network linking stores, headquarters, DCs
and suppliers
Store hardware
Store computer
POS registers linked to store computer
Graphic Order Terminals
Scanner terminals for receiving
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1/6/02 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 54
Information Analysis of POS Data
Sales analysis of product categories over time
SKU analysis
Analysis of waste or disposal
Ten day (week) sales trend by SKU
Sales trends for new product
Sales trend by time and day
List of slow moving items
Contribution of product to sections in store display
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Distribution Strategy
Delivery arrives from over 200 plants
Delivery is cross docked at DC (over 80 DCs for
food)
Food DCs store no inventory
Combined delivery system: frozen foods, chilled
foods, room temperature and hot foods
11 truck visits per store per day (compared to 70 in
1974)
No supplier (not even coke!) delivers direct
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The Future
7-eleven growing rapidly in the US
7-eleven aims to be a web depot in both the US and
Japan. Does this make sense from a supply chain
perspective?
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Summary
Two views of a supply chain
A strategic framework: Achieving fit -
Efficiency/Responsiveness and Supply chain
drivers
Tailored logistics
E-commerce framework
7-eleven