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The supply chain includes not only the manufacturer and suppliers, but also
transporters, warehouses, retailers, and even customers themselves. Consider a
customer walking into a Wal-Mart store to purchase detergent. The supply chain
begins with the customer and his or her need for detergent. The next stage of
this supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart
stocks its shelves using inventory that may have been supplied from a finished-
goods warehouse or a distributor using trucks supplied by a third partx. The
distributor in turn is stocked by the manufacturer (say, Proctor & Gamble [P&G]
in this case). The P&G manufacturing plant receives raw material from a variety
of suppliers, who may themselves have been supplied by lower-tier suppliers.
For example, packaging material may come from Tenneco packaging, while
Tenneco receives raw materials to manufacture the packaging from other
suppliers. This supply chain is illustrated in Figure 1-1, with the arrows
corresponding to the direction of physical product flow.
These examples illustrate that the customer is an integral part of the supply
chain. In fact, the primary purpose of any supply chain is to satisfy customer
needs and, in the process, generate profit for itself. The term supply chain
conjures up images of product or supply moving from suppliers to manufacturers
to distributors to retailers to customers along a chain. This is certainly part of
the supply chain, but it is also important to visualize information, funds, and
product flows along both directions of this chain. The term supply chain may also
imply that only one player is involved at each stage. In reality, a manufacturer
may receive material from several suppliers and then supply several distributors.
Thus, most supply chains are actually networks. It may be more accurate to use
the term supply network or supply web to describe the structure of most supply
chains, as shown in Figure 1-2.
A typical supply chain may involve a variety of stages. These supply chain stages
include:
i. Customers
ii. Retailers
iii. Wholesalers/distributors
iv. Manufacturers
v. Component/raw material suppliers
Each stage in a supply chain is connected through the flow of products,
information, and funds. These flows often occur in both directions and may be
managed by one of the stages or an intermediary. Each stage in Figure 1-2 need
not be present in a supply chain. Dell does not have a retailer, wholesaler, or
distributor in its supply chain. In the case of other retail stores, the supply chain
may also contain a wholesaler or distributor between the store and the
manufacturer.
The objective of every supply chain should be to maximize the overall value
generated. The value a supply chain generates is the difference between what
the final product is worth to the customer and the costs the supply chain incurs
in filling the customer's request. For example, a customer purchasing a wireless
router from Best Buy pays $60, which represents the revenue the supply chain
receives. Best Buy and other stages of the supply chain incur costs to convey
information, produce components, store them, transport them, transfer funds,
and so on. The difference between the $60 that the customer paid and the sum
of all costs incurred by the supply chain to produce and distribute the router
represents the supply chain profitability or surplus. The higher the supply chain
profitability, the more successful is the supply chain. Supply chain success
should be measured in terms of supply chain profitability and not in terms of the
profits at an individual stage.
For any supply chain, there is only one source of revenue: the customer. At Wal-
Mart, a customer purchasing detergent is the only one providing positive cash
flow for the supply chain. All other cash flows are simply fund exchanges that
occur within the supply chain, given that different stages have different owners.
When Wal-Mart pays its supplier, it is taking a portion of the funds the customer
provides and passing that money on to the supplier. All flows of information,
product, or funds generate costs within the supply chain. Thus, the appropriate
management of these flows is a key to supply chain success. Effective supply
chain management involves the management of supply chain assets and
product, information, and fund flows to maximize total supply chain profitability
IMPORTANCE OF BUSINESS LOGISTICS AND SUPPLY CHAIN
The strategic fit in the next Chapter requires that a company's supply chain
achieve the balance between responsiveness and efficiency that best meets the
needs of the company's competitive strategy. To understand how a company can
improve supply chain performance in terms of responsiveness and efficiency, we
must examine the logistical and cross functional drivers of supply chain
performance: facilities, inventory, transportation, information, sourcing, and
pricing. These drivers interact with each other to determine the supply chain's
performance in terms of responsiveness and efficiency. As a result, the structure
of these drivers determines if and how strategic fit is achieved across the supply
chain.
Facilities
Facilities are the actual physical locations in the supply chain network where
product is stored, assembled, or fabricated. The two major types of facilities are
production sites and storage sites. Decisions regarding the role, location,
capacity and flexibility of facilities have a significant impact on the supply chain's
performance.
Inventory
Inventory includes all raw materials, work in process, and finished goods within
a supply chain. Changing inventory policies can dramatically alter the supply
chain's efficiency and responsiveness.
For example, a clothing retailer can make itself more responsive by stocking
large amounts of inventory and satisfying customer demand from stock. A large
inventory, however, increases the retailer's cost, thereby making it less efficient.
Reducing inventory makes the retailer more efficient but hurts its
responsiveness.
Transportation
Transportation involves moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes,
each with its own performance characteristics. Transportation choices have a
large impact on supply chain responsiveness and efficiency.
For example, a mail-order catalog company can use a faster mode of
transportation such as FedEx to ship products, thus making its supply chain
more responsive, but also less efficient given the high costs associated with
using FedEx. Or the company can use slower but cheaper ground transportation
to ship the product, making the supply chain efficient but limiting its
responsiveness.
Information
Sourcing
Sourcing is the choice of who will perform a particular supply chain activity such
as production, storage, transportation, or the management of information. At
the strategic level, these decisions determine what functions a firm performs and
what functions the firm outsources. Sourcing decisions affect both the
responsiveness and efficiency of a supply chain.
Pricing
Pricing determines how much a firm will charge for goods and services that it
makes available in the supply chain. Pricing affects the behavior of the buyer of
the good or service, thus affecting supply chain performance.
For example, if a transportation company varies its charges based on the lead
time provided by the customers, it is very likely that customers who value
efficiency will order early and customers who value responsiveness will be willing
to wait and order just before they need a product transported. Early orders are
less likely if prices do not vary with lead time..
STRATEGY
The foundations for success in the marketplace are numerous, but a simple
model is based around the triangular linkage of the company, its customers and
its competitors the Three Cs. Figure illustrates the three-way relationship.