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Supply Chain Management A LOGISTICS PERSPECTIVE

9e

JOHN J. COYLE The Pennsylvania State University

•

C. JOHN LANGLEY, JR. The Pennsylvania State University

•

ROBERT A. NOVACK The Pennsylvania State University

•

BRIAN J. GIBSON Auburn University

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Supply Chain Management: A Logistics Perspective, Ninth Edition John J. Coyle, C. John Langley Jr., Robert A. Novack, Brian J. Gibson

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A very special note of thanks and appreciation is due to our families. John Coyle would like to thank his wife Barbara, their children John and Susan, and their grandchildren Lauren, Matthew, Elizabeth Kate, Emily, Ben, Cathryn, and Zachary. John Langley

would like to thank his wife Anne, their children Sarah and Mercer, and their grandchildren Bryson and Molly. Bob Novack would like to thank his wife Judith and their children Tom, Elizabeth, and Alex. Brian Gibson would like to thank his

wife Marcia and son Andy.

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Brief Contents

Preface xxii About the Authors xxvi

Part I Chapter 1 Supply Chain Management: An Overview 3 Chapter 2 Role of Logistics in Supply Chains 33 Chapter 3 Global Dimensions of Supply Chains 75

Part II Chapter 4 Supply Chain Relationships 107 Chapter 5 Supply Chain Performance Measurement

and Financial Analysis 137 Chapter 6 Supply Chain Technology—Managing

Information Flows 179

Part III Chapter 7 Demand Management 215 Chapter 8 Order Management and Customer

Service 255 Chapter 9 Managing Inventory in the Supply Chain 311 Chapter 10 Transportation—Managing the Flow of the

Supply Chain 395 Chapter 11 Distribution—Managing Fulfillment

Operations 459

Part IV Chapter 12 Supply Chain Network Analysis and

Design 509 Chapter 13 Sourcing Materials and Services 549 Chapter 14 Operations—Producing Goods and

Services 583 Chapter 15 Supply Chain Sustainability 619

Part V Chapter 16 Strategic Challenges and Change for Supply

Chains 645

Subject Index 673

Name Index 687 v

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Contents

Preface xxii About the Authors xxvi

Part I Chapter 1 Supply Chain Management: An Overview 3

SUPPLY CHAIN PROFILE: SAB Distribution: Another Sequel 4

Introduction 5 What Forces Are Driving the Rate of Change 7

Globalization 7 Technology 10 Organizational Consolidation and Power Shifts 10 The Empowered Consumer 11 Government Policy and Regulation 12

ON THE LINE: Malt-O-Meal Company: Going National 14

The Supply Chain Concept 15 Development of the Concept 15

Major Supply Chain Issues 24 Supply Chain Networks 24 Complexity 24 Inventory Deployment 25 Information 25 Cost and Value 25

ON THE LINE: Auto Parts Distributor LKQ Discovers the Key to Effective Carrier Management 26

Organizational Relationships 26 Performance Measurement 27 Technology 27 Transportation Management 27

SUPPLY CHAIN TECHNOLOGY: Trends in Retail Distribution 28 Supply Chain Security 28

Summary 29 Study Questions 29 Notes 30 Case 1.1: Central Transport, Inc. 31

Chapter 2 Role of Logistics in Supply Chains 33 SUPPLY CHAIN PROFILE: Jordano Foods: The Sequel 34

Introduction 35 What Is Logistics? 37

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Value-Added Roles of Logistics 39 Form Utility 39 Place Utility 40 Time Utility 40 Quantity Utility 40 Possession Utility 40

ON THE LINE: Building India: Transforming the Nation’s Logistics Infrastructure 41

Logistics Activities 41 Transportation 42 Storage 42 Packaging 43 Materials Handling 43 Inventory Control 43 Order Fulfillment 44 Forecasting 44 Production Planning 44 Procurement 44 Customer Service 45 Facility Location 45 Other Activities 45

Logistics in the Economy: A Macro Perspective 45 ON THE LINE: Ce De Candy’s Sweet Transformation 46

Logistics in the Firm: The Micro Dimension 49 Logistics Interfaces with Manufacturing or Operations 49 Logistics Interfaces with Marketing 50 Logistics Interfaces with Other Areas 52

Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics 53 Competitive Relationships 53 Product Relationships 56 Spatial Relationships 59

Techniques of Logistics System Analysis 60 Short-Run/Static Analysis 60 Long-Run/Dynamic Analysis 61

Approaches to Analyzing Logistics Systems 63 Materials Management versus Physical Distribution 63 Cost Centers 64 Nodes Versus Links 65 Logistics Channels 65

SUPPLY CHAIN TECHNOLOGY: Mission Foods’ Wireless Evolution 68 Logistics and Systems Analysis 68

viii Contents

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Summary 70 Study Questions 70 Notes 71 Case 2.1: Senco Electronics Company: A Sequel 72 Case 2.2: Pete’s 74

Chapter 3 Global Dimensions of Supply Chains 75 SUPPLY CHAIN PROFILE: Red Fish–Blue Fish, LLP: A Sequel 76

Introduction 77 Supply Chains in a Global Economy 79 ON THE LINE: More Deliveries, Same Cost 80

The Scope and Magnitude of Global Business 81 Global Markets and Strategy 83 ON THE LINE: Serving Emerging Markets: A Survival Guide 84 ON THE LINE: Asia’s Widening Middle 86

Supply Chain Security: A Balancing Act 87 SUPPLY CHAIN TECHNOLOGY: Tracing through the Supply Chain 88

Ports 89 North American Free Trade Agreement 90 Maquiladora Operations 91 Asian Emergence 92 New Directions 93 Global Transportation Options 93

Ocean 93 Air 95 Motor 96 Rail 96

Global Intermediaries 96 Foreign Freight Forwarders 96 Airfreight Forwarders 97 Non-Vessel-Operating Common Carriers 97 Export Management Companies 97 Export Trading Companies 98 Customs House Brokers 98

Storage Facilities and Packaging 99 Storage Facilities 99 Packaging 99

Summary 100 Study Questions 100 Notes 101 Case 3.1: Red Fish–Blue Fish, LLP: Another Sequel 103

Contents ix

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Part II Chapter 4 Supply Chain Relationships 107

SUPPLY CHAIN PROFILE: Client Intimacy: A New Mission for Supply Chain Managers? 108

Introduction 108 Logistics Relationships 109

Types of Relationships 109 Intensity of Involvement 109 Model for Developing and Implementing Successful

Supply Chain Relationships 111 Need for Collaborative Relationships 115

Third-Party Logistics—Industry Overview 117 ON THE LINE: Collaborative Distribution Can Show You the Path to Lower Supply Chain Costs and Carbon Emissions 117 Definition of Third-Party Logistics 119 Types of 3PL Providers 119 3PL Market Size and Scope 121

Third-Party Logistics Research Study—Industry Details 123 Profile of Logistics Outsourcing Activities 123 Strategic Role of Information Technology 124

SUPPLY CHAIN TECHNOLOGY: Technology a Key Driver of 3PL Competitiveness 125

Management and Relationship Issues 127 Customer Value Framework 129 A Strategic View of Logistics and the Role of 3PLs 130

Summary 132 Study Questions 132 Notes 133 Case 4.1: CoLinx, LLC 134 Case 4.2: Ocean Spray Cranberries, Inc. 136

Chapter 5 Supply Chain Performance Measurement and Financial Analysis 137 SUPPLY CHAIN PROFILE: CLGN Book Distributors.com 138

Introduction 140 Dimensions of Supply Chain Performance Metrics 140 Developing Supply Chain Performance Metrics 145 Performance Categories 146 The Supply Chain–Finance Connection 151 ON THE LINE: Profit-Focused Supply Chain Planning 152

The Revenue–Cost Savings Connection 153 The Supply Chain Financial Impact 154

x Contents

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Financial Statements 158 ON THE LINE: Leased Assets to Go Back on Your Books? 159

Financial Impact of Supply Chain Decisions 160 Supply Chain Service Financial Implications 164 Summary 172 Study Questions 172 Notes 174 Case 5.1: CPDW 175 Case 5.2: Paper2Go.com 176

Appendix 5A Financial Terms 177

Chapter 6 Supply Chain Technology—Managing Information Flows 179 SUPPLY CHAIN PROFILE: The Precision Imperative 180

Introduction 181 The Role of Information in the Supply Chain 182

Information Requirements 183 Information Technology Capabilities 184 Information Technology Challenges 185

A Framework for Managing Supply Chain Information 186 Foundation Elements 186 Key Requirements 188 Differentiating Capabilities 189

SCM Software 190 Planning 191 Execution 192 Event Management 193 Business Intelligence 193 Related Tools 194 Enterprise Resource Planning 195

Supply Chain Technology Implementation 195 Needs Assessment 196 Software Selection 196

ON THE LINE: SaaS Capabilities Boost Transportation Software Sales 199 Technical Issues 199 Asking the Right Questions 201

Supply Chain Technology Innovations 202 Radio-Frequency Identification (RFID) 202 Cloud Computing 203 Mobile Computing 204

SUPPLY CHAIN TECHNOLOGY: Smartphones and SCM 204 3PLs as Technology Providers 205

Contents xi

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Summary 207 Study Questions 207 Notes 208 Case 6.1: Bazinga Licensing Ltd. 210 Case 6.2: Catnap Pet Products 211

Part III Chapter 7 Demand Management 215

SUPPLY CHAIN PROFILE: LuAnn’s Chocolates 216

Introduction 217 Demand Management 217 Balancing Supply and Demand 220 Traditional Forecasting 221

Factors Affecting Demand 221 Simple Moving Average 222 Weighted Moving Average 223 Exponential Smoothing 225 Adjusting Exponential Smoothing for Trend 225 Seasonal Influences on Forecasts 228

Forecast Errors 229 SUPPLY CHAIN TECHNOLOGY: Delivering APS Value in Six Months 231

Sales and Operations Planning 234 ON THE LINE: BASF Credits S&OP as a Cornerstone of Success 236

Collaborative Planning, Forecasting, and Replenishment 237

Fulfillment Models 240 Channels of Distribution 240 Direct-to-Customer (DTC) Fulfillment 242

Summary 249 Study Questions 249 Notes 250 Case 7.1: Tires for You, Inc. 251 Case 7.2: ChipSupreme 253

Chapter 8 Order Management and Customer Service 255 SUPPLY CHAIN PROFILE: Tom’s Food Wholesalers 256

Introduction 256 Influencing the Order—Customer Relationship

Management 258 Step 1: Segment the Customer Base by Profitability 258 Step 2: Identify the Product/Service Package for Each

Customer Segment 259

xii Contents

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Step 3: Develop and Execute the Best Processes 259 Step 4: Measure Performance and Continuously

Improve 260 Activity-Based Costing and Customer Profitability 261

Executing the Order—Order Management and Order Fulfillment 267 Order-to-Cash (OTC) and Replenishment Cycles 268 Length and Variability of the Order-to-Cash Cycle 272

E-Commerce Order Fulfillment Strategies 273 SUPPLY CHAIN TECHNOLOGY: Get Ready to go Mobile 274

Customer Service 275 The Logistics/Marketing Interface 275 Defining Customer Service 277 Elements of Customer Service 277 Performance Measures for Customer Service 281

Expected Cost of Stockouts 283 Back Orders 284 Lost Sales 284 Lost Customer 285 Determining the Expected Cost of Stockouts 285

Order Management Influences on Customer Service 286 Product Availability 286

ON THE LINE: Plus-Sized Customer Service 288 Financial Impact 290 Order Cycle Time 292 Logistics Operations Responsiveness 295 Logistics System Information 298 Postsale Logistics Support 300

SUPPLY CHAIN TECHNOLOGY: Connecting with Big Customers 302

Service Recovery 303 Summary 305 Study Questions 305 Notes 306 Case 8.1: Telco Corporation 307 Case 8.2: The Bullpen 309

Chapter 9 Managing Inventory in the Supply Chain 311 SUPPLY CHAIN PROFILE: Micros and More 312

Introduction 313 Inventory in the U.S. Economy 314 Inventory in the Firm: Rationale for Inventory 315

Batching Economies or Cycle Stocks 317 Uncertainty and Safety Stocks 318 Time/In-Transit and Work-in-Process Stocks 318

Contents xiii

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SUPPLY CHAIN TECHNOLOGY: Logistics Provider Prescribes Inventory Management 319 Seasonal Stocks 321 Anticipatory Stocks 322 Summary of Inventory Accumulation 322 The Importance of Inventory in Other Functional

Areas 322 Inventory Costs 323

Inventory Carrying Cost 323 Ordering and Setup Cost 328 Carrying Cost Versus Ordering Cost 330 Expected Stockout Cost 331 In-Transit Inventory Carrying Cost 335

Fundamental Approaches to Managing Inventory 336 Key Differences Among Approaches to Managing

Inventory 337 Principal Approaches and Techniques for Inventory

Management 339 Fixed Order Quantity Approach (Condition of Certainty)

339 Fixed Order Quantity Approach (Condition of

Uncertainty) 348 Fixed Order Interval Approach 356 Summary and Evaluation of EOQ Approaches to Inventory

Management 357 Additional Approaches to Inventory Management 357

Just-in-Time Approach 357 ON THE LINE: Inventory Optimization: Show Me the Money 358 Materials Requirements Planning 361 Distribution Requirements Planning 366 Vendor-Managed Inventory 369

Classifying Inventory 370 ABC Analysis 371 Quadrant Model 373 Inventory at Multiple Locations—The Square-Root

Rule 374 Summary 377 Study Questions 378 Notes 378 Case 9.1: MAQ Corporation 380 Case 9.2: Baseball Card Emporium 381

Appendix 9A Special Applications of the EOQ Approach 382 Adjusting the Simple EOQ Model for Modal Choice

Decisions—The Cost of Inventory in Transit 382 Adjusting the Simple EOQ Model for Volume

Transportation Rates 385

xiv Contents

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Adjusting the Simple EOQ Model for Private Carriage 388 Adjusting the Simple EOQ Model for the Establishment and

Application of In-Excess Rates 389 Summary 393

Chapter 10 Transportation—Managing the Flow of the Supply Chain 395 SUPPLY CHAIN PROFILE: Economic Recovery and Transportation Demand 396

Introduction 397 The Role of Transportation in Supply Chain Management

(SCM) 397 Challenges to Carrying out This Role 398 Modes of Transportation 401

Motor Carriers 401 Railroads 404 Air Carriers 405 Water Carriers 407

ON THE LINE: Piracy: A Modern Day Problem 409 Pipelines 409 Intermodal Transportation 411

Transportation Planning and Strategy 413 Functional Control of Transportation 414 Terms of Sale 415 Decision to Outsource Transportation 416 Modal Selection 418 Carrier Selection 423 Rate Negotiations 424

Transportation Execution and Control 424 Shipment Preparation 425 Freight Documentation 426 Maintain In-Transit Visibility 428 Monitor Service Quality 429 Transportation Metrics 429

Transportation Technology 432 SUPPLY CHAIN SUSTAINABILITY: Reducing Empty Miles 433

Transportation Management Systems 433 SUPPLY CHAIN TECHNOLOGY: TMS Shines Light on Inbound Supply Chain 435

Summary 438 Study Questions 438 Notes 439 Case 10.1: Supreme Sound Explosion 442 Case 10.2: Bob’s Custom BBQs 444

Contents xv

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Appendix 10A Federal Regulation of the Transportation Industry 446 Economic Regulation 446 Safety Regulation 449 Summary 451 Notes 451

Appendix 10B Basis of Transportation Rates 452 Cost of Service 452 Value of Service 453 Distance 454 Weight of Shipment 455 Commodity Characteristics 455 Level of Service 456 Summary 457 Notes 457

Chapter 11 Distribution—Managing Fulfillment Operations 459 SUPPLY CHAIN PROFILE: Kroger: Grocery Giant Changes the Game 460

Introduction 461 The Role of Distribution Operations in SCM 462

Distribution Facility Functionality 462 Distribution Tradeoffs 464 Distribution Challenges 467

Distribution Planning and Strategy 467 Capability Requirements 468 Network Design Issues 470 Facility Considerations 474

SUPPLY CHAIN TECHNOLOGY: Walmart’s Environmentally Friendly DCs 475

Distribution Execution 478 Product-Handling Functions 478

ON THE LINE: Goods-to-Person Puts a Different Spin on Order Picking 480 Support Functions 483

Distribution Metrics 484 Customer-Facing Measures 484 Internal Measures 485

Distribution Technology 486 Warehouse Management Systems 487

SUPPLY CHAIN TECHNOLOGY: Moving Coca-Cola by Voice 488 Automatic Identification Tools 490

Summary 492 Study Questions 493 Notes 493

xvi Contents

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Case 11.1: BathKing Industries 495 Case 11.2: Tele-Distributors Incorporated 497 Appendix Materials Handling 499

Appendix 11A Materials Handling 499 Objectives and Principles of Materials Handling 499 Materials-Handling Equipment 500 Summary 506 Notes 506

Part IV Chapter 12 Supply Chain Network Analysis and Design 509

SUPPLY CHAIN PROFILE: Volkswagen Opens U.S. Production Facility in Chattanooga, Tennessee 510

Introduction 511 The Need for Long-Range Planning 512

The Strategic Importance of Logistics/Supply Chain Network Design 512

Changing Customer Service Requirements 513 Shifting Locations of Customer and/or Supply

Markets 513 Change in Corporate Ownership 514 Cost Pressures 514 Competitive Capabilities 515 Corporate Organizational Change 515

Logistics/Supply Chain Network Design 515 Step 1: Define the Logistics/Supply Chain Network Design

Process 516 Step 2: Perform a Logistics/Supply Chain Audit 516 Step 3: Examine the Logistics/Supply Chain Network

Alternatives 517 Step 4: Conduct a Facility Location Analysis 518 Step 5: Make Decisions Regarding Network and Facility

Location 518 Step 6: Develop an Implementation Plan 519

Major Locational Determinants 519 Key Factors for Consideration 520

ON THE LINE: Global Sourcing and Manufacturing Compel Companies to Rethink U.S. Distribution Networks 522 Current Trends Governing Site Selection 524

Modeling Approaches 524 Optimization Models 525 Simulation Models 528 Heuristic Models 529 Potential Supply Chain Modeling Pitfalls to Avoid 530

Contents xvii

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SUPPLY CHAIN TECHNOLOGY: Supply Chain Network Design in an Era of Dynamic Costs 531

Example of a Heuristic Modeling Approach: The Grid Technique 532

Transportation Pragmatics 539 Summary 543 Study Questions 543 Notes 545 Case 12.1: Johnson & Johnson 546 Case 12.2: Fireside Tire Company 547

Chapter 13 Sourcing Materials and Services 549 SUPPLY CHAIN PROFILE: Achieving Greater Cost Savings for Global Manufacturers Through Merger of Supply Chain Service Providers 550

Introduction 550 Types and Importance of Items and Service Purchased 552 Strategic Sourcing Methodology 555

Step 1: Project Planning and Kickoff 556 Step 2: Profile Spend 556 Step 3: Assess Supply Market 556 Step 4: Develop Sourcing Strategy 557 Step 5: Execute Sourcing Strategy 558 Step 6: Transition and Integrate 559 Step 7: Measure and Improve Performance 560

Managing Sourcing and Procurement Processes 560 Supplier Selection 561 ON THE LINE: IBM Achieves Success via Improved Purchasing and Strategic Sourcing 563

Supplier/Vendor Evaluation and Relationships 564 Certifications and Registrations 564

The Special Case of Procurement Price 565 Total Landed Cost (TLC) 569 e-Sourcing and e-Procurement 570

Which of These Solutions Should Be Considered 571 Advantages 572 Disadvantages 573

SUPPLY CHAIN TECHNOLOGY: Transportation Sourcing – Innovative Approaches to Bid Optimization 574

e-Commerce Models 574 Summary 576 Study Questions 576 Notes 577 Case 13.1: South Face 578 Case 13.2: Durable Vinyl Siding Corporation 580

xviii Contents

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Chapter 14 Operations—Producing Goods and Services 583 SUPPLY CHAIN PROFILE: Ford: Putting on the Top Hat 584

Introduction 585 The Role of Production Operations in Supply Chain

Management (SCM) 586 Production Process Functionality 586 Production Tradeoffs 587 Production Challenges 589

Operations Strategy and Planning 590 Production Strategies 590

ON THE LINE: Whirlpool’s On-Shore Production Decision 595 Production Planning 596

Production Execution Decisions 599 Assembly Processes 599

ON THE LINE: Creating Your Own Chocolate Bar 600 Production Process Layout 602 Packaging 604

SUPPLY CHAIN SUSTAINABILITY: Dell’s Three C’s Packaging Strategy 606

Production Metrics 607 Total Cost 607 Total Cycle Time 607 Delivery Performance 608 Quality 608 Safety 608

Production Technology 608 Summary 611 Study Questions 612 Notes 612 Case 14.1: Elvis Golf Ltd. 615 Case 14.2: Team HDX 617

Chapter 15 Supply Chain Sustainability 619 SUPPLY CHAIN PROFILE: Trash to Treasure Foundation: A Sequel 620

Introduction 621 Supply Chain Sustainability Framework 622 Reverse Logistics Systems 624 Importance and Magnitude of Reverse Flows 625 ON THE LINE: Staples Shows Business Value of Environmental Initiatives 627

Reverse Logistics Systems versus Closed Loops 628 Customer Returns 630 Environmental Challenges 631

ON THE LINE: Triple Bottom Line 631 Economic Value 632

Contents xix

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Achieving a Value Stream for Reverse Flows 632 Managing Reverse Flows in a Supply Chain 634 SUPPLY CHAIN TECHNOLOGY: Improving Reverse Flows with Technology 635

Summary 637 Study Questions 637 Notes 638 Case 15.1: Fitness Retreads, LLP: A Sequel 640

Part V Chapter 16 Strategic Challenges and Change for Supply Chains 645

SUPPLY CHAIN PROFILE: From Bean to Cup: How Starbucks Transformed Its Supply Chain 646

Introduction 648 Principles of Supply Chain Management 648

Principle 1: Segment Customers Based on Service Needs 648

Principle 2: Customize the Logistics Network 648 Principle 3: Listen to Signals of Market Demand and Plan

Accordingly 648 Principle 4: Differentiate Products Closer to the

Customer 649 Principle 5: Source Strategically 649 Principle 6: Develop a Supply Chainwide Technology

Strategy 650 Principle 7: Adopt Channel-Spanning Performance

Measures 650 Focus of Supply Chain Management 650

Getting to Growth: Think Beyond Cost 651 Develop World-Class Collaboration Skills 653 Grow Your Leadership Capabilities 653

ON THE LINE: Best Buy’s Supply Chain Transformation 654

Supply Chain Strategies 655 Differentiation Strategies 655

SUPPLY CHAIN TECHNOLOGY: Technology a Key Requirement for Supply Chain Success 656 Financial Strategies 658 Technology-Based Strategies 660 Relationship-Based Strategies 661 Global Strategies 664

xx Contents

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Supply Chain Transformation 666 Motorola 666

Summary 668 Study Questions 668 Notes 669 Case 16.1: Tommy Hilfiger and Li & Fung 670 Case 16.2: Peerless Products, Inc. 671

Subject Index 673 Name Index 687

Contents xxi

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Preface

Supply chain management and the closely related concept of logistics are necessary cornerstones of competitive strategy, increased market share, and shareholder value for most organizations. Now more than ever, students who are currently planning to pursue a career in business will benefit from a clear understanding of this field. Practicing man- agers will also find this text a beneficial and helpful resource because of its timeliness and the depth and breadth of the topics covered.

With this edition we have tried to cover, as comprehensively as possible, the changes in the way business is being done. In fact, the title of this edition—Supply Chain Management: A Logistics Perspective—reflects the ever-changing nature of this rapidly evolving field. The author team strives to offer you the most current, comprehensive thinking on supply chain management, combined with an authenticated, real-world logistics perspective. In keeping with the dramatic changes that have taken place in the global business environment and in the field of supply chain management, the organiza- tion of this edition again provides a logical framework for achieving a meaningful under- standing of the concepts and principles of supply chain management. Additionally, it is important to understand that a major feature of this text is that not only is the discipline of supply chain management viewed from a logistics perspective but also that logistics is positioned as a set of key processes and functions that are viewed as essential to strategic and operational success with the broader supply chain concept.

Part I provides a framework for your understanding of supply chain management and some of its important related components. Chapter 1 is devoted to a comprehensive introduction to supply chain management. Chapter 2 presents an overview of all of the important dimensions of logistics and explains the relationship of logistics to supply chain management. Finally, Chapter 3 explores global supply chains and their relevance to global trade strategy and success.

Strategic factors are the focus of Part II. Chapter 4 leads off with a discussion of supply chain relationships and the use of third-party logistics services. Chapter 5, a chapter devoted to performance measurement and financial analysis, will help you understand how to use both performance and financial metrics to gauge efficiency and effectiveness. And finally, Chapter 6 examines the role and importance of information systems in the effective management of supply chains.

Part III addresses the key process areas within supply chain fulfillment. Chapter 7 dis- cusses demand management, while Chapter 8 addresses the very closely connected topics of order management and customer service. Chapter 9 focuses on one of the most crucial assets on many companies’ balance sheets—inventory management—revealing the costs of inventory and the most effective means of managing inventory. Transportation and distribution can be viewed as the glue that holds supply chains together, and effective strategies and technologies in these areas are the subjects of Chapter 10 and Chapter 11.

With Part IV, you’ll be drawn into the world of supply chain planning, sourcing, and operations. Chapter 12 will give you the tools needed to analyze, design, and refine a supply chain network, while Chapter 13 focuses attention on key topics and issues relating to sourcing, procurement, supplier and vendor relationships, and the latest elec- tronic technologies to be used in these areas. Chapter 14 on operations and Chapter 15 on reverse flows present entirely new material created for this edition.

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The final chapter, in Part V, explores the major macro trends that will impact the future of logistics and supply chain management, as well as strategies for staying competitive in the future. Among the major types of strategies discussed are differentia- tion, financing, technology, relationships, and globalization. Last, some thoughts are included on the need for organizations of all types to transform and change their supply chains as conditions would suggest.

Features • Learning Objectives at the beginning of each chapter provide students with an overall perspective of chapter material and also serve to establish a baseline for a working knowledge of the topics that follow.

• Supply Chain Profiles are the opening vignettes at the beginning of each chapter that introduce students to the chapter’s topics through familiar, real-world companies, people, and events.

• On the Line features are applied, concrete examples that provide students with hands-on managerial experience of the chapter topics.

• Supply Chain Sustainability boxes have been added to highlight the critical role of supply chain management in conserving resources, reducing waste, and mitigating the environmental impact of fulfillment operations.

• Supply Chain Technology boxes help students relate technological developments to supply chain management concepts and logistics practices.

• End-of-chapter summaries and study questions reinforce material presented in each chapter.

• Short cases at the end of each chapter build upon what students have learned. Questions that follow the cases sharpen critical thinking skills.

Ancillaries Instructor’s Resource CD (ISBN 1-111-82299-9) contains three essential resources:

• The Instructor’s Manual includes chapter outlines, answers to end-of-chapter study questions, commentary on end-of-chapter short cases and end-of-text comprehensive cases, and teaching tips.

• A convenient Test Bank offers a variety of true/false, multiple choice, and essay questions for each chapter.

• PowerPoint slides cover the main chapter topics and contain graphics from the main text.

Student Resources A rich library of Student’s Resource are available on the companion Web site, such as:

• Suggested reading for Part 1 through Part 5

• Directory of Trade and Professional Organizations in Supply Chain Management

• Additional Cases

• A Guide of Careers in Logistics

• Glossary

• Games and more

Preface xxiii

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Acknowledgments The authors are indebted to many individuals at our respective academic institutions

as well as other individuals with whom we have had contact in a variety of venues. Our university students and our executive program students have provided an important sound- ing board for the many concepts, techniques, metrics, and strategies presented in the book. Our faculty and corporate colleagues have provided invaluable insights and appropriate criticism of our ideas. Some individuals deserve special consideration: Dr. David A. Lindsley (University of Toledo), Mark J. Basile (DuPont Corporation), Dr. Joe B. Hanna (Auburn University), Dr. Chris Norek (Chain Connectors), Ms. Jessica Volpe (Penn State University), Mr. Tim Gross (Penn State University), Mr. Sammie Markham (Penn State University), Ms. Devin Maguire (Penn State University), and especially Ms. Jean Beierlein and Ms. Tracie Shannon (Penn State University). Special thanks and appreciation to Dr. Kusumal Ruamsook, Visiting Research Associate for the Center for Supply Chain Research at The Pennsylvania State University, for her invaluable support.

The ninth edition of this text will be the first one that does not list Dr. Edward Bardi as one of the co-authors. Ed was one of the two, original co-authors of the text when it was published in 1976. It is unusual for an educational book to have a life cycle that exceeds 35 years and has gone through many editions. Ed Bardi played an important role in the success of the text by helping to keep it innovative, timely and vital. Not one to postpone or procrastinate, Ed would usually finish his chapters first, and thereby provide incentive and pressure for his fellow co-authors to be more timely in meeting deadlines. He would also volunteer to do some of the more tedious and less glamorous (but important) sections of the text, for example, subject index, author index, glossary, etc. We have missed Ed’s participation and contributions this time and hope that we have lived up to his expectations and standards. We want to express our appreciation and thanks and extend a wish for good health and joy to Ed and his wife, Carol, and their family.

We extend our appreciation to the members of our Cengage Learning team, who have been very professional and helpful with this textbook: Charles McCormick, Jr., Senior Acquisitions Editor; Daniel Noguera, Developmental Editor; Jennifer Ziegler, Content Project Manager; Rathi Thirumalai, Senior Project Manager; Gunjan Chandola, Senior Project Manager; Stacey Shirley, Art Director; Adam Marsh, Marketing Manager; and Elaine Kosta, Rights and Acquisitions Specialist.

Special thanks should be given to the following Professors who served as reviewers and who provided meaningful input for our ninth edition:

Jeffrey L. Bennett Northwood University

John A. Caltagirone Loyola University Chicago

Adam Conrad Pennsylvania State University

Eddie Davila Arizona State University

Kathryn Dobie North Carolina A&T State University

Matt Drake Duquesne University

S. Altan Erdem Edison Community College

Christopher C. Esgar Penn State University, Mont Alto Campus

Paul L. Ewell Virginia Wesleyan College

Ephrem Eyob Virginia State University

Martin Farris University of North Texas

xxiv Preface

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Lou Firenze Northwood University

Michael J. Gravier Bryant University

Joh J. Gregor Washington & Jefferson College

Joe Hanna Auburn University

Ahmad Hassan Morehead State University

Balaji Janamanchi Texas A&M International University

Jonatan Jelen Baruch College

Walter Kendall Tarleton State University

Marco Lam York College of Pennsylvania

Ian M. Langella Atkin Shippensburg University

Tenpao Lee Niagara University

Cheng Li California State University, Los Angeles

Walter Martin Wake Tech Community College

John R. Mawhinney Duquesne University

Ron Mesia Florida International University

Saeed Mohaghegh Assumption College

Martin Nunlee Delaware State University

Anthony M. Pagano University of Illinois at Chicago

Ann Rensel Niagara University

Paul Skilton Washington State University

Michael J. Stevenson Hagerstown Community College

Robert S. Trebatoski Penn State University

David Vellenga Maine Maritime Academy

Simon Veronneau Quinnipiac University

Haibo Wang Texas A&M International University

William Waxman UHCL

Jon Whitford Rio Hondo College

Linda Wright Longwood University

Rick Yokeley Forsyth Technical Community College

Preface xxv

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About the Authors

John J. Coyle is currently director of corporate relations for the Center for Supply Chain Research and professor emeritus of logistics and supply chain management in the Smeal College of Business at Penn State University. He holds a BS and MS from Penn State and earned his doctorate from Indiana University in Bloomington, Indiana, where he was a U.S. Steel Fellow. He joined the Penn State faculty in 1961 and attained the rank of full professor in 1967. In addition to his teaching responsibilities, he has served in a number of administrative positions, including department head, assistant dean, senior associate dean, special assistant for strategic planning to the university pres- ident, and executive director of the Center for Supply Chain Research. He also served as Penn State’s faculty representative to the NCAA for 30 years and to the Big Ten for 10 years. Dr. Coyle was the editor of the Journal of Business Logistics from 1990 to 1996. He has authored or coauthored 20 books or monographs and numerous articles in pro- fessional journals. He has received 14 awards at Penn State for teaching excellence and advising. In addition, he received the Council of Logistics Management’s Distinguished Service Award in 1991; the Philadelphia Traffic Club’s Person of the Year Award in 2003; and the Eccles Medal from the International Society of Logistics for his contribu- tions to the Department of Defense and the Lion’s Paw Medal from Penn State for Distinguished Service, both in 2004. Dr. Coyle currently serves on the boards of three logistics and supply chain service companies and on the Advisory Board of the NLDC and continues to be active in teaching in the Executive Education Programs at Penn State.

C. John Langley Jr. is clinical professor of supply chain management in the Smeal College of Business at Penn State University and also serves as director of development in the Center for Supply Chain Research. Previously, he served as the John H. Dove dis- tinguished professor of supply chain management at the University of Tennessee and the SCL professor of supply chain management at the Georgia Institute of Technology. Dr. Langley is a former president of the Council of Supply Chain Management Professionals and a recipient of the Council’s Distinguished Service Award. He has been recognized by the American Society of Transportation and Logistics as an honorary distinguished logistics professional for his long-term contributions and continuing commitment to the transportation logistics community, and he is a recipient of the Outstanding Alumnus Award from Penn State’s Business Logistics Program. Dr. Langley received his BS in mathematics, MBA in finance, and Ph.D. in business logistics degrees, all from Penn State University. Dr. Langley has coauthored several books, including Sup- ply Chain Management: A Logistics Perspective. Also, he is lead author of the annual Third Party Logistics Study and recently completed the 2012 16th Annual 3PL Study. His research publications have appeared in journals such as the Journal of Business Lo- gistics, International Journal of Physical Distribution and Logistics Management, Interna- tional Journal of Logistics Management, and Supply Chain Management Review. Dr. Langley serves on the Boards of Directors of UTi Worldwide, Inc., Forward Air Corpo- ration, and Averitt Express, Inc., in addition to several involvements on academic advi- sory boards to logistics organizations. He also is a member of the Program Faculty for the Kühne Logistics University in Hamburg, Germany, and of the Industrial and Profes- sional Advisory Council (IPAC) at Penn State University and currently serves as educa- tion advisor for NASSTRAC.

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Robert Novack is an associate professor of supply chain management in the Department of Supply Chain and Information Systems at Penn State University. From 1981 to 1984 he worked in operations management and planning for the Yellow Freight Corporation in Overland Park, Kansas, and from 1984 to 1986 he worked in planning and transportation at Drackett Company in Cincinnati, Ohio. Dr. Novack’s numerous articles have been published in such publications as the Journal of Business Logistics, Transportation Journal, and International Journal of Physical Distribution and Logistics Management. He also is a coauthor of Creating Logistics Value: Themes for the Future. Active in the Council of Supply Chain Management Professionals, he has served as over- all program chair for the annual conference, as a track chair, and as a session speaker as well as a member of numerous committees. Dr. Novack holds the CTL designation from AST&L and is a member of WERC. He earned a BS degree and an MBA in logistics from Penn State University and a Ph.D. in logistics from the University of Tennessee.

Brian J. Gibson holds the Wilson Family Professorship in supply chain management and is a program coordinator for the Department of Supply Chain and Information Systems Management at Auburn University. Previously, he served on the faculty of Georgia Southern University and as a logistics manager for two major retailers. He has received multiple awards for outstanding teaching, research, and outreach, most notably the Council of Supply Chain Management Professionals’ Innovative Teaching Award in 2009. Gibson’s research has been published in the Journal of Business Logistics, Supply Chain Management Review, International Journal of Logistics Management, International Journal of Physical Distribution and Logistics Management, and other leading publica- tions. He is coauthor of Transportation: A Supply Chain Perspective, author of the elec- tronic textbook Supply Chain Essentials, and lead author of the annual State of the Retail Supply Chain Report. Dr. Gibson currently serves on key committees for the Council of Supply Chain Management Professionals and the Retail Industry Leaders Association. Dr. Gibson earned a BS/BA from Central Michigan University, an MBA from Wayne State University, and a Ph.D. in logistics and transportation from the University of Tennessee.

About the Authors xxvii

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Part I

As indicated in the Preface, the authors decided to reorganize the sequence and groupings of the new and revised chapters in the ninth edition of the text to be consistent with the changes that have occurred in global supply chains. Consequently, Part I now includes a chapter on global supply chains as an important part of the discussion and expla- nation of the framework for the remaining chapters. This change was deemed necessary for the understanding of the overall complexity, mag- nitude and importance of global supply chain management for financial success in the 21st century. Today’s global economy presents chal- lenges and opportunities for all organizations: private or public; small, medium or large; products or services; and profit or non-profit. Globali- zation of the world economy is occurring with increasing speed that makes supply chain management ever more important to the competi- tive success and financial viability of most organizations.

Thomas Friedman, a staff writer for the New York Times, concludes in his bestselling book, “The World Is Flat,” that the world has been leveled by ten forces. One of these forces that he describes is supply chaining, which is essentially a collaborative approach among organiza- tions to coordinate or integrate the flow of goods, information and cash to deliver value for consumers or users and efficiency and effectiveness for organizations. The collaboration stretches vertically and horizontally on a global basis to become a cornerstone of competitive strategy and a necessary ingredient for competitive success. In keeping with that logic, Chapter 1 is focused upon the development and basic tenets of supply chain management. Chapter 2 discusses the logistics concept, which can be considered as the backbone of an effective supply chain. Chapter 3 presents the special challenges and issues of global supply chains and the relationships to the first two chapters. Overall, these chapters pro- vide a solid base for the remaining chapters in the text.

Specifically, Chapter 1 provides an introduction and overview of supply chains in the 21st century, and examines the major external or exogenous forces driving the rapid rate of change in global markets.

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The chapter explains the development and rationale for supply chains on both a domestic and global basis. It provides a thorough grounding in the fundamentals and dimensions of supply chains and discusses and demonstrates their importance to 21st century organizations. Finally, the chapter examines the major challenges and issues facing organizations and their global supply chains.

Chapter 2 is focused upon explaining the role and importance of logistics in the supply chain. As indicated above, logistics is considered by some as the backbone of the supply chain since it is so intimately involved with the flow of materials and products through the supply chain. A logistics- related process is frequently the first and last “touch” in the supply chain. Logistics provides the foundation for the material flows, forward and backward, in the supply chain. Chapter 2 also examines the relation- ship between logistics and the other functional areas in a business organization and the factors related to products and markets that impact logistics costs. A final consideration in the chapter is a review of techniques that can be used for examining logistics tradeoffs.

As indicated above, Chapter 3 adds the overall global dimension to the discussion and analysis of supply chain management. This chapter builds upon the discussions in Chapters 1 and 2 by addressing the spe- cial challenges related to global supply chains. It is not only large orga- nizations but also medium- and small-sized organizations that have been or will be impacted by globalization. Consequently, excellence in managing supply chains is a requisite for businesses and other organiza- tions to succeed. The real special challenge of globalization is that it adds time and distance to supply chains that translates usually to cost, complexity and more risk—challenges and opportunities.

2 Part I

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Chapter 1

SUPPLY CHAIN MANAGEMENT : AN OVERVIEW

Learning Objectives After reading this chapter, you should be able to do the following: • Explain the external change drivers in the global economy and their impact on

global supply chains.

• Discuss the development of supply chain management in leading organizations and understand its contributions to their financial viability.

• Appreciate the significance and role of supply chain management among private as well as public or nonprofit organizations.

• Understand the contributions of supply chain management to organizational efficiency and effectiveness for competing successfully in the global marketplace.

• Explain the benefits that can be achieved from implementing supply chain best practices.

• Understand the major challenges and issues facing organizations currently and in the future.

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Supply Chain Profile SAB Distribution: Another Sequel

When Sue Purdum, former president and CEO of SAB Distribution, “passed the baton” to her successor, Susan Weber, she had held her leadership role for over 15 years. She was credited not only with helping SAB to survive in a highly competitive economic environment but also with restoring its profitability through several strategic moves in the marketplace.

SAB was established as a classic, middle-of-the-supply-chain organization since it purchased con- sumer products from major manufacturers such as Kraft, Kimberly-Clark, Procter & Gamble (P&G), Unilever, and others and sold them to smaller distributors, wholesalers, and retailers. When Susan Weber assumed the role of CEO of SAB, she knew that its continued survival depended upon the company reexamining its role in the supply chains and making appropriate strategic and tactical changes.

COMPANY BACKGROUND SAB Distribution was established in 1949 in Harrisburg, Pennsylvania, by three World War II veterans who had served as supply officers in the U.S. Navy. They selected Harrisburg because of its central location in the mid-Atlantic region and because of its access by rail and highways. The founders of SAB—Skip, Al, and Bob—recognized the need for a consumer products whole- saling company to serve medium- and small-size retailers within a 200-mile radius of Harris- burg. Their vision proved to be correct, and the company grew and prospered in subsequent years. The company was incorporated in 1978, and a CEO, Pete Swan, was appointed in 1980 when the founders retired.

SAB’s market area expanded into nearby states, such as New York, New Jersey, and Delaware, and its product line was extended from nonperishable consumer items to include perishables and additional nonfood consumer products. Ms. Purdum took over from Pete in 1990 when the company was at a major crossroads that could have led to the sale of the company. Ms. Purdum’s career at SAB was marked by a series of competitive challenges that she navi- gated successfully. Susan Weber assumed the CEO role in 2005 with the full knowledge that significant change was necessary if SAB was to survive as a profitable organization. Essentially, SAB needed a transformation in the scope of its activities.

CURRENT SITUATION SAB was faced with a number of challenges to its future existence. First and foremost, its cus- tomers had to compete against large retailers like Walmart that could buy direct from the same consumer product manufacturers as SAB, that is, with no middleman. Walmart’s buying advan- tage had to be offset in some way to keep SAB’s customers competitive. In addition, globalization was affecting SAB’s business because of an increase in imported products for the more diverse population of the United States and the ongoing search for lower-priced alternatives. The net effect was a much more complex and competitive business environment.

When Sue Purdum assumed the role of CEO in 1990, she analyzed the competitive environment and understood the need to change SAB’s business practices. She focused initially upon effi- ciency in warehouse operations to lower the cost of doing business. She improved order fulfill- ment so that customers received their orders faster and with fewer mistakes, which lowered the customers’ cost of doing business by reducing their inventory requirements. She also developed partnerships with a core group of motor carriers to give them more volume, which led to lower rates and better service. Finally, she invested in information technology since she recognized that

4 Chapter 1

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Introduction The first decade of the twenty-first century was a period of rapid change for most

organizations, especially businesses. That rate of change has not slowed down and is actually increasing in the second decade of the twenty-first century. The forces of change require organizations to be much more nimble and responsive; that is, organizations need to be able to transform themselves quickly to survive in the intensely competitive, global environment. The SAB case is a good example of this survival mode that forces companies to transform. SAB would have been driven out of business in the 1990s if it had not changed, and it now faces an even more daunting challenge, which will necessi- tate still bigger changes.

higher-quality and more timely information would improve SAB’s forecasting, with consequent reductions in inventory costs and improved order fulfillment.

Initially, Susan Weber continued to improve warehouse efficiency, order fulfillment and carrier collaboration, but she knew that she had to transform the company by attracting larger retailers as customers. Their current customers, small- to medium-sized retailers, were losing market share to the larger retailers which, obviously, negatively impacted SAB’s profitability.

Susan Weber realized that the large retailers outsourced part of their operations to third-party logistics companies that provided them with services such as warehousing, order fulfillment, transportation, and so forth more efficiently or more effectively than the large retailers could handle those processes themselves. Given SAB’s proficiency in these areas, she believed that there were opportunities for SAB to help compress the logistics operations of existing and poten- tial customers by eliminating duplicative echelons in their supply chains. For example, between the producer’s plant and the retail store, there were often three or more distribution locations where products were stored and handled. These circumstances became the focus for Susan Weber’s strategy to change and grow SAB.

Some SAB executives left the company through early retirement or by changing companies. The remaining managers not only recognized the logic of Susan Weber’s assessment of their compet- itive market but also the opportunities associated with the changes that she outlined. Now in the fifth year of her CEO role, Susan Weber can look back and see some successful changes that have been initiated. SAB has attracted five large, regional retail chains in the Northeast and is developing a distribution park for warehousing, a transportation hub, and a call center near Scranton, Pennsylvania. The company will have access to several interstate highways and a major railroad for intermodal service.

The new distribution park will allow SAB to expand their value-added services that Susan Weber initiated when she became CEO. SAB is now providing third-party services to some of their cus- tomers (warehousing and inventory management, order fulfillment and delivery, and special packaging). Their initial venture into this area has been reasonably successful, and they expect to attract more regional chains such as Acme Markets and Wegman’s. A focus for the new dis- tribution park will be fresh fruits and vegetables and other perishable food items, commonly referred to as the cold supply chain.

As you read this chapter, consider the issues and challenges that SAB faces with these new initiatives.

Source: John J. Coyle, DBA. Used with permission.

Supply Chain Management: An Overview 5

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Several quotes cited in a previous edition of this book are still apropos:

“Change is inevitable, but growth and improvement are optional.”1

“You either change and get better or you slip and get worse; you cannot stay the same.”2

“When the rate of change outside the organization is faster than inside, the end is near.”3

Susan Weber, CEO of SAB, understands the wisdom of these comments. The ratio- nale for change can be made by using examples of the past and present giants of the retailing industry shown in Table 1.1.

Montgomery Ward, the leading mass retailer in the 1930s and 1940s, lost its leader- ship position to Sears in the 1950s because it did not have the vision to understand that the population exodus from the cities to the suburbs after World War II would cause it to lose sales volume at its large downtown stores. Sears developed a strategy to open multiple smaller stores in suburban shopping centers, providing locational convenience and free parking. In the 1970s, when the U.S. economy was struggling with inflation and unemployment, Kmart replaced Sears as the retail leader with its emphasis upon price discounts. In the 1990s, Walmart became the leading retailer with a multifaceted strategy based on discount pricing for brand-name products, location in smaller commu- nities, a “Made in America” slogan, and more customer service. A key element in Walmart’s ability to discount brand-name products was an understanding of the importance of efficiency in its logistics and supply chain system from purchasing, through delivery to its stores, to lowering cost of operations and maintaining a continual focus on improving its supply chain processes. Walmart continually makes adjustments to improve not only its store operations but also its logistics and supply chain opera- tions. The fact that two of the four retailing giants discussed above no longer exist as viable organizations is not lost upon Walmart. Walmart’s annual sales now exceed $500 billion, but some experts are questioning whether it is becoming stagnant since its “same store sales” have been declining.

One could argue that most retailers are essentially supply chain companies since they buy products produced by others and sell these same products to their customers. While other factors such as merchandising, pricing, store location, and layout are important, supply chain management and logistics are key ingredients for success in today’s highly competitive global environment. Susan Weber of SAB appears to comprehend the poten- tial role that supply chains can play in making retail organizations successful. She also seems to understand that the dynamics of today’s global environment require new think- ing and perspectives. Table 1.1 shows the historical leading retailers and clearly indicates

Table 1.1 Leading Retailers: 1930–2010

Montgomery Ward—1930s and 1940s

Sears and Roebuck—1950s and 1960s

Kmart—1970s and 1980s

Walmart—1990s and 2000s

????—2010s

Source: Center for Supply Chain Research, Penn State University.

6 Chapter 1

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that change is necessary to maintain or gain market share. Table 1.2 demonstrates even more dramatically the forces of change and the need to transform the organization, espe- cially the supply chain, since only three of the top 10 retailers from 1996 are in the top 10 in 2010 (note also the number of global companies on the 2010 list).

At this juncture, an examination of the major external forces or change drivers shaping the economic and political environment is appropriate. We need to understand the impact of these forces of change on businesses and other organizations.

What Forces Are Driving the Rate of Change We know that supply chain management (SCM) became a part of the vocabularies

of CEOs, CFOs, COOs, and CIOs during the 1990s. The dynamics of the global environ- ment changed dramatically during that decade, and organizations had to adapt to these changes or perish. Unfortunately, there were a number of casualties like some of the retailers previously mentioned.

Five major external forces appear to be driving the rate of change and shaping our economic and political landscape: globalization, technology, organizational consolida- tion, the empowered consumer, and government policy and regulation. The impact of these factors varies from sector to sector, but they are all important. Additional exter- nal forces may also influence some organizations, particularly in the public and non- profit sectors.

Globalization Arguably, globalization is the most frequently cited change factor by business leaders,

and it has replaced the post–World War II Cold War as the dominant driving force in world economics. The concept of the global marketplace or the global economy has taken on new meaning for all enterprises (profit and nonprofit; small, medium, and large; products or services) and for individual consumers during the last two decades.

Table 1.2 Leading Retailers

1996 2010

1. Walmart 1. Walmart

2. Sears Roebuck 2. Carrefour

3. Metro 3. Metro

4. Tangelmann 4. Tesco

5. Kmart 5. Schwarz

6. Carrefour 6. Kroger

7. Rewe Zentrale 7. Home Depot

8. Edeka Zentrale 8. Costco

9. Auchan 9. Aldi

10. Dayton Hudson 10. Target

Source: Center for Supply Chain Research, Penn State University.

Supply Chain Management: An Overview 7

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Overall, globalization has led to a more competitively intense economic and geopolit- ical environment. This environment manifests itself in opportunities and threats both economic and political. Some individuals have implied that there is no “geography” in the current global environment (figuratively speaking) or, perhaps more aptly, that time and distance have been compressed. So, for example, companies seeking to rationalize their global networks frequently ask such questions as the following:

• Where in the world should we source our materials or services?

• Where in the world should we manufacture or produce our products or services?

• Where in the world should we market and sell our products or services?

• Where in the world should we warehouse and distribute our products?

• What global transportation alternatives should we consider?

Some important issues or challenges for supply chains in the global economy are (1) more economic and political risk; (2) shorter product life cycles, and (3) the blurring of traditional organizational boundaries. All three deserve some discussion.

Supply and demand have become more volatile for a number of reasons. Acts of ter- rorism, for example, can have serious implications for the flow of commerce. Companies have put in place security measures to protect their global supply chains and are pre- pared to act quickly to offset challenges to the flow of materials through their supply chains, but the risk is ever present. One such challenge has been the contamination of food products and supplies from countries such as China. An interruption in the flow of products from China can cause serious shortages in the supply of food and other pro- ducts. Natural catastrophes such as hurricanes, floods, and earthquakes have become more problematic because of the scope and extent of global trade; therefore, they pose a significant potential problem for global supply chains. The natural catastrophes that occurred in Japan in 2011 interrupted or disrupted supply chains worldwide in auto and technology companies. Other examples could be offered, but suffice it to say that challenges to supply and demand can be exacerbated in number and severity by the dis- tances involved, which necessitates risk mitigation strategies.

Longer-run issues of supply and demand also arise with the global competition for sources of supply and markets. The growth in steel production and automobile manufactur- ing in China and information technology in India has caused significant changes in U.S. manufacturing of parts and finished goods. The global supply chains of the best companies must be adaptive and resilient to meet the challenges of the global marketplace.

Shorter product life cycles are a manifestation of the ability of products and services to be duplicated quickly. Technology companies are particularly vulnerable to the threat of their new products being reengineered. However, almost all products in our highly competitive global environment are faced with this issue. From a supply chain perspec- tive, shorter product life cycles present a challenge for inventory management. Products that are duplicated will most likely face a faster reduction in demand and new pricing policies, both of which present challenges to effective inventory management. The risk of obsolescence in certain sectors of the economy as new products are developed is another challenge for inventory management. It also means continually developing new products or reconfiguring old products. Both are a challenge for supply chains. Technol- ogy companies are particularly vulnerable to product obsolescence.

The blurring of traditional organizational boundaries is the result of companies having to adjust or transform their business model or the way that they do business in

8 Chapter 1

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a competitive global economy. To maintain their financial viability (read profitability), companies may have to outsource some parts of their operation to another domestic or global company that can provide what they need more efficiently and, hopefully, maintain the same quality. They may also add to their current operations or services to add value for customers. SAB is considering this strategy in an effort to retain and add customers.

Outsourcing is not new. It has been going on for many decades. No organization is completely independent. The competitiveness of the global environment, however, has increased the scope of outsourcing both domestically and globally. As previously men- tioned, companies need to analyze how they do business in order to stay competitive and financially viable. Nike, for example, outsources all of its manufacturing and has done so for many years. Airlines and hotels have outsourced their call centers. Many automobile and computer manufacturers outsource components or parts that they need for finished products. There are many examples of outsourcing for materials and ser- vices. From a supply chain and logistics perspective, the growth in outsourcing is note- worthy because it increases the importance of effective and efficient global chains because they become longer and more complex.

Before discussing technology, mention should be made of the “BRIC factor” in the analysis of globalization and supply chains. BRIC is an acronym for the four countries of Brazil, Russia, India, and China. These four countries have a total population of well over 3.0 billion, with China accounting for about 1.3 billion of that total. These four countries, especially China and India, have been a leading force in the changing world marketplace in this era of globalization. They not only produce products and services for export, but they have also become major consumers of energy, basic materials, and finished products. For example, General Motors sells more cars in China than in the United States; the Buick is the largest seller. The supply chains of most, if not all, com- panies have been affected by the emergence of the BRIC countries. Walmart, for exam- ple, is by far the largest buyer of products produced in China, which is in sharp contrast to its 1970s slogan of “Made in America.” It is estimated that if Walmart were a country, it would be China’s seventh- or eighth-largest trading partner.

Currently, there is growing discussion about a new group of developing, low-cost countries. The so-called VISTA Countries—Vietnam, Indonesia, South Africa, Turkey, and Argentina. It is expected that some or all of these countries will replace the BRIC countries as low-cost producers of various products and services. However, the BRIC countries with their developing middle class will become a growing market area for local and imported products.

SAB Distribution has been impacted by globalization because a growing number of products that it buys and distributes are being produced in whole or in part in other countries even though a U.S. company is their destination. SAB also needs to evaluate buying products directly from global producers. While this will add to the complexity of its supply chains, it may enable SAB to provide more competitively priced products. Also, SAB will be able to satisfy the needs of its more diverse customers. Similar to other U.S. companies, SAB is faced with both an opportunity and a threat by globalization.

A strong complement to the growth in the global economy has been the growth and development in the technology related to supply chains. Mention has been made of time and distance being compressed, and technology has certainly played a major role in making this happen. Technology will be discussed as the next external change factor.

Supply Chain Management: An Overview 9

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Technology Technology has had a major impact on supply chains as a facilitator of change as

companies have transformed their processes. However, it is also a major force in chang- ing the dynamics of the marketplace. Individuals and organizations are connected 24/7 and have access to information on the same basis via the Internet. Search engines such as Google have made it possible to gather timely information quickly. We have become what some individuals describe as the “click here” generation. We no longer have to wait for information to be “pushed” to us via the media on their schedule; we can “pull” information as we need it. Vast stores of data and information are virtually at our fingertips. Social networks such as Facebook and Twitter are playing an ever increas- ing role in business organizations and will influence supply chains because of their impact on customer demand and the speed of information transfers. Many companies see opportunities to “data mine” the tweets to uncover demand-related information for improved forecasting.

It has been argued that technology has allowed individuals and smaller organizations to connect to the world’s “knowledge pools” to create an unbelievable set of opportu- nities for collaboration in supply chains. A corollary of this phenomenon is that the world has become “flat.” In other words, traditionally underdeveloped countries such as China and India have become enabled and can participate in the global economy much more readily. The world is no longer tilted toward the developed countries such as the United States and European countries in terms of an economic advantage. Outsourcing to the less-developed countries has been enhanced by technology. Collaboration oppor- tunities with individuals and companies throughout the globe have increased. The flip side is that these economic advances have also created market opportunities for U.S. companies. Consequently, the flow of commerce has become multidirectional. This factor also increases the need for efficient and effective supply chains.

Susan Weber, as SAB’s new CEO, will have to more fully exploit the opportunities presented by technology both on the procurement side of business and in marketing pro- ducts to customers. Her predecessor used technology to improve internal processes, for instance through warehouse operations and order fulfillment as well as transportation carrier collaboration. Susan will need to focus more externally to improve overall supply chain efficiency and effectiveness.

Organizational Consolidation and Power Shifts After World War II, product manufacturers became the driving force in supply

chains. They developed, designed, produced, promoted, and distributed their products. Frequently, they were the largest organizations in the supply chain in terms of sales vol- ume, employees, buying power, locations, and other factors. They typically exerted their influence throughout the supply chain to their specific economic advantage, especially in the distribution of their products.

During the 1980s and especially the 1990s, a significant change occurred in the rela- tive economic power in a growing number of supply chains as mass retailers became increasingly larger. Retail giants such as Walmart, Sears, Kmart, Home Depot, Target, Kroger, and McDonald’s became powerful market leaders and engines for change. Walmart, for example, was number one on the Fortune 500 list by the middle of the first decade of the twenty-first century. It had surpassed Ford, General Motors, and ExxonMobil with more than $500 billion of annual sales and was the number one employer in many states.

10 Chapter 1

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While other retailers are not as large as Walmart, their size and economic buying power have also increased significantly. An important aspect of the economic power shift toward the retail end of the supply chain is that many consumer product companies find that 15 to 20 percent of their customers account for 70 to 80 percent of their total sales. Walmart alone may account for over 10 percent of their total sales. As noted pre- viously, if Walmart were a country, it would be China’s eighth largest trading partner.4

This phenomenon is not unique to the United States. For example, a list of the top 10 global retailers would include Carrefour, Metro, Ahold, and Tesco, all of which are head- quartered in other countries. (See Table 1.2.)

As you would expect, the large retailers are accorded special consideration from con- sumer product companies. For example, customized distribution services are provided such as scheduled deliveries, “rainbow” pallets [mixed arrays of products or stock- keeping units (SKUs)], advance shipment notices (ASNs), shrink-wrapped pallets, and so forth. These services allow retailers to operate more efficiently and often more effec- tively. The scale of the retailers can also provide scale economies (read cost savings) to the producers of the products. It can be a win-win arrangement for both sides, with sav- ings passed on to the ultimate customer—the consumer.

In addition to customization, the retailer may be provided value-added services such as vendor-managed inventory (VMI). Essentially, this service usually means that the manufacturer will manage the inventory of its products (and possibly related products) at the retailer’s warehouse(s) and reorder as appropriate for customer fulfillment. The manufacturer may also have a representative at the designated retail warehouse locations to assure accurate and timely delivery. The retailer should experience lower costs associ- ated with inbound logistics, and the manufacturer should be able to offset its additional cost with increased sales (fewer stockouts, more complete orders, etc.) because of the more accurate and timely information of product orders at the store level.