Isbn 978 0 538 47918 9

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