Chapter 10 - Information Systems and Supply Chain Management

CHAPTER 10
INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Creating Strategic Advantage through Supply LO 10-1 Understand the strategic advantage
Chain Management and Information Systems generated by a supply chain.

 It is the retailer’s responsibility to gauge

customers’ wants and needs and work
with the other members of the supply
chain – distributors, vendors, and
transportation companies – to make sure
the merchandise that customers want is
available when they want it. See PPT 10-4 for supply chain definition.

 In a simplified supply chain, manufacturers PPT 10-5 illustrates the components of a typical
ship merchandise either to a distribution supply chain.
center, fulfillment center, or they ship
directly to stores.

 Supply chain management is a set of Ask students to think about the five “rights” of
activities and techniques firms employ to merchandising. Which one of the five is not a
efficiently and effectively manage these direct function of supply chain management?
flows of merchandise from the vendors to How are the other four directly related to supply
the retailer’s customers. chain management?

 The goal for the supply chain is to execute

four of the five rights of merchandising:
right product, right place, right quantity,
right time. Supply chain would not impact
“right price” as retail price is not a function
of the supply chain (although the cost of
transportation may be considered when
setting the retail price).

 Retailers have increasingly taken a

leadership position in their respective
supply chains. Based on the consolidation
and emergence of large, global retail
chains, retailers often play a dominant role
in coordinating supply chain management
activities. Retailers also are sharing their
data on shopping behaviors with suppliers
to plan production, promotions, deliveries,

10-1
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

assortments, and inventory levels.

A. Strategic Advantage
 Not all retailers can develop a competitive Zara’s strategic supply chain advantage is
advantage from their information and discussed in PPT 10-7.
supply chain systems. Achieving this
advantage requires a substantial financial
investment as well as the coordinated
effort of employees and functional areas Walmart’s sustainable advantage through
throughout the company. supply chain management is summarized in PPT
10-8.
 When retailers do develop a competitive
advantage from these systems, as
Walmart has, the advantage is sustainable
– it is very difficult for competitors to
duplicate.

B. Improved Product Availability See PPT 10-7

 An efficient supply chain has two benefits Ask students to consider how their feelings
for customers: (1) fewer stockouts and (2) toward a retailer change when the product they
tailored assortments. These benefits want is not available in the store. Would they
translate into greater sales, higher shop online with that same retailer for the out-
inventory turnover, and lower markdowns of-stock product or would they look to purchase
for retailers. the item from another retailer? Do they lose
trust in that retailer? Are stockouts more
significant for brick-and-mortar retailers as
compared to online retailers?

1. Fewer Stockouts
 A stockout occurs when an SKU that a
customer wants is not available.

 Data from apparel shoppers show that

when experiencing a stockout, 17 percent Ask students if stockouts drive consumers to
of consumers will switch to another brand, another brand, another store, or to stop
39 percent will go to another store to buy shopping all together.
the product, and the remaining 44 percent
will just stop shopping.

 Accordingly, stockouts cost U.S. retailers

approximately $130 billion in lost revenue
each year.

 In general, stockouts have short-term and

10-2
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

long-term effects on sales and profits.

2. Tailored Assortments
 Another benefit provided by information
systems that support supply chains is
making sure the right merchandise is
available at the right store.

 Retailers use sophisticated statistical

methods to analyze sales transaction data
and adjust store assortments on a wide
range of merchandise on the basis of the
characteristics of customers in each store’s
local market.

C. Higher Return on Assets

 An efficient supply chain and information See PPT 10-8
system can improve a retailer’s return on
assets (ROA) because the system increases
sales and net profit margins, without
increasing inventory.

 Net profit margin is improved by

increasing the gross margin and lowering
expenses.

 An information system that coordinates

buyers and vendors allows retailers to take
advantage of special buying opportunities
and obtain the merchandise at a lower
cost, thus improving their gross margins.

 Retailers can lower transportation

expenses by coordinating deliveries.

 With more efficient distribution centers,

merchandise can be received, prepared for
sale, and shipped to stores with minimum
handling, further reducing expenses.

 Sophisticated inventory management

systems can allow the retailer to carry
relatively little backup inventory to stay in
stock.

10-3
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

 With a lower inventory investment, total

assets are also lower, so the asset and
inventory turnovers are both higher.

II. The Flow of Information through a Supply LO 10-2 Describe how information flows in a
Chain supply chain.

 The flow of information is complex in a

retail environment.
See PPT 10-10, 10-11, and 10-12 for detailed
 As the transaction takes place, the information on the Information Flow process.
merchandise Universal Product Code
(UPC) is scanned and a sales receipt is
generated for the customer. Purchase
information is recorded in the POS
terminal and sent to the buyer/planner.
The planner uses this information to plan Discuss with students what may happen if the
additional purchases and make markdown incorrect UPC is scanned at the POS. How would
decisions. Note: RFID may eventually this impact stockouts, over-stocks, sales,
replace UPC tags (discussed later in the replenishment, etc.?
chapter).

 The sales transaction data are also sent to

the distribution center (DC) or fulfillment
center (FC). When the store inventory
drops to a specified level, more
merchandise is shipped to the store.
Inventories across stores, distribution
centers, or fulfillment centers are
automatically updated in the system.

 When the inventory drops to a specified

level, the buyer/planner communicates
with the vendor regarding the purchase
order for the merchandise. At this point
they often negotiate shipping dates and
terms of purchase.

 The buyer/planner communicates with the

DC or FC to coordinate deliveries from the
vendor and to the stores, and check
inventory status.

 In some situations, especially when

merchandise is reordered frequently, the
ordering process is done automatically,

10-4
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

bypassing the buyers/planners.

 When the manufacturer ships the product

to the DC or FC, it sends an advanced
shipping notice (ASN) to the distribution
center. An ASN is a document that tells the
distribution center what specifically is
being shipped and when it will be
delivered.

 When the shipment is received at the DC

for FC, the buyer/planner is notified and
then authorizes payment to the vendor.

A. Data Warehouse
 Purchase data collected at the point of sale See PPT 10-13
goes into a huge database known as a data
warehouse. The information stored in the Ask students what would they like to know
data warehouse is accessible on various about their customers. How would they use
dimensions and levels. that information?

 Analysts from various levels of the retail

operation extract information from the
data warehouse for making marketing Ask students why one major drug store retailer
decisions about developing and decided to put beer next to diapers. (Because a
replenishing merchandise assortments. market-basket analysis showed that guys were
“sent” to the store at night to buy diapers and
 Data warehouses also contain information ended up buying beer.)
about customers, which is used to target
promotions and group products together
in stores.
Ask students what benefit would there be for
 Electronic Data Interchange (EDI) is the retailers and vendors to communicate
computer-to-computer exchange of “seamlessly” through systems. How can EDI help
business documents from a retailer to a build a sustainable competitive advantage in
vendor and back. supply chain management?

 Retailers can transmit information about

sales data, purchase orders, invoices, and
data about returned merchandise.

 Vendors can transmit information about

on-hand inventory status, vendor
promotions, and cost changes to the
retailer, as well as information about
purchase order changes, order status,

10-5
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

retail prices, and transportation routings.

B. Vendor-Managed Inventory (VMI) and See PPT 10-14

Collaborative Planning, Forecasting and
Replenishment (CPFR)
 VMI is an approach for improving
marketing channel efficiency, in which the
manufacturer is responsible for
maintaining the retailer’s inventory levels
in each of its stores.1

 CPFR is a more advanced form of retailer-

vendor collaboration that involves sharing
proprietary information such as business
strategies, promotion plans, new product
developments and introductions,
production schedules and lead time
information.

III. The Flow of Merchandise through a Supply LO 10-3 Consider the flow of merchandise
Chain through a supply chain.

 Making merchandise flow involves first See PPT 10-15. Also see a diagram of
deciding whether the merchandise will go Merchandise Flow in PPT 10-16.
from the manufacturer to a retailer's DC,
FC, or directly on to stores.

 Once in a DC, multiple activities take place

before merchandise is shipped to a store.
FC will be discussed next.

 The merchandise flows and pertinent

decision variables in an Internet channel
are similar, except those orders arrive Discuss the differences in merchandise flow for
from customers one at a time and go out the Internet as compared to stores. Which
in relatively small quantities, so the facility aspects are similar and which aspects are
used to store and process these orders— different?
that is, the fulfillment center (FC)—works
a little differently

 Merchandise flows from:

 Vendor to distribution center

 2. Distribution center to stores

10-6
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

 3. Alternatively, from vendor directly to

stores.

A. Distribution Centers versus Direct Store See PPT 10-17

Delivery
 Retailers can use a distribution center or
direct store delivery, depending on
merchandise characteristics and the
nature of demand.

 To determine which distribution system –

distribution centers (DC) or direct store
delivery (DSD) - is better, the retailer must
consider the total cost associated with
each alternative versus the customer
service criterion of having the right
merchandise at the store when the
customer wants to buy it.
Ask students why DSD would be better for
perishable goods. High-fashion goods? Fads?
 Advantages of using a distribution center
are: (1) more accurate sales forecasts, (2)
the retailer’s ability to carry less
merchandise in the individual stores, Ask students to name types of retailers that
which results in less inventory investment should use distribution centers and those that
system-wide, (3) easier to avoid running should not.
out of stock or having too much stock, and
(4) since distribution centers are better
equipped to prepare merchandise for sale,
it is more cost-effective to store
merchandise and get it ready for sale than
in individual stores.

 Distribution centers are not viable for all

retailers. If a retailer has only a few
outlets, then the expense of a distribution
center is probably unwarranted. Also, if
many outlets are concentrated in
metropolitan areas, then the merchandise
can be consolidated and delivered by the
vendor to all the stores in one area. In
some cases, it is quicker to get
merchandise to stores by avoiding the
extra step of using a distribution center.
This is particularly important for
perishable goods (meat and produce),
high-fashion items, or fads since shelf life
10-7
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

is limited.

 What type of retailer should use a

distribution center? Retailers with wildly
fluctuating demand at a store level, stores
that require frequent replenishment,
stores that carry a relatively large number
of items or order in less than full-case
quantities, and retailers with a large
number of outlets that are not
geographically concentrated within a
metropolitan area would all benefit from
using a distribution center.

B. The Distribution (or Fulfillment) Center See PPT 10-19

 The distribution center performs several

functions, which might include: managing
inbound transportation; receiving and
checking; storing and cross-docking;
getting merchandise floor-ready; ticketing
and marking; preparing to ship
merchandise to stores; and shipping
merchandise to stores.

 Fulfillment centers perform the same

functions but because they deliver direct
to customers rather than stores, they do
not get merchandise floor ready. They may
have different packaging standards since
their products are delivered direct to
consumer.

1. Managing Inbound Transportation

 Buyers and planners are more involved in
coordinating the physical flow of
merchandise to the stores. Buyers are
generally responsible for the purchase and
profitability of merchandise, whereas
planners are responsible for the financial
planning and analysis of merchandise and
its allocation to stores.

 The dispatcher is the person who

coordinates deliveries to the distribution
center.

10-8
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

2. Receiving and Checking Using UPC or RFID

 Receiving refers to the process of
recording the receipt of merchandise as it
arrives at a distribution center.

 Checking is the process of going through

the goods upon receipt to make sure they
arrived undamaged and that the
merchandise ordered was the actual
merchandise received.

 Many distribution systems using EDI are

designed to minimize, if not eliminate,
labor-intensive and time-consuming
processes.

 Radio frequency identification (RFID) tags

are tiny computer chips that automatically
transmit to a special scanner all the
information about a container's contents
or individual products.

3. Storing and Cross-Docking

 After the merchandise is received and Ask students to think about the variety of
checked, it is either stored or cross- products they purchase and which of those
docked. products would be good candidates for cross-
docking. What products would be best stored at
 Using a cross-docking distribution center, the DC and why?
merchandise cartons are prepackaged by
the vendor for a specific store. Because
the merchandise is ready for sale, it is
placed on a conveyor system that routes it
from the unloading dock at which it was
received to the loading dock for the truck
going to the specific store – thus, the name
cross-docked.

 Cross-docked merchandise is only in the

distribution center for a few hours before
it is shipped to the stores.

 Merchandise size and the sales rate

typically determine whether cartons are
cross-docked or stored.

10-9
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

4. Getting Merchandise Floor-Ready

 Floor-ready merchandise is merchandise Ask students if they think retailers are asking
that's ready to be placed on the selling too much of their vendors in making them
floor. Getting merchandise floor-ready provide floor-ready merchandise. Consider the
entails ticketing, marking, and, in the case challenges for manufacturers of having to
of apparel, placing garments on hangers. adhere to multiple retailers’ floor-ready
requirements. What about retailers that sell one
commodity (specialty store) as compared to
retailers that sell multiple commodities
(department store or discount store)?

5. Ticketing and Marking

 Ticketing and marking refers to affixing
price and identification labels on the
merchandise.

 It is more efficient for a retailer to perform

these activities at a DC than in the stores.

 An even better approach from the

retailer's perspective is to get vendors to
ship the merchandise floor-ready, thus
totally eliminating this expensive, time-
consuming process. Having floor-ready
merchandise benefits the retailer because
the cost of making the merchandise floor-
ready is passed on to vendors.

6. Preparing to Ship Merchandise to a Store

 After receiving the store order, the
computer at a distribution center creates a
pick ticket, a document that tells the order
filler how much of each item to get from
the storage area.

 The pick ticket is printed in warehouse

location sequence so the order fillers don’t
waste time crisscrossing the distribution
center looking for merchandise. The
system knows which items are out of stock
so it doesn’t even print them on the pick
ticket.

 Order fillers take the merchandise to a

staging area where an electronic sorter
10-10
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

routes the merchandise to the bay with

the truck going to the store.

 In some distribution and fulfillment

centers, the filler functions are performed
by robots.

7. Shipping Merchandise to Stores

 The management of outbound
transportation from distribution center to
stores has become increasingly complex as
chain stores expand. Centers may use a
sophisticated routing and scheduling
computer system. This system considers
the rate of sales in the store, road
conditions, and transportation operating
constraints to develop the most efficient
routes possible. As a result, stores are
provided with an accurate estimated time
of arrival and vehicle utilization is
maximized.

C. Inventory Management-through Just-in-Time

Inventory Systems
 Just-in-time (JIT) inventory systems, also
known as quick response (QR) inventory
systems in retailing, are inventory
management systems that deliver less
merchandise on a more frequent basis
than traditional inventory systems.

 The benefits of a JIT system include Discuss with students how reduced lead times
reduced lead time (the amount of time can better forecast demand. How would lower
between the recognition that an order inventory investments delivered more frequently
needs to be placed and the arrival of the help improve profits and stockouts?
needed merchandise at the seller's store
and is available for sale), increased
product availability, and lower inventory
investment.

 JIT systems are complex, costly and

require high collaboration between
companies and vendors. A strong
commitment is required by the firm and its
vendors to cooperate, share data, and

10-11
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

develop systems.

IV. System Design Issues and Trends LO 10-4 Review the considerations and trends in
the design of supply chains.
A. Outsourcing Supply Chain Functions
See PPT 10-23
 To streamline their operations and make
more productive use of their assets and
personnel, some retailers outsource
supply chain functions. Many independent Ask students to weigh the pros and cons of
companies are very efficient at performing outsourcing supply chain functions.
individual activities or all the supply chain
activities.

 The primary benefit of outsourcing is that

the independent firms can perform the
activity at a lower cost and/or more
efficiently than the retailer.

 The disadvantage is when retailers

outsource a supply chain activity they can
no longer develop a sustainable
competitive advantage based on the
performance of this activity (competitors
can hire the same firm for outsourcing).

B. Pull and Push Supply Chains See PPT 10-24 for a summary of characteristics
of push and pull supply chains.
 In a pull supply chain, orders for
merchandise are generated at the store
level based on sales data captured by POS
terminals. The demand for an item pulls it Ask students: Compare the advantages and
through the supply chain. disadvantages of using a push supply chain
versus a pull supply chain. Which categories of
 In a pull supply chain, there is less business are better suited for each method?
likelihood of being overstocked or out of
stock because the store orders
merchandise as needed based on
consumer demand.

 The pull approach increases inventory

turnover, is more responsive to changes in
customer demand, and there is less
likelihood of being overstocked or out of
stock.

10-12
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

 In a push supply chain, merchandise is

allocated to the store based on forecast
demand. A forecast is developed and
specific quantities of merchandise are
shipped to distribution centers and stores
at predetermined time intervals.

 Although generally more desirable, a pull

approach is not the most effective in all
situations. It requires a more costly and
sophisticated information system to
support it, some merchandise does not
allow retailers flexibility to adjust
inventory levels based on demand, and
push supply chains are more efficient for
merchandise that has steady, predictable
demand.

C. Radio Frequency Identification Devices See PPT 10-25, 10-26

 Radio frequency identification devices are

tags that transmit identifying information
and are attached to individual items,
shipping cartons, and containers.

 RFID technology has advantages over

traditional bar codes, including (1) the
ability to hold more data and update data
stored on the device and (2) enables the
accurate, real-time tracking of every single
product, from manufacturer to checkout in
the store.
Discuss the advantages of RFID. Ask students if
 RFID has several demonstrated benefits they foresee any disadvantages. What are the
including: (1) reduced labor costs for risks or downsides of these systems?
warehouse and distribution, (2) reduced
labor costs at point-of-sale, (3) inventory
savings, (4) reduced theft, and (5) reduced
out-of-stock conditions.

 High costs are the major obstacle to the

adoption of RFID systems.

 Complex and highly integrated systems

are also a challenge with successful
implementation and use of RFID.

10-13
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

D. Supply Chain for Fulfilling Catalog and Internet See PPT 10-27
Orders
 The supply chain and information systems
for supporting catalog and Internet
channels tend to be distinct from those
that support the traditional store channel

 The information system for supporting a

store channel focuses on products—
making sure that the right number of
products are delivered to each store—
while information systems supporting
nonstore channels are focused on the
customer—making sure that the right
customer receives the right product.

 Some companies use the store inventory

to fulfill the nonstore orders which can
reduce inventory costs and shipping
expense while reducing the delivery time.

 Synergies between the channels can be

exploited if the same centers are used for
all channels.

E. Drop Shipping See PPT 10-28

 Drop shipping, or consumer direct

fulfillment, is a system in which retailers
receive orders from customers and relay Ask students when drop shipping orders would
these orders to vendors; the vendors then make the most sense for product-related
ship the merchandise ordered directly to purchases. Which retailers could utilize drop
the customer. shipping? Could this be a sustainable
competitive advantage? Why or why not?
 Robots are being used in the drop ship
fulfillment environment.

 Advantages include reduced = inventory

costs and investment because the vendor,
rather than the retailer, assumes the costs
and risks of supplying merchandise to
customers.

 Disadvantages in drop shipping from a

retailer’s perspective include a longer
delivery time, increased costs (with
multiple purchases), loss of control, and
10-14
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

defining the process for handling returns.

F. Customer Store Pickup See PPT 10-29

 Rather than shipping orders directly to

customers, retailers can enable them to
make a purchase online and then pick up
the merchandise in stores.

 For retailers to be successful with the buy-

online/pick-up-in-store option, they need
to invest in technology that enables order
allocation systems to locate every item in
stock to fulfill the order in a timely
manner.

 Mobile task management technology is a

wireless network and a mobile device that
receives demand notification and enables
a speedy response. This solution allows
the associate closest to the ordered item
to physically pull it and verify its
availability.

G. Reverse Supply Chain See PPT 10-30

 Reverse supply chain is the process of

capturing value from and/or properly
disposing of merchandise returned by
customers and/or stores.

 Reverse supply chain systems are

challenging. Items may be damaged, and
without the original shipping carton, thus
causing special handling needs.
Transportation costs can be high because
items are shipped back in small quantities.

V. Summary
 Supply chain management and
information systems have become
important tools for achieving sustainable
competitive advantage. Developing more
efficient methods of distributing
merchandise creates an opportunity to
reduce expenses and improve customer

10-15
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

service levels.

 Efficient supply chain management

provides three benefits to retailers: (1)
fewer stockouts, (2) tailored assortments,
and (3) higher return on assets.

 A retailer’s information system tracks the

flow of merchandise through distribution
centers to retail stores and from
fulfillment centers to their customers.
Most communications between vendors
and retailers occur via electronic data
interchange over the Internet.

 Many retailers are adopting a quick

response inventory system that is
characterized by smaller, more frequent
shipments from manufacturers.

 In designing their supply chain

management systems, retailers make
decisions about what activities to
outsource; when to use a push and pull
system for replenishing stores; whether
the benefits of radio frequency
identification devices outweigh the costs;
how to handle merchandise shipped
through DCs to stores versus FCs to
customers; whether to have
manufacturers ship merchandise directly
to customers; whether to offer customers
the opportunity to pick up

10-16
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

ANSWERS TO “GET OUT AND DO IT!” QUESTIONS

ANSWERS TO SELECT “GET OUT AND DO IT!” QUESTIONS

1. CONTINUING ASSIGNMENT Interview the store manager working for the retailer you have selected
for the Continuing Case assignment. Write a report that describes and evaluates the retailer’s
information and supply chain systems. Use this chapter as a basis for developing a set of
questions to ask the manager. Some of the questions might be these: Where is the store’s
distribution center (DC)? Does the retailer use direct store delivery from vendors? How frequently
are deliveries made to the store? Does the merchandise come in ready for sale? What is the
store’s percentage of stockouts? Does the retailer use a push or pull system? Does the store get
involved in determining what merchandise is in the store and in what quantities? Does the retailer
use vendor-managed inventory (VMI), electronic data interchange (EDI), collaborative planning,
forecasting, and replenishment (CPFR), or radio frequency identification (RFID)?

Students’ answers will vary based on the retailer selected.

2. INTERNET EXERCISE Go to Barcoding Incorporated’s web page at [Link] and

search for retail, warehouse management, and RFID. How is this company using technology to
support retailers with information systems and supply chain management?

Some of the information students will find on this homepage:

If inefficiencies throughout the system could be eliminated, from the stockroom to the shelf to the point
of sale, it eases the pressures faced at the register, and unlocks even greater profit potential. Mobile
computing and data capture solutions, such as bar code and RFID (radio frequency identification),
provide retail companies with greater visibility and control over inventory and stock levels, more
productive employees, and a better customer experience.

Barcoding Inc. can deliver bottom line benefits to retail companies of all shapes and sizes with our
tailored solutions. By leveraging technologies like mobile checkout, and RFID and wireless networks to
maximize employees' time on the floor and improve the shopping experience through more face time
with customers, Barcoding can deliver key benefits like higher same store sales, decreased inventory
stock outs, and increased inventory turnover while delivering long-term efficiencies that help season
after season.

The field of robotics changes so rapidly that it can be difficult to pin down what to expect next.
International Data Corp (IDC) recently announced its predictions for the global robotics industry.

They predict that “robot as a service” will account for 30 percent of all commercial service robotic
applications by the year 2019, and the same percentage of top organizations will have a designated chief
robotics officer role.

Talent Shortage

10-17
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

They also foresee a talent shortage in robotics that will result in 35 percent of robotics jobs sitting vacant
in 2020. At the same time, the average salary for workers in this field is expected to grow by 60 percent
or more.

They project that 45 percent of the world’s top commercial companies will use robot systems for
delivery operations and order fulfillment warehousing by 2018. Robots will increasingly depend on cloud
software, with a robotics cloud marketplace eventually emerging.

Better Efficiency

Robotic deployments are expected to become more collaborative, and just under a third of new
deployments will be smart collaborative varieties that can function three times faster than the robots
found today while still being safe for people to work around. Their operational efficiency is expected to
improve by 200 percent by 2020 thanks to increased connectivity to a mesh of shared intelligence.

3. INTERNET EXERCISE Go to the homepage for RFID Journal at [Link]/ and search for
supply chain in the current issue. Summarize one of the recent articles, and explain how the key
concept(s) described could make the shopping experience better for consumers and improve
efficiency in the supply chain.

Students’ answers will vary depending on the article they search. The website has an entire section
devoted to RFID and retail. Students can see how RFID chips improve efficiencies in B2B relationships for
everyone from fish mongers to luxury retailers.

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

1. Retail system acronyms include DSD, VMI, EDI, CPFR and RFID. What do these terms means and
how are they related to one another?

Each of these terms describes a system designed to enhance the efficiency of supply chain management.
DSD, direct store delivery, bypasses the retailer’s distribution center and delivers merchandise directly
to the retailer’s stores. When DSD happens, retailers receive additional services, such as assessing the
store’s stock levels and backroom inventory. DSD and VMI, vendor-managed inventory, are often
combined. When a vendor engages in VMI, it likely offers the retailer the option of DSD too. VMI seeks
to improve supply chain efficiency by assigning the vendor to maintain inventory levels in the retailer’s
stores. These systems are typically based on electronic data interchange (EDI). An EDI is an exchange of
data between two or more computers. In most cases, the vendor’s and retailer’s computers “talk to each
other” and exchange data on ordering, inventory levels, delivery dates, and sales. CPFR (collaborative
planning, forecast and replenishment) is a system of integrated information sharing between retailers
and their vendors, including information such as forecasts, strategies, and promotion plans.
Collaborative supply chain management relationships are designed to reduce the lead-time for receiving
merchandise, thereby lowering inventory investments, improving customer service levels, and reducing
distribution expenses. RFID stands for radio frequency identification, the next generation of inventory
tracking and identification.

10-18
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

2. Explain how an efficient supply chain system can increase a retailer's level of product availability
and decrease its inventory investment.

By eliminating the need for paper transactions, an efficient supply chain management system reduces
lead-time. Shorter lead-time reduces the need for safety stock because the shorter the lead-time, the
easier it is to forecast demand, and therefore, less inventory is needed to hold as safety stock. In short,
when the retailer can make purchase commitments closer to the time of sale, inventory investment is
reduced. Finally, an efficient supply chain management system can reduce distribution expenses by
allowing the retailer to negotiate a direct store delivery system in which the vendors deliver to each
store rather than the distribution center, then prepare the merchandise for sale with services such as
price labeling.

3. This chapter presents some trends in supply chain and information systems that benefit retailers.
How do vendors benefit from these trends?

Vendors benefit from collaboration in supply chain management just as retailers do. Vendors share the
retailer’s goals of providing merchandise to customers where and when they want it, with minimum
cost, so collaborations to improve the flow of information and merchandise benefit both supply chain
members. When working collaboratively with a retailer, the vendor can better plan its purchases of raw
materials and production process to provide the optimal merchandise flow, eliminating the potential for
a bullwhip effect of excess inventory buildup to take place. Additionally, vendors benefit from enhanced
information flows in collaborative relationships, allowing them to respond to retailers’ needs more
precisely and rapidly.

4. What type of merchandise is most likely to be cross-docked at retailers’ DCs? Why is this often the
case?

Merchandise prepackaged by vendors for specific stores is cross-docked because it is ready for sale. No
further processing and no storage at the distribution center are required. This merchandise is routed on
a conveyor system through the warehouse from the unloading dock to the loading dock for the truck
going to the store for which it is designated. Floor-ready merchandise is likely to be cross-docked, as is
large or bulky merchandise that would be more cumbersome to store. Also, merchandise that can be
relied on to sell quickly likely moves through the cross-dock system in a matter of hours to make its way
to the designated retail store.

5. Why haven't more fashion retailers adopted an integrated supply chain system similar to Zara's?

Zara's integrated supply chain management system depends on two major factors for its success. The
first is the technological connections between the sales floor and the design center in Spain. Such
technology requires higher capital investments and employee training. The second is Zara vertical
integration; it controls the entire design, production, and sales process. Zara's integrated supply chain
management system is particularly beneficial to its effort to sell fast fashion products.

For retailers selling conventional products or products that stay in fashion for a longer time, such
coordination between sales and design may not be needed. Also, most retailers are not as vertically
10-19
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

integrated as Zara. For a conventional retailer, the added cost of collecting consumer information on
design issues and transferring it to vendors may not be worth the effort; most retailers would rather let
vendors/manufacturers take care of consumer demands and trends through their own marketing
research systems. Moreover, the production processes for most products may gain little from the added
margins obtained in small lot production, unlike fashion clothing. On the contrary, most manufacturers
seek economies of scale and therefore make design changes to products and retooling changes to
production processes only infrequently. Such design and manufacturing changes are easier for clothing
manufacturers, and the design and production processes at Zara are based on a work-station flow model
(rather than assembly line) and are quite labor intensive.

6. Explain the differences between pull and push supply chains.

A pull distribution strategy is when orders for merchandise are generated at the store level based on
demand data captured by point-of-sale (POS) terminals. A push distribution strategy is when
merchandise is allocated to the stores based on historical demand and the inventory position at the
distribution center, as well as the needs of the stores. A pull strategy decreases the likelihood of being
overstocked or out-of-stock, and the stores may order merchandise based on the needs of their
customers. Although it is effective, retailers with less sophisticated forecasting and information systems
usually cannot use pull distribution. A push strategy also benefits retailers that have less desirable
merchandise that still must be sold.

7. Consumers have five key reactions to stockouts: buy the item at another store, substitute a
different brand, substitute the same brand, delay the purchase, or do not purchase the item.
Consider your own purchasing behavior, and describe how various categories of merchandise
would result in different reactions to a stockout.

A stockout occurs when an SKU a consumer wants is not available. Students’ answers will vary widely
here. This question allows for a discussion of factors such as brand loyalty and shopping behavior when
predicting responses to stockout situations. Consider the different impacts of convenience, comparison,
and specialty shopping to determine likely responses. For example, it might be helpful to discuss a
consumer’s reaction to a 7-Eleven being out of milk on a quick stop versus Best Buy being out of a
popular mobile device, available at several other consumer electronics retailers and online, during a
planned shopping trip.

8. Abandoned purchases as a result of stockouts can mean millions of dollars a year in lost sales. How
are retailers and manufacturers using technology to reduce stockouts and improve sales?

Retailers are turning to investments in information technology and supply chain management systems
to help reduce stockouts. Some retailers rely on CPFR systems to share information with vendors to
anticipate changes in product offerings, promotions, and business strategies and thus better manage
and maintain their product availability.

9. What is a universal product code (UPC)? How does this code enable manufacturers, distributors and
retailers to track merchandise throughout the supply chain?
10-20
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

“Universal Product Codes (also known as GTIN-12) appear as lines (bars) of varying widths representing
the series of numbers commonly shown below the bars. Barcode scanners, as you will know them from
your favorite retailers, read the bars and convert them back to the 12-digit UPC number that they
represent. This number is then looked up within the retailer's inventory system to find the
corresponding product name and price that you provided them with when you signed your agreement
for them to carry your product. In short, the UPC is a 12-digit unique code for your product represented
by scannable bars.”

[Link]

10. Why are some retailers switching from UPC codes to RFID?

RFID devices have two advantages over traditional bar codes. First, they can hold more data and update
the data stored. For instance, the device can keep track of where an item has been in the supply chain
and even where it is stored in a DC. With these data, retailers can dramatically reduce inventory levels
and stockouts. Second, the data on the devices can be acquired without a visual line of sight. Thus, RFID
enables the accurate, real-time tracking of every single product, from manufacturer to checkout in the
store. It eliminates the manual point-and-read operations needed to get data from UPC bar codes. RFID
provides an accurate, affordable, real-time measure of item inventory levels.

11. Why is Walmart’s supply chain management successful? Read the post, “Walmart's successful
supply chain management,” at
[Link]
chain-management-walmart. Describe how innovation had made supply chain management a
competitive advantage for Walmart.

Key points from the post include the following excerpts:

“Vendor Managed Inventory (VMI) – manufacturers became responsible for managing their products in
Walmart’s warehouses. As a result, Walmart was able to expect close to 100% order fulfillment on
merchandise.

“Walmart has long practiced strategic sourcing to find products at the best price from suppliers who are
in a position to ensure they can meet demand. The company then establishes strategic partnerships with
most of their vendors, offering them the potential for long-term and high-volume purchases in exchange
for the lowest possible prices.

“Walmart streamlined supply chain management by constructing communication and relationship

networks with suppliers to improve material flow with lower inventories. The network of global
suppliers, warehouses, and retail stores has been described as behaving almost like a single firm.

“Cross-docking is a logistics practice that is the centerpiece of Walmart’s strategy to replenish inventory
efficiently. It means the direct transfer of products from inbound or outbound truck trailers without the
need for extra storage, by unloading items from an incoming semi-trailer truck or railroad car and
loading these materials directly into outbound trucks, trailers, or rail cars (and vice versa), with no

10-21
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

storage in between. Cross-docking keeps inventory and transportation costs down, reduces
transportation time, and eliminates inefficiencies.

“Walmart embraced and invested in technology to become an innovator in the way stores track
inventory and restock their shelves, thus allowing them to cut costs. In 2015, the company spent a
reported $10.5 billion on information technology and has also invested significantly in improving their
eCommerce capability. Walmart’s IT systems allows the company to accurately forecast demand, track
and predict inventory levels, create highly efficient transportation routes, manage customer
relationships, and service response logistics.

“Suppliers and manufacturers within the supply chain synchronize their demand projections under a
collaborative planning, forecasting and replenishment scheme, and every link in the chain is connected
through technology that includes a central database, store-level point-of-sale systems, and a satellite
network. What made Walmart so innovative was that it had been sharing all this information with their
partners.

“Walmart has used radio frequency identification tags (RFID), which use numerical codes that can be
scanned from a distance to track pallets of merchandise moving along the supply chain. As inventory
must be handled by both Walmart and its suppliers, Walmart has encouraged its suppliers to use RFID
technology as well. According to researchers at the University of Arkansas, there has been a 16%
reduction in out-of-stocks since Walmart introduced RFID technology into its supply chain.”

12. How is Target working to make the supply chain more sustainable? Read the company press
release, “Supply-Chain Sustainability,” at
[Link]
Summarize the Clean by Design program, Sustainable Apparel Collection, and Environmental
Oversight efforts with textile suppliers.

Key points from the press release include the following excerpts:

Clean By Design

“Target partners with the Apparel Impact Institute’s (Aii) Clean by Design (CbD) program, which
identifies practical, cost-saving opportunities so that our suppliers can increase operational efficiencies
in their factories, while simultaneously reducing resource usage, waste and emissions.

“In 2011, in collaboration with our suppliers, we piloted the 10 best practices of Clean by Design in three
Chinese textile mills, and saw significant savings in water and energy use. Encouraged by those results,
and in continued collaboration with additional suppliers, we expanded the program in 2012, onboarding
an additional 60 mills into the CbD program.

“The facility improvements adopted by our suppliers’ participating mills have yielded strong results.
Through the CbD program in 2016, seven participating mills reduced water use by more than 940,000
tons—on average, water usage was down 8%. In addition, all 10 participating mills in 2016 saved more
than 10,000,000 kWh of energy.

10-22
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

“Then through Cohort 1 of our 2018 CbD program, the 20 participating mills reduced water use by an
average rate of 20%, saving 3,560,000 tons. They also lowered energy consumption by an average rate
of 12%. As a result, Cohort 1 reduced more than 111,000 tCO2e of greenhouse gas emissions in 2018.
Following that, the additional nine participating mills of CbD 2018 Cohort 2 saved at least 13.7% water,
amounting to 1,119,000 tons, lowered energy consumption by at least 6.3%, and reduced further 35,800
tCO2e of greenhouse gas emissions.

“To date, together with our suppliers, we have engaged 72 Chinese mills in the Clean by Design
program, which is just one of the ways we partner with our supply chain to use resources responsibly.
It’s a key element of reducing carbon emissions throughout our business to meet our ambitious climate
goals, which were approved by the Science Based Targets Initiative.

Sustainable Apparel Coalition

“In 2011, we became a founding member of the Sustainable Apparel Coalition (SAC), a group of more
than 200 brands, retailers, suppliers, non-profits and NGOs who work to reduce the environmental and
social impacts of apparel and footwear products around the world. The coalition’s first major project was
to create The Higg Index, a tool to help the industry measure the impact of materials, packaging,
manufacturing processes and transportation on the environment.

“In 2012, Target began asking business partners and their factories producing Target-brand products to
use the Higg Index, a self-assessment. The results are part of our business partners' annual scorecards.

Environmental Oversight

“At Target, we recently expanded our Standards of Vendor Engagement to include environmental
sustainability standards and we are applying them within our merchandise supply chain to ensure our
partners are achieving and sustaining a high level of environmental performance.

“To apply these standards, we go beyond our tier one suppliers to also work with our tier two apparel
textile suppliers using our Secondary Facilities Oversight (SFO) program. The SFO was modeled upon a
framework created by the Natural Resources Defense Council for brands developing supply chain
policies to improve environmental performance. We’ve taken initial steps to apply the framework by
mapping Target’s tier one and tier two apparel and textile suppliers as published within our global
factory list, accessible here. Currently, all tier one and tier two apparel textile suppliers disclose
environmental impacts related to their production using the Sustainable Apparel Coalition’s Higg
Facilities Environmental Module (FEM). Target also holds tier two apparel textile suppliers accountable
by using the Higg FEM verification process to audit and ultimately elevate their environmental
performance.

“Those results are subject to third party verification and are mapped against the applicable
environmental sustainability standard to ensure compliance and to promote excellent environmental
performance within our supply chain.”

10-23
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.
Chapter 10 - Information Systems and Supply Chain Management

CONNECT ACTIVITIES

Activity Title Activity Type(s) Topic Learning Objective

H&M Innovations in Case Analysis Supply Chains 10-4 Review the

Supply Chain considerations and
Management trends in the design of
supply chains.

Reed's Pharmacy- Case Analysis Supply Chains 10-4 Review the

Redesigning the Supply considerations and
Chain trends in the design of
supply chains.

Walmart: Pioneer in Case Analysis Supply Chains 10-1 Understand the

Supply Chain strategic advantage
Management generated by a supply
chain.

Understanding the Matching Supply Chains 10-1 Understand the

Distribution Center strategic advantage
generated by a supply
chain.

Fast Fashion: Efficient Case Analysis Supply Chains 10-2 Describe how
Supply Chain information flows in a
Management at Zara supply chain.

iSeeit! Video Case: Video Case Supply Chains 10-1 Understand the
Supply Chain strategic advantage
generated by a supply
chain.

10-24
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC.