Chapter 1

Understanding the Supply Chain

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Outline
• What is a Supply Chain?
• Decision Phases in a Supply Chain
• Process View of a Supply Chain
• The Importance of Supply Chain Flows
• Examples of Supply Chains

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What is a Supply Chain?
• Introduction
• The objective of a supply chain

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What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a customer
request
• Includes manufacturers, suppliers, transporters, warehouses,
retailers, and customers
• Within each company, the supply chain includes all functions involved
in fulfilling a customer request (product development, marketing,
operations, distribution, finance, customer service)
• Examples: Dell Direct Model, Walmart Supply Chain

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What is a Supply Chain?
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to manufacturers to
distributors, but also includes movement of information, funds, and
products in both directions
• Probably more accurate to use the term “supply network” or “supply
web”
• Typical supply chain stages: customers, retailers, distributors,
manufacturers, suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
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Flows in a Supply Chain

Information

Product
Customer
Funds

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Dell’s Supply Chain Model
The Objective of a Supply Chain
• Maximize overall value created
• Supply chain value: difference between what the final product is
worth to the customer and the effort the supply chain expends in
filling the customer’s request
• Value is correlated to supply chain profitability (difference between
revenue generated from the customer and the overall cost across the
supply chain)

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The Objective of a Supply Chain
• Example: Dell receives $2000 from a customer for a computer
(revenue)
• Supply chain incurs costs (information, storage, transportation,
components, assembly, etc.) $1500.
• Difference between $2000 and $1500 is the supply chain profit
• Supply chain profitability is total profit to be shared across all stages
of the supply chain
• Supply chain success should be measured by total supply chain
profitability, not profits at an individual stage

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The Objective of a Supply Chain
• Sources of supply chain revenue: the customer
• Sources of supply chain cost: flows of information, products, or funds
between stages of the supply chain
• Supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain
profitability

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 Decision Phases of a Supply Chain

• Supply chain strategy or design

• Supply chain planning
• Supply chain operation

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Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what processes each stage will perform
• Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
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Supply Chain Planning
• Definition of a set of policies that govern short-term operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year

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Supply Chain Planning
• Planning decisions:
• Which markets will be supplied from which locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions demand uncertainty, exchange
rates, competition over the time horizon

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Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined
• Goal is to implement the operating policies as
effectively as possible
• Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)
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Process View of a Supply Chain
• Cycle view: processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two successive
supply chain stages
• Push/pull view: processes in a supply chain are divided into two
categories depending on whether they are executed in response to a
customer order (pull) or in anticipation of a customer order (push)

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Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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Cycle View of a Supply Chain
• Each cycle occurs at the interface between two successive
stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Figure 1.3
• Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired outcome
of each process.
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Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories depending on
the timing of their execution relative to customer demand
• Pull: execution is initiated in response to a customer order (reactive)
• Push: execution is initiated in anticipation of customer orders
(speculative)
• Push/pull boundary separates push processes from pull processes

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Push/Pull View of
Supply Chain Processes
• Useful in considering strategic decisions relating to supply chain
design – more global view of how supply chain processes relate to
customer orders
• Can combine the push/pull and cycle views
• L.L. Bean (Figure 1.6)
• Dell (Figure 1.7)
• The relative proportion of push and pull processes can have an impact
on supply chain performance

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Supply Chain Macro Processes in a Firm
• Supply chain processes discussed in the two views can be classified
into (Figure 1.8):
• Customer Relationship Management (CRM)
• Internal Supply Chain Management (ISCM)
• Supplier Relationship Management (SRM)
• Integration among the above three macro processes is critical for
effective and successful supply chain management

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Examples of Supply Chains
• Gateway
• Zara
• McMaster Carr / W.W. Grainger
• Toyota
• Amazon / Borders / Barnes and Noble
• Webvan / Peapod / Jewel

What are some key issues in these supply chains?

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Summary of Learning Objectives
• What are the cycle and push/pull views of a supply chain?
• How can supply chain macro processes be classified?
• What are the three key supply chain decision phases and what is the
significance of each?
• What is the goal of a supply chain and what is the impact of supply
chain decisions on the success of the firm?

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• Questions