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Supply Chain
Management
A LOGISTICS PERSPECTIVE
10e
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Supply Chain
Management
A LOGISTICS PERSPECTIVE
10e
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 • Mexico • Singapore • United Kingdom • United States
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review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to
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Supply Chain Management: A Logistics
Perspective, Tenth Edition
John J. Coyle, C. John Langley, Jr.,
Robert A. Novack and Brian J. Gibson
Vice President, General Manager, Science,
Math & Quantitative Business: Balraj
Kalsi
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Dedication
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, Molly, and Anna. 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, son Andy, and his longtime mentor Dr. Bob Cook (1947–2014).
Another note of gratitude is due to Ms. Kusumal Ruamsook, Research Associate and
Instructor, The Center for Supply Chain Research and Department of Supply Chain
and Information Systems, Penn State University. We thank Kusumal for her many
contributions to the preparation of this 10th edition, including not only certain areas of
subject matter but also for her preparation of PowerPoint slide decks that will be of great
value to those who use the text in a classroom environment. Appreciation is extended
also to the staff and students who work with the Center for Supply Chain Research who
contributed significantly to the overall effort related to the preparation of this edition.
The authors of Supply Chain Management: A Logistics Perspective would like to express
their sincere appreciation and respect for the many contributions made to this text by
Dr. John Coyle, Professor Emeritus of Logistics and Supply Chain Management at The
Pennsylvania State University. The first edition was published in 1976 by Dr. Coyle and
co-author Dr. Edward J. Bardi. Looking back at the preface to that first edition, the first
sentence reads: “Business logistics is a relatively new field of study in business administration.” While this discipline has grown in many ways over many years, we find that
excellence today in areas such as supply chain and value chain are heavily dependent
on sound planning and execution in the area of logistics. In fact, the subtitle of this text
was carefully crafted to underscore the importance of logistics as a key element of supply
chain management. It has been a great privilege for the authors of this text to have had
the opportunity to work in close quarters with Dr. Coyle to provide a textbook that
hopefully has been and will continue to be valuable to students, professors, and industry
practitioners who have relied on our book as a useful resource. Also, the authors wish to
express special recognition to John’s wife, Barbara, who has had “up close and personal”
involvement with these first 10 editions of Supply Chain Management: A Logistics
Perspective. In appreciation for her support of our collective writing effort, we would like
to bestow on Mrs. Barbara Coyle the title of “Honorary Author” of this 10th edition.
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Brief Contents
Preface xxv
About the Authors xxix
Part I
Chapter 1 Supply Chain Management: An Overview 3
Chapter 2 Global Dimensions of Supply Chains 27
Chapter 3 Role of Logistics in Supply Chains 51
Chapter 4 Distribution and Omni-Channel Network
Design 89
Part II
Chapter 5 Sourcing Materials and Services 139
Chapter 6 Producing Goods and Services 171
Chapter 7 Demand Management 207
Chapter 8 Order Management and Customer
Service 233
Part III
Chapter 9 Managing Inventory in the Supply
Chain 289
Chapter 10
Distribution—Managing Fulfillment
Operations 371
Chapter 11
Transportation—Managing the Flow of the
Supply Chain 417
Part IV
Chapter 12 Aligning Supply Chains 477
Chapter 13 Supply Chain Performance Measurement
and Financial Analysis 507
Chapter 14
Supply Chain Technology—Managing
Information Flows 549
Chapter 15
Strategic Challenges and Change for
Supply Chains 581
Subject Index 621
Name Index 635
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vii
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Contents
Preface xxv
About the Authors xxix
Part I
Chapter 1 Supply Chain Management: An Overview 3
SUPPLY CHAIN PROFILE: SAB Distribution: The Final Chapter
4
1-1 Introduction 5
1-2 Shaping the Supply Chains of the Twenty-First Century:
Evolution and Change 6
1-2-1 Globalization 7
1-2-2 Technology 9
1-2-3 Organizational Consolidation and Power Shifts 9
1-2-4 The Empowered Consumer 10
1-2-5 Government Policy and Regulation 10
ON THE LINE: Changing Times for Drugs 11
1-3 Supply Chains: Development and Shaping
for the Twenty-First Century 12
1-3-1 Development of the Concept 12
1-4 Major Supply Chain Issues 18
1-4-1 Supply Chain Networks 18
1-4-2 Complexity 19
1-4-3 Inventory Deployment 19
1-4-4 Information 19
1-4-5 Cost and Value 20
1-4-6 Organizational Relationships 20
1-4-7 Performance Measurement 20
1-4-8 Technology 21
1-4-9 Transportation Management 21
1-4-10 Supply Chain Security 21
1-4-11 Talent Management 22
Summary 22
Study Questions 23
Notes 23
Case 1.1: Lehigh Valley Transport and Logistics Service
(LVTLS) 24
Case 1.2: Central Transport, Inc. 25
ix
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x
Contents
Chapter 2 Global Dimensions of Supply Chains 27
SUPPLY CHAIN PROFILE: “The Impact of Changing Weather Patterns”
28
2-1 Introduction 28
2-2 Rationale for Global Trade and Commerce 29
2-3 Contributing Factors for Global Commerce and Supply
Chain Flows 30
2-3-1 Population Size and Distribution 30
ON THE LINE: Economic Growth and the Birth Rate 34
2-3-2 Land and Resources 34
2-3-3 Technology and Information 35
2-4 Global Supply Chain Flows 35
2-5 Supply Chains in a Global Economy 39
ON THE LINE: More Deliveries, Same Cost 40
2-6 Global Markets and Strategy 41
2-7 Supply Chain Security: A Balancing Act 43
2-8 Ports 44
2-9 North American Free Trade Agreement 45
Summary 45
Study Questions 46
Notes 46
Case 2.1: Red Fish, Blue Fish, LLP 48
Chapter 3 Role of Logistics in Supply Chains 51
SUPPLY CHAIN PROFILE: Small Ports Boxed Out by Big Ships
3-1 Introduction 52
3-2 What Is Logistics? 54
3-3 Value-Added Roles of Logistics
3-3-1 Form Utility 56
3-3-2 Place Utility 56
52
55
ON THE LINE: AGE OF THE DRONE: Good News or Bad News???
56
3-3-3 Time Utility 56
3-3-4 Quantity Utility 57
3-3-5 Possession Utility 58
3-4 Logistics Activities 58
3-4-1 Transportation 58
3-4-2 Storage 59
3-4-3 Packaging 59
3-4-4 Materials Handling 59
3-4-5 Inventory Control 59
3-4-6 Order Fulfillment 60
3-4-7 Forecasting 60
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Contents
xi
3-4-8 Production Planning 60
3-4-9 Procurement 60
3-4-10 Customer Service 60
3-4-11 Facility Location 61
3-4-12 Other Activities 61
ON THE LINE: “Ups and Wiley Coyote” 61
3-5 Logistics in the Economy: A Macro Perspective 62
3-6 Logistics in the Firm: The Micro Dimension 65
3-6-1 Logistics Interfaces with Manufacturing or
Operations 65
3-6-2 Logistics Interfaces with Marketing 66
3-6-3 Logistics Interfaces with Other Areas 68
3-7 Logistics in the Firm: Factors Affecting the Cost and
Importance of Logistics 68
3-7-1 Competitive Relationships 68
3-7-2 Product Relationships 71
3-7-3 Spatial Relationships 73
3-7-4 Logistics and Systems Analysis 75
Summary 76
Study Questions 76
Notes 77
Case 3.1: Jordano Food Products 78
Case 3.2: Senco Electronics Company 80
Appendix 3A
Techniques of Logistics System Analysis 81
Short-Run/Static Analysis 81
Long-Run/Dynamic Analysis 82
Appendix 3B
Approaches to Analyzing Logistics Systems 84
Materials Management versus Physical Distribution
Nodes versus Links 85
Logistics Channels 86
84
Chapter 4 Distribution and Omni-Channel Network Design 89
SUPPLY CHAIN PROFILE: Why is Tennessee a Hotbed for
90
4-1 Introduction 90
4-2 The Need for Long-Range Planning 92
4-2-1 The Strategic Importance of Supply Chain
Network Design 92
4-2-2 Changes to Global Trade Patterns 93
4-2-3 Changing Customer Service Requirements 93
Manufacturing?
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Contents
4-2-4 Shifting Locations of Customer and/or
Supply Markets 94
4-2-5 Change in Corporate Ownership/Merger and
Acquisition Activity 94
4-2-6 Cost Pressures 94
4-2-7 Competitive Capabilities 95
4-2-8 Corporate Organizational Change 96
4-3 Supply Chain Network Design 96
4-3-1 Step 1: Define the Supply Chain Network
Design Process 97
4-3-2 Step 2: Perform a Supply Chain Audit 97
4-3-3 Step 3: Examine the Supply Chain Network
Alternatives 98
4-3-4 Step 4: Conduct a Facility Location Analysis 98
4-3-5 Step 5: Make Decisions Regarding Network and
Facility Location 99
4-3-6 Step 6: Develop an Implementation Plan 99
4-4 Major Locational Determinants 99
4-4-1 Key Factors for Consideration 100
ON THE LINE: Supply Chain Managers Target U.S. Cities for Onshoring
103
4-4-2 Current Trends Governing Site Selection 104
4-5 Modeling Approaches 105
4-5-1 Optimization Models 106
4-5-2 Simulation Models 109
4-5-3 Heuristic Models 110
4-5-4 Potential Supply Chain Modeling Pitfalls to
Avoid 111
4-5-5 Example of a Heuristic Modeling Approach:
The Grid Technique 111
4-5-6 Transportation Pragmatics 116
4-6 Omni-Channel Network Design 117
4-6-1 Introduction 117
Opportunities
ON THE LINE: Keynote: Omni-channel’s Impact on Supply Chain
118
4-6-2 Channels of Distribution 119
4-6-3 Customer Fulfillment Models 121
Management
ON THE LINE: Distribution: What does it take to be an Omni-channel
124
Summary 127
Study Questions 128
Fulfillment DC?
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Contents
xiii
Case 4.1: Johnson & Johnson 130
Case 4.2: Bigelow Stores 131
Notes 132
Appendix 4A Grid Method—Sensitivity Analyses and Application to
Warehouse Location In a City 133
Grid Method—Sensitivity Analysis 133
Grid Method—Application to Distribution Center
Location in a City 133
Part II
Chapter 5 Sourcing Materials and Services 139
SUPPLY CHAIN PROFILE: Strategic Sourcing Facilitates Innovation,
Transformation, and Cost Reduction
140
5-1 Introduction 140
5-2 Types and Importance of Items and Services
Purchased 142
5-3 Strategic Sourcing Process 145
5-3-1 Step 1: Develop Strategic Plan 146
5-3-2 Step 2: Understand Spend 146
5-3-3 Step 3: Evaluate Supply Sources 147
5-3-4 Step 4: Finalize Sourcing Strategy 147
5-3-5 Step 5: Implement Sourcing Strategy 150
5-3-6 Step 6: Onboarding and Transitioning 151
5-3-7 Step 7: Collaborative Process
Improvement 151
ON THE LINE: Haworth, Inc. Realizes $1.2 Million in Cross-Border
152
5-4 Supplier Evaluation and Relationships 152
5-5 Total Landed Cost (TLC) 153
5-6 e-Sourcing and e-Procurement 155
5-6-1 Which of These Solutions Should be
Considered 156
Savings
ON THE LINE: Transportation Sourcing—Innovative Approaches to Bid
Optimization 158
5-7 e-Commerce Models 159
Summary 160
Study Questions 161
Notes 161
Case 5.1: Alligator, Inc. 162
Case 5.2: Trans-Global, Inc. 164
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xiv
Contents
Appendix 5A
The Special Case of Procurement Price 165
Sources of Price 165
Traditional Basic Input Costs 166
Direct Transaction Costs 166
Supplier Relational Costs 167
Landed Costs 167
Quality Costs/Factors 168
Operations Logistics Costs 168
Chapter 6 Producing Goods and Services 171
SUPPLY CHAIN PROFILE: Establishing a Production Footprint:
172
6-1 Introduction 172
6-2 The Role of Production Operations in Supply Chain
Management (SCM) 173
6-2-1 Production Process Functionality 174
6-2-2 Production Tradeoffs 175
6-2-3 Production Challenges 177
6-3 Operations Strategy and Planning 178
6-3-1 Production Strategies 178
ON THE LINE: A North American Manufacturing Comeback 182
6-3-2 Production Planning 184
6-4 Production Execution Decisions 186
6-4-1 Assembly Processes 186
ON THE LINE: Have it Your Way 187
6-4-2 Production Process Layout 189
6-4-3 Packaging 191
ON THE LINE: Developing More Sustainable Packaging 193
6-5 Production Metrics 194
6-5-1 Total Cost 195
6-5-2 Total Cycle Time 195
6-5-3 Delivery Performance 195
6-5-4 Quality 195
6-5-5 Safety 195
6-6 Production Technology 196
Summary 198
Study Questions 199
Notes 199
Case 6.1: Hudson Guitars 202
Case 6.2: Elvis Golf Ltd. 204
The VW Journey
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Contents
Chapter 7
xv
Demand Management
207
SUPPLY CHAIN PROFILE: The Great Convergence
7-1 Introduction 209
7-2 Demand Management 209
7-3 Balancing Supply and Demand
208
212
ON THE LINE: Volatility in Demand has Become the Norm
212
7-4 Traditional Forecasting 213
7-4-1 Factors Affecting Demand 213
7-5 Forecast Errors 214
7-6 Forecasting Techniques 216
7-6-1 Simple Moving Average 216
7-6-2 Weighted Moving Average 218
7-6-3 Exponential Smoothing 220
ON THE LINE: Practice Change 222
7-7 Sales and Operations Planning 222
7-8 Collaborative Planning, Forecasting, and
Replenishment 224
Summary 227
Study Questions 228
Notes 228
Case 7.1: Tires for You, Inc. 229
Case 7.2: Playtime, Inc. 231
Chapter 8 Order Management and Customer Service 233
E-COMMERCE SURVEY ASKS: Need for Green or Need for Speed?
234
8-1 Introduction 234
8-2 Influencing the Order—Customer Relationship
Management 236
8-2-1 Step 1: Segment the Customer Base by
Profitability 236
8-2-2 Step 2: Identify the Product/Service Package for
Each Customer Segment 237
8-2-3 Step 3: Develop and Execute the Best Processes 237
8-2-4 Step 4: Measure Performance and
Continuously Improve 238
8-2-5 Activity-Based Costing and Customer
Profitability 239
8-3 Executing the Order—Order Management and Order
Fulfillment 245
8-3-1 Order-to-Cash (OTC) and Replenishment Cycles 246
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Contents
8-3-2 Length and Variability of the Order-to-Cash
Cycle 250
8-4 E-Commerce Order Fulfillment Strategies 252
8-5 Customer Service 252
8-5-1 The Logistics/Marketing Interface 253
8-5-2 Defining Customer Service 253
8-5-3 Elements of Customer Service 255
ON THE LINE: Timely Delivery Matters Most 259
8-5-4 Performance Measures for Customer Service 259
8-6 Expected Cost of Stockouts 261
8-6-1 Back Orders 262
8-6-2 Lost Sales 262
8-6-3 Lost Customer 263
8-6-4 Determining the Expected Cost of Stockouts 263
8-7 Order Management Influences on
Customer Service 263
8-7-1 Product Availability 264
8-7-2 Financial Impact 267
8-7-3 Order Cycle Time 269
8-7-4 Logistics Operations Responsiveness 272
8-7-5 Logistics System Information 275
8-7-6 Postsale Logistics Support 277
ON THE LINE: After-Sales Service: The Forgotten Supply Chain 279
8-8 Service Recovery 280
Summary 281
Study Questions 282
Notes 283
Case 8.1: Telco Corporation 284
Case 8.2: Webers, Inc. 286
Part III
Chapter 9 Managing Inventory in the Supply Chain 289
SUPPLY CHAIN PROFILE: Inventory Management Requires an End-to-End
290
9-1 Introduction 290
9-2 Inventory in the U.S. Economy 291
9-3 Inventory in the Firm: Rationale for Inventory 292
9-2-1 Batching Economies or Cycle Stocks 294
9-2-2 Uncertainty and Safety Stocks 295
9-2-3 Time/In-Transit and Work-in-Process Stocks 295
Approach
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Contents
xvii
9-2-4 Seasonal Stocks 297
9-2-5 Anticipatory Stocks 298
9-2-6 Summary of Inventory Accumulation 298
9-2-7 The Importance of Inventory in Other Functional
Areas 298
9-3 Inventory Costs 299
9-3-1 Inventory Carrying Cost 300
9-3-2 Ordering and Setup Cost 303
9-3-3 Carrying Cost Versus Ordering Cost 306
9-3-4 Expected Stockout Cost 307
SUPPLY CHAIN PROFILE: Is RFID Ready for a Reinvention? 311
9-3-5 In-Transit Inventory Carrying Cost 312
9-4 Fundamental Approaches to Managing Inventory 313
9-4-1 Key Differences Among Approaches to Managing
Inventory 313
9-4-2 Principal Approaches and Techniques for Inventory
Management 315
9-4-3 Fixed Order Quantity Approach (Condition of
Certainty) 316
9-4-4 Fixed Order Quantity Approach (Condition of
Uncertainty) 325
9-4-5 Fixed Order Interval Approach 332
9-4-6 Summary and Evaluation of EOQ Approaches to
Inventory Management 333
9-5 Additional Approaches to Inventory Management 334
SUPPLY CHAIN TECHNOLOGY: Distributor of Education Supplies Passes
334
9-5-2 Just-in-Time Approach 335
9-5-3 Materials Requirements Planning 338
9-5-4 Distribution Requirements Planning 343
9-5-5 Vendor-Managed Inventory 345
9-6 Classifying Inventory 347
9-6-1 ABC Analysis 347
9-6-2 Quadrant Model 350
9-6-3 Inventory at Multiple Locations—The Square-Root
Rule 351
Summary 353
Study Questions 354
Notes 355
Case 9.1: MAQ Corporation 356
Case 9.2: Baseball Card Emporium 357
Inventory Exam
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xviii
Contents
Appendix 9A
Special Applications of the EOQ Approach 358
Adjusting the Simple EOQ Model for Modal Choice
Decisions—The Cost of Inventory in Transit 358
Adjusting the Simple EOQ Model for Volume Transportation
Rates 361
Adjusting the Simple EOQ Model for Private Carriage 365
Adjusting the Simple EOQ Model for the Establishment and
Application of In-Excess Rates 365
Summary 369
Chapter 10 Distribution—Managing Fulfillment Operations 371
SUPPLY CHAIN PROFILE: The Changing Face of Distribution
372
10-1 Introduction 373
10-2 The Role of Distribution Operations in SCM 373
10-2-1 Distribution Facility Functionality 374
10-2-2 Distribution Tradeoffs 376
10-2-3 Distribution Challenges 378
ON THE LINE: DC Automation: Solving the Labor Dilemma
379
10-3 Distribution Planning and Strategy 380
10-3-1 Capability Requirements 380
10-3-2 Network Design Issues 382
10-3-3 Facility Considerations 386
(and more)
ON THE LINE: Efficient and Environmentally Friendly DCs
389
10-4 Distribution Execution 390
10-4-1 Product-Handling Functions 390
10-4-2 Support Functions 393
10-5 Distribution Metrics 394
10-6 Distribution Technology 396
10-6-1 Warehouse Management Systems 397
ON THE LINE: Convergence is the Word in WMS 398
10-6-2 Automatic Identification Tools 399
Summary 401
Study Questions 402
Notes 402
Case 10.1: Power Force Corporation 404
Case 10.2: TV Gadgetry 406
Appendix 10A Materials Handling 408
Objectives and Principles of Materials Handling
Materials-Handling Equipment 409
408
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Contents
xix
Summary 415
Notes 416
Chapter 11 Transportation—Managing the Flow of the Supply
Chain 417
418
11-1 Introduction 419
11-2 The Role of Transportation in Supply Chain
Management 419
11-2-1 Role Inhibitors 420
11-3 Modes of Transportation 422
11-3-1 Motor Carriers 423
11-3-2 Railroads 425
11-3-3 Air Carriers 427
11-3-4 Water Carriers 428
11-3-5 Pipelines 430
11-3-6 Intermodal Transportation 432
ON THE LINE: The Sixth Mode of Transportation 434
11-4 Transportation Planning and Strategy 434
11-4-1 Functional Control of Transportation 435
11-4-2 Terms of Sale 435
11-4-3 Decision to Outsource Transportation 437
11-4-4 Modal Selection 439
11-4-5 Carrier Selection 443
ON THE LINE: Courting the Carrier Community 444
11-4-6 Rate Negotiations 445
11-5 Transportation Execution and Control 445
11-5-1 Shipment Preparation 445
11-5-3 Freight Documentation 446
11-5-4 Maintain In-Transit Visibility 448
11-5-5 Transportation Metrics 448
11-5-6 Monitor Service Quality 450
11-6 Transportation Technology 451
ON THE LINE: Freight Visibility Solutions 452
11-6-1 Transportation Management Systems 453
Summary 454
Study Questions 455
Notes 456
Case 11.1: Vibrant Video 458
Case 11.2: Bob’s Custom BBQs 460
SUPPLY CHAIN PROFILE: A Transportation “Perfect Storm”
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xx
Contents
Appendix 11A Federal Regulation of the Transportation Industry 462
Economic Regulation 464
Safety Regulation 465
Summary 466
Notes 467
Appendix 11B Basis of Transportation Rates 468
Cost of Service 468
Value of Service 469
Distance 470
Weight of Shipment 471
Commodity Characteristics 471
Level of Service 472
Summary 473
Notes 473
Part IV
Chapter 12 Aligning Supply Chains 477
SUPPLY CHAIN PROFILE: Why is Strategic Alignment So Hard? 478
12-1 Introduction 479
12-1-1 Intensity of Involvement 480
12-1-2 Model for Developing and Implementing
Successful Supply Chain Relationships 481
12-1-3 Imperative for Collaborative Relationships 485
12-2 Third-Party Logistics—Industry Overview 488
ON THE LINE: Collaborative Distribution to Achieve Strategic Goals 488
12-2-1 Definition of Third-Party Logistics 489
12-2-2 Example Services of 3PL Providers 491
12-2-3 Global 3PL Market Size and Scope 492
12-3 Third-Party Logistics Research Study—Industry
Details 494
12-3-1 Profile of Logistics Outsourcing Activities 494
12-3-2 Strategic Role of Information Technology 496
ON THE LINE: Collaboration Technologies Facilitate 3PL-Customer
496
12-3-3 Management and Relationship Issues 498
12-3-4 Customer Value Framework 499
12-3-5 A Strategic View of Logistics and the Role
of 3PLs 500
Summary 500
Study Questions 501
Relationships
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Contents
xxi
Notes 502
Case 12.1: Quik Chips, Inc. 503
Case 12.2: HQ Depot 505
Chapter 13 Supply Chain Performance Measurement and Financial
Analysis
507
SUPPLY CHAIN PROFILE: CLGN Book Distributors.com
508
13-1 Introduction 510
13-2 Dimensions of Supply Chain Performance Metrics 510
13-3 Developing Supply Chain Performance Metrics 515
ON THE LINE: Establishing Ocean-Alliance KPIs 516
13.4 Performance Categories 516
13-5 The Supply Chain–Finance Connection 521
13-6 The Revenue–Cost Savings Connection 522
13-7 The Supply Chain Financial Impact 523
ON THE LINE: What’s the ROI on a Managed Transportation Services
527
13-8 Financial Statements 527
13-9 Financial Impact of Supply Chain Decisions 528
13-10 Supply Chain Service Financial Implications 533
Summary 541
Study Questions 541
Notes 543
Case 13.1: Wash & Dry, Inc. 544
Case 13.2: Paper2Go.com 545
Relationship?
Appendix 13A Financial Terms 546
Chapter 14
Supply Chain Technology—Managing Information Flows 549
SUPPLY CHAIN PROFILE: Omni-channel Retailing Runs on
550
14-1 Introduction 551
14-2 Information Requirements 551
14-2-1 Meet Quality Standards 552
14-2-2 Support Multidirectional Flows 554
14-2-3 Provide Decision Support 554
14-3 Systems Capabilities 555
14-3-1 Enable Process Excellence 555
14-3-2 Link Network Elements 557
14-3-3 Mitigate Known Risks 558
14-4 SCM Software 559
14-4-1 Planning 560
Information
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xxii
Contents
ON THE LINE: Planning Software Drives Forecast Accuracy
14-4-2
14-4-3
14-4-4
14-4-5
561
Execution 562
Event Management 563
Business Intelligence 563
Facilitating Tools 564
ON THE LINE: RFID Supports Omni-channel Success
566
14-5 SCM Technology Implementation 566
14-5-1 Needs Assessment 566
14-5-2 Software Selection 567
14-5-3 Implementation Issues 569
14-6 Supply Chain Technology Innovations 570
14-6-1 Internet of Things 570
14-6-2 Mobile Connectivity 571
14-6-3 Functional Automation 572
Summary 573
Study Questions 574
Notes 574
Case 14.1: Inflate-a-Dome Innovations 578
Case 14.2: Grand Reproductions Inc. 580
Chapter 15 Strategic Challenges and Change for Supply Chains 581
SUPPLY CHAIN PROFILE: Adapting Your Supply Chain for the
Future…Now 582
15-1 Introduction 582
15-2 Principles of Supply Chain Management 583
15-2-1 Principle 1: Segment Customers Based on
Service Needs 583
15-2-2 Principle 2: Customize the Logistics
Network 584
15-2-3 Principle 3: Listen to Signals of Market Demand
and Plan Accordingly 585
15-2-4 Principle 4: Differentiate Products Closer to the
Customer 585
15-2-5 Principle 5: Source Strategically 586
15-2-6 Principle 6: Develop a Supply Chain-Wide
Technology Strategy 586
15-2-7 Principle 7: Adopt Channel-Spanning
Performance Measures 587
15-2-8 An Update on the Seven Principles of SCM 587
15-3 Supply Chain Analytics and Big Data 588
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xxiii
588
15-3-1 Supply Chain Analytics Maturity Model 589
15-3-2 Analytical Resources 591
15-3-3 Big Data and the Supply Chain 591
15-4 Omni-Channel 593
15-4-1 Strategies for Success 593
15-4-2 The Future of Omni-Channel 595
15-5 Sustainability 596
15-5-1 Benefits and Challenges 596
15-5-2 Social and Environmental Responsibility 597
15-5-3 Reducing Risk 598
15-5-4 “R’s” of Sustainability 598
15-5-5 Reverse Flows 599
15-6 3-D Printing 600
15-6-1 An Inside Look at 3-D Printing 601
15-6-2 Illustrative Examples of 3-D Printing 601
ON THE LINE: Maersk Uses 3-D Printing for Spare Parts on Ships 602
15-6-3 3-D Printing Strategic Impacts on Supply Chains
and Logistics 603
15-7 The Growing Need for SCM Talent Management 603
ON THE LINE: Employer Branding in Action 606
15-8 Closing Thoughts 606
Summary 608
Study Questions 608
Notes 609
Case 15.1: Snoopze’s P. O. Plus 611
Case 15.2: Peerless Products, Inc. 613
ON THE LINE: The Changing Geography of Supply Chains
Appendix 15A Reverse Logistics Systems versus Closed Loops 614
Customer Returns 616
Environmental Challenges 617
Economic Value 617
Achieving a Value Stream for Reverse Flows 618
Managing Reverse Flows in a Supply Chain 619
Subject Index
Name Index
621
635
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Preface
The publication of the 10th edition of this text, Supply Chain Management: A Global
Logistics Perspective, in the spring of 2016 will mark the 40th anniversary of the first edition.
While the original edition was titled THE MANAGEMENT OF BUSINESS LOGISTICS,
the title and content changes made to the original text over the course of that 40 years
period reflect the dynamic happenings in the United States and other countries throughout
the world. If we had predicted drones making deliveries, 3-D printing replacing inventory, robots filling orders in warehouses and modern mobile phones for shopping in 1976,
we may have been committed to an appropriate institution or accused of writing science
fiction. Albeit, in this edition these developments plus numerous others are given coverage and acceptance with an explanation of their impact on global economies and specifically the logistics and supply chain systems of many businesses in the twenty-first century.
The World has changed dramatically, especially the business environment, which has been
described by some pundits as a “white water” world. You had to “fasten your seat belt” and
put on your protective “helmet” to survive the tumultuous changes and fast pace of the
last 40 years. Through it all, logistics and supply chain management played an increasingly
important role to improve organizational efficiency, effectiveness, and competitiveness.
In 1976, some individuals suggested that the United States was destined to become a
second class economic power and would be surpassed by Japan, West Germany and others
in the highly competitive, global marketplace for producing products and services. The U.S.
economy was in the “doldrums,” but the seeds of change were being sowed. The first important change was the deregulation of major elements of the transportation system in the
United States that occurred over a several year period in the late 1970s and early 1980s. The
net result of deregulation was that the purchase and sale of transportation services became
similar to the selling and buying of other goods and services with limited government oversight. The more competitive prices spurred economic activity by lowering the cost of goods
sold and helped to make U.S. products more competitive in domestic and global markets.
The subsequent deregulation of the financial and communication industries contributed to
additional economic vitality in the 1980s as pointed out in Chapter 1.
Globalization, technology, and more informed consumers also influenced and changed
the dynamics of the U.S. economy in the 1990s (discussed in more detail in Chapter 1). A
critical ingredient for all the changes and the resurgence of the U.S. economy was the development of efficient and effective supply chains by many organizations as well as logistics
and supply chain service providers (3PLs) that contributed to the growth of the U.S. economy and its global presence throughout the world. It was an amazing set of changes that we
hope have been adequately reflected in the various editions of this text over the previous 40
years (hence the content and title changes noted above). Global organizations learned that
lean, fast, agile, and flexible supply chains were a requirement of the twenty-first century
where economic swings would likely be quicker and of shorter duration than in the past.
Adaptability and readiness were also ingredients for continuing growth and profitability.
Another important lesson for success was a recognition that “finance” had to be a common
language for supply chain executives because that was the basic language of the boardroom. EPS,
ROA, ROI, cash flow, and shareholder value had to be embraced by supply chain executives in
reporting their contributions to the success of the organization. These were the metrics the executive board would use to evaluate performance. While order cycle time, inventory turns and order
xxv
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xxvi
Preface
fill rates could be used as internal metrics for judging supply chain and logistics performance,
they had to be translated into terms that resonated well with executive management.
Recognizing the fast paced change that has continued into the twenty-first century
and the criticality of efficient and effective supply chain management, the authors have
attempted to reflect these dimensions in the 10th edition of this text with new content and
some reordering of the topics to improve the flow of material.
Part I-Supply Chain Foundations
This section of the text provides a framework for an appreciation and understanding of supply
chain management as it developed and expanded to meet the challenges of the last 30 years.
Chapter 1 provides an overview of the role and importance of supply chain management in the
twenty-first century. This is followed by Chapter 2 that has been added to explore the global
issues of the twenty-first century among the various countries of the world with an in-depth
look at demographics. Chapter 3 explores the important dimensions of logistics management in
support of global supply chain challenges. This provides due recognition to the critical role played
by logistics as the backbone of supply chains. The final chapter in Part 1, Chapter 4 explores the
challenges of supply chain design in a traditional sense, as well as in the rapidly-emerging context
of omni-channel distribution.
Part II-Supply Chain Fundamentals
The underlying fundamentals of supply chains can be visualized in the so-called SCOR®
Model that provides a solid conceptual view of the key ingredients of a supply chain. The content
of this section continues in the spirit of the SCOR® model, with each chapter exploring one of the
critical components of the model. Strategic sourcing is the topic for Chapter 5 with consideration being given to sourcing materials and services. In this era of outsourcing, the strategic global
procurement of goods and services has taken on increased importance and relevance. The focus
of Chapter 6 is on operations. Efficient and effective operations in manufacturing and related
areas such as maintenance are of great significance in the supply chain. Chapter 7 in this section
examines the outbound-to-customer needs and requirements to add value for customers. The
fourth and final Chapter 8 in this section considers customer service and order management
with emphasis on measurement and financial impact.
Part III-Cross-Chain Logistics Processes
This section takes an in-depth look at the major supply chain process areas that are
essential to achieving the objectives of customer order fulfillment. Referred to as “crosschain logistics processes,” these areas of competency are major contributors to the successfully executing the delivery of raw materials, components, and finished processes, consistent
with requirements. To provide useful insight and perspectives on this topic, Chapter 9
focuses on contemporary and futuristic approaches to managing inventory in the supply
chain. Chapter 10 highlights the role of distribution as a key supply chain responsibility and
Chapter 11 provides broad coverage of the importance of transportation as a key element
of overall supply chain success.
Collectively, the successful execution of these processes contribute significantly to
achieving the promise of the efficient and effective supply chain by ensuring that customers
receive the right product in the right quantities at the right place, right time, and at the right
cost. Customers will therefore be satisfied and the order-to-cash flow should be maximized.
While seemingly not as “glamorous” to some as other aspects of supply chain management,
they are nevertheless an essential components of successful supply chains.
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Preface
xxvii
Part IV-Supply Chain Challenges and Future Directions
Part IV examines the strategic issues that face supply chain managers as organizations
strive to remain competitive in the global economy. One of the issues is that of supply chain
alignment which has been receiving increasing attention by supply chain professionals and
academics. Covered in Chapter 12 is the need for alignment on both internal and external
perspectives because of the need for collaboration among supply chain participants. Chapter
12 also provides useful information regarding the role of third party providers of logistics
services, and how they may contribute to desired degrees of alignment among members of the
supply chain. Chapter 13 provides insight into the important areas of performance measurement
and financial analysis that are so critical to successfully executing today’s supply chain responsibilities. The topic of technology is examined in Chapter 14 because of its increasingly critical
role in achieving supply chain success. Not only are supply chain technologies important to the
functioning of supply chains and the organizations that are involved, but they have become key
contributors to creating customer value and making significant contributions to the success of
overall organizations. In short, it has become apparent that the use of capable technologies has
become a very important change agent to help deal with the increasing pressures faced by supply
chains. Last, Chapter 15 provides an insightful look at some of the governing principles of supply
chain management, and how they continue to evolve and remain current in the fast-changing
world of supply chain management. This concluding chapter also provides in-depth commentaries on several topics that are of great contemporary and future interest to achieving the goals
of supply chain management and overall business success.
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.
• 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
The website 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.
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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 president, 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 professional 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 contributions 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 two logistics and supply chain service companies.
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 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 degree in mathematics, MBA in finance, and Ph.D. in
business logistics, all from Penn State University. Dr. Langley has coauthored several books,
including Supply Chain Management: A Logistics Perspective. Also, he is lead author of the
annual Third Party Logistics Study and recently completed the 2016 20th Annual 3PL Study.
His research publications have appeared in journals such as the Journal of Business Logistics, International Journal of Physical Distribution and Logistics Management, International
Journal of Logistics Management, Supply Chain Management Review, and Land Economics.
Dr. Langley serves on the Boards of Directors of UTi Worldwide, Inc., Forward Air Corporation, and Averitt Express, Inc., in addition to several involvements on academic advisory
boards to logistics organizations. He also participated as a member of the Program Faculty
for the Kühne Logistics University in Hamburg, Germany, currently serves as education
advisor for NASSTRAC.
xxix
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xxx
About the Authors
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 overall 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 is executive director of the Center for Supply Chain Innovation and the
Wilson Family Professor of supply chain 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. Gibson’s research has been published in the Journal of Business Logistics, International Journal of Logistics Management, International Journal of Physical Distribution and
Logistics Management, Supply Chain Management Review, Supply Chain Quarterly, and
other leading publications. He is coauthor of Transportation: A Supply Chain Perspective,
author of the electronic textbook Supply Chain Essentials, and lead author of the annual
State of the Retail Supply Chain Report. Dr. Gibson serves as SCPro certification chair and
board member for the Council of Supply Chain Management Professionals, education advisor for NASSTRAC, and supply chain steering committee member for the Retail Industry
Leaders Association. Dr. Gibson earned a BS from Central Michigan University, an MBA
from Wayne State University, and a Ph.D. in logistics and transportation from the University of Tennessee.
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Part I
This section of the text provides a framework and overview to provide
an appreciation, some insights and an understanding of supply chain
management as it expanded and developed over the course of the last 30
years. This part of the text has been updated and revised again to better
reflect the authors’ view of the dynamic happenings of the 21st century
for global supply chains. Companies and other organizations will need to
navigate the associated challenges to achieve efficiency and effectiveness while executing to meet the expectations of their “customers.”
The first chapter provides an overview of the role and increasing importance of supply chain management in today’s tumultuous environment.
This chapters explores the external forces impacting global supply chains
and the major challenges and issues in the 21st century. The chapter
also provides an overview the basis tenets of supply chain management
and its development.
The second chapter covering the global dimensions of supply chains
has been repositioned in the text and expanded to explicate more fully
the complexity of the global demographic and economic issues that will
continue to impact global supply chains. Effective response to these
global dynamics will be critical for survival.
Chapter 3 discusses and explores the dimensions of logistics management and its importance to the proficiency of global supply chains.
The role of logistics as the “backbone” for world class supply chains is
examined and explained.
Chapter 4 has been repositioned in Part I and expanded to include an
analysis and discussion of omni-channel distribution and the related
network design. This is an important issue and growing challenge for
many supply chains as they respond to the needs of today’s demanding
and technology savvy consumers.
1
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Chapter 1
SUPP LY C H A I N M A NA G E M E NT: A N OV E RV IE W
Learning Objectives
After reading this chapter, you should be able to do the following:
• Explain how efficient and effective supply chains can improve customer
fulfillment and cash flow.
• Discuss the development and shaping of supply chains in leading organizations
and understand their contributions to their financial viability.
• Appreciate the important 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 form implementing supply chain best
practices.
• Understand the major supply chain challenges and issues faced by
organizations currently and in the future.
3
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4
Chapter 1
Supply Chain Profile
SAB Distribution: The Final
Chapter
SAB was established as a classic, middle-of-the-supply chain organization since it purchased
consumer 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 CEO of SAB in 2010, she knew that in spite of several major changes,
its continued survival depended upon the company reexamining its role in various 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
(Skip, Al, and Bob) who had served as navy supply officers. Harrisburg was selected because of
its central location in the mid-Atlantic region and because of its access to rail and highways for
suppliers and potential customers. The founders of SAB recognized the need for a consumer products wholesaling company to serve medium- and small-size retailers within a 200-mile radius of
Harrisburg. 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
expanded from nonperishable food products to include perishables and nonfood consumer products.
Sue Purdum took over from Pete Swan in 1995 when the company was facing major competitive challenges that could have led to the sale of the company, but she “navigated” the company successfully.
Susan Weber assumed the CEO role with the full knowledge that significant change was necessary if
SAB was to continue to survive as a profitable organization. Essentially, SAB needed a transformation
in the scope of its activities.
CURRENT SITUATION
SAB is faced with a number of challenges to its future existence. First and foremost, many of
its customers compete against large retailers like Walmart that can buy directly from the same
consumer product manufacturers as SAB, with no “middleman.” Walmart’s buying advantage 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 with more potential volatility.
When Sue Purdum assumed the role of CEO in 1995, she analyzed the competitive environment
and understood the need to change to SAB’s business practices. She focused upon efficiency in
warehouse operations, improved fulfillment, and developed partnerships with a core group of motor
carriers. Finally, she invested in information technology. The net effect of these changes lowered the
cost of doing business for SAB’s customers and enabled them to be more competitive. It was a winwin since SAB also became more efficient and effective as well as more profitable.
Initially, Susan Weber followed the lead of Sue Purdum, but she knew that she had to transform the
company to attract large retailers as customers. Their current customers were losing market share to
the larger retailers which negatively impacted SAB’s profitability.
Susan Weber realized that the large retailers outsourced part of their logistics operations to thirdparty logistics companies to lower their cost of doing business. Given SAB’s proficiency in logistics,
she believed that there were opportunities for SAB to eliminate duplicative echelons in those supply
chains. For example, between a producer’s plant and a retail store, there were often three or more
distribution locations where products were stored and handled.
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Supply Chain Management: An Overview
The SAB managers recognized the challenge of Susan Weber’s assessment of their competitive
market but also the opportunities associated with the changes that she outlined. After five years
of Susan Weber’s leadership, SAB attracted five large regional retail chains in the Northeast and
developed a distribution park for warehousing, a transportation hub, and a call center near Scranton,
Pennsylvania.
The new distribution park allowed SAB to expand their value-added services to customers by providing third-party logistics services (warehousing and inventory management, order fulfillment, delivery
and special packaging).
SAB hopes to attract additional regional chains such as Wegman’s. A focus for their new distribution
park is fresh fruits, vegetables, and other perishable food items, commonly referred to as the cold
supply chain. SAB’s success with their distribution park has caught the attention of several other
companies who are planning similar operations along the eastern seaboard.
Recently, Susan was informed by a daughter of one of the founders of SAB that the family had been
contacted by a representative of a major investment group that wanted to buy the family’s share of
the stock (65%) and take the company private. The potential buyout had major implications for Ms.
Weber and her valued employees. She felt that SAB could survive in the current environment, but
she would have to present a plan to the family owners that would convince them to maintain their
current ownership position. As you read this text, consider how SAB could address the challenges of
their current environment including: (1) cost pressure; (2) having a responsive/demand driven supply
chain; (3) supply chain visibility; (4) more collaborative supply chain relationships; and (5) improved
information flow and data analytics.
1-1 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 the second
decade has been more volatile than previous years. The external forces of change require
organizations to be much more nimble and responsive; that is, organizations need to be able
to change and/or transform themselves to survive in the intensely competitive, global environment. The SAB case is a good example of this survivor mode which 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 necessitate still bigger changes.
Several quotes cited in a previous edition of this book are still apropos. They are as
follows:
“Change is inevitable, but growth and improvement are optional.”1
“When the rate of change outside the organization is faster than inside, the end
is near.”2
Susan Weber, CEO of SAB, understands the wisdom of these comments and the need
to collaborate with their customers. The rationale for SAB to change can be made by
comparing the top retail establishments in 2000, 2010, and 2014 (see Table 1.1). 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 very important, supply chain
management and logistics are key ingredients for success in today’s highly competitive
global environment.
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5
6
Chapter 1
v
Table
1.1
Leading Retailers (Sales/Year)
2000
2010
2014
1. Wal-Mart
1. Wal-Mart
1. Wal-Mart
2. Kroger
2. Kroger
2. Kroger
3. The Home Depot
3. Target
3. Costco
4. Sears, Roebuck & Company
4. Walgreen
4. The Home Depot
5. Kmart
5. The Home Depot
5. Walgreen
6. Albertson’s
6. Costco
6. Target
7. Target
7. CVS Caremark
7. CVS Caremark
8. JC Penny
8. Lowe’s
8. Lowe’s
9. Costco
9. Best Buy
9. Amazon.com
10. Safeway
10. Sears Holdings
10. Safeway
Source: National Retail Federation (NRF) https://nrf.com/resources/annual-retailer-lists/top-100-retailers
Susan Weber (CEO, SAB) appears to comprehend the potential role that supply chains
can play in making retail organizations successful. She also seems to understand that the
dynamics of today’s global environment requires thinking “out of the box.” Table 1.1 demonstrates the forces of change and the need to adapt with the shifts which have occurred. In
2010, five of the top 10 retailers of 2000 are not on the list anymore with the caveat that
Sears and Kmart were merged. Note that Sears and Kmart were #4 and #5 in 2000, but
after the merger, the combined company was #10. Four new companies were on the 2010
list. In 2014, two new companies (Amazon and Safeway) joined the top 10 while Sears and
Best Buy were eliminated. Amazon’s appearance on the list is most notable because of their
business model with no stores. Amazon’s impact will be the basis of discussion in following
chapters.
At this juncture, an examination of the major external forces or change drivers shaping
supply chains is appropriate to examine their impact on various organizations and their
supply chains.
1-2 Shaping the Supply Chains of the Twenty-First
Century: Evolution and Change
The dynamics of the global environment changed dramatically during the 1990s, and
organizations had to adapt to these changes or perish. Unfortunately, there were a number
of casualties along the way. Some previously successful companies did not survive in
the more competitive global marketplace because they did not adapt and change. Leading companies such as Westinghouse, Bethlehem Steel, and RCA are no longer in business. Currently successful leaders such as IBM, General Electric, and McDonald’s are
struggling to survive as they try to make appropriate changes in their business models.
Some individuals argue that an appropriate business mantra should be “disrupt or be
disrupted” which may be a way of stating an older axiom, “think outside the box”.
Five major external forces are driving the rate of change: globalization, technology,
organizational consolidation, the empowered consumer, and government policy and
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Supply Chain Management: An Overview
Figure 1.1
7
External Change Drivers
Technology
Organizational
Consolidation
Globalization
External
Change
Drivers
Empowered
Consumers
Energy &
Sustainability
Government Policy & Security
Source: Center for Supply Chain Research, Penn State University.
regulation. (See Figure 1.1) The confluence of these factors in the twenty-first century has
dramatically changed the economic landscape and provided an opportune business climate
for the development of global supply chains and supply chain management.
1-2-1 Globalization
Globalization was the most frequently cited change factor by business leaders, and it
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 took on a special meaning for
all enterprises (profit and nonprofit; small, medium, and large; products or services) and for
individual consumers in the 1990s and the first decade of the twenty-first century. Globalization led to a more competitive economic and geopolitical environment which resulted in
opportunities and threats both economic and political. Some individuals have argued that
there is no “geography” in the current global environment (figuratively speaking) or, perhaps
more aptly, that time and distance have been compressed. For example, companies seeking
to rationalize their global networks ask such questions as: (1) Where in the world should
we source our materials and/or services? (2) Where in the world should we manufacture
or produce our products or services? (3) Where in the world should we market and sell our
products or services? (4) Where in the world should we warehouse and distribute our products? (5) What global transportation and related service alternatives should we consider?
Some important issues or challenges for supply chains in the global economy are more
economic and political risk; shorter product life cycles; and 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 terrorism, for example, the ISIS attacks in the Middle East and pirates attacking cargo ships,
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8
Chapter 1
have serious implications for the flow of commerce. Companies have put security measures in place to protect their global supply chains and to act quickly to offset challenges
to their supply chains which has increased their cost, but the risk is ever present. Natural
catastrophes such as hurricanes, floods, typhoons, and earthquakes have become more
problematic because of climate changes and because they pose a very significant challenge for global supply chains. Challenges to supply and demand are usually exacerbated
in number and severity by the distances involved, which necessitates risk mitigation
strategies.
It has been argued that an interruption or disruption to a supply chain that cuts off the
flow of information and products is analogous to a “heart attack” that cuts off the flow of
blood to the heart. Like a heart attack, supply chain disruption can have lasting effects. The
global supply chains of the best companies must be adaptive, resilient, and responsive to
meet the challenges of the global economy and develop mitigating strategies for disruptive
forces.
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 the highly competitive global environment are faced with this issue. From a supply chain perspective, shorter
product life cycles present a challenge for inventory management. Products that are duplicated will most likely face a faster reduction in demand and require new pricing policies,
both of which present challenges to effective inventory management. The risk of obsolescence as new products are developed is another challenge for inventory management. It
also means continually developing new products or reconfiguring old products to maintain
market share. The rate of development and change in technology is particularly disruptive
to existing enterprises and has led to the demise of some.
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 the more
competitive global economy. For example, to maintain financial viability (read profitability), companies may outsource activities and processes to another company that can provide
what they need more efficiently and hopefully more effectively. They may also add to their
current operations or services to provide additional value for customers. SAB followed this
strategy to retain and add customers.
Outsourcing is not new. No organization is completely independent. The competitiveness of the global environment, however, has increased the scope of outsourcing both
domestically and globally. As previously mentioned, 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. Many automobile
and computer manufacturers outsource components or parts that they need for finished
products as well as logistics related services. From a supply chain and logistics perspective, the growth in outsourcing is noteworthy because it increases the importance of
effective and efficient supply chain management because supply chains are longer and
more complex.
A strong compliment 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. It should be
noted that some organizations think that technology has become a more important driver
of change than globalization.
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Supply Chain Management: An Overview
1-2-2 Technology
Technology has had a major impact on supply chains as a facilitator of change as
c ompanies have transformed their processes. However, it is also a major force in changing 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 and others, have made it possible to gather timely information quickly. We no longer
have to wait for information to be “pushed out” to us; we can “pull” information as we need
it. Vast stores of data and information are virtually at our fingertips. Social networks such as
Facebook or Twitter are playing an ever increasing role in business organizations and
influence supply chains because of their impact on customer demand and the speed of information transfers. Some individuals have argued that another relevant mantra for businesses
in the twenty-first century is “twitter and tweet or retreat.” Many companies see opportunities to “data mine” the social media to uncover demand related information for improved
forecasting and marketing. As will be discussed in more detail, “cloud c omputing”, is more
than a “buzz word” and is revolutionizing information systems.
Technology has allowed individuals and smaller organizations to connect to the world’s
“knowledge pools” to create and establish opportunities for collaboration in supply chains.
Outsourcing to the less-developed countries was enhanced by technology. Collaboration
opportunities with individuals and companies throughout the globe have increased which
has created market opportunities as employment opportunities increased. Technology
has spawned the development of Uber, Airbnb, and other such organizations which have
disrupted their respective marketplaces.
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
products to customers. Her predecessor used technology to improve internal processes,
for example, warehouse operations and order fulfillment as well as transportation carrier
collaboration. SAB will need to focus more externally with information technology to
improve overall supply chain efficiency and effectiveness.
1-2-3 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 volume, employees,
buying power, locations, and other factors. They typically exerted their influence throughout the supply chain often to their specific economic advantage, especially in the distribution of their products.
During the 1980s and especially the 1990s, a significant change occurred as retail giants
such as Walmart, Sears, Kmart, Home Depot, Target, Kroger, McDonald’s, etc., became
powerful market leaders and engines for change. 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.
The large retailers were accorded services such as scheduled deliveries, “rainbow” pallets
(mixed arrays of products or stock-keeping units [SKUs]), advance shipments notices
(ASNs) shrink-wrapped pallets, etc. These services allowed retailers to operate more efficiently and often more effectively and provide scale economies to the producers which was
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9
10
Chapter 1
a win-win arrangement with savings passed on to the consumer. Subsequent chapters will
more fully explicate the benefits.
As more collaboration is practiced among organizations in the supply chains, they can
gain shared cost savings and improved customer service. For example, sharing point-ofsale data is a powerful collaborative tool for mitigating the so-called “bullwhip effect” of
inventory in the supply chain which has multiple benefits for supply chain collaborators.
Companies that report innovative best practices usually obtain about half of their innovative insights outside their company through collaboration with suppliers and customers.
The power of information sharing and collaboration cannot be overstated. This is a key
area for SAB to exploit as it tries to adapt to its competitive environment and increase sales
with existing and new customers. Data sharing will help SAB to lower product stock-outs
and related lost sales to improve on-shelf availability of their products for increased sales.
1-2-4 The Empowered Consumer
The impact of the consumer is more direct for supply chains today because the consumer
has placed increased demands at the retail level for an expanded variety of products and
services. The implementation of an omni-channel distribution strategy by large retailers,
which will be discussed in Chapter 4, is an excellent example of a current strategy made
feasible with technology that is having a major impact on marketing sales at the retail level.
Consumers are empowered by the information that they have at their disposal from the
Internet and other sources. Their access to product sources and related information has
expanded exponentially. Consumers have the opportunity to compare prices, quality, and
service. Consequently, they demand competitive prices, high quality, tailored or customized products, convenience, flexibility, and responsiveness. They tend to have a low tolerance level for poor quality in products and services. They report their likes and dislikes
on the Internet to third party organizations such as Yelp. Some consumers have increased
buying power due to high income levels. They demand the best quality, at the best price,
with the best service. These demands place increased challenges and pressure on the various supply chains for consumer products.
The demographics of our society with the increase in two-career families and singleparent households have made time and convenience critical factors for many households.
The expectation for service is frequently 24/7 availability with a minimum of wait time.
The age old axiom of “let the buyer beware” should probably be changed to “let the seller
beware.” The Internet enables buyers to expand their buying alternatives and quickly make
comparisons before they purchase. The omni-channel distribution option provides additional flexibility for consumers. The power of the consumer has caused much change in
how supply chains function. Supply chains have felt the pressure to keep prices stable even
during inflationary periods. Collaboration has frequently been the basis for efficiencies to
mitigate increased costs.
1-2-5 Government Policy and Regulation
The fifth external change factor is the various levels of government (federal, state, and
local) that establish and administer policies, regulations, taxes, etc., which impact businesses and their supply chains. The deregulation of several important sectors of our economy that occurred in the 1980s and 1990s is a good example. The deregulated sectors
include transportation, communications, and financial institutions, which are cornerstones
of the infrastructure for most organizations.
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Supply Chain Management: An Overview
11
Beginning in the late 1970s and into the 1980s, the U.S. transportation industry was
deregulated at the federal level in terms of economic controls such as rates and areas of
service. The net effect was that it became possible for transportation services to be purchased
and sold in a more competitive environment. Transportation companies were also allowed
to offer more than just transportation services. Many motor carriers, for example, became
logistics services companies and offered services that include order fulfillment, inventory
management, and warehousing. They have moved aggressively ahead in the deregulated
environment to view themselves as outsourcing partners for potential strategic advantages
(see Case 1.1).
The financial sector was also deregulated at the federal level. Financial markets became
more competitive, flexible, and responsive to customer needs. The deregulation of financial institutions fostered changes in how businesses can operate with respect to cash flow,
purchase cards, and short-term investment. These changes made organizations more
On the Line
Changing Times for Drugs
One of the U.S. industries being buffeted by the “winds of change” in the twenty-first century is
the pharmaceutical industry which has been a major force in the U.S. economy for many years. The
industry has provided consistent and excellent employment opportunities and inceased returns to
shareholders for years. However, the industry has been challenged in recent years by more intense
global competition; a related growth in the prescription and use of generic drugs; the end of patent
protection for a growing number of their major drugs; a slower development of new “blockbuster”
drugs to treat major illnesses; more regulation; and an unresponsive supply chain.
One of several “cures” may come to mind for the challenges enumerated in earlier paragraph, but
there is no question that there is a glaring need for managing their supply chains more efficiently and
effectively along with better execution. Discussion with key executives noted a need to change their
strategy from a push approach to a pull strategy. The push approach has led to overstocks of some
SKU’s and stock-outs of others with consequent higher inventory costs and perhaps lost sales. There
is also a need for their supply chains to be more responsive to demand “signals” in a timely manner.
Another needed change is a more collaboration with suppliers, customers, and logistics service
providers. In the past, pharmaceutical companies could essentially dictate and control what
happened in their supply chains. Participants in the supply chain were usually not considered to be
“partners” or needed collaborators. Valuable information and potential innovations were probably
squandered along the way. As has been pointed out in recent years, supply chain collaborators and
partners often provide half or more of the innovative changes that lowered cost and/or improved
service.
Another need is for improved information flow and management as well as more visibility along
the supply chain. This is a necessary ingredient for improved decisions in logistics and transportation. Too frequently, data has been incomplete or incorrect resulting in higher cost and/or ineffective customer service. Timely and accurate Information flow is important and is a necessary part of
improving pharmaceutical supply chains and the financial viability of the industry.
The pharmaceutical industry is still an important part of the economy but like some other sectors
and individual companies, they need to make innovative changes in their supply chains and related
activities to be more competitive and financially viable in the twenty-first century.
Source: John J. Coyle and Kusumal Ruamsook, Center for Supply Chain Research, Penn State University.
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