week2 assignment 1

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Case study introduction

This case describes the forecasting, planning and production processes of a global skiwear supply channel. Sport Obermeyer Ltd. is a high-end fashion design and merchandising company that sells its products through U.S. department stores and ski shops. Although the company has a global supply network, most of its critical outerwear products are sourced through a Hong Kong based joint venture company, Obersport. It has to forecast the demand of its ski parkas almost a year in advance in a field where the fashions change quite fast. It leads to some complex decision making as the manufacturing lead time is very long. The supply chain spreads over many countries, some of the suppliers have very long lead times and the forecasts the company makes at the beginning are less accurate. The case highlights the challenges companies face when planning production for short-life cycle products, operational changes to reduce cost of stockouts and excess stock due to mismatched supply and demand, and other coordination issues in supply chains.


Answer the following questions:

  1. What were the main challenges facing Sport Obermeyer? (Be sure to provide specific data as appropriate)
  2. What factors constrain Sport Obermeyer’s production planning?
  3. What operational changes would you recommend? Why would these changes add value?

The case write-up should not exceed four-pages, double space, font size 12 Times Roman or equivalent, excluding exhibits (note that exhibits should not exceed two pages). The write-up should be professionally done, with arguments or points made in a logical flow. You can use prose or bullet-point format in your write-up, but key arguments should be articulated clearly and concisely. Submit your completed assignment via the Turnitin drop box located in the Assignments area.

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Downloaded by Alexander Barton on 1/9/2018CPID 740082 SCHM 6201: Introduction to Operations and Supply Chain Management Professor Balachandra Northeastern University Spring 1 2018 Downloaded by Alexander Barton on 1/9/2018 Downloaded by Alexander Barton on 1/9/2018 SCHM 6201: Introduction to Operations and Supply Chain Management, Balachandra − Spring 1 2018 Northeastern University THIS PRINT COURSEPACK AND ITS ELECTRONIC COUNTERPART (IF ANY) ARE INTENDED SOLELY FOR THE PERSONAL USE OF PURCHASER. ALL OTHER USE IS STRICTLY PROHIBITED. Downloaded by Alexander Barton on 1/9/2018 XanEdu™ publications may contain copyrighted materials of XanEdu, Inc. and/or its licensors. The original copyright holders retain sole ownership of their materials. Copyright permissions from third parties have been granted for materials for this publication only. Further reproduction and distribution of the materials contained herein is prohibited. WARNING: COPYRIGHT INFRINGEMENT IS AGAINST THE LAW AND WILL RESULT IN PROSECUTION TO THE FULLEST EXTENT OF THE LAW. THIS COURSE PACK CANNOT BE RESOLD, COPIED OR OTHERWISE REPRODUCED. XanEdu Publishing, Inc. does not exert editorial control over materials that are included in this course pack. The user hereby releases XanEdu Publishing, Inc. from any and all liability for any claims or damages, which result from any use or exposure to the materials of this course pack. Downloaded by Alexander Barton on 1/9/2018 Items are available in both online and in print, unless marked with icons. − Print only − Online only SCHM 6201: Introduction to Operations and Supply Chain Management, Balachandra − Spring 1 2018 Table of Contents “What Is the Right Supply Chain for Your Products?” by Fisher, Marshall L. 1 “Disruptive Technologies Enabling Supply Chain Evolution” by Vyas, Nick 15 “Half a Century of Supply Chain Management at Wal−Mart” by Johnson, P. Fraser; Mark, Ken 21 “National Cranberry Cooperative, 1996” by Shapiro, Roy D. 45 XanEdu Extra An Excel−formatted spreadsheet containing the exhibits for the case above is available at http://content.xanedu.com/hs/688122p2.xls “Managing Inventories” by Freeland, James R. 55 “Making Supply Meet Demand in an Uncertain World” by Fisher, Marshall L.; Hammond, Janice H.; Obermeyer, Walter R.; Raman, Ananth 95 “How They Did it: Red Wing Shoes' Journey to S&OP Excellence” by Grothe, Stephanie 109 “Sport Obermeyer Ltd.” by Hammond, Janice H.; Raman, Ananth 117 XanEdu Extra An Excel−formatted spreadsheet containing the exhibits for the case above is available at http://content.xanedu.com/hs/695022p2.xls “The Competitive Potential of Supply Management” by Monczka, Robert M.; Petersen, Kenneth J. 137 “What Makes a Winning Procurement Function?” by Atkinson, William 147 “Services Supply Management: The Next Frontier for Improved Organizational Performance” by Ellram, Lisa M.; Tate, Wendy L.; Billington, Corey 151 “The Power of Supplier Collaboration & Rapid Supplier Qualification” by Noor, JehanZeb; Satpathy, Aurobind; Shulman, Jeff; Musso, Chris 175 “From Superstorms to Factory Fires: Managing Unpredictable Supply−Chain Disruptions” by Simchi−Levi, David; Schmidt, William; Wei, Yehua 183 “VF Brands: Global Supply Chain Strategy” by Pisano, Gary P.; Adams, Pamela 191 i Downloaded by Alexander Barton on 1/9/2018 XanEdu Extra An Excel−formatted spreadsheet containing the exhibits for the case above is available at http://content.xanedu.com/hs/610022p2.xls “Chapter 6: Logistics” by Prater, Edmund; Whitehead, Kim 207 “Freight Story 2008” 223 “How to Win in an Omnichannel World” by Bell, David R.; Gallino, Santiago; Moreno, Antonio 267 “Warehouse and Distribution Best Practices” by Trebilcock, B 279 287 Bibliography ii Downloaded by Alexander Barton on 1/9/2018 www.hbr.org A simple framework can help you figure out the answer. What Is the Right Supply Chain for Your Product? by Marshall L. Fisher Reprint 97205 1 Downloaded by Alexander Barton on 1/9/2018 A simple framework can help you figure out the answer. What Is the Right Supply Chain for Your Product? COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. by Marshall L. Fisher Never has so much technology and brainpower been applied to improving supply chain performance. Point-of-sale scanners allow companies to capture the customer’s voice. Electronic data interchange lets all stages of the supply chain hear that voice and react to it by using flexible manufacturing, automated warehousing, and rapid logistics. And new concepts such as quick response, efficient consumer response, accurate response, mass customization, lean manufacturing, and agile manufacturing offer models for applying the new technology to improve performance. Nonetheless, the performance of many supply chains has never been worse. In some cases, costs have risen to unprecedented levels because of adversarial relations between supply chain partners as well as dysfunctional industry practices such as an overreliance on price promotions. One recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting $30 billion annually. Supply chains in many other industries suffer from an excess of some harvard business review • march–april 1997 products and a shortage of others owing to an inability to predict demand. One department store chain that regularly had to resort to markdowns to clear unwanted merchandise found in exit interviews that one-quarter of its customers had left its stores empty-handed because the specific items they had wanted to buy were out of stock. Why haven’t the new ideas and technologies led to improved performance? Because managers lack a framework for deciding which ones are best for their particular company’s situation. From my ten years of research and consulting on supply chain issues in industries as diverse as food, fashion apparel, and automobiles, I have been able to devise such a framework. It helps managers understand the nature of the demand for their products and devise the supply chain that can best satisfy that demand. The first step in devising an effective supplychain strategy is therefore to consider the nature of the demand for the products one’s company supplies. Many aspects are important— page 1 2 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? for example, product life cycle, demand predictability, product variety, and market standards for lead times and service (the percentage of demand filled from in-stock goods). But I have found that if one classifies products on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. And each category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain. Is Your Product Functional or Innovative? Marshall L. Fisher is the Stephen J. Heyman Professor of Operations and Information Management and codirector of the Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania’s Wharton School in Philadelphia. His current research focuses on how to manage the supply of products with hard-to-predict demand. Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which don’t change much over time, they have stable, predictable demand and long life cycles. But their stability invites competition, which often leads to low profit margins. To avoid low margins, many companies introduce innovations in fashion or technology to give customers an additional reason to buy their offerings. Fashion apparel and personal computers are obvious examples, but we also see successful product innovation where we least expect it. For instance, in the traditionally functional category of food, companies such as Ben & Jerry’s, Mrs. Fields, and Starbucks Coffee Company have tried to gain an edge with designer flavors and innovative concepts. Century Products, a leading manufacturer of children’s car seats, is another company that brought innovation to a functional product. Until the early 1990s, Century sold its seats as functional items. Then it introduced a wide variety of brightly colored fabrics and designed a new seat that would move in a crash to absorb energy and protect the child sitting in it. Called Smart Move, the design was so innovative that the seat could not be sold until government product-safety standards mandating that car seats not move in a crash had been changed. Although innovation can enable a company to achieve higher profit margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short—usually just a few months—because as imitators erode the competitive advantage that innovative products enjoy, com- harvard business review • march–april 1997 panies are forced to introduce a steady stream of newer innovations. The short life cycles and the great variety typical of these products further increase unpredictability. It may seem strange to lump technology and fashion together, but both types of innovation depend for their success on consumers changing some aspect of their values or lifestyle. For example, the market success of the IBM Thinkpad hinged in part on a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. The new design was so controversial within IBM that managers had difficulty believing the enthusiastic reaction to the cursor control in early focus groups. As a result, the company underestimated demand—a problem that contributed to the Thinkpad’s being in short supply for more than a year. With their high profit margins and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products do. To understand the difference, one should recognize that a supply chain performs two distinct types of functions: a physical function and a market mediation function. A supply chain’s physical function is readily apparent and includes converting raw materials into parts, components, and eventually finished goods, and transporting all of them from one point in the supply chain to the next. Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy. Each of the two functions incurs distinct costs. Physical costs are the costs of production, transportation, and inventory storage. Market mediation costs arise when supply exceeds demand and a product has to be marked down and sold at a loss or when supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers. The predictable demand of functional products makes market mediation easy because a nearly perfect match between supply and demand can be achieved. Companies that make such products are thus free to focus almost exclusively on minimizing physical costs—a crucial goal, given the price sensitivity of most functional products. To that end, companies usually create a schedule for assembling finished goods for at least the next page 2 3 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? Before devising a supply chain, consider the nature of the demand for your products. month and commit themselves to abide by it. Freezing the schedule in this way allows companies to employ manufacturing-resourceplanning software, which orchestrates the ordering, production, and delivery of supplies, thereby enabling the entire supply chain to minimize inventory and maximize production efficiency. In this instance, the important flow of information is the one that occurs within the chain as suppliers, manufacturers, and retailers coordinate their activities in order to meet predictable demand at the lowest cost. That approach is exactly the wrong one for innovative products. The uncertain market reaction to innovation increases the risk of shortages or excess supplies. High profit margins and the importance of early sales in establishing market share for new products increase the cost of shortages. And short product life cycles increase the risk of obsolescence and the cost of excess supplies. Hence market mediation costs predominate for these products, and they, not physical costs, should be managers’ primary focus. Most important in this environment is to read early sales numbers or other market signals and to react quickly, during the new product’s short life cycle. In this instance, the crucial flow of information occurs not only within the chain but also from the marketplace to the chain. The critical decisions to be made about inventory and capacity are not about minimizing costs but about where in the chain to position inventory and available production capacity in order to hedge against uncertain demand. And suppliers should be chosen for their speed and flexibility, not for their low cost. Sport Obermeyer and Campbell Soup Company illustrate the two environments and how the resulting goals and initiatives differ. Sport Obermeyer is a major supplier of fashion skiwear. Each year, 95% of its products are completely new designs for which demand forecasts often err by as much as 200%. And because the retail season is only a few months long, the company has little time to react if it misguesses the market. In contrast, only 5% of Campbell’s products are new each year. Sales of existing products, most of which have been on the market for years, are highly predictable, allowing Campbell to achieve a nearly perfect service level by harvard business review • march–april 1997 satisfying more than 98% of demand immediately from stocks of finished goods. And even the few new products are easy to manage. They have a replenishment lead time of one month and a minimum market life cycle of six months. When Campbell introduces a product, it deploys enough stock to cover the most optimistic forecast for demand in the first month. If the product takes off, more can be supplied before stocks run out. If it flops, the six-month, worst-case life cycle affords plenty of time to sell off the excess stocks. How do goals and initiatives differ in the two environments? Campbell’s already high service level leaves little room for improvement in market mediation costs. Hence, when the company launched a supply chain program in 1991 called continuous replenishment, the goal was physical efficiency. And it achieved that goal: the inventory turns of participating retailers doubled. In contrast, Sport Obermeyer’s uncertain demand leads to high marketmediation costs in the form of losses on styles that don’t sell and missed sales opportunities due to the “stockouts” that occur when demand for particular items outstrips inventories. The company’s supply chain efforts have been directed at reducing those costs through increased speed and flexibility. Although the distinctions between functional and innovative products and between physical efficiency and responsiveness to the market seem obvious once stated, I have found that many companies founder on this issue. That is probably because products that are physically the same can be either functional or innovative. For example, personal computers, cars, apparel, ice cream, coffee, cookies, and children’s car seats all can be offered as a basic functional product or in an innovative form. It’s easy for a company, through its product strategy, to gravitate from the functional to the innovative sphere without realizing that anything has changed. Then its managers start to notice that service has mysteriously declined and inventories of unsold products have gone up. When this happens, they look longingly at competitors that haven’t changed their product strategy and therefore have low inventories and high service. They even may steal away the vice president of logistics from one of those companies, reasoning, If we hire their logistics guy, we’ll have low inventory and high service, page 3 4 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? too. The new vice president invariably designs an agenda for improvement based on his or her old environment: cut inventories, pressure marketing to be accountable for its forecasts and to freeze them well into the future to remove uncertainty, and establish a rigid just-in-time delivery schedule with suppliers. The worst thing that could happen is that he or she actually succeeds in implementing that agenda, because it’s totally inappropriate for the company’s now unpredictable environment. Devising the Ideal Supply-Chain Strategy For companies to be sure that they are taking Functional Versus Innovative Products: Differences in Demand Functional (Predictable Demand) Innovative (Unpredictable Demand) Product life cycle more than 2 years 3 months to 1 year Contribution margin* 5% to 20% 20% to 60% Product variety low (10 to 20 variants per category) high (often millions of variants per category) Average margin of error in the forecast at the time production is committed 10% 40% to 100% Average stockout rate 1% to 2% 10% to 40% Average forced end-ofseason markdown as percentage of full price 0% 10% to 25% Lead time required for made-to-order products 6 months to 1 year 1 day to 2 weeks Aspects of Demand * The contribution margin equals price minus variable cost divided by price and is expressed as a percentage. harvard business review • march–april 1997 the right approach, they first must determine whether their products are functional or innovative. Most managers I’ve encountered already have a sense of which products have predictable and which have unpredictable demand: the unpredictable products are the ones generating all the supply headaches. For managers who aren’t sure or who would like to confirm their intuition, I offer guidelines for classifying products based on what I have found to be typical for each category. (See the table “Functional Versus Innovative Products: Differences in Demand.”) The next step is for managers to decide whether their company’s supply chain is physically efficient or responsive to the market. (See the table “Physically Efficient Versus Market-Responsive Supply Chains.”) Having determined the nature of their products and their supply chain’s priorities, managers can employ a matrix to formulate the ideal supply-chain strategy. The four cells of the matrix represent the four possible combinations of products and priorities. (See the exhibit “Matching Supply Chains with Products.”) By using the matrix to plot the nature of the demand for each of their product families and its supply chain priorities, managers can discover whether the process the company uses for supplying products is well matched to the product type: an efficient process for functional products and a responsive process for innovative products. Companies that have either an innovative product with an efficient supply chain (upper right-hand cell) or a functional product with a responsive supply chain (lower left-hand cell) tend to be the ones with problems. For understandable reasons, it is rare for companies to be in the lower left-hand cell. Most companies that introduce functional products realize that they need efficient chains to supply them. If the products remain functional over time, the companies typically have the good sense to stick with efficient chains. But, for reasons I will explore shortly, companies often find themselves in the upper righthand cell. The reason a position in this cell doesn’t make sense is simple: for any company with innovative products, the rewards from investments in improving supply chain responsiveness are usually much greater than the rewards from investments in improving the chain’s efficiency. For every dollar such a com- page 4 5 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? pany invests in increasing its supply chain’s responsiveness, it usually will reap a decrease of more than a dollar in the cost of stockouts and forced markdowns on excess inventory that result from mismatches between supply and demand. Consider a typical innovative product with a contribution margin of 40% and an average stockout rate of 25%.1 The lost contribution to profit and overhead resulting from stockouts alone is huge: 40% x 25% = 10% of sales—an amount that usually exceeds profits before taxes. Consequently, the economic gain from reducing stockouts and excess inventory is so great that intelligent investments in supply chain responsiveness will always pay for themselves—a fact that progressive companies have discovered. Compaq, for example, decided to continue producing certain high-variety, short- life-cycle circuits in-house rather than outsource them to a low-cost Asian country, because local production gave the company increased flexibility and shorter lead times. World Company, a leading Japanese apparel manufacturer, produces its basic styles in lowcost Chinese plants but keeps production of high-fashion styles in Japan, where the advantage of being able to respond quickly to emerging fashion trends more than offsets the disadvantage of high labor costs. That logic doesn’t apply to functional products. A contribution margin of 10% and an average stockout rate of 1% mean lost contribution to profit and overhead of only .1% of sales—a negligible cost that doesn’t warrant the significant investments required to improve responsiveness. Getting Out of the Upper RightHand Cell Physically Efficient Versus Market-Responsive Supply Chains Physically Efficient Process Market-Responsive Process Primary purpose supply predictable demand efficiently at the lowest possible cost respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory Manufacturing focus maintain high average utilization rate deploy excess buffer capacity Inventory strategy generate high turns and minimize inventory throughout the chain deploy significant buffer stocks of parts or finished goods Lead-time focus shorten lead time as long as it doesn’t increase cost invest aggressively in ways to reduce lead time Approach to choosing suppliers select primarily for cost and quality select primarily for speed, flexibility, and quality Product-design strategy maximize performance and minimize cost use modular design in order to postpone product differentiation for as long as possible harvard business review • march–april 1997 The rate of new-product introductions has skyrocketed in many industries, fueled both by an increase in the number of competitors and by the efforts of existing competitors to protect or increase profit margins. As a result, many companies have turned or tried to turn traditionally functional products into innovative products. But they have continued to focus on physical efficiency in the processes for supplying those products. This phenomenon explains why one finds so many broken supply chains—or unresponsive chains trying to supply innovative products—in industries such as automobiles, personal computers, and consumer packaged goods. The automobile industry is one classic example. Several years ago, I was involved in a study to measure the impact that the variety of options available to consumers had on productivity at a Big Three auto plant. As the study began, I tried to understand variety from the customer’s perspective by visiting a dealer near my home in the Philadelphia area and “shopping” for the car model produced in the plant we were to study. From sales literature provided by the dealer, I determined that when one took into account all the choices for color, interior features, drivetrain configurations, and other options, the company was actually offering 20 million versions of the car. But because ordering a car with the desired options entailed an eight-week wait for delivery, more than 90% of customers bought their cars off page 5 6 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? the lot. The dealer told me that he had 2 versions of the car model on his lot and that if neither matched my ideal specifications, he might be able to get my choice from another dealer in the Philadelphia area. When I got home, I checked the phone book and found ten dealers in the area. Assuming each of them also had 2 versions of the car in stock, I was choosing from a selection of at most 20 versions of a car that could be made in 20 million. In other words, the auto distribution channel is a kind of hourglass with the dealer at the neck. At the top of the glass, plants, which introduce innovations in color and technology every year, can provide an almost infinite variety of options. At the bottom, a multitude of customers with diverse tastes could benefit from that variety but are unable to because of dealers’ practices at the neck of the glass. The computer industry of 20 years ago shows that a company can supply an innovative product with an unresponsive process if the market allows it a long lead time for delivery. In my first job after college, I worked in an IBM sales office helping to market the System/360 mainframe. I was shocked to learn that IBM was then quoting a 14-month lead time for this hot new product. I asked how I could possibly tell a customer to wait that long. The answer was that if a customer really wanted a 360, it would wait, and that if I couldn’t persuade it to wait, there must Matching Supply Chains with Products Efficient Supply Chain Innovative Products match mismatch Responsive Supply Chain Functional Products mismatch match harvard business review • march–april 1997 be something seriously lacking in my sales skills. That answer was actually correct: lead times of one to two years were then the norm. This meant that computer manufacturers had plenty of time to organize their supplies around physical efficiency. Now PCs and workstations have replaced mainframes as the dominant technology, and the acceptable lead time has dropped to days. Yet because the industry has largely retained its emphasis on a physically efficient supply chain, most computer companies find themselves firmly positioned in the upper righthand cell of the matrix. That mismatch has engendered a kind of schizophrenia in the way computer companies view their supply chains. They cling to measures of physical efficiency such as plant capacity utilization and inventory turns because those measures are familiar from their mainframe days. Yet the marketplace keeps pulling them toward measures of responsiveness such as product availability. How does a company in the upper righthand cell overcome its schizophrenia? Either by moving to the left on the matrix and making its products functional or by moving down the matrix and making its supply chain responsive. The correct direction depends on whether the product is sufficiently innovative to generate enough additional profit to cover the cost of making the supply chain responsive. A sure sign that a company needs to move to the left is if it has a product line characterized by frequent introductions of new offerings, great variety, and low profit margins. Toothpaste is a good example. A few years ago, I was to give a presentation to a food industry group. I decided that a good way to demonstrate the dysfunctional level of variety that exists in many grocery categories would be to buy one of each type of toothpaste made by a particular manufacturer and present the collection to my audience. When I went to my local supermarket to buy my samples, I found that 28 varieties were available. A few months later, when I mentioned this discovery to a senior vice president of a competing manufacturer, he acknowledged that his company also had 28 types of toothpaste—one to match each of the rival’s offerings. Does the world need 28 kinds of toothpaste from each manufacturer? Procter & Gamble, which has been simplifying many of its prod- page 6 7 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? uct lines and pricing, is coming to the conclusion that the answer is no. Toothpaste is a product category in which a move to the left— from innovative to functional—makes sense. In other cases when a company has an unresponsive supply chain for innovative products, the right solution is to make some of the products functional and to create a responsive supply chain for the remaining innovative products. The automobile industry is a good example. Many suggestions have been made for fixing the problems with the auto distribution channel I have described here, but they all miss the mark because they propose applying just one solution. This approach overlooks the fact that some cars, such as the Ford Fairmont, are inherently functional, while others, such as the BMW Z3 roadster (driven in the James Bond movie Golden Eye), are innovative. A lean, efficient distribution channel is exactly right for functional cars but totally inappropriate for innovative cars, which require inventory buffers How Campbell’s Price Promotions Disrupted Its Supply System 800,000 shipments Cases of Chicken Noodle Soup 600,000 400,000 consumption 200,000 0 0 10 20 30 40 July 1 50 June 30 to absorb uncertainty in demand. The most efficient place to put buffers is in parts, but doing so directly contradicts the just-in-time system that automakers have so vigorously adopted in the last decade. The just-in-time system has slashed parts inventories in plants (where holding inventory is relatively cheap) to a few hours, while stocks of cars at dealers (where holding inventory is expensive) have grown to around 90 days. Efficient Supply of Functional Products Cost reduction is familiar territory, and most companies have been at it for years. Nevertheless, there are some new twists to this old game. As companies have aggressively pursued cost cutting over the years, they have begun to reach the point of diminishing returns within their organization’s own boundaries and now believe that better coordination across corporate boundaries—with suppliers and distributors—presents the greatest opportunities. Happily, the growing acceptance of this view has coincided with the emergence of electronic networks that facilitate closer coordination. Campbell Soup has shown how this new game should be played. In 1991, the company launched the continuous-replenishment program with its most progressive retailers. The program works as follows: Campbell establishes electronic data interchange (EDI) links with retailers. Every morning, retailers electronically inform the company of their demand for all Campbell products and of the level of inventories in their distribution centers. Campbell uses that information to forecast future demand and to determine which products require replenishment based on upper and lower inventory limits previously established with each retailer. Trucks leave the Campbell shipping plant that afternoon and arrive at the retailers’ distribution centers with the required replenishments the same day. The program cut the inventories of four participating retailers from about four to two weeks of supply. The company achieved this improvement because it slashed the delivery lead time and because it knows the inventories of all retailers and hence can deploy supplies of each product where they are needed the most. Pursuing continuous replenishment made Campbell aware of the negative impact that the overuse of price promotions can have on Weeks harvard business review • march–april 1997 page 7 8 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? Functional products require an efficient process; innovative products, a responsive process. physical efficiency. Every January, for example, there was a big spike in shipments of Chicken Noodle Soup because of deep discounts that Campbell was offering. Retailers responded to the price cut by stocking up, in some cases buying a year’s supply—a practice the industry calls forward buying. Nobody won on the deal. Retailers had to pay to carry the year’s supply, and the shipment bulge added cost throughout the Campbell system. For example, chickenboning plants had to go on overtime starting in October to meet the bulge. (See the graph “How Campbell’s Price Promotions Disrupted Its Supply System.”) Recognizing the problem, Campbell required its retail customers on the continuous-replenishment program to waive the option of forward buying at a discounted price. A retailer that promotes Campbell products in its stores by offering a discounted price to consumers has two options: it can pay Campbell an “everyday low price” equal to the average price that a retailer receiving the promotional deals would pay or it can receive a discount on orders resulting from genuine increases in sales to consumers. The Campbell example offers some valuable lessons. Because soup is a functional product with price-sensitive demand, Campbell was correct to pursue physical efficiency. Service— or the in-stock availability of Campbell products at a retailer’s distribution center—did increase marginally, from 98.5% to 99.2%. But the big gain for the supply chain was in increased operating efficiency, through the reduction in retailers’ inventories. Most retailers figure that the cost of carrying the inventory of a given product for a year equals at least 25% of what they paid for the product. A two-week inventory reduction represents a cost savings equal to nearly 1% of sales. Since the average retailer’s profits equal about 2% of sales, this savings is enough to increase profits by 50%. Because the retailer makes more money on Campbell products delivered through continuous replenishment, it has an incentive to carry a broader line of them and to give them more shelf space. For that reason, Campbell found that after it had introduced the program, sales of its products grew twice as fast through participating retailers as they did through other retailers. Understandably, supermarket chains love programs such as Campbell’s. Wegmans Food Markets, with stores in upstate New York, has even aug- harvard business review • march–april 1997 mented its accounting system so that it can measure and reward suppliers whose products cost the least to stock and sell. There is also an important principle about the supply of functional products lurking in the “everyday low price” feature of Campbell’s program. Consumers of functional products offer companies predictable demand in exchange for a good product and a reasonable price. The challenge is to avoid actions that would destroy the inherent simplicity of this relationship. Many companies go astray because they get hooked on overusing price promotions. They start by using price incentives to pull demand forward in time to meet a quarterly revenue target. But pulling demand forward helps only once. The next quarter, a company has to pull demand forward again just to fill the hole created by the first incentive. The result is an addiction to incentives that turns simple, predictable demand into a chaotic series of spikes that only add to cost. Finally, the Campbell story illustrates a different way for supply chain partners to interact in the pursuit of higher profits. Functional products such as groceries are usually highly price-sensitive, and negotiations along the supply chain can be fierce. If a company can get its supplier to cut its price by a penny and its customer to accept a one-cent price increase, those concessions can have a huge impact on the company’s profits. In this competitive model of supply chain relations, costs in the chain are assumed to be fixed, and the manufacturer and the retailer compete through price negotiations for a bigger share of the fixed profit pie. In contrast, Campbell’s continuous-replenishment program embodies a model in which the manufacturer and the retailer cooperate to cut costs throughout the chain, thereby increasing the size of the pie. The cooperative model can be powerful, but it does have pitfalls. Too often, companies reason that there never can be too many ways to make money, and they decide to play the cooperative and competitive games at the same time. But that tactic doesn’t work, because the two approaches require diametrically different behavior. For example, consider information sharing. If you are my supplier and we are negotiating over price, the last thing you want to do is fully share with me information about your costs. But that is what we both must do if we want to reduce supply chain costs by assign- page 8 9 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? ing each task to whichever of us can perform it most cheaply. Responsive Supply of Innovative Products There is a kind of schizophrenia in the way computer companies view their supply chains. Uncertainty about demand is intrinsic to innovative products. As a result, figuring out how to cope with it is the primary challenge in creating a responsive supply process for such products. I have seen companies use four tools to cope with uncertainty in demand. To fashion a responsive supply process, managers need to understand each of them and then blend them in a recipe that’s right for their company’s particular situation. Although it may sound obvious, the first step for many companies is simply to accept that uncertainty is inherent in innovative products. Companies that grew up in an oligopoly with less competition, more docile customers, and weaker retailers find it difficult to accept the high levels of demand uncertainty that exist today in many markets. They have a tendency to declare a high level of forecast errors unacceptable, and they virtually command their people to think hard enough and long enough to achieve accuracy in their forecasts. But these companies can’t remove uncertainty by decree. When it comes to innovative products, uncertainty must be accepted as good. If the demand for a product were predictable, that product probably would not be sufficiently innovative to command high profit margins. The fact is that risk and return are linked, and the highest profit margins usually go with the highest risk in demand. Once a company has accepted the uncertainty of demand, it can employ three coordinated strategies to manage that uncertainty. It can continue to strive to reduce uncertainty— for example, by finding sources of new data that can serve as leading indicators or by having different products share common components as much as possible so that the demand for components becomes more predictable. It can avoid uncertainty by cutting lead times and increasing the supply chain’s flexibility so that it can produce to order or at least manufacture the product at a time closer to when demand materializes and can be accurately forecast. Finally, once uncertainty has been reduced or avoided as much as possible, it can hedge against the remaining residual uncertainty with buffers of inventory or excess ca- harvard business review • march–april 1997 pacity. The experiences of National Bicycle, a subsidiary of Matsushita Electric, and of Sport Obermeyer illustrate the different ways in which these three strategies can be blended to create a responsive supply chain. National Bicycle prospered for decades as a small but successful division. But by the mid1980s, it was in trouble. Bicycles in Japan were functional products bought mainly as an inexpensive means of transportation, and sales were flat. Bicycles had become a commodity sold on the basis of low price, and Japan’s high labor costs left National Bicycle unable to compete with inexpensive bikes from Taiwan and Korea. In 1986, in an attempt to salvage the situation, Matsushita appointed as president of National an executive from another division who had no experience in bicycles. The new president, Makoto Komoto, saw that the division had many strengths: technical expertise in manufacturing and computers, a highly skilled workforce, a strong brand name (Panasonic), and a network of 9,000 dealers. Komoto also noticed that National Bicycle had an innovative product segment that enjoyed high profit margins: sports bicycles that affluent customers bought purely for recreation. He concluded that National’s only hope was to focus on that segment and use the division’s strengths to develop a responsive chain that could supply sports bikes while avoiding the high risk of overproduction that resulted from their short life cycle and uncertain demand. According to Komoto’s vision, a customer would visit a Panasonic dealership and choose a bike from a selection of 2 million options for combining size, color, and components, using a special measuring stand to find the exact size of the frame that he or she needed. The order would be faxed to the factory, where computer-controlled welding equipment and skilled workers would make the bike and deliver it to the customer within two weeks. Komoto’s radical vision became a reality in 1987. By 1991, fueled by this innovation, National Bicycle had increased its share of the sports bicycle market in Japan from 5% to 29%. It was meeting the two-week lead time 99.99% of the time and was in the black. National Bicycle’s success is a good example of a responsive supply chain achieved through avoiding uncertainty. National has little idea what customers will order when they walk into page 9 10 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? Campbell Soup has shown how manufacturers and retailers can cooperate to cut costs throughout the system. a retail shop, but that doesn’t matter: its produce-to-order system allows it to match supply with demand as it happens. By radically increasing the number of choices from a few types of bikes to 2 million, it can induce the customer to sacrifice immediate availability and wait two weeks for a bicycle. National’s program is part of a new movement called mass customization: building the ability to customize a large volume of products and deliver them at close to mass-production prices. Many other companies have found that they, too, can benefit from this strategy. For example, Lutron Electronics of Coopersburg, Pennsylvania, became the world leader in dimmer switches and other lighting controls by giving customers an essentially unlimited choice of technical and fashion features. Says Michael W. Pessina, Lutron’s vice president of manufacturing operations, “With our diverse product line, customer demand can be impossible to predict. Yet by configuring products at the time of order, we can offer customers tremendous variety and fill orders very quickly without having to stock a huge amount of inventory.” Mass customization is not without its challenges. For example, what does National Bicycle do with its plant during the winter, when no one is buying bikes? It builds an inventory of high-end sports bicycles. In addition, mass customization is not necessarily cheap. National’s custom production requires three times more labor than assembly-line mass production of bikes. Interestingly, one of the main reasons why Henry Ford in the early 1900s moved in the opposite direction—from craft to mass production—was to slash labor costs, which he succeeded in doing by a factor of three. So what has changed to make custom production viable now? Affluent consumers are willing to pay for high-margin, innovative products; and those products require a different, more expensive, but more responsive production process than the functional Model T did. Sport Obermeyer, which is based in Aspen, Colorado, designs and manufactures fashion skiwear and distributes it through 800 specialty retailers located throughout the United States. Because 95% of its products are new each year, it constantly faces the challenges and risks of demand uncertainty: stockouts of hot styles during the selling season and left- harvard business review • march–april 1997 over inventory of “dogs” at the end of the season. In 1991, the company’s vice president, Walter R. Obermeyer, launched a project to attack those problems by blending the three strategies of reducing, avoiding, and hedging against uncertainty. To reduce uncertainty, Sport Obermeyer solicited early orders from important customers: the company invited its 25 largest retailers to Aspen each February to evaluate its new line. Sport Obermeyer found that the early orders from this handful of retailers permitted it to forecast national demand for all its products with a margin of error of just 10%. Although it was helpful to get this information several months before Sport Obermeyer was required to ship its products in September, it didn’t solve the company’s problem, because long lead times forced it to commit itself to products well before February. Obermeyer concluded that each day shaved off the lead time would save the company $25,000 because that was the amount it spent each day at the end of September shipping products by air from plants in Asia to have them in stores by early October—the start of the retail season. Once that figure was announced to employees, they found all kinds of ways to shorten the lead time. For example, the person who had dutifully used standard mail service to get design information to the production manager in Hong Kong realized that the $25 express-mail charge was a bargain compared with the $25,000 per day in added costs resulting from longer lead times caused by mail delays. Through such efforts, Sport Obermeyer was able to avoid uncertainty on half of its production by committing that production after early orders had been received in February. Nevertheless, the company still had to commit half of the production early in the season, when demand was uncertain. Which styles should it make then? It would stand to reason that they should be the styles for which Sport Obermeyer had the most confidence in its forecasts. But how could it tell which those were? Then the company noticed something interesting. Obermeyer had asked each of the six members of a committee responsible for forecasting to construct a forecast for all products, and he used the average of the six forecasts as the company’s forecast. After one year of trying this method, the company found that when the six individual fore- page 10 11 Downloaded by Alexander Barton on 1/9/2018 What Is the Right Supply Chain for Your Product? National Bicycle’s success is a good example of a responsive supply chain achieved through avoiding uncertainty. casts agreed, the average was accurate, and when they disagreed, the average was inaccurate. This discovery gave Sport Obermeyer a means of selecting the styles to make early. Using this information as well as data on the cost of overproduction and underproduction, it developed a model for hedging against the risk of both problems. The model tells the company exactly how much of each style to make early in the production season (which begins nearly a year before the retail season) and how much to make in February, after early orders are received. Sport Obermeyer’s approach, which has been called accurate response, has cut the cost of both overproduction and underproduction in half—enough to increase profits by 60%. And retailers love the fact that the system results in more than 99% product availability: they have ranked Sport Obermeyer number one in the industry for service. (See “Making Supply Meet Demand in an Uncertain World,” by Marshall L. Fisher, Janice H. Hammond, Walter R. Obermeyer, and Ananth Raman, HBR May-June 1994.) harvard business review • march–april 1997 Companies such as Sport Obermeyer, National Bicycle, and Campbell Soup, however, are still the exceptions. Managers at many companies continue to lament that although they know their supply chains are riddled with waste and generate great dissatisfaction among customers, they don’t know what to do about the problem. The root cause could very well be a misalignment of their supply and product strategies. Realigning the two is hardly easy. But the reward—a remarkable competitive advantage that generates high growth in sales and profits—makes the effort worth it. 1. The contribution margin equals price minus variable cost divided by price and is expressed as a percentage. This type of profit margin measures increases in profits produced by the incremental sales that result from fewer stockouts. Consequently, it is a good way to track improvements in inventory management. Reprint 97205 Harvard Business Review OnPoint 8509 To order, see the next page or call 800-988-0886 or 617-783-7500 or go to www.hbr.org page 11 12 Downloaded by Alexander Barton on 1/9/2018 Further Reading Harvard Business Review OnPoint articles enhance the full-text article with a summary of its key points and a selection of its company examples to help you quickly absorb and apply the concepts. Harvard Business Review OnPoint collections include three OnPoint articles and an overview comparing the various perspectives on a specific topic. What Is the Right Supply Chain for Your Product? is also part of the Harvard Business Review OnPoint collection Smarter Supply Chains, Product no. 8487, which includes these additional articles: Aligning Incentives in Supply Chains V.G. Narayanan and Ananth Raman Harvard Business Review November 2004 Product no. 8363 The Triple-A Supply Chain Hau L. Lee Harvard Business Review October 2004 Product no. 8096 To Order For reprints, Harvard Business Review OnPoint orders, and subscriptions to Harvard Business Review: Call 800-988-0886 or 617-783-7500. Go to www.hbr.org For customized and quantity orders of reprints and Harvard Business Review OnPoint products: Call Frank Tamoshunas at 617-783-7626, or e-mail him at ftamoshunas@hbsp.harvard.edu page 12 13 Downloaded by Alexander Barton on 1/9/2018 14 Downloaded by Alexander Barton on 1/9/2018 MYTHS S&OP PROCUREMENT MANUFACTURING TECHNOLOGY Disruptive Technologies Enabling Supply Chain Evolution “The world is moving so fast now-a-days that the man who says it cannot be done is generally interrupted by someone else doing it.” Those lines are as true today as when they were first published in the early 1900s. And it’s not just our every day worlds that appear to be evolving before our very eyes. Global supply chains are evolving at a faster rate than at any point in history. In the September 2015 issue of Supply Chain Management Review, I wrote about emerging markets, mega cities, millennial consumers, and e-commerce—the four global trends that supply chain executives must consider when designing their processes and networks (Four Compass Points for Global Supply Chain Management). Together, they form four interconnected points on the supply chain compass in response to the shifting demographics, markets, and economies that will impact where and how we manufacture and deliver goods to our customers. As if those trends aren’t disruptive enough, the tools we rely on to manage distribution, manufacturing, networks, and data are also in the midst of a radical evolution. While distribution models formerly evolved slowly over decades or even centuries—as was the case in the move from horse-drawn carriages to trains to commercial trucks—these new technologies threaten to disrupt our field in By Nick Vyas Nick Vyas is the Director of the USC Marshall Center for Global Supply Chain Management, where he is also an Assistant Professor of Clinical Data Sciences and Operations. He can be reached at Nikhilvy@marshall.usc.edu. For more information, visit marshall.usc.edu. 36 Supply Chain Management Review • J a n u a r y / Fe b 15 ruary 2016 www.scmr.com Downloaded by Alexander Barton on 1/9/2018 compact time frames, ranging from years to mere months. In this fast-paced field, I believe supply chain managers must keep an eye on: • three new tools and emerging technologies— drones, 3D printing, and cognitive calculation; • how these technologies can disrupt current models in positive ways, and; • how we must re-imagine our supply chains to harness new technologies to continue the evolution. These will not be easy tasks. Let’s take a look at each of these emerging technologies through those lenses. www.scmr.com Drones: Laws, Human Employment, and Increased Efficiency For years—and in some instances centuries—products have moved across the water, land, and air by ships and barges, trains and trucks, and airplanes. In some respects, very little has fundamentally changed in those technologies over time, with the exception of gradually increasing fuel efficiency, incremental improvements in speed, and the addition of digital and computer tracking technologies. Today’s semi-tractors and trailers don’t look all that different from the tractors and trailers that S u p p l y 16 Chain Management Review • J a n u a r y / Fe b r u a r y 2 0 1 6 37 Downloaded by Alexander Barton on 1/9/2018 Disruptive Technologies were on the road 30 years ago; indeed, many of today’s cargo planes were put into service 30 years ago. Enter drones, which are emerging as a potentially game-changing alternative to traditional modes of delivery for some processes. Like so many disruptive technologies, drones have their roots in the military, where they are used to limit the loss of life while accomplishing their assigned tasks with fewer mistakes, in shorter periods of time, and with less risk to the safety of the operators. In the last few years, drones have caught the attention of the private sector. In the supply chain, drones could positively affect industries as varied as agriculture, medicine, and retail by reducing the number of steps in the chain and speeding up delivery. The potential benefits are astounding, and, according to author Peter Sachs, the technology and associated laws around the usage of drones are evolving almost weekly. Corporations such as Google and Amazon were quick to realize that autonomous delivery could rapidly change how products make their way through the supply about the potential for drones to increase surveillance and violate individual privacy rights. Already, we have seen news reports of a man in Kentucky who shot his neighbor’s drone out of the sky for hovering too near his property; meanwhile, in California drones operated by hobbyists have allegedly interfered with the work of firefighters and rescue workers following a massive highway pileup. For those reasons, Google and its competitors would do well to remind the public of the many beneficial technological advances that were developed first for military purposes, including microwaves and the World Wide Web. Just as those technologies caused suspicion before they became part of the fabric of our lives, so too can we accept drones. In fact, as reported by the BBC, the FAA has already granted permission to six television and film firms to use drones for their cameras; and they have developed restrictions and policies for such usage. Laws will eventually catch up to the technology in ways that make drones acceptable in our daily experience. Drones may improve the supply chain in several ways. For one, drones could be used in ports and in the air to make deliveries that require fewer individuals to handle materials. As an example, PINC Solutions, a provider of yard management systems, has that deployed a solution that utilizes drones autonomous delivery could rapidly change how to identify the location of trailers, shipproducts make their way through the supply chain. ping containers, and other assets in hard to reach areas. Equipped to carry chain and on to the end customer. Jeff Bezos famously GPS, RFID, OCR, and barcode readers, the drones can interjected drones into the public conversation on “60 fly overhead to quickly locate and identify assets that have Minutes” in December of 2013. Eight months later, in been tagged in a yard or port. While drones will replace August 2014, Google announced “Project Wing,” an ini- some traditional jobs, including some that are currently tiative designed to develop an efficient and reliable glob- hard to fill like truck and delivery drivers, the operation al supply chain system where autonomous drones can of drones will create new jobs for employees with techreduce the time to deliver products to consumers. As nical training and logistical knowledge. “Although drones Astro Teller, Captain of Moonshots at Google X, noted are unmanned, they are not unpiloted,” the BBC has at the time, there has always been a level of friction in reported. “Trained crew at base steer the craft, analyze the transportation of goods, and drone delivery such as the images which the cameras send back, and act on Google imagines “aspires to take another big chunk out what they see.” Moreover, the BBC predicts that human of the friction of moving things around.” Indeed, Gartner employment will come from loading, programming, and estimates that by 2017, 20 percent of logistics organi- maintaining drone technology. zations will exploit drones as part of their monitoring, Drones will undoubtedly alter how consumers order searching, and event management. products, given that the lag time between ordering and There are hurdles that will have to be overcome arrival can be drastically reduced in some circumstances. before drones become a mainstream tool and not just They will also alter how retailers function, from how, where, a fancy of Jeff Bezos’ imagination. Drones’ military lin- and whether they warehouse their products to whether eage has led the public to voice concerns—and more— they opt to maintain or move away from brick-and-mortar Corporations such as Google and Amazon were quick to realize 38 Supply Chain Management Review • J a n u a r y / Fe b 17 ruary 2016 www.scmr.com Downloaded by Alexander Barton on 1/9/2018 and omni-channel in favor of e-retail. up a drone with a defibrillator and a webcam that can be Since Bezos’ “60 Minutes” announcement, Amazon delivered to patients with cardiac arrest faster than an gives every indication that it is pushing for the use of ambulance can drive to the scene. According to the unidisruptive drone technology. As recently as the start of versity, the webcam connects local bystanders to emerthe 2015 holiday shopping period, it released a video gency medical personnel who can direct them on how to touting the latest iteration of an Amazon Prime Air use the defibrillator, delivering life-saving treatments in a drone designed for the home delivery market. Amazon fraction of the usual time. certainly faces technical limitations today—at present Similarly, drones were used to deliver small aid packbatteries are only good for 25 minutes on a charge— ages to remote disaster areas after the Haitian earthbut “at a certain speed, the home-court advantage of local merchants dissipates,” Evan Schumann reported in Computer By producing World. “That happens when an Amazon delivery takes no more time than the products at the point of demand, supply chains shopper would need to drive to a local retailer, complete the purchase and become shorter, leaner, and less complex. return home.” Drones, for instance, could increase the sales of an online retailer like Amazon dur- quake in 2012; and in Papua New Guinea, Doctors ing the last days of the holiday season, when online Without Borders used drones to transport dummy TB sales typically dip because it’s too late to make deliver- test samples from a remote village to the large coastal ies with conventional parcel delivery services and shop- city of Kerema. pers turn instead to stores. While drones still face technical limitations and The health care industry is also experimenting with legal hurdles, the technology will find its niche in supply high speed drones, especially for the delivery of crucial chain management. items. The efficiency and speed at which organ donations, key medications, and vaccines will be able to travel 3D: Cut Out the Middleman and Speed could make healthcare more accessible in urban spaces, Product to the Consumer bypassing road and rail traffic congestions, as well as to Manufacturing processes and their supply chains are rural and third world locations where insufficient infra- complex and slow to respond. As manufacturing supply structure might typically cause detrimental delays. chains add even more suppliers, warehouses, and shipThe Mayo Clinic, for instance, has already begun ping components, they risk further delays in delivery as studies about the possible benefits of utilizing drones in well as increased costs for storage and shipping. the medical supply chain. Cornelius A. Thiels, a general Meanwhile, the promise of 3D printing is simplicity and surgery resident at the Mayo Clinic, notes in a Clinical speed: By producing products at the point of demand, supUpdate that blood is the perfect testing ground for drone ply chains become shorter, leaner, and less complex. While delivery “because it’s expensive and expires—platelets the technology is still emerging—and like drones, still faces and thawed plasma last just five days—and the supply technical shortcomings and cost hurdles—a broad range of is very limited. In our region, the smallest critical access fields, from fashion to automotive to aeronautics to medihospitals stock just two to six units of red cells and no cine, are utilizing advanced printing technology to create fresh frozen plasma or platelets.” Currently, these sup- products on demand. For example, Sinclair Interplanetary ply lines are supported by helicopter and has begun using 3D printing to produce ambulance transport teams, which are satellite reaction wheels. Industries that incredibly expensive in comparison to the produce heavy equipment, such as comcost of flying a drone, according to Thiels. mercial aviation, jet engines, and conEven emergency treatment, which curstruction equipment, are utilizing 3D rently requires an ambulance to arrive on printing to produce parts that are critical the scene before technicians can treat to the production process but with limpatients and transport them to hospital ited demand. Manufacturers like Boeing emergency rooms, could undergo beneficial find that they can manufacture a single changes. Students at the Delft University of part on demand on the factory floor more Technology in the Netherlands have rigged economically than they can purchase and Meanwhile, the promise of 3D printing is simplicity: www.scmr.com S u p p l y 18 Chain Management Review • J a n u a r y / Fe b r u a r y 2 0 1 6 39 Downloaded by Alexander Barton on 1/9/2018 Disruptive Technologies warehouse a minimum order quantity that might not be consumed for months. As the technology is honed, it will produce a wider range of products, with improved endurance. By locating local production centers closer to strategic markets, 3D printing will have a positive impact on: • reducing carbon footprints by cutting back on delivery transportation, improving an organization’s sustainability efforts; • cutting back on warehousing costs by allowing quick made-to-order production; • speeding up turnaround by quickly and cheaply producing replacement parts; and • meeting consumer demands for the swift delivery of personalized products. High-speed networks will aid the entire supply chain in downloading, printing, and distributing products with fewer steps in the supply chain and significantly less waste. Take, for example, car racing, a sport that is incredibly fast paced and demands pit crews that can quickly make a repair and get the driver and car back on the track. In the past, pit crews have kept an inventory of “just in case” supplies on hand, leading to a surplus of material on the track side. In addition, there is the chance that a car will need repairs for which no equipment or parts are available on hand. 3D printing solves many of these problems by allowing crews to produce parts on demand and only when needed. To see the potential effects of using 3D printing to cut back supply chain components in manufacturing, take a look at California-based SpaceX, where three years of research and development led to the use of 3D printing to build the emergency escape rockets on its new manned Dragon spacecraft. SpaceX developed materials that can withstand the demands of space travel even while being produced quickly; writing for Space.com, Elizabeth Howell reports that SpaceX has shown that “Printing the chamber resulted in an order of magnitude reduction in lead time compared with traditional machining—the path from the initial concept to the first hotfire was just over three months.” That kind of lead-time reduction has reduced costs and enabled SpaceX to outstrip NASA in developing and maintaining emerging contracts for space station supply chain. It will come as no surprise that NASA is joining the 3D printing revolution, with plans to ensure that space station crews can, if necessary, produce parts on demand without having to wait for few and far between delivery 40 Supply Chain Management Review • missions: “NASA plans to send a 3D printer produced by California-based company Made in Space to the space station this year,” Howell continues, “and the European Space Agency has mused about using 3D parts to build lunar bases.” Doing this might allow NASA to reenter the game, which SpaceX had been threatening to claim in full. Meanwhile space station crews will be better equipped to maintain the station safely and on demand. Cognitive Calculation: Surpassing Human Adaptability and Accuracy For most of us, early PCs seem like tools from the Stone Age. While the Apple 1, comprised of a single circuit board connected to a keyboard and a television, was considered a marvel in 1976, the computer technology now available to any sixth grader can generate 3D designs, create high quality music, and store up to 6.0 terabytes of data. Meanwhile, super computers, such as the Tianhe-2 created by China’s National University of Defense Technology, are reported to have a wide range of capabilities including simulation, analysis, and government security applications. Performing 33.86 quadrillion calculations in one second, or nearly twice the speed of the U.S. Energy Department’s Titan, according to some analysts, such heightened computational capacity radically outstrips the human ability for calculation and efficient use of data. Super computers can perform tasks that formerly required large staffs of employees working at slower speeds and with less accuracy. All of that computing power is made possible through smart chips and super computing technology that generate speed, information storage, as well as adaptable cognition that imitates human learning. Supply chain management may not need the power of the Tianhe-2 or the Titan just yet, but as super computing technology has expanded in the past decade, computer scientists have adapted these tools to create more practical solutions, such as robots that are not only programmable, but can perform complex functions within microseconds and develop new abilities through learning. These new developments in cognitive calculation and smart computing can reduce the need for human contributions that are at times erroneous and cause slow downs and disruptions in manufacturing, order fulfillment, and transportation. And, just as technology developed for the military, like drones, is finding a home in the private sector, so too are technologies developed in the computer world. Baxter, a robot developed by Rethink Robotics for J a n u a r y / Fe b 19 ruary 2016 www.scmr.com Downloaded by Alexander Barton on 1/9/2018 collaborative industrial applications, is a good example of the potential for applying these advances in cognitive calculation and artificial intelligence (AI) in the but they supply chain. Using some of the most advanced AI on the current market, also expect the companies they do business with Baxter requires no traditional programming. Instead, the robot is “manually to harness these technologies for their benefit. trainable by in-house staff, reducing the time and cost of third party programmers [and is] flexible Take, for example, the rise of millennial consumers, for a range of applications and re-trainable across lines and who have come of age during this time of rapid change. tasks,” according to its manufacturer. That means Baxter is Millennials are not only comfortable and conversant in capable of being taught to perform a multitude of tasks in the use of emerging supply chain models, but they also the plant and distribution center, unlike its human counter- expect the companies they do business with to harness parts who typically specialize in a single field. One robot, these technologies for their benefit. For example, they for instance, can be trained to handle line loading, machine demand selection; visibility into their orders; and speedy, tending, packaging, and materials handling. What’s more, accurate, reliable, and economical delivery. when it finishes a task at one station, it can be easily moved More importantly, millennial consumers have made it to another station and taught the next task. clear that sustainability is an important factor in who they There is one other significant difference: Most indus- choose to do business with. Recent regulations, and pertrial robots are not only designed to replace workers, they haps the Paris accord on climate change, may also push are typically in their own distinct work areas for the pro- sustainability to the forefront. Each of these new technoltection of workers. Baxter, on the other hand, is designed ogies not only improves efficiency, they allow global supto collaborate with human employees. In one warehousing ply chains to address major sustainability concerns of the application, a Baxter robot loads products into a machine future, including: that wraps and seals them for shipment while an associate • energy consumption; at the same workstation unloads and visually inspects the • CO2 emissions; products before putting them on a conveyor. Rather than • traffic congestion; and replacing associates, the robot requires contact and moni• water consumption. toring of human behaviors in order to efficiently learn to Those are just some of the reasons I believe that the process and replicate tasks. new technologies will gain traction and become acceptable Collaborating with these technologies within supply more quickly than past disruptive technologies. The tranchains means that robots can perform monotonous tasks sition process will require supply chain managers, stakeand free up skilled labor for higher level, value-added holders, and consumers to focus on the future rather than tasks. Beyond taking on monotonous tasks, cognitive tech- the past. New training, new methods of collaborations, nologies can also tackle potentially dangerous tasks in the and entirely new supply chain career paths will open. To fields of manufacturing and military operations, reducing advance within the field, supply chain managers must coninjury or loss of life and allowing employees to put their tinue to educate themselves and their teams, and encourskills to work more safely. age new approaches to lean thinking and innovation. Navigating the complex world of modern supply chains Following the Compass requires managers who have an eye to the major compass Early on, I referenced the four global trends that sup- points of the field—with the likely North being millennial ply chain executives must consider when designing their consumers who drive organizations toward new technolprocesses and networks. They are what I refer to as the ogy, into emerging markets, and toward developing mega four interconnected points on the supply chain compass. cities. Employing the evolving and disruptive technoloFollow them, and they will aid supply chain managers as gies including drones, 3D printing, rapid networks, and they respond to shifting demographics, economies, and smart chips will be critical for us to meet the demands global markets. Each of the three technologies I have of these consumers. But effective thought leaders will see just discussed will be important tools for supply chain the possibilities of harnessing these technologies to meet managers as they follow the compass to address these demands, expand into desirable markets, and do so with heightened lean efficiency. 嘷嘷嘷 new and rapidly evolving issues in our networks. Millennials are not only comfortable and conversant in the use of emerging supply chain models, www.scmr.com S u p p l y 20 Chain Management Review • J a n u a r y / Fe b r u a r y 2 0 1 6 41 Downloaded by Alexander Barton on 1/9/2018 S w 9B12D010 HALF A CENTURY OF SUPPLY CHAIN MANAGEMENT AT WALMART1 Ken Mark wrote this case under the supervision of Professor P. Fraser Johnson solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; email cases@ivey.uwo.ca. Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-05-07 INTRODUCTION James Neuhausen was a U.S. stock analyst tasked with preparing a recommendation on what his firm, a large U.S. investment house, should do with its stake in Wal-Mart Stores, Inc. It was an unseasonably warm day in early February 2012, and Neuhausen was reviewing his notes on the firm. Wal-Mart, the world’s largest retailer, was trying to recover from a series of missteps that had seen competitors such as Dollar Stores and Amazon.com close the performance gap. Competitors had copied many aspects of WalMart’s distribution system, including cross-docking product to eliminate storage time in warehouses, positioning stores around distribution centres and widespread adoption of electronic data interchange (EDI), to manage ordering and shipping from suppliers. Neuhausen stated: Wal-Mart is believed to have one of the most efficient supply chains in the retail world. What impact will the increasing variety of product, store formats and the growing importance of international stores have on the way it distributes product? What improvements to its supply chain does the company need to make in order to continue to stay ahead of competitors? Last year, Wal-Mart suffered nine consecutive quarters of declining same store sales. Procter & Gamble’s Chief Executive, Robert McDonald, pointed out that part of the problem was that there were execution issues at Wal-Mart’s U.S. stores.2 More nimble competitors such as Dollar General are rolling out small format stores that are eating into Wal-Mart’s share. In the online space, Amazon.com has become a major threat. Wal-Mart has also changed over the years and it now operates a variety of store formats under 60 different banners around the world. International sales hit US$109 billion in fiscal year 2011, more than a quarter of its business. Can its supply chain keep up and still deliver efficiency gains? 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Wal-Mart or any of it employees. 2 http://operationsroom.wordpress.com/2011/03/07/is-wal-mart-losing-focus/, accessed January 4, 2012. 21 Downloaded by Alexander Barton on 1/9/2018 Page 2 9B12D010 THE RETAIL INDUSTRY U.S. retail sales, excluding motor vehicles and parts dealers, reached US$3.9 trillion in 2011. Major categories in the U.S. retail industry included general merchandise, food and beverage, health and personal care and other categories as can be seen in Exhibit 1. In the United States, retailers competed at local, regional and national levels, with some of the major chains such as Wal-Mart and Costco counting operations in foreign countries as well. In addition to the traditional one-store owner-operated retailer, the industry included formats such as discount stores, department stores (selling a large percentage of soft goods, or clothing), variety and convenience stores, specialty stores, supermarkets, supercentres (combination discount and supermarket stores), Internet retailers and catalog retailers. Online retail sales were rising in importance, accounting for US$197 billion in 2011.3 The top 200 retailers accounted for approximately 30 per cent of worldwide retail sales.4 Major retailers competed for employees and store locations as well as customers. There were two broad strategies in global retailing: variable pricing, or “hi-lo pricing,” and everyday low price (EDLP). Hi-lo pricing, practiced by retailers for decades, involved adjusting the retail price of items to optimize gross margins. For example, at traditional grocery stores, while prices of key items — such as milk, sugar, eggs and butter — were kept consistently low, items such as toothpaste, detergent and tissue had high prices. The goal in a hi-lo environment was to generate increased sales by having the manufacturer fund the trade promotions on some items — lowering prices by 25 to 30 per cent — every month or quarter. On the other hand, an EDLP strategy meant that prices on items were generally consistent from week to week but were kept as low as possible so as to generate the highest consumer foot traffic. Running an EDLP strategy generally required the retailer to focus on keeping operational costs as low as possible and investing any savings into lowering retail prices. The goal, in an EDLP environment, was to generate higher aggregate gross profit by increasing the volume of items sold. As many of the top global retailers faced intense competition in their home markets, a growing trend for these global retailers was international expansion, especially into developing markets such as Asia, South America and Africa. The objective of international expansion was to find a way to continue to grow earnings at a faster pace than was possible domestically. Retailers going abroad sought to capitalize on global purchasing economies of scale and to leverage international expertise from one market to another. But international expansion was fraught with risk, and it was not uncommon for retailers to pull out of a market if they were unable to build profitable operations. WAL-MART STORES, INC. Based in Bentonville, Arkansas and founded by the legendary Sam Walton, Wal-Mart was the number one retailer in the world with fiscal year 2011 net income, from continuing operations, of US$16 billion on sales of US$419 billion. It had over 2 million employees and 8,500 stores in 15 countries, the result of a series of acquisitions over the past 20 years. Beginning with its “big box” discount store format in the 1960s, Wal-Mart’s store formats around the world had grown to include supercentres, which were a larger version of a discount store that included groceries, supermarkets, wholesale outlets, restaurants and apparel stores. Globally, it served about 200 million customers per week.5 3 http://mashable.com/2011/02/28/forrester-e-commerce/, accessed January 15, 2012. http://www.uneptie.org/pc/sustain/reports/Retail/Nov4Mtg2002/Retail_Stats.pdf, accessed May 10, 2006. 5 “WMT — 17th Annual Meeting for the Investment Community,” Thomson StreetEvents, October 13, 2010, accessed January 5, 2012. 4 22 Downloaded by Alexander Barton on 1/9/2018 Page 3 9B12D010 Wal-Mart’s strategy was to provide a broad assortment of quality merchandise and services at “everyday low prices” (EDLP) and was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware. In the U.S. general merchandise arena, Wal-Mart’s competitors included Sears and Target, with specialty retailers including Gap and Limited. Department store competitors included Dillard, Federated and J.C. Penney. Grocery store competitors included Kroger, Albertsons and Safeway. The major membership-only warehouse competitor was Costco Wholesale. Wal-Mart was facing growing competition for large ticket general merchandise products and from online retailers such as Amazon.com. THE DEVELOPMENT OF WAL-MART’S SUPPLY CHAIN Before he started Wal-Mart Stores in 1962, Sam Walton owned a successful chain of stores under the Ben Franklin Stores banner, a franchisor of variety stores in the United States. Although he was under contract to purchase most of his merchandise requirements from Ben Franklin Stores, Walton was able to selectively purchase merchandise in bulk from new suppliers and transport these goods to his stores directly. When Walton realized that a new trend, discount retailing — based on driving high volumes of product through low-cost retail outlets — was sweeping the nation, he decided to open up large warehousestyle stores in order to compete. To stock these new stores, initially named “Wal-Mart Discount City,” Walton needed to step up his merchandise procurement efforts. As none of the suppliers were willing to send their trucks to his stores, which were located in rural Arkansas, self-distribution was necessary. Wal-Mart undertook an initial public offering in 1969 to raise funds to build its first distribution centre in Bentonville, Arkansas. As the company grew in the 1960s to 1980s, it benefited from improved road infrastructure and the inability of its competitors to react to changes in legislation, such as the removal of “resale price maintenance,” which had prevented retailers from discounting merchandise. To keep an eye on his growing network, Walton piloted a small single-engine airplane, which he would land at air strips close to his new stores. Wal-Mart’s supply chain, a key enabler of its growth from its beginnings in rural Arkansas, was long considered by many to be a major source of competitive advantage for the company. It was one of the first firms to rely on data to make operational decisions, using bar codes, sharing sales data with suppliers, controlling its own trucking fleet and installing computerized point-of-sale systems that collected itemlevel data in real time. When Wal-Mart was voted “Retailer of the Decade” in 1989, its distribution costs were estimated at 1.7 per cent of its cost of sales, comparing favourably with competitors such as Kmart (3.5 per cent of total sales) and Sears (5 per cent of total sales).6 Its successes were widely publicized, and competitors had adopted many of Wal-Mart’s management techniques. Yet Wal-Mart continued to lead the industry in efficiency, achieving inventory turns of 11.5 times in fiscal year 2011. For perspective, for the same period, key U.S. competitors Target Corp., Amazon.com and Sears had inventory turns of 8.7 times, 6.2 times, and 4.7 times, respectively. But Kroger Co., the second largest grocery retailer in the United States, had inventory turns of 14.2 times, primarily due to its focus on high-turning perishable food items.7 6 7 “Low Distribution Costs Buttress Chain’s Profits,” Discount Store News, December 18, 1989. Inventory turns calculated from respective firms’ 10-K filings. 23 Downloaded by Alexander Barton on 1/9/2018 Page 4 9B12D010 Procurement As his purchasing efforts increased in scale, Walton and his senior management team would make trips to buying offices in New York City, cutting out the middleman (wholesalers and distributors). Wal-Mart’s U.S. buyers, located in Bentonville, worked with suppliers to ensure that the correct mix of staples and new items were ordered. Over time, many of Wal-Mart’s largest suppliers maintained offices in Bentonville, staffed by analysts and managers supporting Wal-Mart’s business. In addition, Wal-Mart started sourcing products globally, opening the first of these offices in China in the mid-1980s. Wal-Mart’s international purchasing offices worked directly with local factories to source WalMart’s private label merchandise. Private label products were appealing to customers as they were often priced at a significant discount to brand name merchandise; for Wal-Mart, the private label items generated higher margins than suppliers’ branded products. Private label sales at Wal-Mart, first developed in the 1980s, were believed to account for just 16 per cent of Wal-Mart’s sales, compared to 25 per cent at U.S. rivals Safeway and Kroger.8 This was because Wal-Mart’s stated strategy was to be a “house of brands,” procuring top brands in volume and selling them at low prices.9 Every quarter, buyers met in Bentonville to review new merchandise, exchange buying notes and tips and review a fully merchandised prototype store, which was located in a warehouse. In order to gather field intelligence, buyers toured stores two or three days a week and worked on sales floors helping associates stock and sell merchandise. Wal-Mart wielded enormous power over its suppliers. For example, observers noted that increase bargaining clout was a contributing factor in Procter & Gamble’s (P&G) acquisition of chief rival Gillette.10 Prior to the acquisition, sales to Wal-Mart accounted for 17 per cent of P&G’s and 13 per cent of Gillette’s revenues.11 On the other hand, these two suppliers combined accounted for about 8 per cent of Wal-Mart’s sales.12 Some viewed Wal-Mart’s close cooperation with suppliers in a negative light: Wal-Mart dictates that its suppliers . . . accept payment entirely on Wal-Mart’s terms . . . share information all the way back to the purchasing of raw materials. Wal-Mart controls with whom its suppliers speak, how and where they can sell their goods and even encourages them to support Wal-Mart in its political fights. Wal-Mart all but dictates to suppliers where to manufacture their products, as well as how to design those products and 13 what materials and ingredients to use in those products. When negotiating with its suppliers, Wal-Mart insisted on a single invoice price and did not pay for cooperative advertising, discounting or distribution. Globally, Wal-Mart was thought to have around 40,000 suppliers, of whom 200 — such as Nestle, P&G, Unilever, and Kraft — were key global suppliers. With Wal-Mart’s expectations on sales data analysis, category management responsibilities and external research specific to their Wal-Mart business, it was not uncommon for a supplier to have several employees working full-time to support the Wal-Mart business. 8 http://www.ft.com/intl/cms/s/0/762b1f80-1259-11de-b816-0000779fd2ac.html#axzz1lv8XtooH, accessed January 15, 2012. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8ErNwolNpAw, accessed January 15, 2012. 10 http://www.newyorker.com/talk/content/?050214ta_talk_surowiecki, February 7 2005, accessed January 15, 2012. 11 Larry Dignan, “Procter & Gamble, Gillette Merger Could Challenge Wal-Mart RFID Adoption,” Extremetech.com, January 31, 2005. http://www.extremetech.com/article2/0,1558,1758152,00.asp, accessed January 15, 2012. 12 Mark Roberti, “P&G-Gillette Merger Could Benefit RFID”, RFID Journal, February 4, 2005. 13 Barry C. Lynn, “Breaking the Chain,” Harper’s Magazine, July 2006, p. 34. 9 24 Downloaded by Alexander Barton on 1/9/2018 Page 5 9B12D010 Distribution Wal-Mart’s store openings were driven directly by its distribution strategy. Because its first distribution centre was a significant investment for the firm, Walton insisted on saturating the area within a day’s driving distance in order to gain economies of scale. Over the years, competitors had copied this “hub-andspoke” design of high volume distribution centres serving a cluster of stores. This distribution-led store expansion strategy persisted for the next two decades as Wal-Mart added thousands of U.S. stores, expanding across the nation from its headquarters in Arkansas. Stores were located in low-rent, suburban areas close to major highways. In contrast, key competitor Kmart’s stores were thinly spread throughout the U.S. and located in prime urban areas. By the time the rest of the retail industry started to take notice of Wal-Mart in the 1980s, it had built up the most efficient logistics network of any retailer. Wal-Mart’s 75,000-person logistics and its information systems division included the largest private truck fleet employee base of any firm — 6,600 trucks and 55,000 trailers, which delivered the majority of merchandise sold at stores.14 Its 150 distribution centres, located throughout the United States, were a mix of general merchandise, food and soft goods (clothing) distribution centres, processing over five billion cases a year through its entire network. In the United States, Wal-Mart’s distribution centres received about 315,000 inbound truckloads, of which 115,000 were shipped “collect,” which meant they were picked up directly from suppliers’ warehouses by Wal-Mart’s trucking fleet, The remaining 200,000 loads were shipped by suppliers’ trucks or by logistics providers. The goal at Wal-Mart’s distribution centres was for high turning items — such as fresh food or other perishable merchandise — to be cross-docked, or directly transferred from inbound to outbound trailers without extra storage. The average distance from distribution centre to stores was approximately 130 miles. Each of these distribution centres were profiled in a store friendly way, with similar products stacked together. Merchandise purchased directly from factories in offshore locations such as China or India were processed at coastal distribution centres before shipment to U.S. stores. On the way back from delivering product to stores, Wal-Mart’s trucks generated “backhaul” revenue by transporting unsold merchandise on trucks that would be otherwise empty. Wal-Mart’s backhaul revenues — its private fleet operated as a for-hire carrier when it was not busy transporting merchandise from 15 distribution centres to stores — were more than US$1 billion per year. In mid-2010, Wal-Mart was looking to expand its backhaul program, to pick up more product directly from suppliers’ factories. It was seeking, in some cases, a 6 per cent reduction in the manufacturer’s selling price. For perspective, suppliers estimated the actual transportation expense was just 3 per cent of the selling price.16 Because their trucking employees were non-unionized and in-house, Wal-Mart was able to implement and improve upon standard delivery procedures, coordinating and deploying the entire fleet as necessary. Uniform operating standards ensured that miscommunication between traffic coordinators, truckers and store level employees were minimized. During an analyst meeting in October 2011, Johnnie Dobbs, WalMart Stores’ (Wal-Mart’s) EVP Logistics, had stated: Everyday low cost is the foundation for everyday low prices. So our focus across the organization is delivering products that our customers need in the most efficient method 14 http://walmartprivatefleet.com/AboutUs/LeadershipProfiles.aspx, accessed January 2, 2012. http://www.dcvelocity.com/articles/july2004/inbound.cfm, accessed August 19, 2006. 16 http://www.businessweek.com/magazine/content/10_23/b4181017589330.htm, accessed March 3, 2012. 15 25 Downloaded by Alexander Barton on 1/9/2018 Page 6 9B12D010 and process available. So, here’s an example of a sustained cost reduction in our transportation area. We have improved visibility and routing tools. We’ve reengineered processes that have increased the number — that have decreased the number of empty miles and out of route miles that our drivers drive. Our merchants and our suppliers have improved packaging, and we’ve adjusted methods that we use to load our trailers, resulting in increased cases in cube in every trailer that we ship. . . . (This year) we’ll ship 335 million more cases while we’ll drive 300 million fewer miles.17 Store Network In the early years, Wal-Mart grew rapidly as customers were attracted by its assortment of low-priced product. Over time, the company copied the merchandise assortment strategies of other retailers, mostly through observation as a result of store visits. It bought in bulk, bypassing distributors, and passed savings on to consumers. Each Wal-Mart store aimed to be the “store of the community,” tailoring its product mix to appeal to the distinct tastes of that community. Thus, two Wal-Mart Stores a short distance apart could potentially stock different merchandise. In contrast, most other retailers made purchasing decisions at the district or regional level. The display of merchandise was suggested by a store-wide template, with a unique template for each store, indicating the layout of Wal-Mart’s various departments. This template was created by Wal-Mart’s merchandising department after analyzing historical store sales and community traits. Associates were free to alter the merchandising template to fit their local store requirements. Shelf space in Wal-Mart’s different departments — from shoes to household appliances to automotive supplies — was divided up, each spot allocated to specific SKUs. Unlike its competitors in the 1970s and 1980s, Wal-Mart implemented an EDLP policy, which meant that products were displayed at a steady price and not discounted on a regular basis. In a “hi-lo” discounting environment, discounts would be rotated from product to product, necessitating huge inventory stockpiles in anticipation of a discount. In an EDLP environment, demand was smoothed out to reduce the “bullwhip effect.” Because of its EDLP policy, Wal-Mart did not need to advertise as frequently as their competitors and channeled the savings back into price reductions. To generate additional volume, Wal-Mart buyers worked with suppliers on price rollback campaigns. Price rollbacks, each lasting about 90 days and funded by suppliers, had the goal of increasing product sales between 200 and 500 per cent. A researcher remarked: “Consumers certainly love Wal-Mart’s low prices, which are an average of 8 per cent to 27 per cent lower than the competition.”18 The company also ensured that its store level operations were at least as efficient as its logistics operations. The stores were simply furnished and constructed using standard materials. Efforts were made to continually reduce operating costs. For example, light and temperature settings for all U.S. stores were controlled centrally from Bentonville. 17 “WMT — 18th Annual Meeting for the Investment Community,” Thomson StreetEvents, October 12, 2011, Investext, accessed January 12, 2012. 18 William Beaver, “Battling Wal-Mart: How Communities Can Respond,” Business and Society Review 110.2, Summer 2005, p. 159. 26 Downloaded by Alexander Barton on 1/9/2018 Page 7 9B12D010 As Wal-Mart distribution centres had close to real-time information on stores’ in-stock levels, the merchandise could be pushed to stores automatically. In addition, store level information systems allowed manufacturers to be notified as soon as an item was purchased. In anticipation of changes in demand for some items, associates had the authority to manually input orders or override impending deliveries. In contrast, most of Wal-Mart’s retail competitors did not confer merchandising responsibility to entry level employees as merchandising templates were sent to stores via head office and were expected to be followed precisely. To ensure that employees were kept up-to-date, management shared detailed information about day/week/month store sales with all employees during daily 10-minute long “standing” meetings. Information Systems Walton had always been interested in gathering and analyzing information about his company operations. As early as 1966, when Walton had 20 stores, he attended an IBM school in upstate New York with the intent on hiring the smartest person in the class to come to Bentonville to computerize his operations.19 Even with a growing network of stores in the 1960s and 1970s, Walton was able to personally visit and keep track of operations in each one, due to his use of a personal airplane, which he used to observe new construction development (to determine where to place stores) and to monitor customer traffic (by observing how full the parking lot was). In the mid-1980s, Wal-Mart invested in a central database, store level point-of-sale systems and a satellite network. Combined with one of the retail industry’s first chain-wide implementation of UPC bar codes, store level information could now be collected instantaneously and analyzed. By combining sales data with external information such as weather forecasts, Wal-Mart was able to provide additional support to buyers, improving the accuracy of its purchasing forecasts. In the early 1990s, Wal-Mart developed Retail Link. At an estimated 570 terabytes — which, Wal-Mart claimed, was larger than all the fixed pages on the Internet — Retail Link was the largest civilian database in the world. By 2008, Retail Link had 2.5 petabytes (2,500 terabytes) in data storage capacity, second only to eBay’s 4-petabyte installation.20 For a description of how Retail Link fits in with Wal-Mart’s supply chain, see Exhibit 2. Retail Link contained data on every sale ever made at the company during a twodecade period. Wal-Mart gave its suppliers access to real-time sales data on the products they supplied, down to individual stock-keeping items at the store level. In order to harness the knowledge of its suppliers, key category suppliers, called “category captains,” first introduced in the late 1980s, provided input on shelf space allocation. As an observer noted: One obvious result [of using category captains] is that a producer like Colgate-Palmolive will end up working intensively with firms it formerl...
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Explanation & Answer

Attached.

Running head: SUPPLY CHAIN MANAGEMENT

Supply Chain Management
Name
Institution

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SUPPLY CHAIN MANAGEMENT

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Supply Chain Management
Supply chain management is important in helping to focus on the detailing of the system
and the analysis of the products that the consumers require. It assists in ensuring that the
operations of the company are efficient and that there is optimization of the speed of the
operations. In the reduction of costs, the focus on the creation of efficiency is important as it
paves a way towards the improvement of the value of the organization products and this helps in
increasing the competitive advantage of the company in the market. With the improvement in
supply chain management, there is the transformation of the businesses, and this helps in
focusing on the turnaround time that guides the management of the demand of the products and
the increase in the efficiency of the company in meeting the demand in the market.
One of the objectives of sports Obermeyer is to ensure that there is focus on the
satisfaction of the consumers and this is through making sure that the products reach the
consumer at the expected time. The quality of the products makes it important to increase the
changes that help in the management of the supply chain increasing the chances of ensuring that
there is an offering of the commodities to the consumers at the expected time. The supply chain
management includes the monitoring of the trends in the market and the building of relationships
that help the retailers understand the changes to implement in the process (Oláh et al., 2018).
There is structuring of the relationships, and this guides the need for arranging the production
process and the establishment of the components that help in the management of the issues that
the companies continue to face.
One of the challenges that the company faces is the forecasting of demand, and this
entails looking at the changes in the fashion industry and the complexities that guide the
decisions that the company makes towards the sufficiency of the supply chain management. The

SUPPLY CHAIN MANAGEMENT

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company looks at the acquisition of the raw materials and the need to forecast the designs of the
clothing. There is a challenge in the supervision of the supply chain as it spreads over different
countries and this makes it difficult to have control over all the services that the company offers.
There is need to analyze the turnaround time that is expected of the organization and the role that
is enhanced by the manufacturing process. The use of Obersport that is an outsourcing company
is important as it makes sure that there is an arrangement on the delivery of the products and that
the components and the fabric received are of quality. Obserport is important as it helps in
enhancing the distribution of the products and this focuses on the finished products and their
delivery to the potential consumers.
The allocation of the production in the factories in Hong Kong and China is a challenge
in the company, and this creates the need to focus on the feedback received in the market from
the consumers on the quality of the products as there is reduced control. The warehouse in Hong
Kong coordinates with those in Seattle, and this creates the need to analyze the production
process and the transportation to the different stores where the retailers ...


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