9. Supply Chain Management

What are the five levels a supply chain can be divided into?

Tier 2 Suppliers, Tier 1 Suppliers, Manufacturers, Distributors, and Retailers.

What is the primary role of a Tier 2 Supplier in a supply chain?

To make raw materials or specific components.

What is the primary role of a Tier 1 Supplier in a supply chain?

To create integrated, more complex components from materials provided by Tier 2 suppliers.

What is the main function of a Manufacturer in a supply chain?

To design and assemble completed products.

What is the key role of a Distributor in a supply chain?

To facilitate the efficient delivery of products to the market.

What is the primary role of a Retailer in a supply chain?

To offer a product assortment directly to consumers.

At the highest level, what is the fundamental trade-off in supply chain management?

The trade-off between cost and flexibility.

Term: Brick-and-mortar retailers

Retailers with physical stores where consumers can immediately buy goods.

Term: Online retailers

Retailers that merchandize goods via a website or app and ship them to consumers. Also called e-commerce or e-tailers.

What are the three important sources of value that distributors provide?

Cost-effective inventory storage, faster delivery lead times, and smaller order quantities.

Term: Distribution Center (DC)

A building used to receive products from suppliers and then redistribute them to stores or consumers. Also called a fulfillment center.

The service a distributor provides by purchasing in large quantities but allowing customers to purchase in smaller quantities is called _____.

breaking bulk

What are the four key cost metrics used to evaluate a supply chain?

Procurement, labor, inventory, and transportation.

What does the 'procurement' cost metric in a supply chain refer to?

The cost of purchasing materials and goods from suppliers.

What are the three components included in the 'inventory' cost metric?

The cost of capital, storage and maintenance, and risk of obsolescence.

What are the two key service metrics used to evaluate a supply chain?

Lead time and inventory availability.

Term: Lead Time

The time between when an order is received and when it is delivered.

Term: In-stock probability

The probability that all demand for an item is served within a specific interval of time.

Term: Stockout probability

The probability that demand for an item exceeds its available inventory during a period of time.

How are in-stock probability and stockout probability mathematically related?

In-stock probability = 1 − Stockout probability

Term: Fill rate

The fraction of total customer demand that is satisfied from available inventory.

What is the difference between tactical and strategic decisions in supply chain management?

Tactical decisions impact short-term performance, while strategic decisions have long-term implications.

In the context of strategic decisions, what are 'functional products'?

Products that are relatively 'safe' and do not experience considerable variability in demand.

In the context of strategic decisions, what are 'innovative products'?

Products that are fairly 'risky' and can experience substantial variability in demand.

A supply chain designed to minimize cost is known as a _____ efficient supply chain.

physically

A supply chain designed to emphasize flexibility over cost is known as a _____ supply chain.

market-responsive

According to Marshall Fisher's framework, what type of supply chain is a mismatch for an innovative product?

A physically efficient supply chain.

According to Marshall Fisher's framework, what type of supply chain is a good match for a functional product?

A physically efficient supply chain.

Which type of product typically has a high gross margin (20% to 60%) and a high risk of obsolescence?

Innovative products.

Which type of product typically has a low gross margin (5% to 20%) and low demand forecast uncertainty?

Functional products.

What are the four basic categories of variability in a supply chain?

Variability due to demand, the bullwhip effect, supply chain partner performance, and disruptions.

What are the three components of variability due to demand?

Level (how much), variety (which type), and location (where).

Term: Bullwhip effect

The tendency for demand to become more volatile at higher (upstream) levels of the supply chain.

What are three identified causes of the bullwhip effect?

Overreactive ordering, batching, and price promotions.

How does 'batching' contribute to the bullwhip effect?

It forces a firm to order in quantities (e.g., full truckloads) that don't exactly match its more stable customer demand, creating lumpy order patterns.

How can sharing information along the supply chain mitigate the bullwhip effect caused by overreactive ordering?

It allows all levels to respond to actual consumer demand rather than the amplified orders from their immediate downstream partner.

What are the two main types of disruptions that can create variability in a supply chain?

Natural disruptions (e.g., earthquakes, floods) and political/economic disruptions (e.g., wars, currency fluctuations).

What is the primary trade-off when choosing a mode of transportation as a supply chain strategy?

Faster transportation reduces inventory but increases costs, while slower transportation is cheaper but increases inventory.

Term: On-order inventory

Inventory that has been shipped by the supplier but has not yet been received.

Term: On-hand inventory

Inventory that is in a firm's possession and ready to be used to serve customer demand.

What is the effect of a higher safety factor on inventory and service levels?

A higher safety factor increases both the in-stock probability and the average on-hand inventory.

What is the formula for calculating average on-order inventory (Io)?

Average on-order inventory = Lead time (L) × Mean demand (MEAN)

What is the formula for calculating average on-hand inventory (Ih)?

Ih = √(L + 1) × STDEV.S × z, where L is lead time, STDEV.S is demand standard deviation, and z is the safety factor.

What is the primary trade-off associated with overseas sourcing?

It may reduce labor costs but often results in longer lead times and higher inventory holding costs.

Term: Make-to-order (MTO)

A production strategy where the completion of a product only occurs after a customer announces their demand.

Term: Make-to-stock (MTS)

A production strategy where an item is produced before the demand for that item has been identified.

What are two conditions under which a make-to-order strategy is viable?

Any two of: customers desire a broad selection, are willing to wait, final assembly is quick and cheap, or inventory is expensive to hold.

The make-to-order strategy is sometimes referred to as _____, because product differentiation is postponed as late as possible.

delayed differentiation

How does online retailing allow for a broader selection of products compared to traditional retail?

By holding inventory in fewer centralized locations, it can profitably sell slower-moving items that would be too costly to stock in many physical stores.

What is a key disadvantage of online retailing from the customer's perspective?

Customers must wait for the product to be shipped and delivered, unlike the immediate availability at a brick-and-mortar store.

In what way is online retailing similar to the make-to-order strategy?

Online retailing delays commitment to the customer's location, while MTO delays commitment to the product's final attributes; both reduce variability.

What is the 'safety factor' used for in inventory management formulas?

It is a parameter that determines the in-stock probability and, consequently, the amount of on-hand inventory held.

What type of failure from a supply chain partner involves not delivering the quantity needed?

Failure in quantity.

The 2014 Takata airbag recall, which affected millions of vehicles, is an example of what kind of supply chain partner variability?

Failure in quality.

If a key supplier declares bankruptcy, what type of supply chain variability does this represent?

Failure in finances.

The collapse of the Rana Plaza in Bangladesh, where garments were being made for Western brands, highlighted what source of supply chain variability?

Failure in operating practice.

How can locating production in the same country where products are sold help mitigate risk?

It helps mitigate the risk of currency exchange rate fluctuations by matching revenue and cost currencies.

Why might a company like Zara choose to manufacture in a high-cost country like Spain instead of sourcing from a low-cost country?

To achieve a very short lead time, allowing a 'fast fashion' strategy that quickly brings new styles to market and reduces obsolescence risk.

For which type of product is online retailing generally more advantageous: a high-demand, heavy product or a low-demand, specialty product?

A low-demand, specialty product, because centralized inventory is more efficient and transportation cost is less of a factor relative to its value.

What effect does reducing the minimum batch quantity for orders have on demand volatility in the supply chain?

It reduces demand volatility by allowing for smaller, more frequent orders that better match actual consumption, thus mitigating the bullwhip effect.

A firm orders daily (period=1 day) with a 3-day lead time. Average daily demand is 20 units. How many units are on order, on average?

60 units (On-order inventory = 3 days × 20 units/day)

What key advantage did Dell's make-to-order model have over competitors' make-to-stock models in the PC industry?

Dell held much less inventory, allowing it to use newer, cheaper components and achieve a significant cost advantage.

Why is the fill rate metric sometimes more difficult to measure accurately than the in-stock probability?

Because to calculate fill rate, you need to know the total demand, which can be difficult to measure if customers leave without buying when an item is stocked out.

The 'Intel inside' marketing campaign made consumers aware of a company that is typically what layer in the PC supply chain?

A Tier 1 supplier (of microprocessors to manufacturers like Dell or HP).

A firm's gross margin is the difference between the selling price and the purchase cost, expressed as a _____ of the selling price.

percentage

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