Chapter 9: Using Supply Chains to Create Value for Customers

Overview of Supply Chains

Supply chains encompass both upstream and downstream partners integral to the production and distribution of products. These partnerships form a network that drives efficiency, responsiveness, and value creation for customers.

Example: The launch of Ghostbusters: The Video Game illustrates the importance of multi-channel marketing. It was distributed through retailers such as GameStop, Walmart, Best Buy, and Amazon. Understanding the diverse customer base, including both gamers and fans of the original Ghostbusters film, was crucial for effectively targeting marketing strategies.

Importance of Supply Chain Management

Supply chain management involves the design, monitoring, and modification of supply chains to enhance their overall efficiency.

• Origin of the term: The term "supply chain" was first coined in the early 1980s; however, historical figures like Henry Ford recognized the importance of managing supply chain functions even earlier.

• Cost vs. Quality: While the current focus may often lean towards cost savings, an exclusive concentration on costs can lead to diminished product quality.

• Integration with Marketing: Leading companies are increasingly integrating supply chain strategy with their marketing efforts to gain competitive advantages.

• Value Chain Concept: This concept emphasizes the creation of more customer value than competitors by optimizing each component of the supply chain.

Case Study: Zara's Agile Supply Chain

Zara exemplifies the successful integration of supply chain management in fashion retail.

• Zara dramatically reduced its product design-to-delivery time from six months to just two weeks.

• This speed is achieved through close collaboration with supply chain partners and the use of automation technologies that streamline inventory management.

• This newfound agility has set new industry standards and allowed Zara to respond quickly to fashion trends, maintaining a competitive edge.

9.1 Sourcing and Procurement

Learning Objectives

• Understand the importance of sourcing and procurement in supply chain management.

• Analyze the growth trends of outsourcing and offshoring.

• Identify the potential drawbacks associated with outsourcing.

Definition of Sourcing and Procurement

• Sourcing: Involves the evaluation and hiring of suppliers to provide necessary goods and services. The goal is to find reliable suppliers that not only meet quality standards but also provide cost efficiency.

• Procurement: Refers to the actual purchasing process of goods and services identified through sourcing. This step often includes negotiations on price, terms, and quality.

• Example: Ford's transition from self-producing tires to sourcing them from recognized suppliers like Michelin and Goodyear showcases this shift in procurement strategy.

Growth of Outsourcing and Offshoring

• Outsourcing refers to contracting out certain business functions or processes to external companies. This practice allows companies to reduce costs, leverage specialized talents, and focus on core business areas.

• Offshoring is a specific type of outsourcing where these functions are moved to other countries to take advantage of lower labor costs. Clothing companies often design garments in-house but outsource production to countries with cheaper labor.

Considerations in Outsourcing

• Loss of Control: Companies may face challenges in maintaining product quality or ensuring ethical practices when outsourcing, as exemplified by the recalls of Mattel's toys.

• Quality Audits: To mitigate these risks, companies must carry out thorough audits and quality testing. This is critical to uphold product standards.

• Social Responsibility: Organizations are increasingly being held accountable for their operations, necessitating a commitment to sustainability and social responsibility.

9.2 Demand Planning and Inventory Control

Learning Objectives

• Identify how demand planning can add value to supply chain operations.

• Examine the critical role of inventory control in marketing.

• Recognize the necessity for collaboration among partners in inventory control and demand planning.

Demand Planning Process

• Demand planning is critical to estimating customer demand accurately, thereby avoiding product shortages. Notable examples include the shortages of Nintendo's Wii console and IBM's ThinkPad laptops, where demand unexpectedly outstripped supply.

• Forecasting Importance: Accurate demand forecasting affects production schedules, inventory levels, and resource allocation. Companies must consider multiple factors affecting demand including sales history, material availability, economic conditions, and promotional efforts.

Inventory Control Strategy

• The goal of inventory control is to prevent stockouts (running out of stock) while maintaining sufficient safety stock. Safety stock buffers against fluctuations in demand or supply.

• Effective inventory management was highlighted during emergencies, such as the operational differences seen between Target and Walmart post-9/11, which affected their responsiveness and recovery efforts.

9.3 Warehousing and Transportation

Learning Objectives

• Understand the critical roles warehouses play in supply chain management.

• Evaluate the various transportation modes and their respective advantages and disadvantages.

Warehousing Roles

• Warehouses serve to manage safety stock, particularly during peak demand seasons—for example, during the holiday season when purchasing spikes for toys and other gifts.

• Distribution centers focus on efficiently processing and moving goods to where they are needed most, thus reducing lead times and improving service levels.

Transportation Methods Overview

• Trucks: Fast and suitable for direct deliveries, making them a popular choice; however, costs can be high.

• Water: This method is economical for bulk shipments, ideal for heavy products, but it is slower and limited by geographical access.

• Air: Provides the quickest delivery options for high-value or time-sensitive items, but it incurs high costs.

• Rail: Efficient for transporting heavy goods overland but is typically slower than trucking.

• Pipelines: Cost-effective for liquids transport, though initial setup requires significant investment.

9.4 Track and Trace Systems and Reverse Logistics

Learning Objectives

• Analyze why product traceability is vital in the supply chain.

• Describe the concept of reverse logistics and its applications.

Importance of Traceability

• Companies increasingly use tracking systems, such as GPS, to monitor shipments effectively, preventing loss and addressing quality concerns.

• The demand for transparency is growing among consumers, especially regarding safety issues, such as food recalls. Effective traceability can build consumer trust and brand reputation.

Understanding Reverse Logistics

• Reverse logistics refers to the management of returned goods and the recycling of products to reclaim value—an example being Patagonia’s initiative to recycle worn-out products.

• This process is crucial for sustainability goals and can create additional revenue streams for companies through the resale of returned goods.

9.5 Discussion Questions and Activities

Discussion Questions

• Explore how and why marketing professionals should be involved in supply chain decisions to ensure alignment between customer needs and supply capabilities.

• Identify key performance metrics essential for measuring the success of supply chain partners, such as delivery speed, accuracy, and cost efficiency.

• Discuss the challenges and advantages presented by the electronic delivery of products, including logistics, customer experience, and operational efficiency.

Activities

• Research Coca-Cola's distribution system to understand how they manage their extensive supply chain and keep products consistently stocked.

• Engage in a group activity to outline a specific product's supply chain, analyze its components, and discuss potential improvements to increase efficiency and customer satisfaction.