Supply Chain and Logistics Management

Chapter 9: Supply Chain and Logistics Management Supply Chains Supply chain – The linked set of companies that perform or support the delivery of a company’s products or services to customers. When working for an organization, it is likely that one will take part in some way in its supply chain regardless of whether the organization sells products and services A supply chain delivers value to the end-user of products and services by leveraging the core competencies of its company members to, for example, cut costs, provide innovation, ensure quality, and deliver products and services to the right place at the right time. o Without a well-run supply chain, all of the efforts of marketers to design and promote products and services that will satisfy customers will not be as effective because:  will cost too much  be less innovative  be of lower quality  will not be delivered when and where the customer wants them Supply Chain Flows through Marketing Channels The terms upstream and downstream apply to the flows in a supply chain: o The flow of products and the services involved in getting the products to customers is said to move downstream. o The flow of financial resources that move from the customer to the companies that were part of the supply chain is said to move upstream. On their way downstream, products pass through distribution channels. o Distribution channels (marketing channels) – Intermediaries—wholesalers, distributors, and retailers—through which the flow of products travels. o All along the supply chain, distribution channels add value to the product: They make it available to ship to the next step in the supply chain, take customer orders, and ship the product to the next step in the chain. Supply Chain Management A firm that recognizes and responds to the impact supply chain flows have on its business possesses a supply chain orientation. o Supply chain orientation – A management philosophy that guides the actions of company members toward the goal of actively managing the upstream and downstream flows of goods, services, finances, and information across the supply chain. What Is Supply Chain Management? Supply chain management – The actions the firm takes to coordinate the various flows within a supply chain. By viewing the total system of interrelated companies that make up the supply chain as something they can manage, companies have greater control over the customer value they provide. Through collaboration, companies make the entire supply chain more efficient and effective. Supply chain management decisions often involve trade-offs. o Decisions made about one area of the supply chain will affect other areas, sometimes negatively.  E.g. a salesperson might offer a volume discount to a customer, without knowing whether that amount of product can be produced and delivered on time without incurring extra cost. That sale might actually end up costing the company money. o Another important trade-off exists between inventory and customer service.  When there is not enough inventory to satisfy customer demand, the firm may lose sales or ramp up production to quickly increase inventory, incurring unplanned production costs.  Any money tied up in extra inventory is not available to the company to use for other things, such as capital investment, advertising, or paying bills. o Inventory costs money, both to produce or purchase and to store.  Inventory carrying costs – The costs required to make or buy a product, including risk of obsolescence, taxes, insurance, and warehousing space used to store the goods. Supply Chain Integration The objective of supply chain management is to coordinate activities across the supply chain. The ultimate goal is to improve the entire chain’s performance. Integrated supply chains typically realize multiple benefits: o Reduced costs o Better customer service o Efficient use of resources o Increased ability to respond to changes in the marketplace Supply Chain Strategy Supply chain objectives should be based on the firm’s marketing objectives. They can include things such as: o Types and locations of markets to be served. o Market share and customer service desired. o Speed with which new products should be developed. o Cost reduction and profitability goals. There is a difference between the terms push and pull depending on if they are used in a promotion or supply chain context. From a promotion point of view: o The promotion push strategy relies on the sales force and promotion tactics to push products to wholesalers or retailers, who then push those products to consumers. o The promotion pull strategy involves heavy spending for advertising and promotion, to create a demand that pulls products through the distribution channels. Push strategy – A supply chain strategy in which a company builds goods based on a sales forecast, puts those goods into storage, and waits for a customer to order the product. o Advantages:  Firms can achieve economies of scale. This means that purchasing can buy in larger lots which lowers purchase prices, transportation can move full vehicles which lowers the per-unit transportation costs, and manufacturing can make long production runs which are more efficient than short runs.  Push strategies often positively affect customer service because the goods are already in stock, awaiting the customer’s order. o Disadvantages:  If sales forecasts are not accurate, the company will have too much of a product no one wants or not enough of a product that consumers do want. Pull strategy – A supply chain strategy in which customer orders drive manufacturing and distribution operations o Advantages:  Eliminates the risks associated with producing unwanted products, because the good is not made until a customer order is received.  Firms can customize products specifically to customer requirements, Inventory carrying costs are minimized.  The firm can respond rapidly to changing market conditions. o Disadvantages:  Doesn’t often allow firms to take advantage of economies of scale because the company orders only what it needs to meet immediate production requirements. (typically small quantity orders)  Needs flexible production and distribution facilities. Production must be able to change rapidly to produce different products. Hybrid (push-pull) strategy – A supply chain strategy in which the initial stages of the supply chain operate on a push system, but completion of the product is based on a pull system. o Advantages:  It combines the economies of scale of the push strategy with the flexibility of the pull strategy.  It produces more accurate sales forecasts, because firms tend to be more accurate at an aggregate level than at a specific product level. o Disadvantages:  It may not be as cost competitive as a push system, since the firm cannot take advantage of manufacturing and transportation economies of scale.  The firm will still incur costs to store components in inventory.  As in a pure pull system, the company will need to develop a distribution system that can deliver products quickly to avoid customer service complaints. Selecting the Appropriate Strategy o Stability of demand. If a firm can’t predict demand for its product, it can’t create an accurate sales forecast that would allow it to enjoy the benefits of a pure push strategy. Demand o o o uncertainty often occurs when products are in the introductory and growth stages of the product life cycle. During these stages, a firm may want to stick with the maximum flexibility a pull strategy allows. Or the firm may choose a hybrid strategy that commits to inventory of raw and packaging materials without committing to a large amount of finished goods inventory. Degree of cost competitiveness. A push strategy will allow a firm to achieve cost savings through economies of scale in purchasing, manufacturing, and transportation. If cost reduction is part of a firm’s strategy, then a push strategy is the obvious choice. Degree of customization. A pull or hybrid strategy would be a good choice for a company that competes on either: (a) its ability to deliver customized products or (b) a high level of customer service built on manufacturing and distribution flexibility. The speed at which customers need the product. Lead time is the time it takes from placement of an order to delivery of the goods. If customers want a short lead time, the company will need to have products already made and ready to deliver. A push strategy is best for this scenario.