Earlier in this module we discussed the definition of supply chain and the difference between the supply chain and marketing channels. As a reminder, the supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer.
The marketing channel generally focuses on how to increase value to the customer by having the right product in the right place at the right price at the moment the customer wants to buy. The emphasis is on the providing value to the customer, and the marketing objectives usually focus on what is needed to delivery that value.
The primary differences between the two are the following:
- The supply chain is broader than marketing channels.
- Marketing channels are purely customer facing, while supply chain encompasses internal objectives as well.
- Marketing channels are one part of the marketing mix that must be balanced with product, price, and promotion.
In this section we are going to get into the supply chain in more detail. Our goal here is to understand the contributions of integrated supply chain management in order to be able to create a more effective distribution strategy.
The specific things you’ll learn in this section include:
- Identify the components of a supply chain
- Define integrated supply chain management
- Explain the impact of the supply chain on the distribution strategy
Components of a Supply Chain
The interconnected teams and organizations that comprise the supply chain provide a range of different functions. The supply chain for every organization is different. In fact, each product can have different supply chain needs and challenges, leading to different players. In general, the supply chain spans a fairly common set of functions that are accomplished in very different ways.
Sourcing and Procurement
Sourcing is the process of finding, evaluating, and engaging suppliers to provide goods and services to a business. Procurement is the process of purchasing the goods and services. In a B2B sale, the procurement function will usually manage both the sourcing and the procurement functions.
In the earliest days of the automobile, Henry Ford made a decision to own or control the full supply chain—from the mines that provided the ore to the factories that made the glass. Raw materials—iron ore, coal, and rubber, all from Ford-owned mines and plantations—came in through one set of gates at the plant while finished cars rolled out the other. Today it is exceptionally rare for a company to try to own all the raw materials for a physical product. Even software products use preexisting software frameworks and code.
Businesses have shown success in managing external suppliers and have found that it is beneficial to source some materials and services in order to focus on particular areas of specialization. A business may choose to source raw materials that it does not own. It may also choose to outsource services that it could do itself but has found advantageous to source externally. Outsourcing is the process of contracting out a business process to another party.
In sourcing a product or service, businesses will generally conduct a thorough analysis of their needs, evaluating the material requirements, the service requirements, and the financial requirements. Next the company will research potential suppliers, understanding what offerings exist in the market and how well they seem to match with the company’s requirements. Often companies select suppliers based on existing relationships or on the results of the analysis they have done. Other times the company may decide to go to a competitive bid and solicit proposals from a number of firms. (Government entities are usually required to go to public bid.)
Whether it is through a formal bid process or through another market analysis, the supply chain team will analyze the capabilities of potential suppliers and craft a sourcing strategy. The company may prefer to build a deep relationship with a single supplier or work with a number of different suppliers to benefit from different capabilities or reduce the risk of dependency. Then the team will negotiate contracts with the suppliers that align with the business needs.
Hewlett Packard (HP) developed a framework for evaluating and managing suppliers called the TQRDC framework. Supplier contracts and evaluations addressed five factors: technology, quality, responsiveness, delivery, and cost. By negotiating supplier contracts with goals and commitments identified for each of the five areas, and evaluating performance over time, HP was able to engage more collaboratively with its suppliers to continuously improving processes, relationships, and results.
Demand Planning, Order Fulfillment, and Inventory
Demand planning begins early in the new-product development process in order to develop the business case, but as the product goes to market, the accuracy of the demand forecast becomes much more important.
The supply chain organization contracts with suppliers to meet the projected demand. If the forecast is too high, the company not only loses revenue but it may also incur costs for products that are never sold. It the marketer projects demand too low, then the company cannot fulfill orders, resulting in product shortages. This also results in lost revenue and negatively impacts the buyers’ shopping experience. It’s difficult to forecast demand and get it just right.
Supply chain management can help with the forecast and fulfillment process. If suppliers have visibility into the company’s forecast and sales data, they can react immediately when demand is high or low. Otherwise, suppliers will continue to produce and deliver at a level that is not aligned with the latest sales data or the revised forecasts. They will either be building or depleting inventory.
Inventory is an asset that is intended to be sold in the ordinary course of business. Inventory may not be immediately ready for sale and can fall into one of the following three categories:
- Be held for sale in the ordinary course of business
- Be in the process of being produced for sale
- Be materials or supplies intended for consumption in the production process
In managing the supply chain, many businesses prefer to use a just-in-time (JIT) inventory management approach. This means that the company will keep very little inventory on hand at each step in the supply chain. Let’s revisit a real example to see why this might be a good idea.
In our Monster Beverage channel example we can see the product flow in the column on the left. If the manufacturer produces enough concentrate for the production of 100,000 Monster Beverages each week and sends them off with the transportation company, then over time there will be 100,000 beverages each week available to consumers. What if consumers only demand 40,000 beverages each week? Initially there will be an extra 60,000 beverages in supermarkets, but quickly the supermarkets will reduce their purchases to match demand. Next, the extra inventory is likely to build up with the bottlers and lastly in the warehouse. The manufacturer could overproduce for several weeks or more before beginning to realize that there is too much product and inventory.
If Monster uses a JIT inventory process, then new orders from the manufacturer will only be generated as stock is pulled from the warehouse, because the bottler requires it to fulfill orders from the supermarket. Each of the organizations in the supply chain will know when demand is slowing or growing and will be able to react more quickly to changes in demand.
Warehousing and Transportation
In our global economy, it is a huge task to transport and store commercial products. The supply-chain and logistics firm MWPLV International completed a comprehensive analysis of Walmart’s distribution network and found the following:
- Walmart and Sam’s Club distribution centers total 124.2 million square feet. If airlifted to Manhattan they would cover nearly 19 percent of the total borough of Manhattan.
- Approximately 81 percent of the merchandise sold at Walmart is shipped through Walmart’s distribution network. The balance is serviced through direct store delivery in which the manufacturer ships directly to the store.
- There are 42 regional distribution centers that are 1.0–1.5 million square feet. Each has a mechanized conveyor system that sorts products to the correct loading dock for shipment. Each regional center employs around 1,000 employees.
- The regional distribution centers are, on average, 124 miles from the Walmart stores that they serve.
A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers. As we see from the Walmart distribution network, warehouses are not only storage facilities. They are increasingly equipped with technology systems that support the efficient counting, management, and transportation of goods. In the warehousing and transportation process, the goal is to efficiently move the right product to the location where it will be purchased by a customer.
How are all of these products tracked? Each product has a unique identifier called a stock-keeping unit (SKU). The SKU is scanned and tracked at each step in the process from receiving, through storage, to retrieval and shipping.Once loaded on the truck, the entire order is sent between the warehouse, the shipper, and the receiving company using another data format called electronic data interchange (EDI). EDI allows the trucking company to know exactly what it is shipping, and it gives the sending and receiving companies detailed, real-time tracking and status reports.
AMAZON’S ONE-DAY DELIVERY
You can view Amazon’s delivery process in the video below. Note that at 10:47, the video shifts to discuss the working conditions in Amazon’s fulfillment warehouses.
Logistics and Information Management
The physical movement of goods is called logistics, and as you can guess, it is a staggeringly complex and important function. Imagine trying to keep track all of this information—from the initial order forecast to production, warehousing, and transportation. It’s obviously not a job that a human, or even a team of humans, could easily do on a large scale. As global supply chains have grown more complex, businesses have created systems to manage and optimize the supply chain. In 2013, the market for supply chain management software was $8.944 billion.. Put simply, companies are buying expensive systems to help manage the complexity of the supply chain.
Have you ever tracked a package that you were sending or receiving and seen its progress through the supply chain? This is done using track-and-trace software that monitors the progress of physical goods through the supply chain process, often by means of a radio-frequency identification tag. Radio-frequency identification (RFID) uses electromagnetic fields to automatically identify and track tags attached to objects. The tags contain electronically stored information. Passive tags collect energy from a nearby RFID reader’s interrogating radio waves. RFID tags are used in many industries—for example, an RFID tag attached to an automobile during production can be used to track its progress through the assembly line, and RFID-tagged pharmaceuticals can be tracked through warehouses in the supply chain process.
Information throughout the supply chain process is captured in systems that allow supply chain professionals to analyze results and identify improvements that will lead to more reliable, faster, and less expensive delivery to customers throughout the supply chain.
Integrated Supply Chain Management
As the importance of managing the supply chain well has increased, companies have acknowledged that they must manage the supply chain as a complete system and treat it as an integrated function. When an organization takes an integrated approach, it is recognizing that it cannot manage each part of the supply chain as an independent function, but instead needs to understand and manage the connections and interdependencies.
Within the supply chain organization, this means that sourcing, demand planning, inventory planning, warehousing, logistics, and order-fulfillment functions must work together. The rise of supply chain software tools that bring this data and information together in one place is just one indicator of an increasingly integrated focus. Also, many organizations previously had these functions spread between different organizations with little opportunity to interact. Today, most large organizations have an integrated supply chain function with a common management team and common objectives.
Beyond the work occurring within the supply chain organization, there are important connections to marketing, finance, and manufacturing. Marketing plays a direct role in creating the demand forecast and defining the product and delivery expectations for customers. These must be reviewed with the supply chain team so that everyone knows what needs to be achieved, and when that isn’t possible, adjustments can be made and communicated to customers early. The integration with finance is necessary to ensure that investments are budgeted correctly and inventory is accounted for accurately. Manufacturing is often most heavily affected by decisions and requirements of the supply chain team, as they are counting on having an adequate supply and must meet delivery time lines to keep customer commitments.
As with many complex organizational challenges, this integration works best when there are clear objectives that are set across the organizations, a common view of the data (which identify opportunities for improved performance), and clear, frequent communication about potential issues and needs. This enables all of the organizations to focus on delivering value to customers and achieving the company mission.
Supply Chain and Channel Strategy
Let’s look at an example in which the supply chain is key to a successful channel strategy that delivers the right value to customers.
Elli.com is an online retailer that sells customized wedding materials to brides. Elli specializes in paper products that are unique and beautifully designed, and it coordinates a complete look for a bride from her first wedding announcement to her final thank-you note.
In crafting its channel strategy, Elli focused on what it does best: providing a beautiful product to brides with an exceptional service experience. Elli is also a small company that did not want to use its funding to build capability in areas that others could do better and less expensively.
The table below shows the components of the channel strategy and the supply chain decisions the company made to provide unique value to its customers.
|Channel Strategy||Supply Chain Decision|
|Channel Structure||Sell direct to consumer. Brides are nervous about making every detail perfect. If Elli manages all interactions with the brides, the team can provide meticulous, reassuring service, reducing risk to customer relationships.||Do not engage wholesale or retail partners.|
|Sourcing||Elli does not create designs. The company works with a network of designers who submit design concepts. The Elli creative team reviews the designs and offers to resell those they believe Elli brides will love.||Outsource design work. The network of designers must be large enough to ensure a continual stream of designs that match Elli’s quality standards. Designers provide designs to Elli for marketing and fulfillment.|
|Order Fulfillment||Every Elli order is a custom product that is printed or created for an individual bride. When a bride places an order, an Elli staff member personally confirms that order and creates a digital proof of the print item for the bride’s approval.||Elli does not outsource any communication with brides.|
|Manufacturing||Once the proof is approved, the staff member sends the order to an external print service that prints, packages, and ships the order to the bride. The Elli staff member monitors the time line for printing and shipping, and addresses questions from the printer.||Elli has contracted with a local printer. The print partner was carefully selected to ensure that the printing time, quality, and attention to detail matches Elli’s expectations for its customers. By using a local provider, the company can regularly check the quality of orders.|
|Shipping||Elli determined that a national shipping partner could get the orders to brides most quickly and efficiently.||Elli uses a single national shipper. The shipping information is integrated into Elli’s customer database to provide the staff with real-time tracking information on each order.|
|Issue Resolution||Because Elli owns the relationships with brides, designers, printers, and shippers, the company can resolve all issues from a single point of contact.||Elli team members own different supply chain relationships. The team regularly reviews the supply chain performance and shares perspectives on how the partnerships and performance can be improved.|
The Elli approach seems to be using a range of internal capabilities and external channel partners to create a customer experience that leaves brides happy. As you look at Elli’s approach, where is there risk in the distribution strategy? In which areas might issues arise as Elli grows?
- Nagurney, Anna (2006). Supply Chain Network Economics: Dynamics of Prices, Flows, and Profits. Cheltenham, UK: Edward Elgar. ISBN 1-84542-916-8. ↵
- https://www.nsf.gov/about/history/nsf0050/manufacturing/supply.htm ↵
- Oxford English Dictionary (3rd ed.). Oxford University Press. September 2005. ↵
- http://www.bmpcoe.org/bestpractices/pdf/hp.pdf ↵
- http://www.accountingtools.com/dictionary-inventory ↵
- http://www.supplychain247.com/article/2014_top_20_global_supply_chain_management_software_suppliers ↵