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 SUPPLY CHAIN AND
LOGISTICS MANAGEMENT
MADE EASY
Methods and Applications for
Planning, Operations, Integration,
Control and Improvement, and
Network Design
Paul A. Myerson
Professor of Practice in Supply Chain Management
Lehigh University
Publisher: Paul Boger
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Praise for Supply Chain and Logistics Management
Made Easy

“Paul Myerson’s new book is a refreshing and a welcomed addition

to the field, offering the reader a clear and easy-to-understand
presentation of the key concepts and methods used in the field of
supply chain management. His work is not only easy to understand
but also comprehensive in coverage.
“I highly recommend it to university professors who want to
incorporate it in their undergraduate and graduate courses in supply
chain management. I have become a real fan of Supply Chain and
Logistics Management Made Easy. Certainly, nothing in life is
easy, but Paul Myerson’s new book has made the field more
attractive and popular.”
—Richard A. Lancioni, Professor of Marketing and Supply Chain
Management, Fox School of Business & Management, Temple
University

“Is it possible to take a discipline that involves millions of moving

things, people, and processes and make it easy? Paul has taken the
complex subject of supply chain and delivered a thorough and
easy-to-understand review of all its elements. For the business
student, the book provides a comprehensive view of the supply
chain and serves as an effective introduction to the discipline and as
an effective teaching tool. For the supply chain expert, this book is
an excellent tool for reflection on all things supply chain. Each
section brings back thoughts of the challenges the accomplished
supply chain leader has faced. The book is an excellent resource for
anyone in business who is looking to work in or currently works in
supply chain management.”
—Gary MacNew, Regional Vice President, Supply Chain Optimizers

“This is an excellent read for both students and professionals who

are interested in gaining a better understanding of what supply
chain and logistics is all about. It is an easy-to-understand
handbook for anyone who has a need to better understand supply
chain management or is responsible for helping their organization
gain an advantage from their supply chain. Myerson’s book should
be on every manager’s bookshelf for ready reference.”
—Robert J. Trent, Ph.D., Supply Chain Management Program
Director, Lehigh University

“Paul does a great job compacting supply chain management and

logistics into one text. I wish I would have had this book when I
was a logistics student 30+ years ago, but it’s a great text and
reference for me now, too. The SCM discipline is very wide and
diverse now. This book captures all the elements. A complete
professional reference. An easy read that teaches.”
—Andy Gillespie, Director, Global Logistics, Ansell

“Practical, accessible, up-to-date, and covering today’s best

practices, Supply Chain and Logistics Management Made Easy is
the ideal introduction to modern supply chain management for
every manager, professional, and student.”
—Oliver Yao, Associate Professor, Lehigh University
 This book is dedicated to the memory of my father, Dr. Albert L. Myerson,
the smartest
person that I ever knew, who taught me the value of education and research.

I also appreciate the support of my wife, Lynne, and son, Andrew, without
whose
support and patience, this book would have taken a whole lot longer to
write!
 Contents

Part I Supply Chain and Logistics Management: Overview

Chapter 1 Introduction
Supply Chain Defined
SCOR Model
An Integrated, Value-Added Supply Chain
The Value Chain
Leveraging the Supply Chain
Supply Chain Strategy for a Competitive Advantage
Segmenting the Supply Chain
The Global Supply Chain and Technology
Chapter 2 Understanding the Supply Chain
Historical Perspective
Value as a Utility
Organizational and Supply Chain Strategy
Mission Statement
SWOT Analysis
Strategic Choices
Supply Chain Strategy Elements and Drivers
Supply Chain Strategy Methodology
Supply Chain Opportunities and Challenges
Supply Chain Talent Pipeline
Career Opportunities in Supply Chain and Logistics
Management
Growing Demand
Part II Planning for the Supply Chain
Chapter 3 Demand Planning
 Forecasting Used to Be Strictly Like “Driving Ahead, Looking in the
Rearview Mirror”
Forecasting Realities
Types of Forecasts
Demand Drivers
Forecasting Process Steps
Quantitative Versus Qualitative Models
Qualitative Models
Quantitative Models
Product Lifecycles and Forecasting
Introduction
Growth
Maturity
Decline
Time Series Components
Time Series Models
Associative Models
Correlation
Seasonality
Multiple Regression
Forecasting Metrics
Forecast Error Measurement
Demand Forecasting Technology and Best Practices
Chapter 4 Inventory Planning and Control
Independent Versus Dependent Demand Inventory
Types of Inventory
Costs of Inventory
Carrying or Holding Costs
Ordering Costs
 Setup Costs
Total Cost Minimized
Economic Order Quantity Model
Basic EOQ Calculation
Reorder Point (ROP) Models
Fixed-Quantity Model
Fixed-Period Model
Single-Period Model
ABC Method of Inventory Planning and Control
Realities of ABC Classification
Other Uses for ABC Classification
Inventory Control and Accuracy
Cycle Counting
Key Metrics
Inventory Planning and Control Technology
Software
Hardware
Careers
Chapter 5 Aggregate Planning and Scheduling
The Process Decision
Goods and Service Processes
Planning and Scheduling Process Overview
Aggregate Planning
S&OP Process
Demand and Supply Options
Aggregate Planning Strategies
Master Production Schedule
Production Strategies
System Nervousness
 Material Requirements Planning
Bill of Materials
MRP Mechanics
Short-Term Scheduling
Types of Scheduling
Sequencing
Finite Capacity Scheduling
Service Scheduling
Technology
Part III Supply Chain Operations
Chapter 6 Procurement in the Supply Chain
Make or Buy
Outsourcing
Other Supply Chain Strategies
The Procurement Process
Identify and Review Requirements
Establish Specifications
Identify and Select Suppliers
Determine the Right Price
Issue Purchase Orders
Follow Up to Ensure Correct Delivery
Receive and Accept Goods
Approve Invoice for Payment
Key Metrics
Technology
Chapter 7 Transportation Systems
Brief History of Transportation Systems in America
Transportation Cost Structure and Modes
Transportation Costs
 Modes
Legal Types of Carriage
For Hire
Private
Transportation Economics
Transportation Cost Factors and Elements
Rates Charged
Effects of Deregulation on Pricing
Pricing Specifics
Documents
Domestic Transportation Documents
International Transportation Documents
Key Metrics
Technology
Chapter 8 Warehouse Management and Operations
Brief History of Warehousing in America
Economic Needs for Warehousing
Types of Warehouses
Warehouses by Customer Classification
Warehouses by Role in the Supply Chain
Warehouses by Ownership Type
Warehouse Economic Benefits
Consolidation
Accumulation, Mixing, and Sorting
Postponement
Allocation
Market Presence
Warehouse Design and Layout
Size of Facility
 Facility Layout
Warehouse Operations
Packaging
Key Metrics
Customer-Facing Metrics
Technology
Warehouse Management Systems
Yard Management Systems
Chapter 9 Order Management and Customer Relationship
Management
Order Management
Order Placement
Order Processing
Order Preparation and Loading
Order Delivery
Customer Relationship Management
Customer Service
Customer Relationship Management
Technology
Chapter 10 Reverse Logistics and Sustainability
Reverse Logistics Activities
Repairs and Refurbishing
Refilling
Recall
Remanufacturing
Recycling and Waste Disposal
Returns Vary by Industry
Publishing Industry
Computer Industry
 Automotive Industry
Retail Industry
Reverse Logistic Costs
Reverse Logistics Process
Receive
Sort and Stage
Process
Analyze
Support
Reverse Logistics as a Strategy
Using Reverse Logistics to Positively Impact Revenue
Other Strategic Uses of Reverse Logistics
Reverse Logistics System Design
Product Location
Product Collection System
Recycling or Disposal Centers
Documentation System
Reverse Logistics Challenges
Retailer-Manufacturer Conflict
Problem Returns and Their Symptoms
Cause and Effect
Reactive Response
Managing Reverse Logistics
Gatekeeping
Compacting the Distribution Cycle Time
Reverse Logistics Information Technology Systems
Centralized Return Centers
Zero Returns
Remanufacture and Refurbishment
Asset Recovery
 Negotiation
Financial Management
Outsourcing
Reverse Logistics and the Environment
Supply Chain Sustainability
Green Logistics
Chapter 11 Global Supply Chain Operations and Risk Management
Growth of Globalization
Factors Influencing Globalization
Reasons for a Company to Globalize
Global Supply Chain Strategy Development
International Transportation Methods
Ocean
Air
Motor
Rail
Global Intermediaries
Global Supply Chain Risks and Challenges
Questions to Consider When Going Global
Key Global Supply Chain Challenges
Risk Management
Potential Risk Identification and Impact
Sources of Risk
Supply Chain Disruptions
Risk Mitigation
Part IV Supply Chain Integration and Collaboration
Chapter 12 Supply Chain Partners
Outsourcing
Reasons to Outsource
 Steps in the Outsourcing Process
Supply Chain and Logistics Outsourcing Partners
Traditional Service Providers
Third-Party Logistics Providers
Fourth-Party Logistics Service Providers
Chapter 13 Supply Chain Integration Through Collaborative
Systems
Internal and External Integration
Internal Integration
External Integration
Supply Chain Collaboration Methods: A Closer Look
Quick Response
Efficient Consumer Response
Collaborative Planning, Forecasting, and Replenishment
Chapter 14 Supply Chain Technology
Supply Chain Information
Supply Chain Information Needs
Supply Chain Software Market
Supply Chain Planning
Supply Chain Execution
Other Supply Chain Technologies
SCM System Costs and Options
Best-in-Class Versus Single Integrated Solution
Consultants
Current and Future Trends in Supply Chain Software
Short-Term Supply Chain Technology Trends
Emerging Supply Chain Technology Trends
Part V Supply Chain and Logistics Network Design
Chapter 15 Facility Location Decision
 The Importance of Facility Location When Designing a Supply
Chain
Supply Chain Network Design Influencers
Types of Distribution Networks
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit
Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last-Mile Delivery
Manufacturer or Distributor Storage with Customer Pickup
Retailer Storage with Customer Pickup
Impact of E-Business on the Distribution Network
Location Decisions
Strategic Considerations
Location Decision Hierarchy
Dominant Factors in Manufacturing
Dominant Factors in Services
Location Techniques
Location Cost-Volume Analysis
Weighted Factor Rating Method
Center of Gravity Method
The Transportation Problem Model
Technology
Careers
Chapter 16 Facility Layout Decision
Types of Layouts
Product Layouts
Process Layouts
Hybrid Layouts
Cellular (or Work Cell) Layouts
 Fixed-Position Layout
Facility Design in Service Organizations
Designing and Improving Product Layouts
Assembly Line Design and Balancing
Work Cell Staffing and Balancing
Warehouse Design and Layout Principles
Design and Layout Process
Technology
Careers
Part VI Supply Chain and Logistics Measurement, Control, and
Improvement
Chapter 17 Metrics and Measures
Measurement and Control Methods
The Evolution of Metrics
Data Analytics
Measurement Methods
Measurement Categories
Balanced Scorecard Approach
Customer Service Metrics
Operational Metrics
Financial Metrics
SCOR Model
Supply Chain Dashboard and KPIs
Indicators
Benchmarking
Chapter 18 Lean and Agile Supply Chain and Logistics
Lean and Waste
History of Lean
Value-Added Versus Non-Value-Added Activities
 Waste
Lean Culture and Teamwork
Lean Teams
Kaizen and Teams
Team and Kaizen Objectives
Value Stream Mapping
VSM Benefits
Lean Tools
Standardized Work
5S-Workplace Organization System
Visual Controls
Facility Layout
Batch Size Reduction and Quick Changeover
Quality at the Source
Point-of-Use Storage
Total Productive Maintenance
Pull/Kanban and Work Cells
Lean and Six Sigma
Chapter 19 Outlook for Supply Chain and Logistics Management
Supply Chain and Logistics Career Outlook
Trends in Supply Chain and Logistics Management
Supply Chain Trends
Logistics Trends
Supply Chain Leadership Trends
Supply Chain Technology Trends
Conclusion
References
Index
 About the Author

Paul A. Myerson is a Professor of Practice in Supply Chain Management

at Lehigh University and holds a B.S. in Business Logistics and an M.B.A.
in Physical Distribution.
Professor Myerson has an extensive background as a Supply Chain and
Logistics professional, consultant, and teacher.
Prior to joining the faculty at Lehigh, Professor Myerson has been a
successful change catalyst for a variety of clients and organizations of all
sizes, having over 30 years experience in Supply Chain and Logistics
strategies, systems, and operations that have resulted in bottom-line
improvements for companies such as General Electric, Unilever, and
Church and Dwight (Arm & Hammer).
Professor Myerson created and has marketed a Supply Chain Planning
software tool for Windows to a variety of companies worldwide since 1998.
He is the author of the books Lean Supply Chain & Logistics (McGraw-
Hill, Copyright 2012) and Lean Wholesale and Retail (McGraw-Hill,
Copyright 2014) as well as a Lean Supply Chain and Logistics Management
simulation training game and training package (Enna.com, copyright 2012–
13).
Professor Myerson also writes a column on Lean Supply Chain for Inbound
Logistics Magazine and a blog for Industry Week magazine.
Part I: Supply Chain and Logistics
Management: Overview
1. Introduction

In the early 1980s, U.S. companies dramatically increased the outsourcing of

manufacturing, raw materials, components, and services to foreign countries.
Around that time, the term supply chain was coined to recognize the
increased importance of a variety of business disciplines that were now
much more challenging to manage as a result of the new global economy.
Prior to that, functions such as purchasing, transportation, warehousing, and
so on were isolated and at fairly low levels in organizations.
Since that time, we’ve seen the creation of the Internet and various business
technologies such as enterprise resource planning (ERP) systems, advanced
planning systems (APS), and radio frequency ID (RFID), to name a few,
which have helped to speed up the flow of information and product
lifecycles as well as increasing the need for better communication,
collaboration and visibility.
Today, logistics alone accounts for more than 9.5% of U.S. gross domestic
product (GDP). Over $1.3 trillion is spent on transportation, inventory, and
related logistics activities. The concept of the supply chain has now risen in
importance to the extent that commercials on TV extol the virtues of
logistics (for example, UPS “I Love Logistics” commercials) to the point
where it is now part of the common lexicon and very mainstream. As a
result, most universities now offer supply chain and logistics courses, if not
majors, and most organizations have a vice president of supply chain and
logistics management (or similar title).
However, beyond supply chain and logistics employees, not many in
business or the public fully understand the role and importance that the
supply chain plays in gaining and maintaining a competitive advantage in
today’s world.
We are at the point today where most people are familiar with the terms
supply chain and logistics but don’t really know that much about them. In
this book, we not only define the supply chain but also offer insight into its
various components, tools, and technology to help improve your
understanding so that you can use it as a competitive tool in your business.
Because supply chain and logistics costs can range from 50% to 70% of a
company’s sales (with trillions spent on it worldwide), organizations of all
sizes both perform and are interested in this function. Therefore,
understanding and implementing an efficient supply chain strategy can prove
critical to both an employee’s and a company’s success.

Supply Chain Defined

The first thing we need to do is get some definitions out of the way. The
terms supply chain and supply chain management (SCM) should be
separately defined because they are sometimes (mistakenly) used
interchangeably.
The supply chain itself is a system of organizations, people, activities,
information, and resources involved in the planning, moving, or storage of a
product or service from supplier to customer (actually more like a “web”
than a “chain”). Supply chain activities transform natural resources, raw
materials, and components into a finished product that is delivered to the end
customer. For example, I once heard a major paper goods manufacturer
describe their supply chain for toilet paper as ranging from “stump to rump.”
In contrast, supply chain management, as defined by the Council of Supply
Chain Management Professionals (CSCMP), “encompasses the planning and
management of all activities involved in sourcing, procurement, conversion,
and logistics management. It also includes the crucial components of
coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, and customers.”
In essence, supply chain management integrates supply and demand
management within and across companies and typically “includes all of the
logistics management activities noted above, as well as manufacturing
operations, and it drives coordination of processes and activities with and
across marketing, sales, product design, finance and information
technology” (Council of Supply Chain Management Professionals
[CSCMP], 2014).
Some people take a narrower view of supply chain, and in many cases, they
think of it as focused more on the supply end (that is, purchasing), and so
ignore the logistics side (as defined as the part of the supply chain that plans,
implements, and controls the efficient movement and storage of goods,
services, and information from the point of use or consumption to meet
customer requirements). In other cases, many just assume that logistics is
included but don’t state it. Still others, while including both areas above,
ignore the planning aspects of supply chain. Personally, I tend to refer to the
field as supply chain and logistics management to make clear what is
included.
As you will see in this book, it is important to understand the similarities and
differences between more functional areas like logistics, which includes
transportation and distribution, versus the broader concept of SCM, which is
cross-functional and cross-organizational. This can have a major impact on
decision making, structure, and staffing in an organization, so it needs to be
understood and examined carefully.
Depending on one’s view, some of the functions listed here may be included
within the supply chain and logistics organization:
Procurement: The acquisition of goods or services from an outside
external source
Demand forecasting: Estimating the quantity of a product or service
that customers will purchase
Customer service and order management: Tasks associated with
fulfilling an order for goods or services placed by a customer
Inventory: Planning and management
Transportation: For hire and private
Warehousing: Public and private
Materials handling and packaging: Movement, protection, storage,
and control of materials and products using manual, semi-automated,
and automated equipment
Facility network: Location decision in an organization’s supply chain
network
Supply chain management is also intertwined with operations management,
which consists of activities that create value by transforming inputs (that is,
raw materials) into outputs (that is, goods and services). Both activities
support the manufacturing process.

SCOR Model
Another way to view the supply chain is through the SCOR model, which
was developed by the Supply Chain Council (SCC) (2014) to teach,
understand, and manage supply chains. It is a model to both define and
measure the performance of an organization’s supply chain.
The SCOR model is organized around the five major management processes
(see Figure 1.1):
Plan: Alignment of resources to demand
Make: Conversion or value-added activities within a supply chain
operation
Source: Buying or acquiring materials or services
Deliver: All customer interaction, from receiving order to final
delivery and installation
Return: All processes that reverse material or service flows from the
customer backward through the supply chain

Figure 1.1 SCOR model

This provides a broad definition for the supply chain, which highlights its
importance to the organization and how it helps create metrics to measure
performance.

SCOR Metrics
To this aim, the SCOR model is also a hierarchical framework that combines
business activities, metrics, and practices that can be looked at from a high
or very detailed level.
The levels, from broadest to narrowest, are defined as follows:
Level 1: Scope: Defines business lines, business strategy and
complete supply chains.
 Level 2: Configuration: Defines specific planning models such
as “make to order” (MTO) or “make to stock” (MTS), which are
basically process strategies.
Level 3: Activity: Specifies tasks within the supply chain,
describing what people actually do.
Level 4: Workflow: Includes best practices, job details, or
workflow of an activity.
Level 5: Transaction: Specific detail transactions to perform a
job step.
All SCOR metrics have five key strategic performance attributes. A
performance attribute is a group of metrics used to express a strategy. An
attribute itself cannot be measured; it is used to set strategic direction.
The five strategic attributes are as follows:
Reliability: The ability to deliver, on time, complete, in the right
condition, packaging, and documentation to the right customer
Responsiveness: The speed at which products and services are
provided
Agility: The ability to change (the supply chain) to support changing
(market) conditions
Cost: The cost associated with operating the supply chain
Assets: The effectiveness in managing assets in support of demand
satisfaction
The SCOR model contains more than 150 key indicators, such as inventory
days of supply and forecast accuracy, that measure the performance of
supply chain operations and are grouped within the previously listed
strategic attribute categories.
Once the performance of supply chain operations has been measured and
performance gaps identified, they are benchmarked against industry best
practices to target improvement, as discussed in more detail later in this
book.
An Integrated, Value-Added Supply Chain
The goal for today’s supply chain is to achieve integration through
collaboration to achieve visibility downstream toward the customer and
upstream to suppliers. In a way, many of today’s companies have been able
to “substitute information for inventory” to achieve efficiencies. The days of
having “islands of automation,” which may optimize your organization’s
supply chain at the cost of someone else’s (for example, your supplier), are
over.
As you will see throughout this book, the concepts of teamwork and critical
thinking aided by technology enable organizations to work with other
functions internally and with other members of their supply chain, including
customers, suppliers, and partners, to achieve new levels of efficiency and to
use their supply chain to achieve a competitive advantage that focuses on
adding value to the customer as opposed to just being a cost center within
the organization.

The Value Chain

The Value Chain model, originated by Michael Porter, shows the value-
creating activities of an organization, which as you can see in Figure 1.2
relies heavily on supply chain functions.

Figure 1.2 The value chain

In a value chain, each of a firm’s internal activities listed after the figure
adds incremental value to the final product or service by transforming inputs
to outputs.
Inbound logistics: Receiving, warehousing, and inventory control of
input materials
Operations: Transforming inputs into the final product or service to
create value
Outbound logistics: Actions that get the final product to the customer,
including warehousing and order fulfillment
 Marketing and sales: Activities related to buyers purchasing the
product, including advertising, pricing, distribution channel selection,
and the like
Service: Activities that maintain and improve a product’s value,
including customer support, repair, warranty service, and the like
Support activities identified by Porter can also add value to an organization:
Procurement: Purchasing raw materials and other inputs that are used
in value-creating activities
Technology development: Research and development, process
automation, and similar activities that support value chain activities
Human resource management: Recruiting, training, development,
and compensation of employees
Firm infrastructure: Finance, legal, quality control, and so on
Porter recommended value chain analysis to investigate areas that represent
potential strengths that can be used to achieve a competitive advantage. As
you can see, the supply chain adds value in a variety of ways, so it should be
a critical area of focus (Porter, 1985).
We investigate ways to identify value-added and non-value-added activities
(which should be reduced or eliminated) in a supply chain later in this book
using a Lean methodology and tools.

Leveraging the Supply Chain

Because supply chain costs represent a significant portion of a company’s
sales, it isn’t difficult to see why there is such a focus on it. This results in a
“leveraging” effect, as any dollar saved on supply chain contributes as the
same to the bottom line as a much larger and often unattainable increase in
sales (will vary based on an individual company’s profit margin).
Table 1.1 illustrates this through an example of a business that is evaluating
two strategic options: 1) reduce its supply chain costs by approximately
6.5% through more effective negotiations with a vendor, or 2) increase sales
by 25% (which will most assuredly also add to sales and marketing costs).
You can see the leveraging effect of the supply chain as the relatively small
cost decrease contributes as much to the bottom line as the 25% sales
increase (which is pretty difficult to accomplish in any economy).
 Table 1.1 Supply Chain Leveraging Effect
The supply chain cost reduction in this example has impressive results, but
you have to keep in mind that “you can’t get blood from a stone.” That is
where Lean techniques, which are discussed later, can have a significant
impact. Through Lean, a team-based form of continuous improvement that
focuses on the identification and elimination of waste, we can create a
“paradigm shift” that can make process (and cost) improvements that were
previously thought impossible.

Supply Chain Strategy for a Competitive Advantage

Historically, supply chain and logistics functions were viewed primarily as
cost centers to be controlled. It is only in the past 20 years or so that it has
become clear that it can be used for a competitive advantage as well.
To accomplish this, an organization should establish competitive priorities
that their supply chain must have to satisfy internal and external customers.
They should then link the selected competitive priorities to their supply
chain and logistics processes.
Krajewski, Ritzman, and Malhotra (2013) suggest breaking an organization’s
competitive priorities into cost, quality, time, and flexibility capability
groups:
Cost strategy: Focuses on delivering a product or service to the
customer at the lowest possible cost without sacrificing quality.
Walmart has been the low-cost leader in retail by operating an efficient
supply chain.
Time strategy: This strategy can be in terms of speed of delivery,
response time, or even product development time. Dell has been a
prime example of a manufacturer that has excelled at response time by
assembling, testing, and shipping computers in as little as a few days.
FedEx is known for fast, on-time deliveries of small packages.
 Quality strategy: Consistent, high-quality goods or services require a
reliable, safe supply chain to deliver on this promise. If Sony had an
inferior supply chain with high damage levels, it wouldn’t matter to the
customer that their electronics are of the highest quality.
Flexibility strategy: Can come in various forms such as volume,
variety, and customization. Many of today’s e-commerce businesses,
such as Amazon, offer a great deal of flexibility in many of these
categories.
In many cases, an organization may focus on more than one of these
strategies, and even when focusing on one, it doesn’t mean that they will
offer subpar performance on the others (just not “best in class” perhaps).

Segmenting the Supply Chain

Today’s use of “omni-channel marketing,” which is an integrated approach
of selling to consumers through multiple distribution channels (that is, brick-
and-mortar, mobile Internet devices, computers, television, radio, direct
mail, catalog, and so on) has created the need to handle multiple channels
with separate warehouse picking operations, often replenished from a
common inventory in a single facility.
This can lead many companies such as Dell Computer to segment their
entire supply chains, whereby different channels and products are served
through different supply chain processes. The ultimate goal is to determine
the best supply chain processes and policies for individual customers and
products that also maximize customer service and company profitability.
The rationale for this, according to an Ernst & Young white paper titled
“Supply Chain Segmentation,” (2014) is that the “business environment is
getting increasingly complex, especially for technology companies dealing
with rapid innovation, globalization, and a growing number of business
partners, business models, and differences in expectations from different
markets and customers.”
E&Y suggest five ways to consider segmentation:
Product complexity based
Supply chain risk based
Manufacturing process and technology based
Customer service needs based
 Market driven
The idea is that a “one size fits all” strategy will not usually work in today’s
environment.
They suggest that while senior sponsorship is required for successful supply
chain segmentation, you also need cross-functional support from multiple
organizational disciplines. The team must provide supporting policies,
segment-level processes, and IT infrastructure to both automate the
processes and provide metrics.
In Dell’s case, over the past few years, they have expanded beyond their
direct to customer model to a “multichannel, segmented model, with
different policies for serving consumers, corporate customers, distributors,
and retailers. Through this transformation, Dell has saved US $1.5 billion in
operational costs” (Thomas, 2012).

The Global Supply Chain and Technology

Suffice it to say, the concept of “global” supply chain management (GSCM)
is primarily a result of the globalization of business in general. As businesses
search globally for sources of lower-cost materials and labor, someone has to
manage these complex and intricate operations.
The combination of globalization and emerging technologies is continuously
changing the supply chain. Products that were once made domestically, such
as apparel and computers, are now designed, assembled, and marketed
worldwide by a conglomeration of organizations.
As a result, there are many risks (disruptions, natural disasters, domestic job
loss, and so on) and challenges (short product lifecycles, erratic demand, and
so on) that are inherent to the process. To this end, a roundtable at a
Dartmouth University Roundtable identified five major issues and
challenges ahead (Johnson, 2006):
Globalization and outsourcing: Including the impact of China and
India on supply chain structure and coordination
New information technologies: Such as radio frequency identification
(RFID; a data collection technology that uses electronic tags for
storing data) and tools that enable enterprise integration and
collaboration
 Economic forces: Within and between supply chains, from consumer
pricing to supplier contract negotiation
Risk management: Includes risks rising from supply chain
complexity and from security threats
Product lifecycle management: Including post-sale service and
product recovery
We discuss the impact of global operations and various forms of technology
used today in supply chain management later in this book.
For now, we will look back to get a little historical perspective on the topic
of supply chain and logistics management.
2. Understanding the Supply Chain

Over the past 75 years, supply chain and logistics management has evolved
from being a kind of “back water” cost-focused function (the term supply
chain didn’t even come about until the 1980s) to where it is today, a critical
part of an organization’s global growth strategy. It has become a strategic
competitive tool to increase revenue and value to the customer, not just
reduce costs.
Once one has a broader understanding of the topic as covered in this chapter,
it’s not hard to see why it has risen in importance in recent times.

Historical Perspective
Until after World War II, logistics was thought of in military terms for the
most part as the link that supplied troops with rations, weapons, and
equipment. Up to that point, logistics was fragmented within business
organizations, primarily focusing on transportation and purchasing. In
educational institutions, there were no integrated programs. Instead,
individual courses were offered in transportation and purchasing.
After World War II, as businesses began to understand the relationships and
tradeoffs involved such as inventory costs versus transportation costs, which
are discussed later, logistics gained an important place in the business world
as well.
In the 1960s, physical distribution, a more integrated concept that included
activities such as transportation, inventory control, warehousing, and facility
location had become an area of study and practice in education and industry.
Physical distribution involved the coordination of more than one activity
associated with supplying product to the marketplace (that is, more focused
on the outbound side of manufacturing).
In the mid-1960s, the scope of physical distribution was expanded to include
the supply side, including inbound transportation and warehousing, and was
referred to as business logistics. In many cases, purchasing was not included
and went under the heading of materials management or procurement.
In the early 1980s, as American manufacturing had been hammered by
overseas competitors for over a decade and began actively outsourcing
materials, labor, and manufacturing overseas, the term supply chain
management (SCM) entered the common business lexicon. It defined both
the new, complex global world we now live and do business in, as well as an
understanding of the integration and importance of all activities involved in
sourcing and procurement, conversion, and logistics management. This
includes the coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third-party service providers, and customers.
In contrast to the past, where physical distribution, logistics, purchasing, and
so on were all fragmented, many of today’s organizations feature in
integrated supply chain organization in most cases led by a senior-level
executive (see Figure 2.1).

Figure 2.1 Supply chain organizational chart

Technology has helped to drive the concept of an integrated supply chain
starting with the development of electronic data interchange (EDI) systems
as a standardized format for the electronic transfer of data between business
enterprises (which really took off in the 1980s), as well as the introduction of
off-the-shelf enterprise resource planning (ERP) software systems, which
featured integrated core business processes in a common database.
Furthering this into the 21st century has been the expansion of Internet-
based collaborative systems.
This supply chain evolution has resulted in both increasing value added and
cost reductions through integration and collaboration.
Value as a Utility
Utility refers to the value or benefit a customer receives from a purchase.
There are four basic types of utility: form, place, time, and possession. More
recently, the utilities of information and service have been added. SCM
contributes to all of these utilities, because it’s all about having the right
product, at the right place and price, at the right time.
Here are descriptions of each utility:
Form utility: Performed by the manufacturers (as well as third-party
logistics companies, or 3PLs), which perform value-added activities
such as kitting and display assembly, making the products useful.
Time utility: Having products available when needed.
Place utility: Having items available where people want them.
Possession utility: Transfer ownership to the customer as easily as
possible, including the extension of credit.
Information utility: Opening two-way flows between parties (that is,
customer and manufacturer).
Service utility: Providing fast, friendly service during and after the
sale and teaching customers how to best use products. This is
becoming one of the most important utilities offered by retailers,
which in many ways are part of the supply chain.

Organizational and Supply Chain Strategy

If an organization can identify what adds value to their customers and
deliver it successfully, they will have established a competitive advantage,
which in essence is the purpose of a strategic plan.

Mission Statement
To do so, you must first establish a broad mission statement, supported by
specific objectives for your business. A mission statement is a company’s
purpose or reason for being and should guide the actions of the organization,
lay out its overall goal, providing a path, and guiding decision making.
It doesn’t have to be lengthy, but should be well thought out and touch on
the following concepts:
Customers: Who are our customers?
 Products or services: Major products or services.
Markets: Where do we compete?
Technology: What is our basic technology?
Future survival, growth, and profitability: Our commitment toward
economic objectives.
Philosophy: The basic beliefs, core values, aspirations, and
philosophical priorities of the firm.
Self-concept: Identify the firm’s major strengths and competitive
advantages.
Public image: What is our public image?
Concern for employees: Our attitude toward employees.

Objectives
The mission is a broad statement, but should then lead to specific objectives
with measurable targets a firm can use to evaluate the extent to which it
achieves its mission.
In a typical medium- to large-size organization, individual
functions/departments may have their own mission statements, but most at
least have goals and objectives that tie to the company’s overall mission
statement and objectives (see Table 2.1).
 Table 2.1 Company and Supply Chain Mission Statements and Objectives

SWOT Analysis
After specifying the objectives for a business, an organization should
perform a SWOT analysis (strengths, weaknesses, opportunities, and threats)
to determine strategic choices for the organization to establish a competitive
advantage.
The components of a SWOT analysis are as follows:
Strengths: Resources and capabilities that can be used as a basis for
developing a competitive advantage.
Weaknesses: Characteristics that place the business or project at a
disadvantage relative to other businesses.
Opportunities: External environmental analysis may reveal certain
new opportunities for profit and growth.
Threats: Changes in the external environmental may also present
threats to the firm.
Using the SWOT framework, you can start to develop a strategy that helps
you distinguish your organization from your competitors so that you can
compete successfully in your markets.

Strategic Choices
Strategic choices will be made based on the results of the SWOT analysis
and can fall into the competitive priority categories described in Chapter 1,
“Introduction,” of cost, quality, time, or flexibility.
The supply chain must then be managed to support these strategies.

Supply Chain Strategy Elements and Drivers

Hernàn David Perez, paraphrasing Michael Porter, suggests that “supply
chain strategy defines the connection and combination of activities and
functions throughout the value chain, in order to fulfill the business value
proposal to customers in a marketplace” (Perez, 2013).
As a result, he describes how the supply chain strategy is driven by the
interrelation among four main elements (see Figure 2.2):
Industry framework (that is, the marketplace)
Company’s value proposition to the customer via its competitive
positioning
Managerial focus (relationship between supply chain processes and
business strategy)
Internal (supply chain) processes
 Figure 2.2 Four main elements of supply chain strategy

Industry Framework
Developing an industry framework involves identifying the interaction of
suppliers, customers, technological developments, and economic factors that
may impact competition.
Four drivers can impact supply chain design:
Demand variation: This can be a wide array of manufacturing and
supply chain costs and is therefore a major driver of efficiency and
ultimately cost.
Market mediation costs: Costs incurred when supply doesn’t match
demand, often resulting in either lost sales or higher than needed
supply chain costs and excess inventory.
Product lifecycle: Advances in technology as well as consumer trends
have reduced the time to bring an item to market as well as its useful
 life. Affects demand variability as well as marketing and supply chain
costs.
Relevance of the cost of assets to total cost: Largely affects
businesses requiring a high utilization rate to remain profitable (for
example, chemical industry). This encourages a push mentality to gain
high utilization of assets but can result in higher than inventory costs
and lower service levels. Industries that have lower cost assets can
focus on being more responsive.

Unique Value Proposal

The value proposition offered to a company’s customer is best understood
after the establishment of the competitive priority strategy that the
organization has selected in terms of its supply chain. As part of the
organization’s strategy, they need to determine what it takes to win business
and incorporate that into their value proposition, thereby understanding and
incorporating the required key drivers into their supply chain to that
ultimately the required value is delivered to the customer.

Managerial Focus
To be successful, an organization must make sure that its supply chain is
linked and aligned with its competitive priorities. This can only be
accomplished via its decision-making process and management focus.
It can be very easy for management to only focus on efficiency-oriented
performance measurements at the expense of the competitive priorities set
by the company. A misalignment can result with the supply chain being
suboptimized by attaining local cost efficiencies at the cost of the value
proposition offered to the customer.

Internal Processes
Internal processes must be connected and aligned properly. Thinking in
terms of the Supply Chain Operations Reference (SCOR) model processes of
source, make, and deliver can help to make sure this occurs. It is of critical
importance to determine the appropriate decoupling point (that is, where a
product takes on unique characteristics or specifications). This goes in to
determining which parts of your internal processes are push (that is, high
asset utilization rate; just before the decoupling point) versus pull (that is,
workload driven by customer demand).
Supply Chain Strategy Methodology
So how might one go about actually establishing a departmental or
functional supply chain strategy for your organization? Paul Dittman, in his
book Supply Chain Transformation (Dittman, 2012), suggests using nine
steps when developing a supply chain strategy. I have modified those
slightly for purposes of clarity and results:
1. Start with customers’ current and future needs. Customer value is
the customer-perceived benefits gained from a product/service
compared to the cost of purchase. Delivering customer value is critical
to a business, as mentioned earlier.
However, delivering financial value to your shareholders is also
important, and is reflected in various business performance measures
such as profit and market growth.
Supply chain strategy should target to deliver customer value while at
the same time meet shareholder needs by enabling reliable supply and
logistics service, low inventory cost, and short cash-to-cash cycle
times.
Using the SCOR model processes of plan, source, make, deliver, and
return can be a great way to make sure that customer and shareholder
value are in alignment.
(Steps 2–6 that follow involve using a kind of SWOT analysis for your
supply chain organization.)
2. Assess current supply chain capabilities relative to best in class.
This can be accomplished through observation, interviews, data
gathering, and benchmarking your organization against industry best-
in-class performance.
Based on your organization’s overall strategy, some metrics and
measurement may be more important than others. For example, if you
have a time-based strategy, speed of delivery may be important,
whereas cost of delivery (relatively speaking) may not be as important
in terms of achieving best-in-class status.
Developing a gap analysis of your current versus ideal future state
based on this analysis can contribute to a clear and easy-to-follow
roadmap.
3. Evaluate supply chain game changers. It is important to scan the
environment on a regular basis to see what trends may impact
customers and the supply chain. Examples include supply chain
collaboration, visibility, sustainability, Lean Six Sigma, and so on
(some of which we discuss later in this chapter in the “Supply Chain
Opportunities and Challenges” section).
4. Analyze the competition. As the saying goes, “Keep your friends
close but your enemies closer.” Competitive analysis is probably not
done often enough in terms of an organization’s supply chain. If you
plan on using your supply chain to achieve a competitive advantage,
this is a must do.
You may evaluate how integrated and responsive the competition’s
supply chain is when compared to yours and if they offer value-added
services, such as the following:
Product customization and testing
Kitting
Bundling/unbundling
Light assembly
Packaging, repackaging, and reboxing
Labeling
Sorting and recycling
Reverse logistics and returns management
Environmental impact reporting and management
5. Survey technology. Don’t just identifying what is new or being
developed, but what is a good fit (functionally and financially) for your
company. Sometimes it is better to not be on the bleeding edge when it
comes to technology. When I was at Uniliver, they had spent hundreds
of thousands of dollars on artificial intelligence technology to deploy
finished goods inventory to their distribution centers. It never really
went anywhere (at least to my knowledge), for a variety of reasons.
6. Deal with supply chain risk. Risk management needs to be part of
the strategy document. External risks, which are out of your control,
can be driven by events either upstream or downstream in the supply
chain. Here are the main types of external risks:
 Demand risks: Can be caused by unpredictable customer or end-
customer demand.
Supply risks: These types of risks are caused by interruptions to the
flow of product for raw material or components, within your supply
chain. For example, if you are utilizing a just-in-time (JIT) strategy
for a critical part or component, you need to think long and hard as
to what risks are involved, because you do not want to risk shutting
down a production line due to a critical part that you have sole
sourced suddenly becoming unavailable.
Environmental risks: Come from outside the supply chain. These
risks usually relate to economic, social, governmental, and climate
factors, and include the threat of terrorism.
Business risks: Can include a supplier’s financial or management
stability or purchase and the sale of supplier companies.
Physical plant risks: This risk can be caused by the condition of a
supplier’s physical facility and regulatory compliance.
Now that you have identified what adds value to your customers while
making sure it is aligned with shareholder needs, as well as identified
possible current and future performance gaps in your supply chain, a
road map for future success can be developed.
7. Develop new supply chain capability requirements and create a
plan to get there. One way to determine these requirements was
formulated by Hau Lee, who concluded that supply chains that offer
best value to the customer differ from typical supply chains in how
they approach three issues that are closely tied to strategic supply
chain management (Lee, 2004):
Agility: The supply chain’s relative capacity to act rapidly in
response to dramatic changes in supply and demand
Adaptability: Refers to a willingness and capacity to reshape
supply chains when necessary
Alignment: Refers to creating consistency in the interests of all
participants in a supply chain
In Lee’s model, these three A’s can be used to service an organization’s
competitive priorities, as discussed earlier (see Figure 2.3).
 Figure 2.3 Typical to best value supply chains
8. Evaluate current supply chain organizational structure, people,
and metrics. There is no one-size-fits-all approach for creating an
organization. Traditional supply chain organizations are functionally
oriented. In the 1980s and 1990s, companies started to transition to
structures that grouped some core supply chain functions within one
department. From around 2000 onward, the philosophy of the supply
chain as an end-to-end process took hold more often than not with a
director or vice president of supply chain overseeing the operation.
This also requires giving that manager a set of cross-functional
performance objectives (and metrics) and the resources they require to
meet these objectives
This type of organization requires an evaluation of existing capabilities
and identification of any gaps between currently available skills and
 those needed to support this end-to-end strategy.
9. Develop a business case and get buy-in. Of course, any type of
change typically has to be approved by management. To do this, you
need to develop a business case, because whenever resources such as
money or effort are utilized, they should be in support of a specific
business need. An example of a business case for a new supply chain
strategy might state that “improvement initiatives outlined in the plan
will have a broad impact throughout the entire company, increasing
efficiency and aligning business activities across all lines of business.
Different aspects of the enterprise can now coordinate their
procurement efforts and material flows to increase operating
efficiency, and take advantage of their combined buying power to
negotiate better prices and contract terms.”

Supply Chain Opportunities and Challenges

When considering a supply chain strategy, it is important to be aware of
current opportunities and challenges.
We live in volatile times. There are many external threats to our supply chain
now and in the future. A white paper by Hitachi Consulting identified “Six
Key Trends Changing Supply Chain Management Today” (Hitachi, 2009):
Demand planning: Companies are moving more toward a “make what
you sell” demand or pull-driven process and are trying to influence and
manage demand better. Cross-functional processes such as sales &
operations planning (S&OP), which are discussed later in this text,
help to improve awareness, coordination, and accuracy of demand
estimates to ultimately improve customer service while reducing costs.
Organizations that do not wrap their minds around this will continue to
struggle with meeting ever-increasing volatile demand, which in many
cases is caused by incentives and promotions resulting in
manufacturing (and purchasing) producing larger-than-needed lot
sizes, which are pushed through the supply chain, causing
inefficiencies throughout. This is known as the bullwhip effect (see
Figure 2.4), which describes the magnification (especially on
inventory, operational costs, and customer service) that occurs when
orders move up the supply chain. This can be caused by a variety of
things such as forecast errors, large lot sizes, long setups, panic
ordering, variance in lead times, and so on.

Figure 2.4 The bullwhip effect

We discuss ways to combat the bullwhip effect throughout this book
using techniques and tools such as Lean to reduce production and
distribution pushing of large batches, EDI (electronic data interchange)
to avoid batching of orders, collaboration programs such as VMI
(vendor-managed inventory) and CPFR (collaborative planning,
forecasting, and replenishment) to collaborate with customers and
suppliers to share information, everyday low pricing (EDLP), and so
on.
Globalization: No area of business is more impacted by globalization
than the supply chain. The benefits to globalization include access to
more markets, a larger supplier pool, a greater selection of employees,
and so on. On the downside are the various risks mentioned earlier.
Supply chain network design is important to managing the changes
brought about by globalization and can optimize the number, location,
size, and type of facilities and flow of materials throughout the
network.
Increased competition and price pressures: The commoditization of
many products has forced businesses to find better ways to distinguish
themselves. They now look to the supply chain to reduce cost and add
value to the customer through both the product and service.
Cost improvements can be found through the following:
Sales and operations planning
Transportation/distribution management
Improved product lifecycle management
Improved strategic sourcing and procurement
Value-added service can be provided through the following:
Vendor-managed inventory (VMI): Buyer of a product provides
information to a vendor, and the supplier takes full responsibility
for maintaining an agreed inventory of the material, usually at the
buyer’s consumption location.
Radio frequency identification (RFID): The wireless use of radio
frequency to transfer data, to identify and track tags attached to
objects.
Labeling and packaging
Drop shipping
Collaboration
Outsourcing: The supply chain and logistics functions are always a
good candidate for outsourcing because they may not be a core
competency for an organization. There is, of course, the tradeoff of
risk and reward, which requires good supply chain network design
integration with the outsourcing partner in the information chain,
control mechanisms to monitor the various components of the supply
chain, and information systems that connect and coordinate the entire
supply chain.
Shortened and more complex product lifecycles: Today there is
increasing pressure to develop and introduce new and innovative
products quickly. To do this, companies have worked on improving
their product lifecycle management (PLM) processes. Benefits of PLM
to the supply chain include processes and technology to design
products that can share common operations, components, or materials
with other products. This can reduce the risk of obsolescence and
reduce costs when purchasing key materials. A formalized PLM
 process can also help to coordinate marketing, engineering, sales, and
procurement and develop sales forecasts to plan products that are in a
company’s pipeline
Closer integration and collaboration with supplier: Supply chain
collaboration is more than just connecting information systems and
now extends to fully integrating business processes and organization
structures across companies that make up the entire value chain.
S&OP processes now extend to an organization’s external supply chain
partners to include demand information, such as customer forecasts,
and supply information, such as supplier inventories and capacities.
As the supply chain has become more global and complex in nature,
technology has advanced to help manage the process and comes under the
heading of systems such as Enterprise Resource Planning (ERP), Supply
Chain Management (SCM), and supply chain planning (SCP) systems.
These systems enable processes such as the following:
Network and inventory optimization
Logistics optimization
Product lifecycle management
Sales and operations planning
Procurement
Manufacturing optimization
Warehouse operations
Business intelligence
I would also add the trend of companies that have started applying Lean and
Six Sigma concepts to the extended supply chain. These are both team-based
continuous-improvement processes. Lean helps to identify and eliminate
waste throughout an organization, and Six Sigma reduces variation in
individual processes. Because they are somewhat complementary, they have
now, in many cases, been combined as Lean Six Sigma.
There is also the challenge of sustainability as resources have become
increasingly constrained due to the global economy and climate change,
which has led to governmental regulations that attempt to minimize damage
to the environment.
All of these issues are covered in more detail in different sections of this
book.

Supply Chain Talent Pipeline

The growth of the importance of the supply chain and logistics field also
requires good talent that has a fundamental understanding of both supply
chain and logistics concepts and the proper tools and training to analyze and
improve it.
Many universities offer great supply chain programs, such as Lehigh
University (where I teach), but there are, according to a study, “a number of
key emerging trends that individually create tension and potential
disruptions in the supply chain talent pool. Either of those on their own can
create challenges for a supply chain organization similar to a hurricane or a
severe winter gale. At the same time, like the (movie) Perfect Storm, there is
the prospect of these trends colliding to create a supply chain talent ‘perfect
storm’” (Ruamsook & Craighead, 2014).
The authors of the study mention that demand for supply chain talent is
projected to continue to rise, while the talent gap will become greater as
baby boomers start retiring. That, combined with the increased need for
technical skills in a more complex global economy and a possible shortage
in supply chain university faculty in the coming years, may be the impetus
for a perfect storm of sorts.
We all know how accurate the weather forecasts have been lately, so no need
to panic in my opinion. However, it is important to think strategically to
avoid potential obstacles like this.
The paper also points out the need to plan ahead by focusing on the
employee value proposition (that is, opportunity, rewards, and so on),
making sure that you hire people with the right core competencies, focusing
on retention methods, investing in talent and leadership development, and
helping to create a talent pipeline by working with high schools and
universities to develop the talent.
Supply chain educators try to do their part by encouraging business students
to consider supply chain as a major (or minor), while giving them a great
fundamental understanding of supply chain and logistics management
practical concepts and applications (and actual experience through
internships and team projects). They also help them to develop the skills and
abilities necessary to understand and use the various tools and technology
available today to manage and improve the supply chain process in this
complex global economy.
The authors of the aforementioned article emphasize the need for a tighter
industry-academic collaboration to help avoid this perfect storm.
It is important that supply chain organizations prepare properly in this regard
(and in general) and take the long view to plan ahead so that they will be
able to ride out this or any storm successfully.

Career Opportunities in Supply Chain and Logistics

Management
The supply chain talent pipeline can be employed in a variety of areas, many
which might not be totally obvious to those interested in careers in this field.
Depending on one’s interests, talents, and aptitude, careers can be found in
the corporate environment, field operations, and even sales in functional
areas such as forecasting, production and deployment planning,
manufacturing, transportation, distribution, procurement, and technology.
When thinking about a supply chain career path, it helps to consider
preferences and strengths with regard to mathematics, critical thinking,
social, travel, work environment, and so on, because this may steer you
down one path versus another.
Table 2.2 lists a number of jobs in the field.
 Table 2.2 Supply Chain and Logistics Job Sampling

Growing Demand
According to Bloomberg Business Week, SCM “job openings, comfortable
salaries, and the prospect for advancement have caused the academic
community to take notice, with more students majoring in the subject and
more programs offering courses and concentrations in it” (Taylor, 2011).
For example, Lehigh University’s College of Business and Economics has
recently reported the most undergraduate SCM majors in the program’s 10-
year history.
The article goes on to report that SCM majors and MBAs are in high
demand and that the average entry-level professional supply management
salary is about $49,500 and the average salary of those with 5 or fewer years
of experience is $83,689.
For those professionals already in the field who are looking to improve
themselves, certification programs are available, such as the following:
 Certified Professional in Supply Management (CPSM): Offered by
Institute for Supply Management (ISM) and is recognized
internationally
Certified Production and Inventory Management (CPIM):
Certification offered by American Production and Inventory Control
Society (APICS), and is well known to thousands of companies
worldwide
Certified Supply Chain Professional (CSCP): Certification also
offered by APICS, and is the most widely recognized credential in the
field
You should now have a good understanding of the definition and importance
of the field of supply chain management. Next, we examine what I refer to
as the planning and scheduling processes that pertain to supply chain
operations management.
Part II: Planning for the Supply
Chain
3. Demand Planning

It’s only been in the past 20 years or so that businesses have truly come to
realize the importance of forecasting. If you think about it, forecasting is
usually the first step in the planning and scheduling process for most goods
and service organizations, and forecasts for demand drive everything in an
organization: from longer-term decisions (3+ years out) as to new facilities
and products, to medium-term decisions (months to years out) such as
production planning and budgeting, and the short-term (months to a year at
most), where we need to know what to produce (or purchase) and deploy
(see Figure 3.1).

Figure 3.1 Typical planning and scheduling process

The function itself has evolved from being an almost “dreaded”
responsibility of sales and marketing, to where operations took control to
produce stable production requirements, and on to today where it is most
typically part of the supply chain function, where it can rise to the level of
importance in an organization to the point where there may be a director of
forecasting or demand planning. In fact, there is now a professional
organization dedicated to the profession: the Institute of Business
Forecasting & Planning (www.ibf.org).

Forecasting Used to Be Strictly Like “Driving Ahead, Looking

in the Rearview Mirror”
Historically, manufacturers forecasted sales based on shipments to customers
only, which was less than optimal because 1) what we sold may not have
been what was ordered (or where it was supposed to ship from) and 2) the
true driver of most businesses and services is the consumer, not necessarily
our distribution channels.
These limitations were due primarily to companies working in more of a
“vacuum” because data was hard to get and limited to internal sources and
storage space expensive and limited.
Many companies also operated under a two-number system, where sales and
marketing budgeted one number (which might be changed only once per
quarter) and manufacturing developed their own SKU (stock keeping unit)
forecast based on more current sales. In some cases, there was even a third
number used by those responsible for finished goods deployment to
distribution centers, which in many cases was based on percentage
allocations of one of the two aforementioned national or global forecasts.
As technology became more readily available (and more affordable) in the
mid-1980s to early 1990s, many businesses were able to begin to get a better
handle on the forecasting process. Using the pyramid approach to
forecasting (see Figure 3.2), organizations were able to develop a bottom
up/top down one-number forecast, which used various statistical methods as
well as other sources of information at various levels of detail. These one-
number forecasts were able to drive budgeting, production, and deployment
simultaneously and be updated typically on a monthly (or more often basis).
 Figure 3.2 The pyramid approach to forecasting
The availability and sharing of point-of-sale (POS) data from either paid
services or larger customers was also integrated into the process using
collaborative programs between manufacturers and retailers such as quick
response and efficient consumer response (to be discussed in more detail
later) to help reduce the bullwhip effect.

Forecasting Realities
You need to understand certain realities about forecasting before getting into
the details of the process:
All forecasts are wrong. It’s rare that a forecast is 100% accurate. The
idea is to have an integrated, collaborative process that minimizes
variance of actual versus target. You’ll learn later in this book about
the process and importance of setting and measuring forecast accuracy
targets.
 The more “granular” the forecast, the less accurate it is. A national
forecast for a family of items is likely to be more accurate than a
weekly forecast for an SKU at a distribution center that handles a
region of the country. We can compensate for some of the inaccuracy
through proper inventory planning, factoring in scientific safety stock
inventory based on desired service levels and reduced lot sizes and
cycle times included in Lean, as covered later in the book.
It’s easier to forecast next month more accurately than next year.
If we know what we sold yesterday, we typically have a better idea of
what we’ll sell today; whereas 12 months from now, a lot of things can
happen that can affect sales.
You will get a more accurate forecast using demand history rather
than sales history. Years ago, when data storage costs were high and
capacity lower, most companies only stored sales information. Today,
most store order or demand information as well. Unless your company
has a 100% service level, there will be occasions where you ship short,
late, or from the “wrong” location. If you only use sales history, you
would be forecasting to repeat yesterday’s failure. That’s why you
should always use demand history to drive statistical forecasts.
Forecasting really is a blend of art and science. As we will discuss,
there are both qualitative and quantitative methods of forecasting.
Today, the best practice is a combination of both, in addition to
collaboration with supply chain partners, providing better visibility
downstream in the demand chain.

Types of Forecasts
Organizations have various forecasting needs. The major ones are as
follows:
Marketing requires forecasts to determine which new products or
services to introduce or discontinue, which markets to enter or exit,
and which products to promote.
Salespeople use forecasts to make sales plans, because sales quotas are
generally based on estimates of future sales.
Supply chain managers use forecasts to make production, procurement,
and logistical plans.
 Finance and accounting use forecasts to make financial plans
(budgeting, capital expenditures, and so on). They also use them to
report to Wall Street with regard to their earnings expectations.

Demand Drivers
In general, demand can be driven by a number of internal and external
factors, which need to be identified and understood.

Internal Demand Drivers

These types of drivers of demand include sales force incentives, consumer
promotions, and discounts to trade. It was only in the past 20 years that some
manufacturers and retailers began to better understand the full impact of
these drivers on the supply chain resulting in the bullwhip effect.
For example, Procter and Gamble and Walmart have partnered in everyday
low pricing (EDLP) to reduce costs and improve service. At one point, P&G
went as far as stationing 200 employees at Walmart’s headquarters in
Bentonville, Arkansas.
Previously, supply chain and operations were at the mercy of these internal
drivers and had to live through the consequences. Of course, they will
always exist to some degree.

External Demand Drivers

These drivers, although not controllable to any great degree, can be managed
better through best practice techniques with a structured methodology in
place that employs improved communications and integration with other
departments within an organization and with customers. These can include
events in the environment that are mostly unpredictable, such as terror
attacks and stock market crashes, and others that are due to a lack of good
communication and visibility, such as new distribution and larger-than-
anticipated orders.

Forecasting Process Steps

Everyone does things a little different, so it’s always a good idea to develop
a standard methodology for a process. In the case of demand forecasting,
certain general steps should be included (Heizer & Render, 2013):
1. Determine the use of the forecast. Varies by industry and company.
In the case of manufacturing, it may be to drive production and
deployment, in the case of retail it might be to determine purchasing
requirements and for pure service companies might be used primarily
for labor staffing.
2. Select the items to be forecasted. Will we be forecasting by
individual item in various granulations, and at what levels and units of
measure will be need to be able to aggregate forecasts and demand
history?
3. Determine the time horizon of the forecast. Do we need to look at it
in the short, medium, or long term (or all of the above), and what type
of time planning buckets are appropriate (for example, 30 days or less:
daily buckets; 1–3 months out: weekly buckets; and 4+ months:
quarterly buckets).
4. Select the forecasting model(s) and methods. Based on a number of
things we will be discussing, such as where a product is in its lifecycle,
will we use qualitative, quantitative, or a blend of models? To what
degree will we integrate externally supplied information (for example,
customer forecasts, POS data, CPFR, and so on), and what weight will
we give it?
5. Gather the data needed to make the forecas. When using
forecasting software, the initial integration will consider much of this,
such as using demand versus sales, as mentioned previously,
eliminating data errors, and so on. Once this integration has been
created and data validated, it becomes more of a maintenance issue for
things such as new and discontinued items.
6. Generate forecasts. Typically, statistical methods are used to generate
a baseline forecast, possibly at different levels of detail. The planner
will then usually audit the results and, if needed, try other statistical
models. They will then factor in management overrides based on their
experience and knowledge as well as promotional plans, sales
estimates, and externally supplied information mentioned earlier.
7. Validate and implement the results. During the demand part of the
sales and operations planning (S&OP) process that we will discuss in
the next chapter, forecasts are reviewed by cross-functional teams at
various levels of detail and units of measure to ensure the highest level
 of accuracy possible. This will ultimately lead to a one-number system
that was discussed earlier so that everyone is on the same page.
During this time, recent forecast accuracy will be evaluated, as well, to help
target improvement. It is also during this step that the new forecasts are
saved to be measured later for accuracy against predetermined variance/error
targets, as discussed later in the chapter.
Many companies cycle through this process on a monthly basis (this again
varies by industry and how the forecasts will be used), but forecasts are
typically adjusted on an as-needed basis due to over/undersells, new demand
information, changes to promotions and discounts, and so on.

Quantitative Versus Qualitative Models

There are two general types of forecasting models: quantitative and
qualitative.

Qualitative Models
The qualitative method is typically used when the situation is somewhat
vague and there is little data that exists. It is useful for creating forecast
estimates for new products, services, and technology. Generally, it relies
heavily upon intuition and experience.
Qualitative methods include knowledge of products, market surveys, jury of
executive opinion, and the Delphi method.

Knowledge and Intuition of the Products

A forecast can come from the experience of a planner/forecaster who has
years of experience with the product and can look over historical and
forecast statistical estimates to make adjustments based on his or her
judgment. This same method can be used with other people in the
organization such as sales and marketing to gather their estimates.
However, you must always be aware of biases that may result from different
individual’s motivation. For example, sale personnel may have an incentive
to hit a high target to reach a bonus.
In my experience as a senior forecaster at Unilever, after awhile I was able to
determine that sales estimates were typically 50% high, and once factoring
that in, they were fairly useful (at least to start a dialogue). It is also
important to be able to share forecast and historical data in units of measure
and levels of aggregation that are meaningful to others. For example, the
sales department thinks more in terms of revenue dollars, customers, and
product categories. So, a good forecasting process and software system
should be able to convert data back and forth to both present the data and
receive feedback.

Market Surveys
Market surveys involve the process of gathering information from actual or
potential customers. I’m sure most of us have experienced being asked to
answer a survey in a mall. When I was an employee at Burger King
Corporation at their headquarters in Miami, Florida, we would be asked on
occasion to visit the test kitchen upstairs. We would then try different
versions of current and new/test items. Usually we were asked to compare
items that might have subtle differences, like different brands of ketchup.
Another example are focus groups where people are asked about their
perceptions, opinions, beliefs, and attitudes toward a product, service,
concept, advertisement, idea, or packaging. Questions are sometimes asked
in a group setting, and participants can talk with other group members.

Jury of Executive Opinion

In the jury of executive opinion forecasting method, managers within the
organization get together to discuss their opinions on what sales will be in
the future. These discussion sessions usually resolve around experienced
guesses. The resulting forecast is a blend of informed opinions, with some
use of statistical methods.

Delphi Method
In the Delphi method, which is a bit more formal than the jury of executive
opinion method, the results of questionnaires are sent to a panel of experts.
Through an iterative process, multiple rounds of questionnaires are sent out,
and the anonymous responses are aggregated and shared with the group at
the end of each round. The experts are allowed to modify their answers for
each round. The Delphi method seeks to reach the correct response through
consensus.
Both the Delphi and jury of executive opinion forecasting methods are
usually a bit more strategic in nature and used more in developing higher-
level longer-terms forecasts.
Quantitative Models
As opposed to qualitative methods, quantitative methods are typically used
when the situation is fairly stable and historical data exist. As a result, it is
used primarily for existing/current technology products and involves a
variety of mathematical techniques we cover in some detail later in this
chapter under the two major categories of time series and causal models.

Time Series Models

Time series forecasting uses a set of evenly spaced numeric data that is
obtained by observing response variable at regular time periods. The
forecasts are based on past values and assume that factors influencing past,
present, and future will continue. Relatively simple and inexpensive methods
such as moving averages and weighted moving averages are used to predict
the future.

Associative Models
Associative (often called causal) models forecast based on the assumption
that the variable to be forecast (that is, dependent) has a cause-and-effect
relationship with one or more other (that is, independent) variables.
Projections are then based on these associations. Models such as linear and
multiple regression are used in this case.

Product Lifecycles and Forecasting

Before we delve into the various quantitative forecasting models, it is worth
discussing the relationship between forecasts and a product’s lifecycle,
because it is somewhat useful to understand where a product is in its
lifecycle when determining whether to rely more heavily on qualitative or
quantitative models.
Note that the product lifecycle also has an impact on the supply side, as
covered in the next chapter.
The phases in the lifecycle of a product or service are introduction, growth,
maturity, and decline (see Figure 3.3).
 Figure 3.3 Product lifecycle

Introduction
During the introduction phase, there is very little history, if any, to go on, so
forecasters tend to rely more on qualitative estimates that are generated both
internally and externally. This information can come from sources such as
market research; test markets, where that information can be extrapolated;
similar items that you’ve sold before, which may or may not cannibalize
other existing items; sales and customer estimates; advance orders to fill the
distribution pipeline; and so forth.

Growth
As a product gains momentum through expanded marketing and distribution,
some of the simpler time series methods may be used as minimal demand
history becomes available.
A general rule of thumb in forecasting is that to generate a decent statistical
forecast, you need at least 12 months of history. So, during this growth
phase, forecasting is truly a blend of art and science, as both quantitative and
qualitative methods are both used to create a blended forecast.
During the growth phase, it can be very easy to over- or underestimate
forecasts, which can have dramatic effects on cost and service. So, great care
must be taken, and all lines of communication must be established and open
both internally and externally, to avoid surprises where possible (which in
some cases, such as new distribution, may be hard to avoid).

Maturity
When a product reaches maturity, forecast accuracy tends to improve. For
example, when I was in charge of forecasting at Church & Dwight for Arm
& Hammer, it was relatively easy to forecast demand for a box of 1-pound
baking soda because it had been around for more than 150 years. So, we
could rely on simple models to forecast and didn’t need as much field
information because the item wasn’t gaining many new customers. However,
once a product reaches maturity, there are opportunities for brand extensions,
which is what happened with baking soda. Baking soda actually has
hundreds of applications; so, starting with refrigerator and freezer “packs,”
baking soda gained new life (and new products). This went on to baking
soda toothpaste, baking soda deodorant, and so on in the years that followed.

Decline
Once a product goes into its decline phase, besides sales having a general
downward trend, the demand locations start to shift because the trend is not
uniform. On top of that, other alternative channels not previously used such
as dollar stores, discount chains, export, and so on may now be used.
Eventually, the product may be discontinued. However, forecasts must still
be generated to run out existing inventory. Therefore, similar to the
introductory phase, the forecaster relies more on qualitative than on
quantitative methods.

Time Series Components

Time series models can contain some or all of the following components
(see Figure 3.4).
 Figure 3.4 Components of demand
Trend: An ongoing overall upward or downward pattern with changes
due to population, technology, age, culture, and so on that is usually of
several years or more in duration (for example, a fashion trend toward
smaller bikinis).
Cyclical: Repeating up and down movements typically affected by
business cycle, political, and economic factors, which may vary in
length and are usually 2 to 10 years in duration. There are often causal
or associative relationships. Examples include economic recessions.
Seasonal: A regular pattern of fluctuations due to factors such as
weather, customs, and so on that occur within 1 year. Examples
include natural occurrences such as climatic seasons or artificially
created such as the school year or seller promotional plans.
Random: Erratic fluctuations that are due to random variation or
unplanned events such as union strikes and war, which are usually
relatively short in nature and nonrepeatable.
Because these components can be combined in different ways, it is usually
assumed that they are multiplicative or additive.
Time Series Models
The most common quantitative time series models are as follows:
Naive approach: Last period’s actual demand is used as this period’s
forecast, without adjusting them or attempting to establish causal
factors. (For example, if January sales were 100, then February
forecasted sales will be 100.) It is simple, yet cost-effective and
efficient.
Moving average: The simple average of a demand over a defined
number of time periods and is used if there is little or no trend because
it tends to smooth historical data. Typically, more recent history is
averaged to create the estimate. (For example, January–March sales
are averaged to create an April forecast.)
Weighted moving average: An average that has multiplying factors to
give different weights to data at different positions in the sample
window. Typically used when some trend might be present because it
treats older data as usually less important. The weights are based on
experience and intuition and can be used to minimize the smoothing
effect if desired.
For example:
Weighted moving average forecast for April = .6 * March sales + .3 *
February sales + .1 * January sales
In this example, more weight has been given to March demand than to
January and February to generate the April (and onward) forecast.
Exponential smoothing: A smoothing technique used to reduce
irregularities. It is a type of the weighted moving average model where
weights decline exponentially, with the most recent observations given
relatively more weight in forecasting than the older observations.
Exponential smoothing requires an alpha smoothing constant (ranges
between 0 and 1 and denoted by the symbol α), which is subjectively
chosen.
For example:
New forecast = Last period’s forecast + .7 * (Last period’s actual
demand – last period’s forecast)
In this example, the smoothing constant used of .7 will give a
relatively high weighting or smoothing factor to an over- or undersell
 during the most recent month of history when generating the new
forecast.

Associative Models
There are more sophisticated models known as associative models, such as
linear regression (also known as least squares method) and multiple
regression analysis, which use the relationship of an independent variable(s)
(x) to predict a dependent variable (y). The reason it is called the least
squares method is that the formula draws a best fit line through the historical
data over time (that is, with the least deviation; see Figure 3.5). That formula
can then be used to predict future values of y.

Figure 3.5 Least squares method

In linear regression, the relationship is defined as: y = a + bx, where a = the y
axis intercept and b = the slope of the regression line.
A simple example of linear regression would be to derive and use this
equation to predict future sales (y) by plugging in the sales budget (x) that
we plan on using (with n being the total number of observations). If we
know that the two variables are strongly correlated, we can easily derive the
equation using historical sales personnel employment numbers along with
historical sales.
To come up with this equation, we must solve for b and then a. The formula
used to derive each are shown here:

Once we have solved for a and b, we have our regression formula and can
plug in future sales personnel employment estimates to predict future sales.

Correlation
To measure correlation (that is, the mutual relation of two or more things),
we calculate a correlation coefficient, also known as r, which is a measure of
the strength and direction of the linear relationship between two variables
that is defined as the (sample) covariance of the variables divided by the
product of their (sample) standard deviations.

The range of correlation is 0 to 1. A perfect correlation between two

variables would result in an r of +/–1. The lower the correlation between the
two variables, the closer to 0 is the result.

Seasonality
In all the previously mentioned time series methods, as well as linear
regression, we can apply what is known as a seasonality index. As
mentioned, this may reflect actual seasonal sales of an item (that is, we sell
more snow shovels in the winter) or can be artificially created (for example,
a promotional calendar).
A seasonality index is relatively easy to create and can be applied to any of
the previously discussed forecasting methods to give the forecast more
realistic peaks and valleys.
To create a seasonality index, you must do the following:
1. Calculate an average for all item history (for all years and periods).
2. Average each period’s historical data.
 3. Divide each period’s average by the overall average.
4. Apply the period index to the existing time series or linear regression
forecast.
Suppose, for example, that a snow shovel that we sell has historical quarterly
sales, as shown here.

We can create a seasonality index to apply to a flat moving average quarterly

forecast of 100, for example. To do this, we first calculate an average for
each period, and then calculate an overall average of 268. From there, we
can calculate indices for each quarter by dividing their period averages by
the overall average of 268.
If we had a quarterly forecast for next year of 100/quarter, we could apply
the seasonality index for each quarter to that forecast. The resulting quarterly
forecasts would be: Q1 = 2.07 * 100, or 207 shovels; Q2 = .42 * 100, or 42
shovels; Q3 = .09 * 100, or 9 shovels; and Q4 = 1.42 * 100, or 142 shovels.
As mentioned previously, seasonality can be natural or induced. In either
case, it can change over time and needs to be recalculated on an ongoing
basis.

Multiple Regression
When more than one independent variable is going to be used to develop a
forecast, linear regression can be extended to multiple regression, which
allows for several independent variables. (For example, discounting,
promotions, advertising, and so on may all have an impact on sales to one
degree or another.) The formula for this is: y = a + b1 x1 + b2 x2 ... (similar to
the least squares formula, except with multiple independent variables). This
is quite complex and generally done with the help of statistical software.
In the end, you will want to arrive at the best combination of independent
variables for the best possible forecast. A statistic called an r-squared or
coefficient of determination, which is the square of the correlation
coefficient mentioned earlier and is a measure of the strength of the
correlation between y and the various combination of x’s, is calculated. The
closer to 1.0 the r-squared is, the better the correlation, and hopefully, the
more accurate the forecast.
There are many other statistical methods used, ranging from simple to very
complex. The best-in-class methods of forecasting use a blend of qualitative
and quantitative methods that include collaboration both internally with staff
from various departments, including sales, marketing, and finance, and
externally with customers and suppliers.

Forecasting Metrics
You cannot control and improve a process if you don’t measure it, so it is
important to both establish targets and to then track and measure forecast
accuracy. There are many ways to establish forecast targets, including
historical data, contribution, and so on. The one I prefer is the ABC method,
which is a way to classify items based on their sales velocity or contribution
to profits and can be used to not only set forecasting targets but also in
inventory planning and control, as discussed in the next chapter.
To under the ABC method, you needs to understand a phenomenon known
as the Pareto principle or the 80/20 rule. It states that a relatively small
number of your items generate a fairly large percentage of your sales or
profits and are referred to as A items (for example, Whopper, fries, and Coke
are A items at Burger King).
In forecasting, these A items require more time and effort put into them and
typically have better accuracy as a result. The slower movers, known as B
and C items, are somewhat less important and require less forecasting time
and effort and typically have more variability (Myerson, 2014).

Forecast Error Measurement

Forecast accuracy is the difference between what was forecasted for a period
and what was actually sold or shipped. It can be measured in whole units or
as a percentage.
A number of methods are used to measure and monitor accuracy. The main
ones are described in the following subsections.

Mean Absolute Deviation

Simply put, the mean absolute deviation (MAD) is a way to measure the
overall forecast error in units over periods of time.
The actual calculation for the MAD is the sum of the absolute error in units
divided by the number of occurrences and represented as follows:

Mean Squared Error

The mean squared error (MSE) is the average of the squared differences
between the forecasted and actual values. Its formula is the sum of the
square forecast errors divided by the number of occurrences and represented
as follows:

Mean Absolute Percent Error

As opposed to the MAD and MSE, which can vary in size based on the
volume sold of an item, the mean absolute percent error (MAPE) calculates
the absolute percentage error. From my experience, this is the most common
way for businesses to measure and control forecast accuracy.
Typically, targets are set by ABC code or other methods that highlight
relative importance of items, with A type items generally having a smaller
variance because they are major, everyday items and so more predictable. C
items, because there are more of them with much smaller volume, tend to be
more volatile and so tend to have greater forecast variance.
The MAPE is calculated as follows:

Tracking Signal
Over time, forecasts can tend to get out of control fast. As a result, it is a
good idea to utilize what is known as a tracking signal.
The tracking signal is used to determine the larger deviation (in both plus
and minus) of error in forecast, and is calculated by the following formula:

Usually, upper and lower control limits (UCL and LCL) for the number of
MADs that the tracking signal represents. There are no “magic” numbers for
the UCLs and LCLs, because they are somewhat subjective, but keep in
mind that 1 MAD = .8 standard deviations.
In a normal distribution, 3 standard deviations (or +/–4 MADs), should
include 99.9% of the occurrences. So, if your tracking signal starts
exceeding those levels, it is a good indication that something isn’t right.

Demand Forecasting Technology and Best Practices

Computerized forecasting software has been around for a long time. It has
evolved from the mainframe to the PC to the Web, from installed
applications to cloud based on-demand software-as-a-service (SAAS). These
systems range from simple spreadsheet calculations to sophisticated
packaged software systems utilizing a variety of forecasting methods and are
in some cases integrated with customers and suppliers for improved
visibility and collaboration.
Historically, at least in terms of best-of-breed forecasting functionality, the
software has been licensed from a separate vendor and integrated with the
accounting or enterprise resource planning (ERP) software system. These
integrated applications were then used to manage business and automate
back-office functions for all facets of an operation, including product
planning, development, finance, human resources, manufacturing processes,
sales, and marketing. More recently, through development and acquisition,
accounting and ERP vendors are increasingly adding this and other
nontraditional functionality to their systems (see Figure 3.6).
 Figure 3.6 Forecasting screen example (PSI Planner for Windows)
Yet, with all of this, according to a KPMG advisory global survey of 544
senior executives (KPMG, 2007), nearly all organizations still use
spreadsheets for some parts of the process; more worryingly, 40 percent of
them rely solely on spreadsheets to produce the forecast. As a result, this
leaves major chances for losses in efficiency and for redundancies in work
processes.
However, the KPMG advisory found that the following separated the best in
class from the rest regarding forecasting:
Tend to take forecasting more seriously as they hold managers
accountable for agreed-upon forecasts, incentivize managers for
forecast accuracy, and use the forecast for ongoing performance
management
Look to enhance quality beyond the basics by incorporating scenario
planning and use external market reports and data more often
Work harder at it by updating and reviewing forecasts more often and
more formally and tend to use packaged forecasting software systems
more often rather than just spreadsheets
Now that we have answered the demand question, the next step in most
goods-oriented planning processes is this: How much and when do we need
to produce or purchase product?
4. Inventory Planning and Control

In most goods and many service organizations such as restaurants, after

arriving at a short- to medium-term forecast, we need to figure out how
much we want to produce or purchase and when to order or produce it (see
Figure 4.1).

Figure 4.1 Typical planning and scheduling process

This decision is accomplished by determining the current inventory position,
which measures a stock keeping unit’s (SKU) ability to satisfy future
demand. The current inventory position includes scheduled receipts, which
are production (or purchase) orders that have been placed but have not yet
been received, plus on-hand inventory minus any open customer orders. The
current inventory position is then netted against the demand forecast and
lead time while adding in buffer or safety stock to create future period (that
is, day, week, month, and so on) inventory requirements commonly known
as planned orders.
These unconstrained requirements are solidified through a process known as
aggregate planning, covered in the next chapter, which considers various
material, manpower, and machine constraints.

Independent Versus Dependent Demand Inventory

There are two general categories of inventory: independent and dependent
demand inventory. This chapter covers independent demand inventory only.
Dependent demand is represented by an item whose demand is linked
directly to the demand or production level of another item. Dependent
demand items, and the systems for managing them, are typically used in
manufacturing. An example of dependent demand inventory requirements
would be tires that go on a bike; the production of one bicycle would require
two tires of a specific size, and thus the demand for the tires is dependent on
the number of bicycles being produced. Material requirement planning
(MRP) systems, covered in Chapter 5, “Aggregate Planning and
Scheduling,” are planning mechanisms to determine requirements for
dependent demand.
By independent demand, however, we are referring to inventory
requirements for finished goods, which is product ready for the consumer to
purchase and use. Finished goods not only exist in a retail store displayed as
individual items, but start their journey upstream in the supply chain after
production and are typically packed in groups in corrugated containers (for
example, 12 bottles/container) because that is more economical for
warehouse storage and shipping purposes than storing and shipping one unit
of an item.
Finished goods travel through a company’s distribution channel prior to
getting in the consumer’s hands, which typically consists of manufacturers,
distributors, or wholesalers and retailers (see Figure 4.2).

Figure 4.2 Channels of distribution

A manufacturer produces in lots or batches to gain economies of scale (that
is, producing in larger quantities to spread fixed costs over many units so
that the cost/unit is lower). A retailer, unless it is large enough to buy in bulk
direct from the manufacturers such as Target or Walmart, buys from
wholesalers or distributors in smaller quantities.
As product makes its way through the supply chain, both value and cost are
added to product.
The value-adding feature of the supply chain was discussed in Chapter 1,
“Introduction,” with the value chain model and in Chapter 2, “Understanding
the Supply Chain,” when describing value as a utility.
We talk later in the book about Lean concepts for reducing non-value-added
activities, which have a major impact on cost and efficiency as well. Suffice
it to say, all forms of inventory have cost components, which we will cover
shortly.
First, it is important to define the main types of inventory.

Types of Inventory
There are four major types of inventory, as follows:
Raw materials and components: Inventory is usually classified as
raw materials if the organization has purchased them from an outside
company, or if they are used to make components. This category also
includes goods used in the manufacturing process, such as components
used to assemble a finished product.
Work in process (WIP): These are materials and parts that have been
partially transformed from raw materials but are not yet finished goods
and can include partially assembled items that are waiting to be
completed.
Finished goods: Products that are ready to be shipped directly to
customers, including wholesalers and retailers.
Maintenance, repair, and operations (MRO): These are items a
business needs to operate, such as office equipment, packing boxes,
and tools and parts to repair equipment.
Costs of Inventory
As inventory works its way from raw material to finished goods, value is
added as well as cost. Inventory, as an asset, not only shows up on a
financial balance sheet but also goes straight the bottom line on income
statements through components of what is known as holding or carrying
costs.

Carrying or Holding Costs

Whether inventory is purchased or produced, costs are involved in the
acquisition and holding of it. The components of holding costs are as
follows:
Capital or opportunity cost (depending on current interest rates
can range from 5% to 25%): Money either has to be borrowed, in
which case interest must be paid, or capital from internal sources,
which has an opportunity cost associated with it (that is, the money
would generate a return by investing in other things such as capital
equipment).
Physical space occupied by the inventory (3% to 10%): Includes
building rent or depreciation, utility costs, insurance, taxes, and so on.
Handling of inventory (4% to 10%): Includes labor cost such as
receiving, warehousing, and security and material handling costs,
which include equipment lease or depreciation, power, and operating
costs.
Pilferage, scrap, deterioration, and obsolescence (2% to 5%): The
longer inventory sits around, the more (usually bad) things that can
happen to it.
In total, holding costs can range from 15% to 40%, and as you can see, many
of the costs are ongoing operating expenses, which can have a significant
impact on a business’s profitability.
In addition to holding costs, two other major costs are associated with
inventory: ordering and setup costs.

Ordering Costs
When placing an order to purchase additional inventory, both fixed and
variable are costs involved.
Fixed costs are incurred no matter what and include the cost for the facility,
computer system, and so on.
Variable costs associated with purchase orders include preparing a purchase
request, creating the purchase order itself, reviewing inventory levels,
receiving and checking items as they are received from the vendor, and the
costs to prepare and process payments to the vendor when the invoice is
received.
Many businesses tend to ignore these costs, especially the variable ones, but
those that do calculate it in the range of $50 to $150+/order.

Setup Costs
If you are a manufacturer versus a wholesaler or retailer, there are costs
associated with changing production over, known as setup, which includes
labor and parts as well as downtime.
Note that a full changeover includes more than just the equipment
changeover and is thought of in Lean terms as “last good piece to first, next
good piece,” as discussed later in this book.
As with ordering costs, setup costs involve both fixed and variable costs.
The fixed costs of setups include the capital equipment used in changing
over the production line used for the old items for the new items.
The variable costs include the employee costs for any consumable material
used in the teardown and setup. The longer the setup takes, the greater the
variable costs.

Total Cost Minimized

The goal is to minimize total costs. Graphically, that occurs at the
intersection of holding costs, which go up as lot size quantities increase and
setup costs, which go down as the number of orders/setups decrease (see
Figure 4.3). So, in effect, holding and setup costs are inverse, resulting in a
tradeoff between the two of them. At the point that those costs intersect is
where total costs are minimized and is calculated by the simple Economic
Order Quantity (EOQ) inventory model.
 Figure 4.3 Holding versus setup cost tradeoff
As mentioned earlier, it should be noted that there is a lot of pressure to
lower inventory costs in an organization. As a result, this pressure ends up
falling on the shoulders of the supply chain organization to a great degree.
We discuss procurement tactics to minimize some of these costs in Chapter
6, “Procurement in the Supply Chain,” but ultimately, process improvement
techniques like Lean (Chapter 18, “Lean and Agile Supply Chain and
Logistics”), need to be utilized to effectively create a “paradigm shift” of
sorts, as shown on Figure 4.3.

Economic Order Quantity Model

The order quantity that minimizes total inventory costs by optimizing the
tradeoffs between holding and ordering costs is known as the economic
order quantity or EOQ. It is one of the most common inventory techniques
used to answer the how much question.
The EOQ has some assumptions, including the following:
The ordering cost is constant.
The rate of demand is known and spread evenly.
The lead time is known and fixed.
The purchase price of the item is constant.
The replenishment is made instantaneously, and the entire order is
delivered at one time.
These assumptions can be visualized in terms of inventory usage over time
in Figure 4.4, which has become to be known as the Sawtooth model (for
obvious reasons).

Figure 4.4 Sawtooth model

There are actually three basic EOQ models, the first of which we will mainly
discuss and is known as the basic or simple EOQ model.
The other two are as follows:
Production Order Quantity model: As opposed to the basic EOQ
model, the Production Quantity model assumes that materials
produced are used immediately and as a result lowers holding costs
(that is, no instant receipt as in the basic model). As a result, this
model takes into account daily production and demand rates.
Quantity Discount model: This is a version of the simple EOQ where
pricing discounts are factored into the model based on reaching certain
minimum purchase quantities. This then compares the effect of buying
more than perhaps is needed but with a lower price, which may offset
the impact on holding costs, which in part are based on the price of the
product, as you will see in the basic EOQ model.

Basic EOQ Calculation

To calculate the EOQ as well as annual setup, holding, and total inventory
costs, we need the following information:
Q = Optimal number of pieces per order (EOQ)
 D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Once we have that information, we can solve for the following:
Annual setup costs = (number of orders placed per year)*
(setup or order cost per order) or (D/Q)*S.
Annual holding cost = (average inventory level)* (holding
cost per unit per year) or (Q/2)*H.
Total Annual cost = setup cost + holding cost or (D/Q)*S +
(Q/2)*H.

Economic Order Quantity (EOQ) =

Reorder Point (ROP) Models

Now that we’ve used the EOQ to determine how much we need, the next
question is when to replenish, also referred to as the reorder point (ROP).
Basically, two types of models are used in this regard: the Fixed-Quantity
(Q) model and the Fixed-Period (P) model.

Fixed-Quantity Model
The Fixed-Quantity, or Q, model has an ROP that is based on inventory
reaching a specific quantity (Q), at which point inventory is replenished
based on the calculated EOQ (see Figure 4.5).
 Figure 4.5 Fixed-Quantity (Q) ROP model
The calculation for the ROP = Demand per day × Lead time for a new order
(in days) (or d × L).
In a simple example, if our demand is 10 units per day and our
replenishment lead time is 3 days, our ROP is 30 units (that is, 10 units × 3
days).
This simplistic model assumes that demand and lead time are constant,
which does not reflect reality. So, typically, extra buffer inventory is
included in this calculation to compensate for this variability, which is
known as safety stock.

Safety Stock
You can calculate required safety stock in a variety of ways. Many are rules
of thumb, and some are statistically based.
In general, the safety stock quantity that is arrived at is additive in nature,
and so the ROP calculation becomes d × L + ss.
Probabilistic Safety Stock
The idea behind a probabilistic safety stock calculation is that we would like
to keep a certain quantity of safety stock to meet a desired service level to
compensate for demand variability. If we assume a normal distribution, we
can assign a service (or confidence) level as meeting x% of demand during
the lead time (see Figure 4.6).

Figure 4.6 ROP with probabilistic safety stock model

To calculate this, we can associate the number of standard deviations around
the mean to a confidence level (defined as the number of standard deviations
extending from the mean of a normal distribution required to contain x% of
the area), which are contained in a commonly available Standard Normal (Z)
table. (Some commonly used samples are shown here.)

To use this method, we also need to calculate the mean and standard
deviation of demand for our item because demand is variable in this case.
Let’s take an example where we have a mean demand of 100 units per day, a
1 day lead time, a standard deviation during lead time of 15 units, and a
desired service level of 99% (Z = 3.0).
In this type of calculation, the ROP is the expected demand during lead time
plus safety stock.
So in our example, the ROP with safety stock calculation would then be 100
+ (3.0 × 15) or 145 units.
This model only considers demand variability during lead time only, but
there are also other models that compensate for the following:
Variable demand with constant lead time
Variable lead time with constant demand
Variable lead time and demand

Rules of Thumb Safety Stock Calculations

Besides probabilistic safety stock models, some in industry prefer to use
rules of thumb instead (which are sometimes referred to as safety time
because they are expressed in days of supply), which although perhaps not
as scientific, are easier to understand and calculate. Some rules of thumb
examples include the following:
Half lead time: If demand is 10 units per day and replenishment lead
time is 3 days, the calculated safety stock would be 15 units (that is,
(10 * 3) / 2).
Maximum sales less average sales: Provides coverage on the upside
for the occasional large oversell.
Statistical safety stock converted to days: Uses the safety stock
probabilistic models’ unit calculation above converted to a days of
supply inventory target.

Fixed-Period Model
The use of periods of supply targets such as in the third example above can
be advantageous when you tend to have seasonality with your products,
which is one of the main features of Fixed-Period, or P, model (see Figure
4.7).
 Figure 4.7 Fixed-Period (P) ROP model
In this type of model, inventory is continuously monitored. Typically, faster
moving items are reviewed more often, with slower movers being reviewed
less often.
As opposed to a ROP quantity, individual SKU inventory targets (usually in
terms of periods of supply) are the trigger point for replenishment.
Fixed-Period models work well where vendors make routine visits to
customers and take orders for their complete line of products, or when it is
beneficial to combine orders to save on transportation costs such as
shipments to a distribution center. A tool known as distribution requirements
planning (DRP), which enables the user to set inventory control parameters
such as safety stock and calculate the time-phased inventory requirements
and is discussed later, is commonly used in the case of managing a network
of distribution centers.
Single-Period Model
A Single-Period model is used by companies that order seasonal or one-time
items. The product typically has no value after the time it is needed, such as
a newspaper or baked goods. There are costs to both ordering too much or
too little, and the company’s managers must try to get the order right the first
time to minimize the chance of loss.
A probabilistic way of looking at this is most helpful. We do this by
estimating both the cost of a shortage (Sales price / Unit – Cost / Unit) and
of an overage (Cost / Unit – Scrap Value / Unit).
We can then determine a service level (that is, probability of not stocking
out) by dividing the cost of shortage by the combined cost of shortage and
overage.
The calculated service level percentage can then determine a reorder
quantity using the same method as was outlined for the Q ROP model.

ABC Method of Inventory Planning and Control

Many companies treat inventory planning and control with a broad brush,
when in fact they should treat items, or least classes of items, differently. A
method used in many inventory systems to stratify or classify items is called
ABC analysis.
ABC analysis is based on the Pareto principle or 80/20 rule, which states that
a relatively few number of items typically generate a large percentage of
sales or profits (for example, Burger King’s Whopper, fries, and Coke versus
everything else; see Figure 4.8).
 Figure 4.8 Pareto principle or 80/20 rule
So in terms of inventory planning, the A items, because they are the biggest
sellers, have a relatively small days of supply of inventory target as a result
of their high volume and inherent better forecast accuracy as well as the fact
that we manufacture or order them more frequently. C items typically sell in
small amounts and are more volatile, so their inventory target is usually
many days of supply of inventory, which might not really amount to much
anyway because they are small sellers.
From an inventory control aspect, the more important A items should have
tighter physical inventory control, and the accuracy of inventory records for
them should be verified more often.

Realities of ABC Classification

Here are a few of other thoughts regarding the use of ABC analysis for
inventory:
 It’s not necessarily a volume thing: It’s best to use sales (or cost)
dollars or margin versus units when determining ABC codes, because
you may sell a high volume of small inexpensive parts and fewer units
of much more expensive items. If you used units in that case, the high
volume inexpensive items would be given A codes, which is the
reverse of what you would want to happen.
It’s not always exactly the 80/20 rule: It’s somewhat subjective as to
the cutoffs for the assignments of A, B, and C codes, although it’s
usually not hard to determine the best cutoff from A to B and so on.
An A is not always an A: When you have multiple locations (retail,
warehouse, and so on) that stock the same item, it’s best to run the
ABC analysis by location.
History versus forecast for ABC analysis: History or forecasts can
be used to determine ABC codes. Again, it’s somewhat subjective, but
if the items have history, it’s usually best to use that (although do not
go too far back because a B can become an A and vice versa); and if
new items, you may be forced to used a forecast, at least for the time
being.

Other Uses for ABC Classification

Besides ABC classification’s application in forecasting and inventory
planning and control, it is also a useful tool for the following:
SKU rationalization: An analysis whereby ABC codes are assigned to
determine candidates to be discontinued, scrapped, written off, or sold
at a large discount.
Quality control: Pareto charts are one of the tools of quality and used
to analyze quality issues where resources are limited and there are a
variety of quality issues found that need to be resolved.

Inventory Control and Accuracy

Think of an inventory system in business as being similar to your checking
account, where you try to maintain a perpetual inventory of your money in a
checkbook. Once a month, you get a statement of the physical count of your
money and then reconcile the two. If there is a discrepancy of any significant
size, you have to investigate, find out the reason, and make the adjustment to
your checkbook.
Similarly, businesses usually have a software system that keeps a perpetual
count of inventory in their factory, warehouse, or store. (Believe it or not,
some still do this manually.) Similar to your checking account, system
inventory counts can become inaccurate due to inadequate procedures, lost
paperwork, and lack of training.
I’m sure that at one time or another you’ve gone into a store and found that
the item you were looking for was out of stock, despite the employee telling
you that the system showed that there was plenty in inventory at that
location.
It is also critical to manufacturing and sales that inventory counts are
accurate in terms of incoming and outgoing recordkeeping and security.
To ensure system accuracy, historically, once per year companies would
perform a physical inventory count, where everything stops for 2 to 3+ days
(that is, nothing comes in and nothing goes out) while employees (usually
from another location or temporary workers) go out and physically count the
inventory. This is usually done with what is known as a blind count, where a
person is sent out without knowing the current count, returns his count, and
then someone else then reconciles the system perpetual count to the physical
count. If it is off, a second person may be sent out to do a double-blind
count.

Cycle Counting
In recent years, the concept of cycle counting has taken hold. Cycle counts
use ABC codes to determine when items should be counted and what the
target level of accuracy should be (also referred to as the ranking method of
cycle counting). Because there are fewer, higher-volume/profit A items, they
should be cycled through more often with extremely high accuracy targets.
Table 4.1 shows an example of a cycle counting schedule.

Table 4.1 Cycle Count Example

Other benefits of cycle counting include the following:
 Less disruptive to daily operations because it is performed during
regular hours with business as usual.
Provides an ongoing measure of inventory accuracy and procedure
execution (requiring less safety stock as a result).
Accuracy issues are corrected on a timelier basis than an annual
physical inventory.
Tailored to focus on items with higher value, higher movement
volume, or that are critical to business processes.
Trained cycle counters perform the work and usually report to an
inventory control manager.
Root cause analysis is used to ensure that once counts are corrected in
the system, they don’t keep occurring. One method is to determine the
cause of the discrepancy and then take counts daily for that item until
there are no issues.
Another method of cycle counting is the geographic method. In this method
of cycle counting, you start at one end of your facility and count a certain
number of products each day until you reach the other end of the building. In
this method, you end up counting all your items an equal number of times
per year.
Most companies these days do some take on cycle counting, but some still
do an annual count, usually at the insistence of the company’s auditor for
public financial reporting requirements.

Key Metrics
A number of metrics are important to inventory. The most commonly used is
inventory turnover. This reflects the velocity at which inventory is flowing
through your business and is used both as a budgetary and planning target
and benchmark against best-in-class companies for all forms of inventory.
The calculation for inventory turnover is Cost of goods sold / Current
inventory investment, where inventory investment can be represented a
number of ways, including the average of several periods (that is,
(Beginning plus ending inventory) / 2)), or current on-hand inventory.
For example, if we have $200 million in sales with a cost of goods sold of
$100 million and currently have $20 million invested in finished goods
inventory, we turn our inventory five times per year. This may be good or
bad, and that is where benchmarking comes in. If we have a low-cost
strategy and the best in class in our industry turn their inventory ten times
per year, we have to attempt to turn our inventory faster. We will look at
ways to do that when we discuss Lean thinking later in this book.
A high inventory turnover reflects faster-moving inventory, and thus lower
holding or carrying costs. The inverse of this, which is commonly used as a
target for production and deployment planning, is periods of supply (POS),
which can be stated in days, weeks, or months of supply. In the earlier
example, where our $20 million in finished goods inventory is turned five
times per year, we translate that to an average of 2.4 months of supply on
hand (that is, 12 months / 5 turns). Again, depending on our POS target, that
may be good or bad for our business.
In many cases, a true depletion formula is used for POS instead, where
current on-hand inventory is run out against future requirements to catch
peaks and valleys in demand. (That is, a month of supply for an item may be
100 units in the winter and 1,000 units in the summer.) This is more
accurate, but harder to manually calculate.
Many other relevant measures are used, as well, such as assets committed to
inventory (total inventory investment as a percentage of total assets), current
ratio (current assets divided by current liabilities), quick ratio (current assets
less inventory divided by current liabilities), and gross margin return on
inventory or GMROI (gross margin divided by average inventory cost),
which is used heavily in retail.

Inventory Planning and Control Technology

Software
As opposed to forecasting software, inventory control software (at least for
the perpetual tracking of inventory) is usually included in an accounting or
ERP software system as a basic function, although it can be licensed as a
standalone system as well.
The basic inventory control systems track the orders, receipts, shrinkage,
allocation, and shipment of products. It will produce reports such as current
inventory balance, out-of-stock products, and inventory transactions.
Many inventory control systems can also track purchase orders and other
inventory value information that is helpful for accounting.
There is a breed of inventory management and control software designed
specifically for warehouse operations called warehouse management system
(WMS) that helps to manage all inventory within the four walls of a
warehouse, as discussed in more detail later.

Distribution Requirements Planning Software

A particular type of software called distribution requirements planning
(DRP) software is more geared to businesses that have to manage a network
of distribution centers.
The mechanics of DRP are similar to MRP (materials requirements
planning), which is discussed later, in that it develops replenishment plans
by evaluating information such as order size, desired safety times/service
levels, on-hand inventory, scheduled receipts, and both forecasted and actual
demands. However, in the case of DRP, replenishment requirements are for
independent demand inventory versus dependent demand for MRP.
DRP compares future demand versus available inventory (plus scheduled
receipts such as purchase orders or transfers) to predict future shortages and
schedules planned replenishment orders (factoring in lead times) based on
user set criteria, including safety stock or safety time targets (see Figure 4.9).
 Figure 4.9 DRP screen and description example (PSI Planner for
Windows)
DRP is hierarchical because the net requirements can be summarized up the
supply chain to the plant level to create the master production schedule
(MPS), which can then be exploded with a bill of materials (BOM) to
generate requirements for raw materials and components.
DRP is ideal for organizations that want to transition from a push to a
demand pull process, resulting in a more-efficient Lean supply chain.
Hardware
Many inventory systems have barcode or radio frequency identification
(RFID) functionality to scan items that are received, picked, or transferred.
This technology can be used to automate other functions such as cycle
counting. The type of equipment required for this includes barcode scanners,
radio frequency (RF) tags and readers, mobile handheld computers, and
barcode labelers and printers.

Careers
If you are specifically interested in the planning and scheduling topics
covered in this and the next chapter, you might want to research information
available from various professional organizations.
Both the Council of Supply Chain Management Professionals
(www.cscmp.org) and the American Production and Inventory Control
Society (www.apics.org) offer certifications in this field, and they have local
chapters, both of which can prove useful in terms of education and career
advancement.
5. Aggregate Planning and Scheduling

After we’ve made our best estimate of a demand forecast for goods or
services and netted it against our current and targeted inventory position to
determine our future inventory requirements, it becomes necessary to make
sure that we have enough capacity to meet the anticipated demand.
When we think of planning the capacity for a goods or service business, we
typically think in terms of three time horizons:
Long range (1–3+ years): Where we need to add facilities and
equipment that have a long lead time.
Medium range (roughly 2 to 12 months): We can add equipment,
personnel, and shifts; we can subcontract production and/or we can
build or use inventory. This is known as aggregate planning.
Short range (up to 2–3 months): Mainly focused on scheduling
production and people, as well as allocating machinery, generally
referred to as production planning. It is hard to adjust capacity in the
short run because we are usually constrained by existing capacity.
The supply chain and logistics function must actively support all of these
ranges by supplying material and components for production and product to
the customer, and in fact, it has many of its own capacity constraints in terms
of its distribution and transportation services.
In many service organizations, the actual work of capacity and supply
planning for the production of inventory may be partially or totally in
another organization, as is the case of retailers or wholesalers. But even in
those instances, retail and wholesale supply chain organizations are
intertwined with the vendor’s manufacturing process. So, they should
participate, support, and integrate vendor production plans into their own
processes when possible. In addition, service organizations have capacity
constraints in terms of various resources that are impacted by inventory
levels (labor, warehouse capacity, back room retail storage, shelf space, and
so on). Therefore, it is well worth understanding the aggregate planning
process no matter where you are in the supply chain.
The Process Decision
Stepping back for the moment, it should be understood that all organizations,
both goods and services, have to make what is known as the process
decision—that is, how the goods or services are to be delivered.
In most established organizations, there is already an existing process that is
usually based on the industry’s and management’s competitive strategy.

Goods and Service Processes

Process choices in goods and service industries can be defined and
delineated by what has become to be known as the product-process matrix
(Hayes & Wheelwright, 1979; see Figure 5.1). In this model, an
organization’s process choices are based on both the volume produced and
variety of products. At the upper left of the chart, companies are considered
process oriented or focused, and those in the lower right are considered
product focused. The ultimate decision of where a firm locates on the matrix
is determined by whether the production system is organized by grouping
resources around the process or the product.
 Figure 5.1 Product-process matrix

Project Process
Some industries, such as construction or pharmaceutical, are for the most
part project oriented. where they typically make one-off types of products.
They are usually customer specific and too large to be moved; so people,
equipment, and supplies are moved to where they are being constructed or
worked on.

Job Shop Process

Job shops typically make low-volume, customer-specific products. Machine
shops, tool and die manufacturers, and opticians (that is, prescription
glasses) are primary examples of a job shop. As such, they require a
relatively high level of skill and experience because they must create
products based on the customer’s design and specifications.
Each unique job travels from one functional area to another, usually with its
own piece of equipment, according to its own unique routing, requiring
different operations, different inputs, and requiring varying amounts of time.
Job shops can be extremely difficult to schedule efficiently.

Batch Process
Companies that run a batch process deliver similar items and services on a
repeat basis, usually in larger volumes than a job shop. Batch processes have
average to moderate volumes, but variety is still too high to justify
dedicating many resources to an individual product or service. The flow
tends to have no standard sequence of operations throughout the facility.
They do tend to have more substantial paths than at a job shop, and some
segments of the process may have a linear flow.
Examples of batching processes include scheduling air travel, manufacturing
apparel or furniture, producing components that supply an assembly line,
processing mortgage loans, and manufacturing heavy equipment.

Assembly Line or Repetitive Process

When product demand is high enough, an assembly line or repetitive
process, also referred to as mass production, may be used. Assembly line
processes tend to be heavily automated, utilizing special-purpose equipment,
with workers usually performing the same operations for a production run in
a standard flow. In many cases, a conveyor type system links the various
pieces of equipment used.
Examples of this include automotive manufacturing (the classic example)
and assembly lines. In service industries, examples include car washes,
registration in universities, and fast-food operations.
Continuous Flow Process
A continuous flow process, as the name implies, flows continuously rather
than being divided into individual steps. Material is passed through
successive operations (that is, refining or processing) and eventually come
out the end as one or more products. This process is used to produce
standardized outputs in large volumes. It usually entails a limited and
standardized product range and is often used to manufacture commodities.
Very expensive and complex equipment is used, so these facilities tend to
produce in large quantities to gain economies of scale to spread the
considerable fixed costs over as much volume as possible so that the cost per
individual pound or unit is as low as possible. Labor requirements are on the
low side and typically involve mainly monitoring and maintaining of
equipment.
Examples of this include chemical, petroleum, and beverage industries. This
type of process is less common in service industries, but a good emerging
example in supply chain are cross-dock distribution facilities, which move
finished goods product through a distribution facility in as little as 24 to 48
hours.

Mass Customization
Mass customization is a process that produces in high volume and delivers
customer-specific product in small batches and can provide a business with a
competitive advantage and maximum value to the customer. It is a relatively
new frontier for most goods and service businesses, and as a result, there
aren’t that many examples of it.
In manufacturing, Dell computer is a primary example used by many
because they allow customers to more or less assemble their own personal
computers (PCs) online. Dell then assembles, tests, and ships the PCs
directly to the customer in as little as 24 to 48 hours. Some clothing
companies manufacture blue jeans to fit an individual customer.
In service industries such as financial planning and fitness, the service is
customized specifically to meet the individual needs and therefore is an
example of mass customization.
Planning and Scheduling Process Overview
An aggregate plan, also known as a sales & operations plan (S&OP), is a
statement of a company’s production rates, workforce, and inventory levels
based on estimates of customer requirements and capacity limitations (see
Figure 5.2).

Figure 5.2 Typical planning and scheduling process

Many service organizations perform aggregate planning in the same way as
goods organizations, except that there is more of a focus on labor costs and
staffing because it is critical to the service industry (and pure service
companies don’t have inventory to manage, other than supplies).
A variety of methods can be used for aggregate planning, from simple
spreadsheets to packaged software using algorithms such as the
transportation method of linear programming, which is an optimization tool
to minimize costs.
Graphical tools can also be used to supplement this process to allow the
planner to compare different approaches to meeting demand (see the
discussion about supply options later in this chapter).
As the name implies, the plan is usually stated in terms of an aggregate, such
as product family or class of products, and displayed in monthly or quarterly
time periods. It will determine resource capacity to meet demand in the short
to medium term (3 to 12 months) and is usually accomplished by adjusting
capacity (that is, supply) or managing demand.
Once the aggregate plan is formalized, it is then disaggregated to create a
master production schedule (MPS) for independent demand inventory (that
is, finished goods), which is also referred to by many as a production plan.
The MPS is stated in stock keeping unit (SKU) production requirements,
usually in daily, weekly, or sometimes monthly time periods.
The MPS is then exploded using a bill of materials (BOM), which is
basically a recipe of ingredients (that is, dependent demand) that goes into
the final product (that is, independent demand). This activity is known as
material requirements planning (MRP).
Once MRP has been run and material availability confirmed, a short-term or
detailed work schedule is created. This schedule is where the rubber meets
the road because this is a schedule of the actual work to be done, resulting in
either meeting or not meeting customer requirements. The work schedule is
usually in days or even hours and goes out up to a week or so. It has the
specifics as to what product or service will be delivered, when, and who will
deliver it.

Aggregate Planning
Aggregate planning, also referred to as sales & operations planning (S&OP),
is an operational activity that generates an aggregate plan (that is, for
product or service families or classes) for the production process for a period
of 2 to 18 months. The idea is to ensure that supply meets demand over that
period and to give an idea to management as to material and other resource
requirements required and when, while keeping the total cost of operations
of the organization to a minimum.
S&OP Process
Best practice companies have a structured S&OP process to ensure success
for aggregate/S&OP planning. The executive S&OP process itself (see
Figure 5.3) actually sits on top of the number crunching and analysis being
done at a lower level of the organization and involves a series of meetings
prior to a final S&OP executive-level meeting, which are used to create,
validate, and adjust detail demand and supply plans. The meetings are as
follows:
Demand planning cross-functional meeting (Step 2): Generated
forecasts are reviewed with a team that may include representatives
from supply chain, operations, sales, marketing, and finance. As
mentioned in Chapter 3, “Demand Planning,” forecasts have been
generated statistically and aggregated in a format that everyone can
understand and confirm. (For example, sales might want to see
forecasts and history by customer in sales dollars.)
Supply planning cross-functional meeting (Step 3): After confirmed
forecasts have been netted against current on-hand inventory levels to
create production/purchasing plans. Again, this data will usually be
reviewed in the aggregate by product family in units, for example.
Pre-S&OP meeting (Step 4): Data from the first demand and supply
meetings are reviewed by department heads to ensure that consensus
has been reached.
 Figure 5.3 S&OP process
The discussions from this series of monthly management meetings highlight
issues and look at possible resolutions before the outcome of the discussions
is presented to the senior management team as a series of issues to be
resolved. These issues form the basis of the executive S&OP meeting (Step
5).
The actual aggregate plan requires inputs such as the following:
Resources and facilities available to the organization.
Demand forecast with appropriate time horizon and planning buckets.
Cost of various alternatives and resources. This includes inventory
holding cost, ordering cost, and cost of production through various
production alternatives such as subcontracting, backordering, and
overtime.
Organizational policies regarding the usage of these alternatives.
Table 5.1 is an example of an aggregate plan for a company that
manufactures bicycles.

Table 5.1 Aggregate Plan Example

Some companies start with an aggregate plan and disaggregate to an MPS
(that is, SKU level), and others start at the MPS and then aggregate to a class
or family of products or services. In any case, the plans, at all levels,
including detailed work schedule, are tested for various constraints
(manpower, machine, and material) and then adjusted accordingly.

Integrated Business Planning

Note that there is a movement or evolution toward what has been called
integrated business planning (IBP) or advanced S&OP for some leading
organizations, which moves from fundamental demand and supply balancing
to a broader, more integrated strategic deployment and management process.
On the operations side, manufacturing develops plans to balance demand
and supply but do not always know whether the plan will meet the budgets
on which the company’s revenue and profit goals are based. The sales
department may agree to quotas that meet finance’s revenue goals without a
detailed understanding of what manufacturing can deliver. IBF attempts to
bridge those gaps by making sure that revenue goals and budgets are
validated against a bottom-up operating plan, and that the operating plan is
reconciled against financial goals.

S&OP in Retail
Also, although S&OP has been a best practice in manufacturing for 25 or so
years, the retail industry has been slow to adapt it to their planning
processes. The migration toward a broader IBF mentioned earlier for
manufacturing may prove to be an impetus to pull retailers into using an
S&OP process. In any case, when it is used in retail, the S&OP process is
similar to that used by manufacturers. The main differences are that the
sponsors and titles of each step as well as the details of each review such as
issues, data, and decisions are different.

Demand and Supply Options

During the aggregate planning process, when trying to match supply with
demand at the lower cost and highest service, an organization has options to
adjust both demand and supply capacity.
Demand Options
These options refer to the ability to adjust customer demand to fit that
demand to current available capacity. These options include the following:
Influence demand: This can be accomplished to some degree via
advertising, pricing, promotions, and price cuts. Examples including
using early-bird meals in a restaurant or discounts offered if you buy
before a certain date. These methods might not always have enough of
an effect on demand to free up capacity.
Also, as discussed previously, the use of heavy promotions and
discounting can also have the negative bullwhip effect as a
consequence (thus the reason that some companies have gone to
everyday low pricing).
Backorders: These occurs when a goods or service organization gets
orders that they cannot fulfill. In many cases, customers are willing to
wait. In others, it can result in lost sales. In some industries such as
grocery stores, backorders are not used. Instead, if an item is out of
stock, it is cut from the order and reordered next time. This is, of
course, dangerous if your product is substitutable, because it might not
be reordered next time.
New or counter seasonal demand: This can be used to balance
demand by season. For example, a company that sells lawn mowers
may begin production of snow blowers. Companies must be careful to
not go beyond their expertise or base markets.

Supply Capacity Options

These options refer to the ability of an organization to adjust its available
resource capacity to meet demand and include the following:
Hire and lay off employees: As demand hits peaks and valleys,
flexibility in the workforce can be used to compensate for these
fluctuations. Although this can prove beneficial to the company, it can
also have risks and costs in terms of unemployment and new-hire
training costs.
Overtime/idle time: Most companies have the ability to run some
overtime when things get busy. The opposite may be true when things
slow down, by moving idle workers to other jobs, at least to some
extent. Equipment and workers efforts, to some degree, can also be
 sped up or slowed down. Although this might extend capacity a bit in
the short term, employees may burn out. In the case of slack demand,
profitability may suffer as a result of having too many workers doing
make work.
Part-time or temporary workers: This is especially common for
contract manufacturers and in the service industry during the holiday
season. It isn’t usually an option in more technical jobs, other than
some exceptions such computer programming and nursing. Also,
quality and productivity may suffer as a result of this approach.
Subcontracting (or contract manufacturing): Very common in some
industries, such as cosmetics and household and personal-care
products, especially when the demand for a new item is uncertain or a
company doesn’t yet have the capability to make the product. The
downside is that costs may be greater because the subcontractor has to
make a profit too, quality may suffer a bit because you have less
control, and the fact you may be working with a future competitor.
Vary inventory levels: Inventory may be produced before a peak
season when excess capacity may be limited. However, it can also
drive up holding costs, including obsolete or damaged inventory. An
example of this is the ice cream industry, where ice cream can be
produced in the winter and put in a deep freeze until the busy season
starts.

Aggregate Planning Strategies

Three general aggregate planning strategies are commonly used, and use
many of the demand and supply options discussed earlier:
Level plans: Use a constant workforce and produce similar quantities
each time period. This method uses inventories and backorders to
absorb demand peaks and valleys and therefore tends to increase
inventory holding costs.
Chase plans: This method minimizes finished goods inventories by
adjusting production and staffing to keep pace with demand
fluctuations. It looks to match demand by varying either workforce
level or output rate. This can, of course, negatively affect productivity
and costs.
 Mixed strategies: Probably used the most with a mix of both of the
first two methods. In some cases, inventory is increased ahead of rising
demand, and in other cases, backorders are used to level output during
extreme peak periods. There may be layoff or furlough of workers
during the slower, extended periods, and companies may subcontract
production or hire temporary workers to cover short-term peak periods.
As an alternative to layoffs, workers may be reassigned to other jobs,
such as preventive maintenance, during slow periods.
An example of this is where a company has two production facilities that
manufacture the same products, one on the East Coast and one on the West
Coast. If one plant has a distinct cost advantage, it may make sense to
sometimes shift production to the lower-cost plant and expand its service
area temporarily, such as during a slow period of demand. This will, of
course, result in less production required at the lower-cost plant during those
periods, possibly requiring layoffs. This decision is not to be taken lightly
and must consider the total landed cost of the product for each plant,
including transportation and distribution to the customer.

Master Production Schedule

Once the S&OP process has been completed, the aggregate plan is
disaggregated into a master production schedule (MPS), which shows net
production requirements for the next 2 to 3 months, usually in weekly or
monthly time periods by SKU for independent demand items (see Table 5.1).
This is known as time phased planning.
The net requirements above and beyond existing known ones, which are
referred to as scheduled receipts, are called planned orders and planned
receipts, the only difference being that planned orders are planned receipts
that have been offset by the item’s lead time.
Note that the lead time for manufacturing, which is the time required to
manufacture an item, is the estimated sum of order preparation time, queue
time, setup time, run time, move time, inspection time, and putaway time. In
the case of purchased items, the lead time is usually stated by the vendor and
may or may not include inbound transit times.
Production Strategies
Manufacturers usually have one or a combination of the following
production strategies:
Make-to-stock (MTS): Production for finished goods is based on a
forecast using predetermined inventory targets. Customer orders are
then filled from existing stock, and those stocks are replenished
through production orders. MTO enables customer orders to be filled
immediately from available stock and allows the manufacturer to
organize production in ways that minimize costly changeovers and
other disruptions.
Make-to-order (MTO): Produced specifically to customer order.
Usually standardized (but low volume) or custom items produced to
meet the customer’s specific needs. MTO environments are slower to
fulfill demand than MTS and assemble-to-order environments
(described next) because time is required to make the products from
scratch. There also is less risk involved with building a product when a
firm customer order is in hand.
Assemble-to-order (ATO): Products are assembled from components
after the receipt of a customer order. The customer order initiates
assembly of the customized product. This strategy can prove useful
when there are a large number of end products, based on the selection
of options and accessories that can be assembled from common
components. (This is one example of the concept of postponement.)
Engineer-to-order (ETO): This strategy uses customer specifications
that require unique engineering design, significant customization, or
new purchased materials. Each customer order results in a unique set
of part numbers, bills of material (that is, items required to make the
product), and routings (that is, steps to manufacture a product).
For the service industry, the MPS may only be an appointment book or log
to make sure that capacity (in this case, skilled labor or professional service)
is in balance with anticipated demand.
Depending on the production strategy used, the production requirements in
the MPS can be expressed based on a forecast, customer orders, or modules
that are required for the manufacture of other items (for example, Table 5.2).
 Table 5.2 Disaggregation of Aggregate Plan Example

System Nervousness
Frequent changes to the MPS (or subsequently, the material requirements
plan, as discussed shortly) can cause what is known as system nervousness,
where small changes, usually as a result of updating the MPS plan too often,
causes major changes to the requirements plan.
To avoid this, many companies use a time fence, whereby the planning
horizon is broken into two parts:
Demand (or firm) time fence (DTF): A designated period where the
MPS is frozen (that is, not changes to current schedule). The DTF
starts with the present period, extending as several weeks into the
future. It can only be altered by senior management. Unfortunately all
too often from what I’ve seen, the frozen segment is changed often due
to firefighting and customer emergencies.
Planning time fence (PTF): A designated period during which the
master scheduler is allowed to make changes. The PTF starts after the
DTF ends and extends several weeks or more into the future.

Material Requirements Planning

After the MPS has been solidified, it can then be exploded through a bill of
materials (BOM) file to determine raw material and component (that is,
dependent demand) requirements.
The information needed to run a Material Requirements Planning (MRP)
model includes the MPS, a BOM, inventory balances, lead times, and
scheduled receipts (that is, purchase orders and production work orders). All
of these inputs need to be accurate and up to date. Otherwise, it’s the old
garbage in, garbage out situation, resulting in poor execution and ultimately
customer dissatisfaction.
All the inputs are fairly straightforward, but it would be helpful at this point
to delve a little bit into the BOM.

Bill of Materials
A BOM is like a recipe for a product. (In fact, in the case of food, it is.) A
BOM file has a defined structure to it. In this structure, the independent
demand item is called the parent item (for example, 26-inch boys blue bike)
and any dependent demand requirements (for example, two wheels for each
bike) are called child items, with a quantity (2 / Bike in our example) of each
child item needed to make each parent item. This is often referred to as the
product structure (see Figure 5.4).

Figure 5.4 Bicycle BOM and product structure

The finished good or parent item is referred to as being on level 0 and the
child level 1. There can be multiple levels in a BOM, in which case the child
item on level 1 of the wheel in the bike example can then be the parent to the
child items of the rim, tire, spokes (that is, level 2), and so on.
MRP Mechanics
The calculations involved in an MRP system are fairly routine. Think of it as
a giant calculator that crunches the information supplied to create net future
replenishment requirements based on some user-defined parameters.
As mentioned previously, an MRP system is driven by the MPS (which may,
in turn, potentially be driven by a DRP system). The mechanics of the MPS
and MRP systems are basically the same, with the requirements from the
MPS (independent demand) driving MRP requirements (dependent demand)
via the BOM file.
In the bicycle example, Figure 5.5 illustrates the basic calculation where we
have gross requirements (in MPS, gross is the forecast consumed by open
customer orders) for the production of 75 bikes in week 8. Typically, safety
stock or safety time targets would be in place for independent demand items,
but for sake of simplicity, there is none in the example. Because we have 50
bikes in inventory, we need to produce an additional 25 units by week 8. To
do so, we need to have 50 wheels and 25 frames available in week 6, after
offsetting the components’ lead time, for the bike production. Through the
BOM explosion, these requirements show up as gross requirements for the
wheels and frames in MRP. The same netting calculations are then
performed to create planned receipts and planned orders for the wheels and
frames (and then level 2, level 3, and so on items).

Figure 5.5 MPS and MRP mechanics

Although it has been said that no safety stock or safety time are required for
raw or components because it is factored into finished goods requirements,
the reality is that quality and other issues may arise, as well as vendor
minimum order quantities, which may call for safety stock as the prudent
thing to do.
The actual quantity required is typically rounded up based on various lot-
sizing techniques. They range from lot for lot (that is, exact requirements no
matter how small), which is appropriate for just-in-time (JIT) operations, to
economic order quantity (EOQ) calculations, and beyond.
For slow-moving items, an order time may be used, which basically states
that the planned orders will be grouped together so that one larger order
versus many frequent small orders will be placed. In the case of purchased
material or parts, vendors may set order minimums (which can always be
negotiated). Although this might result in greater holding costs, in the case
of slower-moving items, it may be the right thing to do.
Note that in the case of both DRP and MRP, there are resource versions
(versus requirement) that look beyond material requirements and consider
other resources impacted such as labor, facilities, and equipment. Some are
known as closed-loop systems, which allow for the planners to schedule
work based on period capacity constraints using smoothing tools that allow
the system (manually or automatically) to move requirements around to meet
capacity based on priority rules set by the planner such as order splitting
(running parts of a work order at two different times) and overlapping (part
of a work order can move to a second operation while the rest is still on the
first operation).
The planned orders for both independent and dependent demand are then
used (either manually or sent electronically to either an enterprise resource
planning [ERP] or accounting system) to create production work orders and
purchase orders in what is known as short-term scheduling.

Short-Term Scheduling
As mentioned before, the short-term schedule (see Figure 5.6) is where the
rubber meets the road, because effective schedules are necessary to meet
promised customer delivery dates with the highest-quality product or service
at the lowest possible cost.
 Figure 5.6 Typical planning and scheduling process
Operations scheduling is the allocation of resources in the short term (down
to days, hours, and even minutes in some cases) to accomplish specific tasks.
Scheduling includes the following:
Assigning jobs to work centers/machines
Job start and completion times
Allocation of manpower, material, and machine resources
Sequence of operations
Feedback and control function to manage operations
Scheduling techniques vary based on the facility layout and production
process used.
Effective scheduling can support the supply chain to create a competitive
advantage for an organization, as discussed earlier in this book.
Types of Scheduling
Two general types of operations scheduling help to determine the load or
amount of work that is put through process centers:
Forward scheduling: Plans tasks from the date resources become
available to determine the shipping date or the due date and used in
businesses such as restaurants and machine shops
Backward scheduling: Plans tasks from the due date or required-by
date to determine the start date and/or any changes in capacity required
and used heavily in manufacturing and surgical hospitals
In many cases, organizations may use a combination of both depending on
the product or service.
The load put on a work center can be infinite (for example, unlimited
capacity, such as in the basic MRP model) or finite (where capacity is
considered).

Sequencing
Understanding and minimizing flow time is critical to good scheduling and
the efficient utilization of resources. Flow time is the sum of 1) moving time
between operations, 2) waiting time for machines or work orders, 3) process
time (including setups), and 4) delays.
The concept of sequencing uses both priority rules to determine the order
that jobs will be processed in and the actual job time, which includes both
the setup and running of the job, to schedule efficiently.

Priority Rules
Although there are many priority rules, including the catchall emergency
(that is, rush or priority customers), the basic rules are as follows:
First come, first served (FCFS): Jobs run in the order they are
received. Perhaps the fairest, although not always most efficient, way
of scheduling.
Earliest due date (EDD): Work on the jobs due the soonest.
Shortest processing time (SPT): Shortest jobs run earlier to make
sure that they are completed on time. Larger jobs will possibly be late
as a result.
 Longest processing time (LPT): Start with the jobs that take the
longest to get them done on time. This may work well for long jobs,
but the others will suffer as a result.
Critical ratio (CR): Jobs are processed according to smallest ratio of
time remaining until due date to processing time remaining.
The planner can create schedules based on these methods (manually or
automated) to both see the impact on job lateness and flow time and to
determine what works best for the company and its customers. It might not
always be possible to satisfy all customers, though.

Finite Capacity Scheduling

Finite capacity scheduling (FCS) is a short-term scheduling method that
matches resource requirements to a finite supply of available resources to
develop a realistic production plan. The MPS and MRP schedules are
usually imported into this tool along with other information such as priority
rules, setup times, and so on to create short-term daily and hourly schedules.
It uses not only rules-based methods, but also allows for the planner to make
up to the minute changes and adjustments as well as perform what-if
simulation analysis. They allow the planner to handle a variety of situations,
including order, labor, and machine changes. The schedules in FCS are
usually displayed in Gantt chart form (kind of a sideways bar chart, which
can show planned as well as the current status of schedules) and can be
accomplished using a range of tools from relatively simple spreadsheets to
sophisticated optimization FCS software applications.

Service Scheduling
Although service industries need to schedule production and assembly of
product (for example, restaurants), most are primarily interested in
scheduling staff. To effectively schedule staffy, they use tools such as
appointment systems (to control customer arrivals for service and consider
patient scheduling), reservation systems (to estimate demand for service),
and workforce scheduling systems (often using seniority and skill sets to
manage capacity for service).
These can be manual or automated software systems depending on the size
and complexity of the organization.
Technology
Similar to demand planning systems, supply planning tools range from
simple spreadsheets (or even the back of an envelope) to sophisticated
packaged software systems for optimization.
Much of the basic functionality discussed in this chapter, such as inventory
control and management and MRP, is usually part of an organization’s ERP
or accounting system. Other functions described, such as production and
deployment planning and scheduling systems (for example, WMS, DRP, and
FCS systems), are not, and may have to be licensed separately as add-ons
and integrated with existing ERP and accounting systems.
Now that you have a good handle on the planning and scheduling processes
and technologies for the supply chain, it’s time to take a look at supply chain
management from both a strategic and operational viewpoint.
Part III: Supply Chain Operations
6. Procurement in the Supply Chain

Acquiring materials is the next logical step after the planning process is
complete because it is the net result of the planning process just described,
whether for raw materials and components for manufacturing or finished
goods for wholesalers, distributors, or retailers.
Because purchased materials, components, and services make up a great deal
of the supply chain spend for most organizations, resulting in the leverage
effect discussed in the first chapter, it is a very visible and important
component of supply chain management.
Due to the visibility and general rise in awareness of the importance of
supply chain management (SCM) in general, there are many career
opportunities in procurement, from the assistant buyer up to director level in
many goods and service organizations. The institute for supply management
(www.ism.ws) offers the CPSM (Certified Professional in Supply
Management), which is helpful both in terms of education and career
advancement.
Purchasing is a basic function in most organizations and for the purposes of
this book is defined as the transactional function of buying products and
services. In a business setting, this commonly involves the placement and
processing of a purchase order.
This definition for purchasing is to avoid confusion with two other
frequently used concepts and terms of procurement (also known as sourcing
or supply management) and strategic sourcing. We will define them as
follows:
Procurement: The process of managing a broad range of processes
associated with a firm’s need to acquire goods and services in a legal
and ethical manner that are required to manufacture a product (direct)
or to operate the organization (indirect), the foundation of which is
provided by the purchasing function.
Strategic sourcing: The strategic sourcing process takes the
procurement process further by focusing more on supply chain impacts
of procurement and purchasing decisions, and works cross-functionally
within the business firm to help achieve the organization’s overall
business goals. This includes analysis of the company’s annual (or
 more often) spend with suppliers and supply markets and helping to
develop a sourcing strategy that both supports the overall business
strategy while minimizing cost and risk.
In this chapter, we concentrate primarily on the procurement or supply
management process.

Make or Buy
The first decision in this process, at least strategically, is the question of
make or buy, which is the choice between internal production and external
sources.
A simple breakeven analysis can be used to quickly determine the cost
implications of a make or buy decision in the following example.
If a firm can purchase equipment for in-house use for $500,000 and produce
requested parts for $20 each (assume that there is no excess capacity on their
current equipment), or they can have a supplier produce and ship the part for
$30 each, what is the correct decision: make (assume with new equipment)
or buy (that is, outsource production)?
To arrive at the correct decision, a simple breakeven point could easily be
calculated as follows:
$500,000 + $20Q = $30Q
$500,000 = $30Q – $20Q
$500,000 = $10Q
50,000 = Q
As the breakeven point is 50,000 units, the answer is that it is better for the
firm to buy the part from a supplier if demand is less than 50,000 units, and
purchase the necessary equipment to make the part if demand is greater than
50,000 units.
Outsourcing
Many companies choose to outsource activities, resources, and entire
business processes for a variety of reasons that include not being viewed as a
core competency, high taxes, high energy costs, excessive government
regulation, and high production or labor costs. Outsourcing can also
sometimes involve transferring employees and assets from one firm to
another. Logistics (especially distribution and transportation) is always a
good candidate for outsourcing, as are manufacturing and assembly.
The many benefits of outsourcing include the following:
Focus on core activities: Outsourcing noncore activities helps to put
the focus back on the core functions of the business, such as sales and
marketing.
Cost savings: The lower cost of operation and labor makes it attractive
to outsource.
Reduce capital expenditures: Outsourcing frees an organization from
investments in technology, infrastructure, and people that make up the
bulk of a back-end process’s capital expenditure.
Increased flexibility: Outsourcing can improve an organization’s
reaction to fluctuations in customer demand and changes in
technology.
There are also many disadvantages or risks to outsourcing, such as the
following:
Security risk: There is always the risk of losing sensitive data and the
loss of confidentiality.
Loss of management control of business functions: You may no
longer be able to control operations and deliverables of activities that
you outsource.
Quality problems: The outsourcing provider may not have proper
processes or may be inexperienced in working in an outsourcing
relationship.
Loss of focus: The outsourcing provider may work with many other
customers, and therefore may not give sufficient time and attention to
your company. This might result in delays and inaccuracies in the work
output.
 Hidden costs and legal problems: This can occur if the outsourcing
terms and conditions are not clearly defined.
Financial risks: Bankruptcy and financial loss cannot be controlled if
the outsource partner is or becomes financially unstable.
Incompatible culture: Culture of the outsourcing provider and the
location where you outsource to may eventually lead to poor
communication and lower productivity.
The individual company will have to ultimately make the decision after
determining the probability of both the risks and rewards of outsourcing.

Other Supply Chain Strategies

There are a number of other strategies available to the supply chain manager.
They can include the following strategies.

In-Sourcing
There is also an opposite, more recent trend in outsourcing and offshoring
(the relocation by a company of a business process from one country to
another), where companies are starting to perform tasks that were previously
outsourced themselves and develop facilities back in their home Western
locations, as the results of outsourcing were not exactly as expected (for
example, poor quality or low productivity). This is known as in-sourcing.

Vertical Integration
A concept similar to in-sourcing but used to develop the ability to produce
goods or service previously purchased is known as vertical integration. The
integration can be forward, toward the customer, or backward, toward
suppliers, and can be a strategy to improve cost, quality, and inventory, but
requires capital, managerial skills, and adequate demand. It can be risky in
industries with rapid changes in technology.

Near Sourcing
There is also a recent trend for U.S. companies called near sourcing,
primarily as a result of spike in energy costs (that is, transportation) making
it more economical to produce closer to home, such as in the Caribbean or
Mexico.
Few or Many Suppliers
Companies can choose to go with many suppliers or few suppliers for some
materials or products as a supply chain strategy:
Many suppliers: This strategy is used for commodity products in
many cases where price is the driving decision factor and suppliers
compete with one another.
Few suppliers: In this strategy, the buyer establishes a longer-term
relationship with fewer suppliers. The goal is to create value through
economies of scale and learning curve improvements. Suppliers are
more willing to participate in just-in-time (JIT) programs (a strategy to
reduce in-process inventory and associated carrying costs, as discussed
later in the Lean chapter of the book) and contribute design and
technological expertise. This cost of changing suppliers in this strategy
is great because you tend to have all your eggs in one basket and may
have invested heavily in this relationship as a result.

Joint Ventures
Joint ventures are formal collaborations between two companies that reduce
risk, enhance skills, or reduce costs (or a combination of all three). An
example that ended in 2011 was a 50/50 joint venture between Johnson &
Johnson and Merck that handled the over-the-counter (OTC) product lines
Pepcid, Mylanta, and Mylicon.

Virtual Companies
Virtual companies rely on a variety of supplier relationships to provide
services when needed. They usually have very efficient performance, low
capital investment, flexibility, and speed. An example of this is Vizio, a
company that became the largest-selling brand of LCD television in the
United States in 2010, with only 196 employees. They used contract
manufacturing and a creative distribution, with the result that a relatively
low-cost generic TV could be produced with minimal need for employees or
capital.
The Procurement Process
The procurement process typically includes the functions of determining the
purchasing specifications, selecting the supplier, negotiating terms and
conditions, and issuing and administrating purchase orders.
There are some general steps involved in the procurement process, which we
will review in some detail (see Figure 6.1). They are as follows:
1. Identify and review requirements.
2. Establish specifications.
3. Identify and select suppliers.
4. Determine the right price.
5. Issue purchase orders.
6. Follow up to assure correct delivery.
7. Receive and accept the goods.
8. Approve invoices for payment.

Figure 6.1 The procurement process

Identify and Review Requirements

When discussing requirements, you need to understand that procurement
activities are often split into two categories (direct and nondirect) depending
on the consumption purposes of the acquired goods and services (see Table
6.1).
 Table 6.1 Direct Versus Indirect Procurement
The first category, direct, is production-related procurement, and the second
is indirect, which is non-production-related procurement.
Direct procurement is generally referred to in manufacturing settings only. It
encompasses all items that are part of finished products, such as raw
material, components, and parts. Direct procurement, which is a major focus
in supply chain management, directly affects the production process of
manufacturing firms. It also occurs in retail where direct spend may refer to
what is spent on the merchandise being resold.
In contrast, indirect procurement activities concern operating resources that a
company purchases to enable its operations (that is, maintenance, repair, and
operations [MRO] inventory defined in Chapter 4, “Inventory Planning and
Control,” as well as capital spent on plant and equipment). It comprises a
wide variety of goods and services, from standardized low-value items, such
as office supplies and machine lubricants, to complex and costly products
and services, such as heavy equipment and consulting services.
The source for requirements can come from material requirement planning
(MRP) systems via planners and purchase requisitions from other users in
the organization. (A purchase or material requisition is a document
generated by an organization to notify the purchasing department of items it
needs to order, the quantity, and the time frame that will be given in the
future.)
During this step, purchasing will review paperwork for proper approvals;
check material specifications; verify quantity, unit of measure, delivery date
and place; and review all supplemental information.

Establish Specifications
To establish specifications, you must identify quantity, pricing, and
functional requirements as described here:
Quantity: In the case of small-volume requirements, you need to find
a standard item. If larger volume, it must be designed for economies of
scale to both reduce cost and satisfy functional needs.
Price: This relates to the use of the item and the selling price of the
finished product.
Functional: There is a fundamental need to understand what the item
is expected to do per the users. This includes performance and
aesthetic expectations (for example, hand can opener; how smoothly
does it remove the top of cans as well as how ergonomically appealing
is the design?).
In general, the description of the item may be by brand or specification. You
use brand if the quantity is too small or if the item is patented or is requested
by a customer. It is by specification if you’re looking for very specific
physical or chemical makeup, material, or performance specifications.
The source of the specifications themselves can be based on buyer
requirements or standards that may be set independently.
If the buyer sets the specifications, it can become a long and expensive
process requiring detailed description of parts, finishes, tolerances, and
materials used, resulting in the item being expensive to produce.
Standards, in contrast, set by government and nongovernmental agencies,
can be much more straightforward to use because they tend to be widely
known and accepted, lower in price, and more adaptable to customer needs.
Identify and Select Suppliers
The next step in the procurement process is to identify and select suppliers.
Typically, this involves coming up with a long list of suppliers who meet
your requirements in general, and then whittling the list down to final
candidates before selecting the ultimate vendor.
Identification of potential suppliers can come from a variety of sources,
including the Internet, catalogs, salespeople, and trade magazine and
directories.
After you have identified potential vendors, a request for information (RFI)
is issued to them that states a bit about your company and its requirements as
well as requested background on the vendor. It’s usually not too difficult to
refine the vendors that respond down to a smaller list of candidates (usually
five to ten), and from there it is best to include a multifunctional team of
employees to determine the finalists.
Once you have it down to a short list, a request for quotation (RFQ) or
request for proposal (RFP) is issued. An RFQ is an invitation to selected
suppliers to bid or quote on delivering specific products or services and will
include the specifications of the items/service. The suppliers are requested to
return their bids by a set date and time to be considered for selection.
Discussions may be held on the bids, in many cases to clarify technical
capabilities or to note errors in a proposal. The initial bid does not have to
mean the end of the bidding because there may be more than one round.

Vendor Evaluation
I’ve found what is known as the factor rating method (see Figure 6.2) to be
useful in the task of vendor evaluation.

Figure 6.2 Factor rating method for vendor evaluation

The factor rating method identifies criteria that need to be considered as part
of what you will be buying and assigns weights as to the relative importance
of each of these factors. You then score how well each supplier compares on
each factor and give them a score, which is weighted times the rating.
Although this might not be the total decision making factor, it can get you
close enough to help you make a final decision. Intangible factors can
always come into play, such as personal opinions of executives, prior
experience with a vendor, and so on.
Many factors besides price (and not always the lowest is selected) are
important when selecting a supplier, such as the following:
Technical ability: As their product will become part of your product,
can they help you to develop and make improvements to your product?
Manufacturing capability: Can they consistently meet your stated
quality and specifications?
Reliability: Are they reputable and financially stable?
After-sales service: Do they have a solid service organization that
offers technical support?
Location: Are they close enough to support fast and consistent
delivery and support service when needed?

Determine the Right Price

As pointed out before, although price might not be the only determinant, it
certainly contributes greatly to the bottom line because it can be upward of
50% of the cost of goods sold.
Three basic models are used as a basis for pricing:
Cost based: The supplier makes their financials available to purchaser.
Market based: The price based on published, auction, or indexed
price.
Competitive bidding: This is typically used for infrequent purchases,
but can make establishing a long-term relationship more difficult.
When preparing to negotiate price, preparation is the key. On a personal
level, if you are buying a house or car, the more research you do, the better
idea you have of what is available and what is a fair price in the market area
(at least to you). Thanks to the Internet, many sources are available to get a
good idea as to what’s available and a range of pricing based on recent
history. The same goes for business negotiations, where the buyer should
have knowledge of the seller’s costs to some extent.

Negotiation
For the most part, negotiations are based on the type of product:
Commodities: The price is usually determined by the market.
Standard products: The price is set by catalog listings, and there is
usually little room for negotiation (other than volume).
Small value items: Companies should try to reduce ordering costs or
increase volume where possible.
Made-to-order items: Prices are based on quotations from a number
of sources, and as a result, prices are negotiated where possible.
Where negotiations are possible, two general types of negotiation can be
used: distributive and integrative.
In distributive bargaining, the goals of one party are in fundamental, direct
conflict to another party, resources are fixed and limited, and maximizing
one’s own share of resources is the goal for both parties. So, in this case,
there is usually a winner and a loser.
You need to set a target point and a walk-away point to negotiate a final
price that is satisfactory to the buyer. Determining these may take a good
amount of research and judgment. The seller may have a listing or asking
price, and you will submit an initial offer or counteroffer. This type of
negotiating usually requires sufficient clout to justify lower pricing. Larger
companies with multiple locations or business units may have sufficient
volume to justify this.
When I was a member of General Electric’s corporate sourcing, we were
able to leverage over $1 billion/year spent annually on transportation
corporation-wide by collecting freight volumes by mode for all the 100+ GE
units to negotiate significant savings. This was accomplished not only by
collecting and analyzing the annual spend, but also by reducing the number
of carriers within each mode to a company-wide group of core carriers to
maximize negotiation power.
Integrative negotiation, in contrast, is more collaborative, with a goal for a
win-win conclusion by the creation of a free flow of information and an
attempt to understand the other negotiator’s real needs and objectives. This
process emphasizes commonalties between the parties and minimizes the
differences through a search for solutions that meet the goals and objectives
of both sides.

Issue Purchase Orders

At this point, we move from procurement to more of the day-to-day supplier
scheduling and follow-up, which go more under the heading of purchasing
activities. This involves execution of the master schedule and MRP to ensure
good use of resources, minimize work in process (WIP), and provide the
desired level of customer service. This usually falls under the auspices of
what is known as a buyer/planner, who works hand in hand with the master
scheduler. Buyer/planners are responsible for the control of production
activity and the flow of work through the plant and can be also be
responsible for purchasing, materials requirements planning, supplier
relationship management, product lifecycle and service design, and more.
They also coordinate the flow of goods from suppliers.
The purchase order is used to buy materials between a buyer and seller. It
specifically defines the price, specifications, and terms and conditions of the
product or service and any additional obligations for either party. The
purchase order must be delivered by fax, mail, personally, email, or other
electronic means.
The types of purchase orders may include the following:
Discrete orders: Used for a single transaction with a supplier, with no
assumption that further transactions will occur.
Prenegotiated blanket: A purchase order made with a supplier
containing multiple delivery dates over a period of time, usually with
predetermined pricing, which often has lower costs as a result of
greater volumes (possibly through centralized purchasing and/or the
consolidation of suppliers) on a longer-term contract. It is typically
used when there is an ongoing need for consumable goods.
Prenegotiated vendor-managed inventory (VMI): The supplier
maintains an inventory of items at the customer’s plant and the
customer pays for the inventory when it is actually consumed. Usually
for standard, small-value items such as maintenance, repair, and
operating supplies (MRO) like fasteners and electrical parts.
 Bid and auction (e-procurement): This involves the use of online
catalogs, exchanges, and auctions to speed up purchasing, reduce
costs, and integrate the supply chain. There are many e-commerce sites
for industrial equipment and MRO inventory auctions; they vary in
format from catalog (for example, www.grainger.com,
www.chempoint.com) to auction (for example, www.biditup.com).
Websites can be for standard items or industry specific.
Corporate purchase card (pCard): This is a company charge card
that allows goods and services to be procured without using a
traditional purchasing process; sometimes referred to as procurement
cards or pCards. There is always some kind of control for each pCard,
such as a single-purchase dollar limit, a monthly limit, and so on. A
pCard holder’s activity should be reviewed periodically independently.
To further enhance the speed and accuracy of transactions, many companies
use what is known as EDI (electronic data interchange), which is the
computer-to-computer exchange of business documents in a standard
electronic format between business partners. In the past, EDI transactions
either went directly from business to business (in the case of large
companies) or through third parties known as value-added networks (VANs).
Today, a large portion of EDI transactions now flow through the Internet.
Sometimes included in the category of EDI is the use of electronic funds
transfer (EFT), which is the electronic exchange transfer of money from one
account to another, within a single financial institution or across multiple
institutions, through computer systems. This also includes e-commerce
payment systems, which facilitate the acceptance of electronic payment for
online transactions, which has become increasingly popular as a result of the
widespread use of the Internet-based shopping and banking.

Follow Up to Ensure Correct Delivery

Enterprise resource planning (ERP) software modules assume that scheduled
dates will be received on time. However, a scheduled delivery date must be
monitored and managed to identify and avoid possible missed dates in
advance where possible. In some cases, delays may be inevitable, and as a
result, recovery plans must be developed and managed.
To collaboratively resolve problems, it is also critical to understand the
supplier’s production process, capacity, and constraints.
On occasion, expediting is necessary, but it should be on an exception basis.
Supplier performance should be monitored on an ongoing basis. If a
particular supplier is consistently being expedited, the corrective action
occur.
In many organizations, purchasing may work hand in hand with either their
traffic or transportation department or that of the vendors (depends on
shipping terms, as discussed later).

Receive and Accept Goods

The key objective at receipt of goods is to ensure that proper physical
condition, quantity, documentation, and quality parameters are met. To
accomplish this requires a cross-functional activity among purchasing,
receiving, quality control, and finance.
Receiving is technically a non-value-added activity from a customer
perspective because it is designed to ensure that everything up to that point
has been done properly. The goal is to ensure quality throughout and to
reduce or eliminate the need for inspection. In many cases, technology such
as barcode scanners and handheld computers can automate the process.
Some of the inspection processes can also be reduced or eliminated by
various inspection and certification processes being performed by the
vendor.

Approve Invoice for Payment

The final step in the procurement process is approving an invoice for
payment (see Figure 6.3) according to the terms and conditions of the
purchase order (PO). Typically, the data in the PO is matched with that found
on the packing slip that was received and checked when the product arrived
and the invoice.

Figure 6.3 Document flow

Any discrepancies must be reconciled before payment is issued to the
vendor. In some cases, small levels of discrepancies can be ignored (for
example, +/– 3% or +/– $20).
Discounts for early payment should be taken whenever possible; although in
a sluggish economy, many customers try to extend payment as long as
possible because of cash-flow issues.

Key Metrics
Price is only one measure of cost and only one element of assessing the
attractiveness of a supplier, but it is the most common way most companies
view and manage interactions with their suppliers.
Besides price (which is benchmarked against industry standards in many
cases), most companies also spend a lot of time and attention on operational
dimensions of measurement, which can include quality measures such as
parts per million defect rates, and service-level measures such as time to
respond to inquiries, on-time delivery, and so on.
Some forward-thinking companies are beginning to share information about
their strategic business strategies with their key suppliers and have joint
discussions about how they can contribute and what metrics can be used to
evaluate those contributions. These metrics can be designed to highlight
areas for supplier improvement or development, to provide early warning of
potential problems at suppliers, and to ensure the ongoing financial health
and sustainability of key suppliers.

Technology
Most ERP and accounting systems have at least some purchasing features, at
least to create purchase orders directly or from an MRP system.
There are also Internet applications such as e-commerce sites, exchanges,
and auctions, as mentioned previously, for e-procurement.
There are also web-based applications (Ariba software, for example) that
enable companies to facilitate and improve the procurement process by
providing solutions that help companies analyze, understand, and manage
their corporate spending to achieve cost savings and business process
efficiency. Ariba started off with the idea of purchasing staff buying items
from vendors who provided their catalogs online, because the typical
procurement process can be labor intensive and often costly for large
corporations. Customers are offered a large number of supplier catalogs to
purchase from.
Ariba software enables a company to automate, monitor, and control the
complete purchasing lifecycle from requisition to payment. Users can create
requisitions that are approved according to preconfigured business rules that
each company decides upon. Purchase orders can be automatically generated
and sent directly to suppliers, and order acknowledgments and ship notices
are sent back to the original requestor.
The invoicing process is relatively easy for the suppliers using a tool such as
Ariba because they can create an invoice directly from the requestors
purchase order. Invoices are then prematched with the purchase order line
items and any receiving information so that the requestor can reconcile and
pay without any delays.
We cover transportation next, and then distribution operations, both of which
are necessary to keep the entire supply chain process, as discussed so far,
moving.
7. Transportation Systems

As the saying goes, “A chain is only as strong as its weakest link.” In the
case of the supply chain, the link is your transportation system, and its
strength can mean the difference between the success and failure of your
business.
To be successful, the transportation system used to connect your supply
chain must be managed and controlled properly, with complete visibility and
great communication between partners. Transportation and logistics costs
(mainly warehouse operations, which are covered in the next chapter) can
account for as much as 7% to 14% of sales depending on the industry you
are in. Transportation costs alone comprise the vast majority of this expense
for most companies. Best-in-class companies have transportation and
logistics related costs in a range of 4% to 7% depending on industry sector.
So, it’s not hard to see both operationally and financially important
transportation is to a successful business.
There are also many professional career opportunities in the transportation
field, both in corporate goods and services organizations (usually in the
transportation, traffic, or logistics departments) as well as in transportation
companies. They can range from corporate to operations and even sales.
Besides the Council of Supply Chain Management Professionals (CSCMP)
organization mentioned previously, there are many others, such as AST&L
(American Society for Transportation & Logistics; www.astl.org) and SOLE
(International Society for Logistics; www.sole.org).
As a first step, it is important to understand background on the history of
transportation systems in the United States, followed by a discussion of the
various characteristics of transportation types and modes, along with their
cost elements, rate structures, and some of the necessary documentation.

Brief History of Transportation Systems in America

In the late 18th century, overland transportation was primarily by horse, and
water and river transportation was primarily by sailing vessel.
As a result of the distances between cities and the cost to maintain roads,
many highways in the late 18th century and early 19th century were actually
privately maintained turnpikes. Other highways were largely dirt roads and
impassable by wagon for at least some of the year. Economic expansion in
the late 18th century to early 19th century was the impetus for the building
of canals to move goods rapidly to market. One of the most successful
examples was the Erie Canal.
As a result, access to water transportation tended to shape the geography of
early settlements and boundaries.
Development of the midwestern and southern states located on or near
Mississippi River system was accelerated by the introduction of steamboats
on these rivers in the early 19th century.
The rapid expansion railroad transportation in the 1830s to 1860s ended the
canal boom and provided a timely, scheduled year-round mode of
transportation. Railroads rapidly spread to connect states by the mid-1800s.
As the United States industrialized after the Civil War, and with the creation
of the transcontinental rail system in the 1860s, railroads expanded rapidly
across the United States to serve industries and the growing cities.
The passage of the Act to Regulate Interstate Commerce, in 1887, allowed
the federal government to become more active in protecting the public
interest. It established the Interstate Commerce Commission (ICC), which
had broad regulatory power in the area of transportation, which lasted until
1980. During this period, the federal and state governments determined who
could provide transportation services and the price they could charge for
their services.
The invention of the automobile started the decline of passenger railroads
and increased mobility in the United States, the latter adding to economic
output.
Freight railroads also began to decline as motor freight captured a significant
portion of the business. This loss of business, along with the highly regulated
environment with its restricted pricing power, forced many railroads into
bankruptcy and resulted in the nationalization of several large eastern
carriers into the Consolidated Rail Corporation (Conrail).
Air cargo deregulation was signed into law a year prior to the passage of the
Air Deregulation Act in 1978, which was directed at passenger airlines.
Deregulation in trucking and railroads became official with the passage of
the Motor Carrier Act of 1980 (MC 80) and the Staggers Rail Act (Staggers
Act), which created a regulatory environment favorable to the business
economics of the railroad and trucking industries.
With globalization starting in the 1980s, air cargo transport, a vital
component of many international logistics networks commonly used for
perishables and premium express shipments, grew rapidly.
In the 1990s, the increase in foreign trade and intermodal ocean container
shipping led to a resurgence of freight railroads, which today have
consolidated into two eastern and two western private transportation
networks: Union Pacific and BNSF in the west, and CSX and Norfolk
Southern in the east. The Canadian National Railway acquired the Illinois
Central route down the Mississippi River Valley.

Transportation Cost Structure and Modes

The primary modes of transportation are truck/motor carrier, rail, air, water,
intermodal transportation, and pipeline. Before getting into specifics, it is
helpful to understand the cost structure for transportation because a primary
source of difference between modes is operating cost and flexibility.

Transportation Costs
Transportation costs are both fixed and variable. The fixed-cost component
refers to costs that do not change with the volume moved, such as buildings,
equipment, and land. Variable costs, in contrast, are costs that do change
with the volume moved, such as fuel, maintenance, and wages.
The areas where these costs occur in transportation are as follows: 1) the
ways (that is, road, air, and water), 2) terminals (including administration)
where goods are loaded and unloaded, and 3) the vehicles themselves used
to haul the freight.

Ways
The ways are the land, water, road, space, and so on over which goods are
moved and may be owned by the operator (railroad tracks), run by the
government (roads, canals), or made by Mother Nature (ocean).
Terminals
The terminals are used to sort, load and unload goods, connect between line-
haul and local deliveries or between different modes or carriers as well as
dispatching (that is, to monitor the delivery of freight over long distances
and coordinate delivery pickup and drop-off schedules), maintenance, and
administration.

Vehicles
The vehicles themselves are either owned or leased by the transportation
companies and have a mix of fixed (for example, vehicle capital investment)
and variable (for example, fuel, maintenance, and labor) operating costs.

Modes
In general terms, trucks carry the greatest dollar volume of freight in the
United States (71%) because they tend to haul higher-value consumer goods.
Rail, which tends to haul lower-value commodity items longer distances,
matches motor carriers in terms of ton-miles (39% each). Not surprisingly,
air transport has by far the longest average miles per shipment, at 1,304,
followed by rail (728) and then water (520) (U.S. Department of
Transportation, 2007; see Figure 7.1).
 Figure 7.1 Shipment characteristics by mode of transportation
The following subsections cover each mode of transport in more detail.

Rail
Rail is the slowest, least flexible, yet lowest-cost mode of transportation. So,
it is typically used to transport bulky commodities over long distances.
Because rail carriers must provide own ways, they are actually natural
monopolies, but still must provide their own terminals and vehicles, resulting
in a large capital investment and high volumes required to operate a railroad.
As a result, they tend to have high fixed costs and low variable costs.
Railroads come in three general types:
Class I: At least 350 miles in track and/or revenue at least $272
million (in 2002 dollars). Class I carriers comprise only 1% of the
 number of U.S. freight railroads, but they account for 70% of the
industry’s mileage operated, 89% of its employees, and 92% of its
freight revenue. Class I carriers typically operate in many different
states and concentrate largely (though not exclusively) on long-haul,
high-density intercity traffic lanes. There are seven Class I railroads:
BNS, Canadian National, Canadian Pacific, CSX Transportation,
Kansas City Southern, Norfolk Southern, and Union Pacific.
Regional and local line haul: Regional railroads are line-haul
railroads with at least 350 route miles and/or revenue of between $40
million and the Class I threshold. There were 31 regional railroads in
2002. Regional railroads typically operate 400 to 650 miles of road
serving a region located in two to four states.
Local line haul carriers operate less than 350 miles and earn less than
$40 million per year. In 2002, there were 309 local line haul carriers.
They generally perform point-to-point service over short distances.
Most operate less than 50 miles of road (more than 20% operate 15 or
fewer miles) and serve a single state.
Switching and terminal (S&T) carriers: Railroads that primarily
provide switching/terminal services, regardless of revenue. They
perform pickup and delivery services within a certain area. In 2002,
there were 205 S&T carriers. The largest S&T carriers handle
hundreds of thousands of carloads per year and earn tens of millions of
dollars in revenue (Association of American Railroads, 2004).

Motor Carriers
Motor carrier is the most widely used mode of transportation in the domestic
supply chain; most consumer products are shipped via this method from
manufacturers, wholesalers, and distributors to retailers. In fact, there are
more than half a million private, for hire, and other U.S. interstate motor
carriers.
The economic structure of the motor carrier industry contributes to the vast
number of carriers in the industry because it has low fixed and high variable
costs.
Motor carriers pay for highway, tunnel, and bridge access through taxes or
tolls and provide their own terminals and are fairly fast and flexible because
they can offer door-to-door service and are used for small-volume goods to
many delivery locations.
Within this mode, there are full-truckload, less-than-truckload (LTL; national
and regional), and small-package carriers. Examples of for-hire carriers
include Schneider and Werner (TL), Con-way Freight and Old Dominion
Freight Line (LTL), and UPS (small package).
Full-truckload carriers have the lowest overhead because they gain
economies by filling out one load or trailer with one customer’s freight and
go point to point. In contrast, LTL and small-package carriers must have a
network of terminals called break bulks for sorting and mixing as each
vehicle may have dozens of customer’s small shipments going to a variety of
places. This infrastructure is reflected in their rates, as discussed later in the
chapter.

Air Carriers
Air cargo carriers are the fastest, most expensive mode of transportation and
are an especially important part of many international logistics networks.
They use government-provided terminals and air traffic control systems, so
they have relatively low fixed costs but operate with high variable costs for
fuel and operating costs and tend to haul high-value, lower-volume, and
time-sensitive cargo at premium rates.
Some cargo airlines are divisions or subsidiaries of larger passenger airlines;
others, such as UPS, FedEx, and DHL, operate for cargo only.

Water Carriers
As noted earlier, water transport is one of the oldest forms of transport. It is
divided between domestic and (deepwater) international transport.
Nature provides ways in most cases; however, canals and ports are
government controlled. The carrier pays for use of terminals and owns the
ships, so there are moderate fixed costs but low operating costs.
This mode is fairly slow and not very flexible and is used to haul low-value
bulk cargo over long distances. However, with the advent of containerization
in the 1970s, it has become a major facilitator of international trade, carrying
81% international freight movement.
Intermodal Carriers
Intermodal refers to freight being transported in an intermodal container or
vehicle. The most widely used intermodal systems are the trailer on a flatcar
(TOFC) and container on a rail flatcar (COFC).
This takes advantage of the economies of each mode of transportation (rail,
ship, and truck), with no handling of the freight itself when changing modes.
As a result, this improves accessibility, reduces cargo handling, and
improves security. It also reduces damage and loss and increases the speed
with which freight is transported.
It has also helped to facilitate the growth of global trade when used in
conjunction with water transport on container ships with standardized
containers that are compatible with multiple modes of transport.

Pipeline
Pipelines are a unique mode of transportation used for high-volume gases or
liquids moving from point to point. The equipment is fixed in place, and the
product moves through it in high volume. There are 174 operators of
hazardous liquid pipelines that primarily carry crude oil and petroleum
products, the most well known of which is the Trans-Alaska Pipeline System
(TAPS).
Crude oil pipelines are the basis for our liquid energy supply. The crude oil
is collected by pipelines from inland production areas like Texas, Louisiana,
Alaska, and western Canada. Pipelines also move crude oil produced far
offshore in coastal waters as well as from Mexico, Africa and the Middle
East, and South America delivered by marine tankers, often moving for the
final leg of that trip from a U.S. port to a refinery by pipeline.
In addition, two-thirds of the lower 48 states are almost totally dependent on
the interstate pipeline system for their supplies of natural gas.

Global Intermediaries
There also exists as many global intermediaries as there are a variety of
services required for international trade. Some of them are as follows:
Freight brokers: Similar to any other type of broker, the main
function is to bring together a buyer and a seller. The buyer in this case
is the shipper of the goods, and the seller is the trucking company. The
broker negotiates the terms of the deal and handles much of the
paperwork.
Freight forwarders: Heavily utilized in global trade, for both surface
and air, to comply with export documentation and shipping
requirements, many exporters utilize a freight forwarder to act as their
shipping agent. The forwarder advises and assists clients on how to
move goods most efficiently from one destination to another. A
forwarder has extensive knowledge of documentation requirements,
regulations, transportation costs, and banking practices, thus assisting
in the exporting process for many companies.
They may also provide essential freight services such as assembling
and consolidation of smaller shipments plus taking larger bulk
shipments and breaking them into smaller shipments.
Customs brokers: Perform transactions at ports on for other parties.
Typically, an importer hires a customs broker to guide their goods into
a country. Similar to the forwarder, the broker will recommend
efficient means for clearing goods through customs entry and can also
estimate the landed costs for shipments entering the country. U.S.
exporters typically do not book shipments directly with a foreign
customs broker, because freight forwarders often partner with customs
brokers overseas who will clear goods that the forwarder ships to the
overseas port. However, foreign customs brokers contract the services
of the domestic freight forwarder when the goods are headed in the
opposite direction.
The types of transactions negotiated for an importer may include the
entry of goods into a customs territory, payment of taxes and duties,
and duty drawback or refunds of any kind.
Non-vessel-operating common carriers (NVOCCs): NVOCCs are
also freight forwarders, except that they 1) may own and operate and
sometimes lease the containers they ship, 2) be required to publish a
public tariff (that is, rates), 3) may have to take on the status of a
virtual carrier and take on liabilities of a carrier, and 4) whereas
freight forwarders can be agents for an NVOCC, the reverse is not
true, giving NVOCCs more flexibility.
Legal Types of Carriage
There are two legal types of carriers, for hire and private, as described here.

For Hire
For-hire carriers offer service to the general public and are subject to
government regulations in regard to rates, routes, and markets served.
They come in two major forms:
Common carriers: Licensed to carry only certain goods available to
public to designated points or areas served and offer scheduled service.
Common carriers must file both liability insurance and cargo
insurance. Public airlines, railroads, bus lines, taxicab companies,
cruise ships, motor carriers, and other freight companies generally
operate as common carriers (as do communications service providers
and public utilities).
Contract carriers: For-hire interstate operators that offer
transportation services to certain shippers under contracts. Contract
carriers must file only liability insurance.
There are also independent carriers, referring to an individual owner-
operator or trucker who can make agreements with private carriers, common
carriers, contract carriers, or others as they want.

Private
Carriers are considered private when a company transports only their own
goods. Their primary business is not transportation, and the vehicles are not
for hire. Private carriage usually refers to trucking, but is also found in rail
and water transportation.
Very high volume or specific needs are needed to justify the expense. Many
retail organizations, as well as some manufacturers, distributors, and
wholesalers, operate their own fleets. We’ve all seen Walmart and Toys R Us
trucks (with Jeffrey Giraffe) printed on the side of the trailer on a highway at
one time or another. These are examples of private carriage.
In many cases, private vehicles such as those mentioned here can also be
used to backhaul freight from suppliers after delivering product from
distribution facilities to retail locations. This can avoid the need for the
vehicle to make the return trip empty and to reduce their fleets’ overall
operating costs.

Transportation Economics
In this section, we will deal with the application of demand and cost
principles to transportation.

Transportation Cost Factors and Elements

There are a variety of factors that impact transportation costs, which we will
now cover.

Cost Factors
The primary factors influencing transportation costs pricing are distance,
weight, and density (see Figure 7.2a, b, c).

Figure 7.2 Transportation economics

Distance: As distance traveled increases, variable expenses such as
labor, fuel, and maintenance increase.
 Weight: The transport cost per unit decreases as the load weight
increases. This is as a result of economies of scale as a result of
spreading the fixed costs over more weight. That is why it is always
best to combine small loads into larger ones where possible, up to the
capacity of the vehicle carrying the load.
Density: This is the combination of weight and cubic volume. Vehicles
have both weight and cubic capacity and tend to cube out before
weighting out. So, shipping higher-density products enables the cost to
be spread over more weight versus a lighter load such as paper cups,
where you are shipping a lot of air for your money. As a result, higher-
density products are charged less per hundredweight or CWT (that is,
per hundred pounds; one of the common forms of transportation
pricing, which is discussed shortly).
Stowability: Similar to density and is also a factor. It refers more to
the ease of storage, such as when shipping items are easily stacked or
nested.
Other factors: Can includes factors such as the amount of handling
necessary (smaller volumes typically require more handling), type of
handling (full pallets can be handled with more automated equipment
versus individual cases, which are handled manually in most cases),
liability (can be a function of the value or nature of the product),
perishability, and market factors such as market (origin and
destination) volume and balance, which refers to amount of freight
flowing both ways. Finally, an empty return or backhaul can be costly
to the carrier and thus may affect rates into an area that has very little
freight coming out. (For example, because there is very little
manufacturing in Florida, rates into the state may be high because
carriers have a hard time finding freight for the return trip.)

Shipping Patterns
There are a variety of shipping patterns, as shown in Figure 7.3. A shipment
may go direct from the origin point to destination or make one or more stops
in between. This will depend on the primary cost factors mentioned above
(for example, TL versus LTL).
 Figure 7.3 Common shipping patterns

Cost Elements
Four major elements, the principles, are the same for all modes:
Line haul: Carriers have basic costs to move product from point to
point that include fuel, labor, and depreciation. The costs are pretty
much the same per mile whether the container is full or empty, so the
line haul cost is total of these costs divided by the distance traveled.
So, for example, if the line haul cost to transport material from point A
to point B is $5 per mile and the route is 500 miles, the total line haul
cost is $2,500. The actual cost (in $/CWT) for a shipment weighing
12,000 pounds is $20.83/CWT (that is, $2,500 / 120), and the cost for a
shipment weighing 45,000 pounds is $5.56/CWT.
As a result, the total line haul cost will vary with the cost per mile to
operate the vehicle and the distance the material is moved. The line
haul cost per hundredweight varies based on the cost per mile,
distance, and weight, as you learned in the earlier example.
Other line haul services may be required, as well, including the following:
Reconsignment: This involves changing the consignee while the
shipment is in transit and is used commonly in industries where goods
are shipped before they are sold.
Diversion: The changing of the destination of a shipment while in
transit, which is often used in conjunction with reconsignment.
Pooling: This allows a shipper to use a less-costly container or
truckload rate by consolidating smaller shipments going to one
destination and one consignee into one pool car or truck.
Stopping in transit: This allows the shipper to use a full container or
truckload rate and drop off portions of the load at various intermediate
 destinations. The shipper is invoiced for a stop-off charge for each
stop, which is usually a lot less than shipping the load at less than car
or truck load rates.
Transit privilege: This allows for the shipper to unload a car or trailer,
process the shipment, and then reload and ship the processed product
to its final destination using a through rate (that is, a single
transportation rate on an interline haul made up of two or more
separately established rates).
Pickup and delivery: These costs depend on the time spent picking up
and dropping off cargo and not distance. There is a charge for each
pickup, so it is useful to consolidate multiple shipments to avoid
multiple separate trips.
The loading and unloading of freight at pickup and delivery is
generally the responsibility of the carrier in the case of LTL or LCL
(and small-package) shipments, whereas the shipper is usually
responsible for TL and CL loading and unloading.
The carrier will specify the amount of time the shipper and receiver
have for loading and unloading. In the case of rail free time, this is 24
to 48 hours; after free time, rail carriers charge what is called a
demurrage fee; motor charge what is called a detention fee. Motor
carrier loading and unloading times vary, but can be as little as a half
hour.
Terminal handling: These costs depend on how many times the
shipment must be handled. In the case of full truckloads (TL), there is
no terminal handling because they go directly to the customer.
However, LTL shipments must be sent to a terminal, sorted, and
consolidated, so charges are incurred. As a result, it is wise to
consolidate shipments into fewer parcels where possible.
There are other terminal services besides handling, including the following:
Consolidation: Many small shipments are consolidated into a one
larger shipment going to a customer, qualifying the shipper for a lower
rate.
Dispersion: This is the opposite of consolidation, with one large
shipment being distributed to multiple customers at the destination
terminal.
 Shipment services: The carrier provides freight handling for
consolidation or dispersion.
Vehicle service: Carriers need to maintain a diverse and adequate fleet
of transit vehicles for shipper’s use.
Interchange: Carriers must provide the ability to interconnect with
other carriers of the same or different modes so that through rates may
be used by the shipper.
Weighing: The carrier (or shipper) provides the weight of shipment.
Tracing: Carriers can communicate to shipper where the shipment is
and when it might be delivered. In most cases, this information can be
supplied via the Internet.
Expediting: In some cases, it is necessary to move a shipment faster
than normal, and as a result, this may require a premium over-regular
handling.
Billing and collecting: This includes the costs of paperwork and
invoicing the shipper. Carriers also provide clerical services for bills of
lading (documents issued by a carrier for a shipment of merchandise
giving title of that shipment to a specified party), freight bills, and
routing of the shipment.

Rates Charged
Now that we you understand the general economics of transportation cost
and it its major elements, let’s turn our focus to pricing.

Effects of Deregulation on Pricing

Since deregulation, transportation rates or prices are negotiated like other
commodities. Some changes as a result of deregulation by mode are as
follows:
Motor and water carriers: Rate and tariff-filing regulations were
eliminated except for household and noncontiguous trade for domestic
water transportation (that is, shipments that originate or terminate in
Alaska, Hawaii, or a U.S. territory or possession). The common
carriage concept was for the most part eliminated, as all carriers may
contract with shippers. Antitrust immunity for collective ratemaking
was eliminated.
 Air carriers: As mentioned earlier, economic regulation of air carriers
was eliminated in 1977. However, safety regulation remains in force.
Rail carriers: This is still the most regulated of the transportation
modes. There has been, however, complete deregulation over certain
types of traffic: piggyback and fresh fruits.
Freight forwarders and brokers: Both are required to register with
the Surface Transportation Board (STB). Brokers must also post a
$75,000 bond to ensure payment to the carriers. No economic rate or
service controls these entities. A freight forwarder is considered a
carrier and is liable for freight damages.

Pricing Specifics
Full container or truck load rates may be expressed in a flat dollar or mileage
rate, and less than containers or truckloads may be a discount off of the class
rate from the tariff.
In general, prices (known as rates) are expressed in either dollars (whole or
per mile) or cents per hundredweight (CWT) and are contained in tariffs,
which can be in hard copy or electronic form.

Freight Classifications
The classification of an item must first be determined. The classification is
based on the cost elements of an item mentioned earlier: density, stowability,
ease of handling, and liability. The class given to an item is known as its
rating.
Truck and rail each have their own set of classifications. For motor carriers,
it is the National Motor Freight Classification (NMFC), and for rail, it is the
Uniform Freight Classification (UFC).
A class of 100 is considered average. A class can range from 35 to 500. (In
general, the higher the rating, the higher the transportation cost.)

Rate Determination
After the class is identified, the rate must be determined and is based on the
origin and destination. There is usually a minimum charge and various rates
at weight breaks as the shipments increase in size. There may also be rate
surcharges or accessorial charges for extra services provided by the carrier.
There are also other types of rates, such as the following:
 Cube or density rates: Freight rate computed on the basis of a cargo’s
volume, instead of its weight.
Exception rates: A deviation from the class rate; changes (exceptions)
made to the classification.
Commodity rates: The carrier will offer an all-commodity rate for this
specific route despite the class of the commodity carried. The class of
the commodity does not matter to the carrier.
Freight-all-kinds (FAK) rates: These are rates for a carrier’s tariff
classification for various kinds of goods that are pooled and shipped
together at one freight rate. Consolidated shipments are generally
classified as FAK.

Documents
A variety of documents are used in transportation both domestically and
internationally. This section covers the main ones in this section.

Domestic Transportation Documents

Before discussing the major domestic documents, it is first useful to
understand terms of sale.

Terms of Sale
Transportation costs are the second- or third-highest expense that a
manufacturing company has beyond the cost of labor and raw materials, so it
makes sense to know how they are allocated. Even if your vendor pays the
freight charges, you need to know the amount they paid, because at some
point when you have enough volume, you may want to take control of your
inbound freight and negotiate rates with your own carriers to less than you
are paying now. You should always identify freight costs separate from cost
of goods.
Negotiating the most appropriate terms of sale will allow you to add value to
your purchase.
The terms determine which party is to pay the freight bill, which party has
title to the goods, and which party controls the movement of the goods.
The two major terms are as follows:
 F.O.B. origin: The buyer pays for the freight, takes title to the goods
once loaded, and controls movement of the goods.
F.O.B. destination: The seller pays for the freight, has title to the
goods until they are delivered, and controls movement of the goods.
There are variations to these terms, as follows:
F.O.B. origin, freight collect: The buyer pays freight charges, owns
goods in transit, and files claims, if any.
F.O.B. origin, freight prepaid: The seller pays freight charges, and
the buyer owns goods in transit and files claims, if any.
F.O.B. origin, freight prepaid and charged back: The seller pays
freight charges, owns goods in transit, and the buyer files claims, if
any.
F.O.B. destination, freight collect: The buyer pays freight charges,
and the seller owns goods in transit and files claims, if any.
F.O.B. destination, freight prepaid: The seller pays freight charges,
owns goods in transit, and files claims, if any.
F.O.B. destination, freight collect and allowed: The buyer pays
freight charges, and the seller owns goods in transit and files claims, if
any.

Bill of Lading
A bill of lading (B/L) is a contract between the carrier and the shipper issued
by a carrier, which details a shipment of merchandise and gives title of that
shipment to a specified party (that is, a receipt) with specified timing.
A B/L includes title to the goods and name and address of the consignor and
consignee and summarizes the goods in transit and their class rates.
Electronic bills are now used often where the carrier and shipper have an
established strategic partnership.
There are two main types of B/Ls:
(Uniform) straight bill of lading: These are nonnegotiable and
contain terms of the sale, including the time and place of title transfer.
Order (notified) bill of lading: These are negotiable, and the
consignor retains the original until the bill is paid. They can be used as
a credit instrument because there is no delivery unless the original bill
of lading is surrendered to the carrier.
There are also export bills of lading (covered in the section “International
Transportation Documents”) and government bills of lading. Government
B/Ls are used when the product is owned by the U.S. government.
In cases where there are individual stops or consignees when multiple
shipments are placed on a single vehicle, what is known as a shipment
manifest is used. Each shipment still requires a B/L, and the manifest lists
the stop, B/L, weight, and case count for each shipment. The goal of a
manifest is to provide one document that describes the complete contents of
the load.
The B/L also documents responsibilities for all possible causes of loss or
damage and includes terms such as the following:
Common carrier liable for all losses, damage, or delays in shipment.
Exceptions include acts of God, public enemy, shipper, public
authority, and inherent nature of the goods.
Reasonable dispatch.
Shipper liable for mending, cooperage, bailing, or reconditioning of
goods or packages and gathering of loose contents for packages.
Freight not accepted stored at owner’s cost.

Freight Bills
Freight bills are the carrier’s invoice for charges for a given shipment. The
credit terms are specified by the carrier and can vary extensively. In some
cases, credit may be denied if the charges are worth more than the freight.
Bills may also be either prepaid or collect per the previous discussion on
freight terms.
Because there tends to be large changes to fuel costs, low visibility of the
future freight costs, and a relatively high complexity of freight quotes,
freight invoices are susceptible to human and process errors and require
auditing to ensure that the organization does not overpay for services it did
not incur.
These audits can be performed internally or externally, both prepayment and,
in some cases, postpayment.
When I worked in General Electric Corporate Sourcing, I helped to establish
the GE Corporate Freight Payment Center in Fort Myers, Florida. The two
major goals of the service was to both consolidate information for their 100
or so business units to leverage the over $1 billion spent company-wide on
transportation services and to perform a pre-audit on freight bills in a more
standardized, automated fashion (because freight bill errors, including
overcharges and duplicate bills and payments, can range as high as 5%
domestically and even as high as 10% internationally).

Freight Claims
A freight claim is a document filed with the carrier to recover monetary
losses due to losses, damage, delay, or overcharges by the carrier. In most
cases, claims are filed within 9 months, the claimant is notified by receipt
within 30 days, and settlement or refusal usually occurs within 120 days.
The claimants are expected to take some reasonable measures to minimize
the loss, such as requiring the carrier to pay for the difference between the
original value and the damaged or salvage value.

International Transportation Documents

By its very nature, documentation for international transportation is much
more complex than required for domestic transportation. The types of
documents vary widely by country and fall into two major categories of sales
and transportation.

Sales Documents
A sales contract is usually the initial document used international trade. A
letter of credit, a document issued by a financial institution ensuring
payment to a seller of goods or services, may also accompany shipment.
For export, one may need an export license, which is the express
authorization by a country’s government to export a specific product before
it is shipped. Governments may require an export license to exert some
control over foreign trade for political or military reasons, control the export
of natural resources, or control the export of national treasures or antiques.
Also for export, a shipper’s export declaration is required by U.S. Customs,
which is designed to keep track of the type of goods exported from the
United States, as well as their destination and their value.
There may also be export taxes and quotas in effect.
For import, countries require certain documents to ensure that no shoddy
quality goods are imported; and to help determine the appropriate tariff
classification, the correct value of imported goods, the correct country of
origin for tariff purposes; or to protect importers from fraudulent exporters
or limit (or eliminate) imports of products that the government finds
inappropriate for whatever reason.
Import documents include the following:
Certificate of origin: A document provided by the exporter’s chamber
of commerce that attests that the goods originated from the country in
which the exporter is located. It is used by the importing country to
determine tariff of goods.
Certificate of manufacture: A document provided by the exporter’s
chamber of commerce that attests that the goods were manufactured in
the country in which the exporter is located.
Certificate of inspection: A document provided by an independent
inspection company that attests that the goods conform to the
description contained in the invoice provided by the exporter and that
the value of the goods is reflected accurately on the invoice. It is
always obtained by the exporter in the exporting country, before the
international voyage takes place, and the certificate of inspection is the
result of a pre-shipment inspection (PSI).
Certificate of free sale: This shows that the goods sold by the exporter
can legally be sold in the country of export; this certificate is designed
to prevent the export of products that would be considered defective in
the country of export.
Import license: A document issued by the importing country that is
designed to prevent import of nonessential or overly luxurious
products in developing countries short of foreign currency supply.
Certificate of insurance: Some international terms of sale, or
Incoterms (International Commerce Terms), require that the exporter
provide insurance, and a certificate of insurance offers this proof of
coverage.
Carnet: International customs documents that simplify customs
procedures for the temporary importation of various types of goods.
They ease the temporary importation of commercial samples,
professional equipment, and goods for exhibitions and fairs by
avoiding extensive customs procedures and eliminating payment of
 duties and value-added taxes (minimum 20% in Europe, 27% in
China); they replace the purchase of temporary import bonds.

Terms of Sale
International Commercial Terms, also known as Incoterms, are a set of rules
that define the responsibilities of sellers and buyers for the delivery of goods
under sales contracts for domestic and international trade. They are
published by the International Chamber of Commerce (ICC) and are widely
used in international commercial transactions. They provide a common set
of rules to apportion transportation costs and clarify responsibilities of
sellers and buyers for the delivery of goods under sales contracts. The goal is
to simplify the drafting of contracts and help avoid misunderstandings by
clearly describing the obligations of buyers and sellers.
The terms may include export packing costs, inland transportation, export
clearance, vehicle loading, transportation costs, insurance, and duties.
The two main categories of Incoterms® 2010 are now organized by modes of
transport:
Group 1: Incoterms® that apply to any mode of transport.
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
DAT Delivered at Terminal
DAP Delivered at Place
DDP Delivered Duty Paid
Group 2: Incoterms® that apply to sea and inland waterway transport
only.
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF Cost, Insurance, and Freight
International Transportation Documents
Transport documents are a crucial part of international trade transactions.
The documents are issued by the shipping line, airline, international trucking
company, railroad, freight forwarder, or logistics companies.
To the shipping company and freight forwarder, transport documents provide
an accounting record of the transaction, instructions on where and how to
ship the goods, and a statement giving instructions for handling the
shipment.

International Bill of Lading

B/Ls in international trade help guarantee that exporters receive payment and
that importers receive merchandise. The export B/L can govern foreign,,
intercountry, and domestic movements of the goods.
An international B/L can have a number of additional attributes, such as on-
board, received-for-shipment, clean, and foul. An on-board B/L denotes that
merchandise has been physically loaded onto a shipping vessel, such as a
freighter or cargo plane. A received-for-shipment B/L denotes that
merchandise has been received, but is not guaranteed to have already been
loaded onto a shipping vessel. Such bills can be converted upon being
loaded.
Some of the specific types of B/Ls related to international transportation
include the following. (Straight and intermodal for domestic have already
been discussed.)
Ocean bill of lading: Sets terms and lists origin and destination ports,
quantities and weight, rates, and special handling needs for the ocean
movement. The ocean carrier is held liable for losses due to negligence
only, with other losses being the responsibility of the shipper. A
commercial invoice determines the value of the products in the case of
losses due to negligence.
Air waybill: A B/L used in the transportation of goods by air,
domestically or internationally.
B/Ls can also be for receipt or title to goods in the form of a
Negotiable or to order B/L: A negotiable B/L allows the owner of the
goods to sell them while they are in international transit. The transfer
of ownership to the new owner is done with the B/L, because it is a
certificate of title to the goods. Only ocean B/Ls can be negotiable.
 Clean B/L: This type of B/L is used as a receipt for goods and is
issued by carrier when goods arrive in port; damages and other
exceptions should be noted. (A foul B/L denotes that merchandise has
incurred damage prior to being received by the shipping carrier. Letters
of credit usually will not allow for foul B/Ls.)

Key Metrics
In addition to budgeting transportation costs by mode and by lane, a variety
of performance measurements are used in transportation for current
performance versus historical results, internal goals, and carrier
commitments. The main categories of key metrics are service quality and
efficiency and may include on-time delivery, loss and damage rate, billing
accuracy, equipment condition, and customer service.

Technology
Transportation management systems (TMSs) have been around for a long
while. Historically, they have been an add-on to an existing enterprise
resource planning (ERP) or legacy (that is, homegrown) order-processing or
warehouse management system (WMS).
Like most software today, they can be installed as resident software or web
based and accessed on demand.
A TMS offers benefits to an organization such as automated auditing and
billing, optimized operations, and improved visibility.
They typically include functionality to plan, schedule, and control an
organization’s transportation system, with functionality for the following:
Planning and decision making: Helps to define the most efficient
transport schemes according to parameters such as the following:
transportation cost, lead time, stops, and so on. Also includes inbound
and outbound transportation mode and transportation provider
selection and vehicle load and route optimization.
Transportation execution: Allows for the execution of a
transportation plan such as carrier rate acceptance, carrier dispatching,
electronic data interchange (EDI), and so on.
Transport follow-up: Tracking of physical or administrative
transportation operations such as traceability of transport event by
 receipt, custom clearance, invoicing and booking documents, and
sending of transport alerts (delay, accident, and so on).
Measurement: Cost control and key performance indicator (KPI)
reporting as it relates to transportation.
Ultimately, a supply chain system is made up of connecting links and nodes,
where the transportation system provides the links, and the facilities provide
the nodes. Therefore, the next logical topic to cover is warehouse
management and operations.
8. Warehouse Management and Operations

A warehouse is typically viewed as a place to store inventory. However, in

many supply chain systems, the role of the warehouse is more properly
viewed as a switching facility versus just a storage facility because it
provides time and place utility for raw materials, industrial goods, and
finished products, allowing firms to use customer service as a value-adding
competitive tool.
Therefore, warehouses are one of the more complex areas of the supply
chain because they are the point of intersection for all the members of the
supply chain.
Even the name is a bit of a misnomer. The term warehouse implies that
something is stored or warehoused for a fairly long time. That might be true
in many cases, but in today’s faster-paced world, material tends to fly though
warehouses rather than stay put long (that is, if you want to remain
competitive and stay in business for the long run).
More often than not, on the outbound end (typically finished goods or
components), the facilities are referred to as distribution centers (DCs),
whereas warehouse is more often used to describe a facility where raw
materials and parts are stored.
Still others such as e-commerce businesses or e-tailers refer to their facilities
as warehouse and fulfillment centers or variations on that, because order
fulfillment is the complete process from point-of-sales inquiry to delivery of
a product to the customer. Sometimes order fulfillment is used to simply
describe the act of distribution or the shipping function as per the above, but
in the broader sense it refers to the way firms respond to customer orders and
to the process they take to move products from those orders to the customer.
For our purposes, we define the facilities as follows:
General warehouse: This type of facility is primarily for the storage
and protection of goods, with the need to minimize handling and
movement.
Distribution warehouse (or distribution center): In these facilities,
goods are received in large volumes. The goods are then sorted, stored,
and then consolidated into customer orders for fulfillment. This type of
facility is more concerned with throughput.
For simplicity, we will just refer to them as warehouses or DCs from now on
in this chapter.
Like transportation, warehousing offers a variety of professional career
opportunities at the corporate, operations, and sales areas. In corporate, there
are positions that oversee both private and public warehouses from both a
strategic and operational perspective.
In the warehouses themselves, positions range from supervisors, analysts,
and managers to general managers of facilities. In addition, in public
warehousing, there are a variety of sales positions. There is also an
organization known as WERC (Warehouse Educational and Research
Council; www.werc.org) for professional networking, education, and career
searches.

Brief History of Warehousing in America

The original warehouses in the United States were sheds at docks. Once the
railroad system was established in the mid-1800s, warehouses were
established for consolidation and distribution to support it.
As the transportation system further developed, warehousing shifted more to
manufacturers, wholesalers, and retailers.
After WWII, as the retail industry grew rapidly, it became necessary for
retailers to establish DCs to provide a better assortment of products to
consumers as well as to gain transportation and purchasing economies.
Today, warehouses and DCs may be highly automated as inventory moves
quickly through them to support JIT (just-in-time) production processes and
the consumers’ ever-increasing demand for a vast assortment of products in
stores and fast delivery to their homes.
#60148575 ©industrieblick-Fotolia.com

Economic Needs for Warehousing

We need warehousing for a variety of reasons, such as the following:
Seasonal production: There is a need for proper storage or
warehousing for products such as agricultural commodities, from
where they can be supplied as and when required.
Seasonal demand: Some goods are demanded seasonally like snow
blowers in the winter or lawnmowers in the summer. The production of
these goods may take place throughout the year to meet the peak
seasonal demand. As a result, there is a need to store these goods in a
warehouse to make them available at the time of need.
Production economies of scale: Manufacturers typically produce in
lots or batches to meet existing as well as future demand of the
products to enjoy the benefits of the economies of scale of mass
production. These large quantities of finished products, produced on a
large scale, need to be stored properly until purchased by the customer.
Quick supply: Goods of all types are produced at specific sites but
consumed throughout the country and perhaps the world. Because the
manufacturing sites may be far from the ultimate consumer, they may
be supplied via a large, distant distribution network. Therefore, it is
essential to stock these goods near the place of consumption so that
without any delay, these goods are made available to the consumers at
the time of their need.
 Continuous production: The continuous production of goods in
factories requires an adequate supply of raw materials. As a result,
there is a need to keep sufficient quantities of raw material in the
warehouse to ensure continuous production.
Price stabilization: To keep the price of the goods in the market
stable, there is a need to keep sufficient stock in warehouses because
scarcity in supply of goods may increase their price in the market.
Conversely, excess production and supply may also lead to a fall in
prices of the product. So, by keeping the supply of goods in balance,
warehousing can contribute to price stabilization.

Types of Warehouses
We will now look at various types of warehouses that exist today from a
number of views. One view is by customer classification, another by role in
the supply chain, and yet another is by ownership type.

Warehouses by Customer Classification

When thinking of warehouses by customer classification, we come up with
the following types:
Factory warehouse: This type of facility connects production with
wholesalers. It typically supplies a small number of large orders daily
with advance information about order makeup.
Retail distribution warehouse: These serve a number of internal
retail units. They have advance information about order detail and
perform carton and item picking from a forward area. They generate
more orders per shift than DCs that perform consolidation.
Catalog retailer/e-tailer: This is a fulfillment warehouse filling orders
from catalog sales a large number of small (frequently single-line)
orders. There is item and, sometimes, carton picking daily with
advance composition of orders usually unknown (only statistical
information available).
Support of manufacturing operations: This is usually a relatively
small warehouse or stock room that provides raw material and/or work
in process to manufacturing operations. There are many small orders
driven by production schedules and, in some cases (parts, hardware,
 and so on), there is only statistical information available about order
composition. There are usually stringent, short time requirements.

Warehouses by Role in the Supply Chain

Since World War II, as the consumer market grew, the function of
warehousing has evolved from pure storage to more speed, cost reduction,
flexibility, and efficiency. This has led to warehouses that are more geared to
this, and they include the following:
Distribution centers (DCs): This type of facility is stocked with
products (usually finished goods) to be redistributed to retailers,
wholesalers, or directly to consumers. DCs are usually thought of as
being demand driven, and are often referred to as retail distribution
centers, per above, when they primarily distribute goods to retail
stores, order-fulfillment center commonly when they distribute goods
directly to consumers, and cross-dock facilities (see later in this list)
when they store little or no product but distribute goods to other
destinations.
Consolidation: These facilities receive materials from a number of
sources and combine them into exact quantities for a specific
destination. A local or central DC may play this role.
Break-bulk: This is when a warehouse receives a single large
shipment and arranges for delivery to multiple destinations. Break-
bulks are common in the less-than-truckload (LTL) trucking industry.
Cross-docking: There is also a type of warehouse (or section of a
warehouse) used heavily in retail distribution to deliver inventory to
retail locations known as cross-dock. This entails the practice of
unloading materials from an incoming semi-trailer truck or railroad car
and loading these materials directly into outbound trucks, trailers, or
rail cars, with little or no storage in between. It is common for
inventory to flow through this type of facility within 24 to 48 hours.
Cross-docking has become an integral part of the supply chain strategy
of retailers such as Walmart and Toys R Us to turn inventory rapidly in
the DCs and to resupply stores rapidly.
Reverse logistics: Whereas many warehouses have a small section of
their facility to handle returns, some are entirely dedicated to what is
known as reverse logistics for items that are going from the end user
 back to the distributor or manufacturer. Specifically, this is the process
of moving goods from their final destination for the purpose of
capturing value, or proper disposal, and may also include
remanufacturing and refurbishing activities.

Warehouses by Ownership Type

There are a number of general categories of warehouses, as follows:
Public warehouse: The public warehouse is essentially space that can
be leased to solve short- or long-term distribution needs. Public
warehouse fees can be a combination of storage fees and inbound and
outbound transaction fees. A public warehouse can charge per pallet or
charge for each square foot that is used by a company. Retailers that
operate their own private warehouses may occasionally seek additional
storage space if their facilities have reached capacity or if they are
making a special, large purchase of products. For example, retailers
may order extra merchandise to prepare for in-store sales or order a
large volume of a product that is offered at a low promotional price by
a supplier. Their use varies by industry, but it is common in the
household product, personal-care, and grocery industries to use shared
public warehouse facilities. Some of these public warehouses also
provide value-added services such as light assembly and kitting and
may operate their own private fleet of trucks to facilitate local delivery.
Fees for public warehousing are both time based (that is, storage
charges) and transaction based (that is, handling charges; in/out
handling fees, documentation, special services, and so on).
Private warehouse: This type of warehouse is owned and operated by
channel suppliers and resellers and used in their own distribution
activity. For instance, a major retail chain may have several regional
warehouses supplying their stores, or a wholesaler will operate a
warehouse at which it receives and distributes products. Private
warehouses require a capital investment to be made by their owner, but
these warehouses can be extremely cost-effective in the long run.
Contract warehouse: As the name implies, a contract warehouse
handles shipping, receiving, and storage of products on a contract
basis. Contract warehouses generally require a client to commit to a
specific period of time (generally in years) for the services. Contracts
 may require clients to purchase or pay for storage and material-
handling equipment. Fees for contract warehouses may be transaction
and storage based, fixed, cost plus, or any combination.
Bonded warehouse: A bonded warehouse is licensed to accept
imported goods for storage before payment of customs duties. By
storing his goods in a bonded warehouse, the importer gains some
control without paying the duty. The goods in bonded warehouses are
under the supervision of customs officers, and permission is necessary
before the owner can access them.
Government warehouse: These warehouses are owned, managed, and
controlled by central or state governments, public corporations, or
local authorities. Both government and private enterprises may use
these warehouses to store their goods.
In many cases, this type of warehouse is mainly located at the
important sea ports, and in most cases is owned by the dock
authorities. The general public can also use this group of warehouse on
payment of fixed charges. If a customer cannot pay the rent within the
specified time or period, the authority can recover the rent by
disposing of the goods.
Co-operative warehouse: These warehouses are owned, managed,
and controlled by co-operative societies. They provide warehousing
facilities at the most economic rates to the members of their society.

Warehouse Features
All the previously described types of warehouses, depending on the industry
they serve, may have features that define them, such as the following:
Automated warehouses: With advances in computer and robotics
technology, many warehouses now have automated capabilities. The
level of automation ranges from a small conveyor belt transporting
products in a small area all the way up to a fully automated facility
where only a few people are needed to handle storage activity for
thousands of pounds/kilograms of product. In many cases, warehouses
use machines to handle nearly all physical distribution activities such
as moving product-filled pallets (that is, platforms that hold large
amounts of product) around buildings that may be several stories tall
and the length of two or more football fields.
 Climate-controlled warehouses: Warehouses handle storage of many
types of products, including those that need special handling
conditions such as freezers for storing frozen products, humidity-
controlled environments for delicate products, such as produce or
flowers, and dirt-free facilities for handling highly sensitive computer
products. These are typically used for agricultural products, but there
are other items besides food that may require temperature/humidity
control, such as some medical products.

Warehouse Strategy
The actual warehouse strategy of an organization may vary by industry,
volume, seasonality pattern, and their competitive strategy. The fact is that
many firms utilize a combination of private, public, and contract facilities.
For example, a private or contract facility may be used to cover basic year-
round requirements, whereas public facilities are used to handle peak
seasons. In other cases, central warehouses may be private, whereas market
area or field warehouses are public facilities.
A good rule of thumb when planning your warehouse strategy is that a
warehouse designed for full-capacity utilization will be fully utilized
between 75% and 85% of the time. (That is, 15% to 25% of the time is only
used for surge capacity to meet peak requirements.) In this case, it may be
more efficient to build private facilities to cover the 75% requirement and
use public facilities to accommodate peak demand.
In other cases, a firm may find that private warehousing is the best route to
go at specific locations on the basis of greater distribution volume, whereas
in other markets, public facilities may be the lower-cost option.
In still other cases, the warehouse strategy may be differentiated by customer
and product, where some customer groups are best served from a private
warehouse, whereas a public warehouse may be the better choice for other
customers.
Warehouse Economic Benefits
Warehousing provides specific economic benefits. As discussed earlier, in
supply chain and logistics management, there are many cost and service
tradeoffs (see Figure 8.1). In general, the more warehouses or DCs you have
in your network, the greater the inventory costs but the lower the cost of lost
sales (as a result of being closer to your markets).

Figure 8.1 Supply chain and logistics management cost tradeoffs

This is due to the fact that you are trying to hit a finer target (that is, smaller
demand forecast quantity) and therefore need to carry additional inventory,
resulting in higher carrying costs. This is described by a theory known as the
square root rule, which states that total safety stock can be approximated by
multiplying the total inventory by the square root of the number of future
warehouse locations divided by the current number.
For example, if you are going from one to two DCs in your network, you
would need to carry 40% more safety stock (that is, the square root of 2 / 1,
which equals 1.41).
As we carry more inventory, warehouse operations costs tend to increase,
but due to the economies we gain by having what is known as a long in,
short out, our transportation costs decline. The idea here is that, depending
on our demand profile, we are able to ship full truckloads to our markets
serviced by a DC as opposed to many more-expensive smaller shipments.
More specifically, the benefits can be categorized as described in the
following subsections.

Consolidation
This is a form of warehousing that pulls together small shipments from a
number of suppliers in the same geographic area and combines them into
larger, more economical shipping loads intended for the same area as
described in the long in, short out rule mentioned earlier (see Figure 8.2).

Figure 8.2 Consolidation warehouse

Consolidation warehousing may be used by a single firm, or a number of
firms may join together and use a for-hire consolidation service.
Through the use of a consolidation program, each individual manufacturer or
shipper can have lower total distribution cost than could be realized on a
direct shipment basis individually.
Break-bulk warehouse operations are similar to consolidation except that no
storage is performed. This is the term typically used to describe the regional
warehouses used by LTL motor carriers.
A break-bulk operation receives combined customer orders from
manufacturers and ships them to individual customers and sorts or splits
individual orders and arranges for local delivery (see Figure 8.3). As the
long-distance transportation movement is a large shipment, transport costs
are lower, and there is less difficulty in tracking.
 Figure 8.3 Break-bulk warehouse

Accumulation, Mixing, and Sorting

Accumulation may occur when a warehouse accumulates spot stock for a
selected amount of a firm’s product line to fill customer orders during a
critical marketing period. Manufacturers with limited or highly seasonal
product lines are users of this type of service.
Instead of placing inventories in warehouse facilities on a year-round basis
or shipping directly from manufacturing plants, delivery time can be
substantially reduced by advanced inventory commitment to strategic
markets.
When warehouse facilities are utilized for stock spotting, it allows
inventories to be placed in a variety of markets adjacent to important
customers just before a peak period of seasonal sales.
This is also used by suppliers of agricultural products to position their
products closer to a service-sensitive market during the growing season.
After the growing season, the remaining inventory is shipped back to a
central warehouse.
Accumulation can also help to provide an assortment to customers and thus
provides the benefit of mixing (or sorting), where truckloads of products are
shipped from manufacturing plants to warehouses (see Figure 8.4). Each
large shipment enjoys the lowest possible transportation rate.
 Figure 8.4 Accumulation warehouse
Upon arrival at the mixing warehouse, factory shipments are unloaded, and
the desired combination of each product for each customer or market is
selected.
When plants are geographically separated, overall transportation charges and
warehouse requirements can be reduced by mixing.
An assortment warehouse stocks product combinations in anticipation of
customer orders. The assortments may represent multiple products from
different manufacturers or special assortments as specified by customers.
In the first case, for example, a uniform wholesaler would stock products
from a number of different clothing suppliers so that customers can be
offered assortments.
In the second case, the wholesaler would create a specific company uniform,
including shirt, pants, and shoes.
Postponement
Warehouses can also be used to postpone, or delay, production by
performing processing, light manufacturing, assembly, and labeling
activities. A warehouse with packaging or labeling capability allows
postponement of final production until actual demand is known. For
example, when I was at Arm & Hammer, we used public warehousing for
our finished goods distribution. Many of our larger customers such Walmart
and ShopRite wanted to differentiate our product, so they required us to put
special stickers on the items. We paid the warehouse to unpack and label to
order. Although this was not very efficient, it significantly reduced the
number of unique stock keeping units (SKUs) that we had to keep in stock,
and thus we could label them to order, which lowered our risk and our
inventory carrying costs.

Allocation
This involves the matching of on-hand inventory to customer orders in the
packaging configuration desired by the customer. For example, a wholesaler
may order product from its supplier in pallet quantities, which are made up
of many cases of the same product. Their customer, a small retailer, may
only want one case or even individual bottles of product contained in a case.
The concept of allocation allows for this to occur.

Market Presence
Market presence might not seem to be an obvious benefit of a warehouse;
the idea of having a local warehouse is often mentioned by marketing
managers as a way to gain a competitive advantage. The market presence
factor is based on the perception or belief that local warehouses can be more
responsive to customer needs and offer quicker delivery than more distant
warehouses. In many cases, especially in the grocery industry, customers
have their own fleet of trucks, which they can use to pick up their orders
from a supplier instead of having it delivered, thus saving the customer on
shipping costs.
As a result, it is thought that a local warehouse will enhance market share
and potentially increase profitability.
Warehouse Design and Layout
The first decision is where to locate a warehouse, which can be a strategic
decision using a variety of methods, as discussed later in this book.
Once the site is selected, warehouse design is performed using criteria that
looks at both physical facility characteristics and product movement.
One of the first facility considerations is to decide the size of the facility
within the network.

Size of Facility
One of the major determinants is the demand that is expected to be stored
and distributed through the facility now and in the foreseeable future. This is
effected by the product mix, functional requirements such as allocation
methods (for example, pallet in, pallet out, case pick, or pick and pack by
item), automation, and so on. An area may also be needed for processing
rework and returns, office space might be needed for administrative and
clerical activities, and space must be planned for miscellaneous requirements
and any other value-added functions performed such as kitting, light
assembly, and so on.
There are three factors that need to be considered in the design process, as
covered in the following subsections.

Number of Stories in the Facility

The ideal warehouse design is limited to a single story so that product does
not have to be moved up and down. The use of elevators to move product
from one floor to the next requires time and energy.
Conveyors and elevators are also often a bottleneck in product flow because
many material handlers are usually competing for a limited number of
elevators.
Although it is not always possible, particularly in central business districts
where land is restricted or expensive, warehouses should be limited to a
single story.
Cube Utilization
The objective is to optimize tradeoffs between handling costs and costs
associated with warehouse space. You want to maximize the total cube of the
warehouse (that is, utilize its full volume while maintaining low material
handling costs).
The fact is that warehouse density tends to vary inversely with the number of
different items stored, which may seem counterintuitive. The reason is that if
you only had one SKU in your warehouse, all the containers would have the
same exact cubic dimensions, making it fairly easy to maximize the density
of what is stored there, getting the most for your investment. The reality is
that in most warehouses, a variety of items in various sizes are stored,
making it harder to maximize storage density.
Regardless of facility size, the design should maximize the usage of the
available cubic space by allowing for the greatest use of height on each floor.
Older warehouses tend to have 20- to 30-foot ceilings, although modern
automated and high-rise facilities may have ceiling heights up to 100 feet.
Through the use of racking or other hardware, it should be possible to store
products up to the building’s ceiling, which may allow for up to eight racks
high.
Maximum effective warehouse height is limited by the safe lifting
capabilities of material-handling equipment, such as forklifts.

Product Flow
Warehouse design should also allow as much straight product flow through
the facility as is possible, whether items are stored or not. In general, this
means that product should be received at one end of the building, stored in
the middle, and then shipped from the other end (not always the case). The
reasoning for this is that straight line product flow tends to minimize
congestion and confusion.
Where you store product in a warehouse (also known as product slotting)
can have a huge impact on efficiency and can improve labor productivity as
follows:
Locating product in the best pick sequence can reduce order-picking
labor requirements.
 Matching product unit loads with the appropriate size storage slot can
reduce replenishment labor requirements.
Balancing workload between operators can reduce response time and
improve flow.
Separating similar products can avoid picking errors and, as a result,
increase picking accuracy.
Other benefits of efficient slotting include the following:
Lower product damage as a result of storing by heavier product first in
the pick path, then more easily damaged product later.
Palletizing productivity can be improved by sorting product by case
height. This results in tighter pallets for better trailer utilization.
Building expansion can be put off as a result of having optimum
warehouse layout and cube utilization.
In the case of retail DCs, store-level productivity can be increased by
organizing product in family groups. This reduces sorting of product
for restocking at stores.

Facility Layout
As mentioned, the layout of a warehouse should be designed to maximize
flow of material, people, equipment, and even information. (Figure 8.5
shows an example of storage plan designed to maximize product flow.)
 Figure 8.5 Product flow storage plan
It is better for a material handler or piece of handling equipment to make a
longer move than to have a number of handlers make numerous, individual,
short segments of the same move. Exchanging the product between handlers
or moving it from one piece of equipment to another wastes time and
increases the potential for damage. In general, fewer, longer movements in
the warehouse are preferred.
Where possible, all warehouse activities should handle or move the largest
quantities possible. Instead of moving individual cases, warehouse activities
should be designed to move groups of cases such as pallets or containers.
This grouping or batching might mean that multiple products or orders must
be moved or selected at the same time, sometimes referred to as wave or
batch picking of orders for loading and shipping.
This might increase the complexity of an individual’s activities because
multiple products or orders must be moved, but it reduces the number of
activities and the total cost.
We also need to consider product characteristics, especially those relating to
volume, weight, and storage.
Product volume or velocity is the major consideration when determining a
warehouse storage plan.
High-volume sales or throughput product should be stored in a location that
minimizes the distance it is moved, such as near primary aisles and in low
storage racks, because such a location minimizes travel distance and the
need for extended lifting.
In contrast, lower-volume product can be stored in locations that are farther
away from primary aisles or higher up in storage racks.
The storage plan should also have a strategy for products dependent on
weight and storage characteristics. Relatively heavy items should be
assigned to locations low to the ground to minimize the effort and risk of
heavy lifting, often considered as a part of what is called ergonomics (that is,
designing and arranging things so that people can use them easily and
safely).
Bulky or low-density products usually require extensive storage volume, so
open floor space or high-level racks may be used for them, whereas smaller
items may be put in storage shelves or drawers.
The storage plan must consider and address the specific characteristics of
each product.

Material Handling
The material handling equipment necessary will also be based on the product
physical and volume characteristics.
The goal of material handling is to increase the cube utilization by using as
much height as possible, keep aisle space to a minimum, improve operating
efficiency, increase the load per move, and improve speed of response.
Material handling costs are associated with all movement of materials within
a warehouse, including incoming transport, storage, finding and moving
material, and outgoing transport. These costs not only include the operators
and equipment cost but also supervision, insurance, and depreciation.
The major types of material handling equipment are as follows:
Storage and handling equipment: This type of equipment usually
includes nonautomated storage equipment including pallet racking and
shelving.
Engineered systems: These are custom engineered material-handling
systems such as conveyors, handling robots, AS/RS (automated
 storage and retrieval), AGV (automated guided vehicle), and most
other automated material-handling systems.
Industrial trucks: These pieces of equipment are operator-driven
motorized warehouse vehicles (for example, forklift truck), powered
manually (for example, hand truck) or by gasoline, propane, or
electrically.
Bulk material handling: This equipment is used to move and store
bulk materials such as liquids and cereals. This equipment is often seen
on farms, shipyards, and refineries.

Pallet Positioning
The actual layout of a warehouse will depend on the proposed material
handling system and will require development of a floor plan to facilitate
product flow (see Figure 8.5).
Warehouse layouts must be refined to fit specific needs, but in general, if
pallets will be utilized (as is most common), the first step is to determine the
pallet size. While a pallet of nonstandard size may be desirable for
specialized products, it is best to use standardized pallets because of their
lower cost. The most common sizes are 40 by 48 inches and 32 by 40 inches.
In general, the larger the pallet load, the lower the cost of movement per
package over a given distance. However, keep in mind that the items to be
placed on the pallet and the related patterns will determine, to a large degree,
the size of pallet best suited to the operation. No matter the size finally
picked, management should adopt one size for the total operation if possible.
It is also important to consider pallet positioning. In a mechanized
warehouse, the best and most accessible position is usually a 90-degree, or
square, placement, meaning that the pallet is positioned perpendicular to the
aisle.

Pilferage and Deterioration

An organization also needs to consider pilferage and deterioration when
laying out a warehouse (both the interior and exterior grounds).

Pilferage
It is critical to protect against theft of merchandise in warehouse operations
especially for high-value goods.
Typically, at the entrance, as standard procedure, only authorized personnel
are permitted into the facility and surrounding grounds, and entry to the
warehouse yard should be controlled through a single gate.
Many companies that I’ve visited have both an external gate and internal
security entrance, which operates much like airport security with x-ray
wanding of the body, checking bags, and walking through x-ray machines.
Many shortages are the result of innocent mistakes made during order
picking and shipment, but the purpose of security is to restrict theft from
anywhere. To show how creative theft can be, years ago I worked at an
upscale retail DC. At the time, the Izod alligator was extremely popular. It
was so valuable that temporary employees were cutting the embroidered
alligator logo off of shirts, leaving the shirts behind when they left for the
day. So theft, in many cases, can also come from employees during working
hours.
It is also important that items are not released from the warehouse unless
accompanied by a release document, and if samples are authorized for
salespeople, the merchandise should be kept separate from other inventory
and also accounted for.

Deterioration
A variety of things can make an item nonusable or nonmarketable (the most
common of which is damage from careless transfer or storage). Only so
much can be done to protect product from being damaged by rough
handling, such as forks accidentally rammed through product by a forklift
driver or product falling off of racks.
Product that is noncompatible with other products but stored in the same
facility can also cause deterioration (or contamination), but deterioration
from careless handling within the warehouse is the most common form and a
loss that cannot be insured.

Warehouse Operations
The major processes in a warehouse are receiving, putaway, storage, picking,
loading, and shipping (see Figure 8.6). Each involves a series of steps.
 Figure 8.6 Major warehouse processes
Receiving: This process can include the scheduling of carriers to
deliver product and the unloading, counting, verifying of order or bill
of lading information, and inspecting of material.
Receiving usually entails a combination of lift truck, conveyors, and
manual processes. When product is floor stacked, it may need to be
manually offloaded and put onto a pallet or conveyor. Unit or pallet
loads can be offloaded with forklift trucks for efficient unloading of a
trailer or container.
Putaway: Product is identified by SKU or part number, sorted, and put
away, with the location being recorded. Product is usually brought to
remote storage.
Storage: Product is stored in a designated location within the
warehouse. This may be racks, bins, shelves, or even on the floor.
Picking: This process occurs when customer orders for product are
ready to be shipped or to replenish a forward case or unit pick area. In
the case of replenishment, pick slots are replenished from storage
locations (typically full pallets or cases). Depending on the size of the
 orders (that is, full pallets, case, or eaches), outbound orders are picked
from either storage or pick-and-pack areas, SKUs and quantities are
then validated, and the items are brought to shipping area.
Shipping: The shipping process includes the scheduling of the carrier
for pickup as well as the staging of product in the shipping dock area
and finally loading onto a vehicle.
Once the carrier arrives, the order (both product and documents) is
prepared for shipment and then loaded and secured on the correct
vehicle with protective packaging for shipment and documents.
Dispatch is then called, and the product is sent on its way.

Packaging
Everything we buy, whether in business or as a consumer, comes in some
kind of packaging. From a logistics perspective, packaging provides
protection for the item as it being handled in the warehouse or when the item
is being shipped, as well as for economies and efficiency in shipping,
storage, and handling.
As mentioned previously, most warehouses use pallets. Therefore, it is
important when developing packaging that items are stored safely and
efficiently on a pallet, thus reducing the cost of materials handling.
Customers who will be purchasing items at the pallet level will also benefit
from efficient packaging.
Packaging must protect the item from damage during handling and from
environmental damage such as extreme temperature, water damage,
contamination with other goods, or damage from static in the case of
electronic items.
Internal packaging is developed mainly as a visual device to interest to
appeal to the consumer as well as information required by law. The external
packaging protects the internal packaging and the item and must also have
enough information so that it identifies the contents, in text and often with
barcodes for use with radio frequency (RF) technology in the warehouse.
The external packaging also needs to have dimensions that allow a
reasonable quantity to be stored on a pallet in the most efficient manner.
When companies develop packaging, they usually look at lightweight
materials where possible, such as paperboard, aluminum, and plastic.
Corrugated cardboard is typically used for efficient exterior packaging, as a
result of its strength, light weight, and recyclability. The corrugated outer
container has information printed on it, as well as barcodes that identify the
item and manufacturer, and in some cases radio frequency identification
(RFID) tags, which use wireless noncontact RF electromagnetic fields to
store and transfer data, for the purposes of automatically identifying and
tracking tags attached to items.

Key Metrics
In a warehouse, there are both customer-facing and internal metrics.

Customer-Facing Metrics
The customer-facing metrics look at order accuracy and completeness,
because customers want to receive the exact products and quantities that
they ordered at the right time, not substitute or incorrect items, and/or wrong
quantities that are shipped late. Timeliness is a critical component of
customer service. There is one measurement that is kind of the white whale
in the logistics field because it is very difficult to attain, known as the perfect
order measurement, which measures whether an order (by line item) is
delivered to the right place, at the right time, in defect-free condition and
with the correct documentation, pricing, and invoicing.
So, for example, consider an order with the following metrics:
Order entry accuracy: 99.9% Correct (10 errors per 10,000 order
lines)
Warehouse pick accuracy: 99%
Delivered on time: 97%
Shipped without damage: 99%
Invoiced correctly: 99.5%
It has a perfect order measure of 99.9% * 99% * 97% * 99% * 99.5% =
94.4%.
Internal Metrics
Internal measurements look at speed and efficiency or productivity from a
variety of views, including distribution cost and aggregate cost efficiency
(total distribution spending versus goal or budget), asset utilization, and
resource productivity and efficiency because distribution costs can average
as much as 10% of every sales dollar.

Technology
Two general types of software are commonly used today at warehouses and
DCs. They are warehouse management systems (WMSs) and yard
management systems (YMSs).

Warehouse Management Systems

WMSs are used to manage the receipt, movement, and storage of materials
within the four walls of a facility and process the related transactions
necessary for receiving, putaway, picking, packing, and shipping. The best-
in-class systems go beyond basic picking, packing, and shipping and use
advanced algorithms to mathematically organize and optimize warehouse
operations.
Many enterprise resource planning (ERP) vendors include WMS modules,
but more typically, companies license from vendors that specialize in this
type of system, and they are then integrated with their ERP or accounting
systems and can be installed systems or cloud-based, on-demand software-
as-a-service (SaaS) systems (see the WMS example in Figure 8.7).
 Figure 8.7 Warehouse management screen (Reprinted with permission of
SphereWMS from ASP Global Services)
Warehouse management systems can use automatic identification and data-
capture technology, such as barcode scanners, mobile computers, and
potentially RFID, to efficiently manage and monitor the flow of products,
because speed and accuracy are paramount in a warehouse. Once data has
been collected, data is synchronized either via batch or real-time wireless
transmission to a central database, which provides a variety of reports about
the status of material in the warehouse.
In warehouses where there are multiple picking locations requiring fast and
accurate picking, a pick-to-light or light-directed system can be used to
enhance the capabilities of the employees. A pick-to-light system has lights
above the racks or bins the employee will be picking from. The operator then
scans a barcode that is on a tote or picking container representing the
customer order. Based on the order, the system will require the operator to
pick an item from a specific bin. A light above the bin will illuminate,
showing the quantity to pick. The operator then selects the item or items for
the order. The operator then presses the lighted indicator to confirm the pick.
If no further lights are illuminated, the order is complete.
Voice-directed picking systems are gaining popularity. In this type of picking
system, workers wear a headset connected to a small wearable computer that
tells the worker where to go and what to do using verbal commands. The
operators then confirm their tasks by saying predefined commands and
reading confirmation codes printed on locations or products throughout the
warehouse. These systems are used instead of paper or mobile computer
systems requiring workers to read instructions and scan barcodes or enter
information manually to confirm their tasks, thus freeing the operator’s
hands and eyes.

Yard Management Systems

YMSs integrate warehouse operations with inbound and outbound
transportation and maximize yard and warehouse efficiency by managing the
flow of all inbound and outbound goods.
The YMS enables a business to plan, execute, track, and audit loads based
on critical characteristics such as shipment type, load configuration, labor
requirements, and dock and warehouse capacity.
The YMS is used to arrange dock appointments for receiving orders and for
arranging and scheduling outbound transportation equipment and also helps
to manage materials and transportation equipment in the warehouse or
factory yard.
Many WMS and most, if not all, ERP systems include customer order
processing and management functionality, which we cover next.
9. Order Management and Customer Relationship
Management

So far, we have discussed planning for demand and supply and how
transportation and warehouse operations provide time and place utilities to
the customer. Ultimately, it falls upon the shoulders of the supply chain and
logistics function to fulfill orders to meet customer demand, and that is
where order management and customer relationship management come into
play.
Order management refers to the set of activities that occur between the time
a company receives an order from the customer and the time a warehouse is
notified to ship the goods to fill that order. Another term, order fulfillment,
includes the steps involved in receiving, processing, and delivering orders to
end customers. In many cases, they are used interchangeably.
The actual time that it takes to perform these activities is often referred to as
the order cycle or lead time (see Figure 9.1), and some organizations expand
on this to include customer payment, which is referred to as the order-to-
cash cycle.

Figure 9.1 Customer order cycle

Wrapped around this process is customer service, which has expanded to be
known as customer relationship management, or CRM. CRM refers to
focusing on customer requirements and delivering products and services,
resulting in high levels of customer satisfaction, and also refers to automated
transaction and communication applications to support this function.
Order management or fulfillment and customer service are usually part of
the supply chain or operations functions because they are intimately related.

Order Management
Order management is primarily made up of four stages: order placement,
order processing, order preparation, and loading and order delivery (see
Figure 9.2).

Figure 9.2 Order management process

Order Placement
Order placement is the series of events that occur between when a customer
places or sends an order and the time the seller receives the order. There are
a variety of methods of order placement, including in person, mail,
telephone, fax, or electronically via EDI (electronic data interchange) or the
Internet.
Order Processing
Order processing refers to the time from when the seller receives an order
until an appropriate location (that is, warehouse) is authorized to fill the
order.
Order processing typically may include the following steps:
1. Check for completeness and accuracy.
2. Customer credit check.
3. Order entry into the computer system (manually or electronically).
4. Marketing department credits salesperson.
5. Accounting department records the transaction.
6. Inventory department locates the nearest warehouse to the customer
and advises them to pick the order (again, manually or transmitted
electronically, depending on the company’s technological capabilities).
7. Transportation department arranges for shipment of the order.
Factors that may affect order processing time include the following:
Processing priorities: Similar to short-term scheduling, can be first-
come, first-served, shortest lead time, and so on. This varies based on
an individual organization’s strategy and policies.
Order-filling accuracy: The more accurate the order is received from
the customer and input by customer service, the less time spent
correcting it.
Order batching: It may be more efficient to batch orders for picking
in a warehouse. One batching method, mentioned previously, is known
as wave picking, where orders are assigned into groupings or waves
and released together.
Lot sizing: Full pallet orders may be processed faster than case or unit
pick, as discussed in Chapter 8, “Warehouse Management and
Operations.”
Shipment consolidation: Full truckload orders will be delivered faster
than less than truckload (LTL), as discussed Chapter 7, “Transportation
Systems.” Consolidating small orders going to the same area can not
only decrease transportation costs but also speed delivery.
Order Preparation and Loading
Order preparation and loading includes all activities from when an
appropriate location is authorized to fill the order until goods are loaded
aboard an outbound carrier.
In many cases, this can be one of the best places to improve the effectiveness
and efficiency of an order cycle and can account for the majority of a
facility’s operating cost and time. Technology such as handheld scanners,
radio frequency identification (RFID), voice-based order picking, and pick-
to-light systems (discussed in Chapter 8) can help speed up the process.

Order Delivery
Order delivery is the time from when a carrier picks up the shipment until it
is received by the customer. It is important to closely coordinate picking and
staging of orders with carrier arrival because docks and yards can get
congested easily and charges apply when carriers are made to wait too long
before loading.
Most consumer goods are delivered either from a point of production
(factory or farm) in the case of larger or expedited shipments or more
typically through one or more points of storage (that is, manufacturer,
wholesaler/distributor, or retail warehouses) to a point of sale (that is, retail
store), where the consumer buys the good to consume there or to take home.
There are many variations on this model for specific types of goods and
modes of sale. Products sold via catalog or the Internet may be delivered
directly from the manufacturer or field warehouse to the consumer’s home.
In some cases, manufacturers may have factory outlets that serve as both a
warehouse and a retail store.
While all processes in the supply chain in general, and order management
specifically, are subject to measurement (covered later in the text), this is
where the “rubber meets the road,” so to speak, and is probably one of the
most critical points for success or failure in the supply chain. This is due to
the fact that delivery, which may be performed by a third party in many
cases, is the last point of physical contact with the customer (except in the
case of returns, covered in the next chapter).
Customer Relationship Management
The supply chain and logistics function supports a vast array of entities,
including suppliers, manufacturers, distributors, wholesalers, and retailers,
and so the “customer” can wear many hats.
From the view of the general supply chain, the consumer is the final
customer. However, depending on where you are in the supply chain, the
customer may be the next step in the supply chain. If you are a supplier or
vendor, a manufacturer may be your customer. To the manufacturer, the
wholesaler, distributor, retailer, or end user may be your customer. Within
each “node” in the supply chain (for example, manufacturing), there are a
host of processes, so the next step in the process may be your customer as
well as the end user.

Customer Service
In general, customer service is a means by which companies try to
differentiate their product, sustain customer loyalty, increase sales, and
improve profitability. Its main elements are price, product quality, and
service.
The supply chain and logistics function is a critical part of the marketing mix
because it has a significant impact on all four of its components of product,
price, promotion, and place. As discussed earlier this book, the supply chain
provides a place and time utility to the customer as provided by the logistics
or physical distribution variables of product availability and order cycle
time.

Multifunctional Dimensions of Customer Service

Looking at customer service in terms of its multifunctional dimensions,
logistics can provide benefits to the customer in terms of the following:
Time: Meaning the entire order fulfillment cycle time
Dependability: Can offer guaranteed fixed delivery times of accurate,
undamaged orders
Communications: Offers ease of order taking, and queries response
Flexibility: Provides the ability to recognize and respond to a
customer’s changing needs
Transactional Elements of Customer Service
Customer service can be looked at as having three transactional components
(see Figure 9.3):
Pre-transaction elements: Customer service factors that arise prior to
the actual transaction taking place.
Transaction elements: The elements directly related to the physical
transaction and are those that are most commonly concerned with
logistics.
Post-transaction elements: These involve those elements that occur
after the delivery has taken place.

Figure 9.3 Components of customer service

The most dominant customer service elements are logistical in nature, and
late delivery is the most common service complaint, with speed of delivery
usually being one of the most important service elements. The penalty for
service failure is primarily lost sales.
At the end of the day, the most important elements from the customer
perspective are usually on-time delivery, order fill rate, product condition,
and accurate documentation. As the saying goes, it is a lot more expensive to
acquire a new customer than to keep an existing one.

Service Quality and Metrics

Service “quality” is a measure of the extent to which the customer is
experiencing the level of service that they are expecting. In other words,
service quality is the match between what the customer expects and what the
customer experiences. Mathematically, service quality can be expressed as
follows: (perceived performance / Desired expectations) * 100
In general, when establishing customer service objectives, they should be
specific, measurable, achievable, and cost-effective.
Chapter 4, “Inventory Planning and Control,” discussed how safety stock
levels can be set to desired service levels, which illustrates the cost/service
tradeoff, at least from a product availability standpoint.
Other customer service metrics include the following:
Percent of sales on backorder
Number of stock outs
Percent of on-time deliveries
Number of inaccurate orders
Order cycle time
Fill rate as a percentage of demand met, orders filled complete, and so
on

Internal Versus External Metrics

Customer service can also be looked at from an internal (for example, item
and line fill rate) and external metric (order fill rate and “perfect order”)
perspective and should be tied to organizational and functional strategies and
can be benchmarked against other best-in-class companies in your industry
as well.

Levels of Focus
Another way that some companies look at customer satisfaction is by
breaking it into levels of focus.
The first level is a basic focus on customer “service,” where you offer a
product/service and a customer needs that product/service. The transaction
happens, money changes hands, and no major issues come up. You then
benchmark it against industry and competitor practices to achieve internal
standards.
The second level, or customer “engagement,” is about building a relationship
and loyalty so that when a customer is ready to buy, they will immediately
purchase from the company they’ve been engaged with during that time.
You also want to consider the customer’s perception of satisfaction and
manage performance to keep them satisfied.
The third level, customer “intimacy,” occurs when companies are close
enough to their customers that they can begin to anticipate a customer need
and respond accordingly. You may even extend the supply chain to include
your customer’s customer and also provide value-added services for select
customers.

Managing Customer Service

To reach the third level of customer “intimacy,” it can be useful for an
organization to segment individual customers or groups of customers based
on profitability. This is known as customer profitability analysis (CPA). CPA
is the allocation of revenues and costs to customer segments or individual
customers to calculate the profitability of the segments or customers (see
Figure 9.4).

Figure 9.4 Customer profitability analysis

CPA suggests that different customers consume differing amounts and types
of resources and recognizes that all customers are not the same and that
some customers are more valuable than others to an organization.
It can be used to identify when an organization should pursue different
logistical approaches for different customer groups and has been facilitated
by the acceptance of activity-based costing, which measures the cost and
performance of activities, resources, and cost objects.
Resources are assigned to activities, and then activities are assigned to cost
objects based on their use. This is as opposed to traditional cost accounting,
which is well suited to situations where an output and an allocation process
are highly correlated, which might not be the case in the area of supply chain
and logistics customer service.

Service Failure and Recovery

There will be situations where actual performance does not meet the
customer’s expected performance, commonly referred to as a service failure.
Examples of order-related service failures include the following:
Lost delivery
Late delivery
Early delivery
Damaged delivery
Incorrect delivery quantity
The process for returning a customer to a state of satisfaction after a service
or product has failed to live up to expectations, known as service recovery,
can be costly, but it may lead to an increase in customer loyalty. However,
unsatisfactory service recovery can increase the consequences of the initial
failure.
Customer Relationship Management
Customer relationship management, or CRM, is the act of strategically
positioning customers to improve the profitability of the organization and
enhance its relationships with its customer base. Tools such as CPA and
activity-based costing (ABC; which identifies activities in an organization
and assigns the cost of each activity with resources to all products and
services according to the actual usage by each) can be used to segment an
organization’s customer base by profitability and identify the product/service
package for each customer segment per Figure 9.4. To be successful, you
must then develop and execute the best processes for each segment and
measure performance and continuously strive for improvement.
For a CRM strategy to succeed, there must also be an infrastructure that
increases value to the customer and a means to motivate them to remain
loyal. To improve profitability, the CRM system must manage both
relationships among people within an organization and between customers
and the company’s customer service representatives.
Besides segmenting customers for supply chain customer service,
organizations use CRM to target their marketing efforts; use relationship
marketing or permission marketing, where customers select the type and
time of communication; and cross-selling (as well as upselling), where
additional products are sold as the result of an initial purchase (for example,
emails from barnesandnoble.com describing other books bought by people
that match your tastes).

Technology
An order management system (OMS) is a computer software system used in
many industries for order entry and processing. In most cases, it is part of a
larger ERP or accounting system (see Figure 9.5).
 Figure 9.5 Order management system (OMS) and other supply chain
execution systems
OMS applications manage processes, including order entry, customer credit
validation, pricing, promotions, inventory allocation, invoice generation,
sales commissions, and sales history.
A distributed order management (DOM) system differs from an OMS in that
it manages the assignment of orders across a network of multiple production,
distribution, and retail locations to ensure that logistics costs and customer
service levels are optimized.
An OMS is usually deployed as part of an enterprise application, such as an
ERP system, because its sales engine is integrated with the organization’s
inventory, procurement, and financial systems.
As previously mentioned, a CRM system manages a company’s interactions
with current and future customers and involves using technology to
organize, automate, and synchronize sales, marketing, customer service, and
technical support. This includes the management of business contacts,
clients, contract wins, and sales leads within the sales function, sometimes
referred to as sales force automation (SFA) software.
Perhaps the biggest benefit to most businesses when moving to a CRM
system comes from having all your business data stored and accessed from a
single location, whereas before CRM systems, customer data was spread out
over office productivity suite documents, email systems, mobile phone data,
and even paper note cards and Rolodex entries.
The last step in supply chain and logistics operations is known as reverse
logistics and is covered next.
10. Reverse Logistics and Sustainability

Reverse logistics, an often-overlooked process that can help companies

reduce waste and improve profits, is, as the name implies, the reverse of
what we’ve described so far in terms of planning and operations. It can be
defined as the process of planning, implementing, and controlling the
efficient flow of recyclable and reusable materials, returns, and reworks
from the point of consumption for the purpose of repair, remanufacturing,
redistribution, or disposal
To take this a step further, with today’s environmental concerns,
organizations need to try to integrate environment thinking into the entire
supply chain process, forward and reverse. This includes product design,
material sourcing and selection, manufacturing processes, delivery of the
final product to the consumers, and end-of-life management of the product
after its useful life.
In a perfect world, of course, there would be no need for much of the
material handled in reverse logistics, and later in the book, we discuss ways
to use Lean thinking to reduce waste in the supply chain, but for now we will
examine concepts and applications in this area.

Reverse Logistics Activities

According to a 2010 Aberdeen Group study, the average manufacturer
spends an astounding 9% to 15% of total revenue on returns (Aberdeen
Group, 2010).
There are a variety of reasons for the reverse logistics process, including the
following:
Processing returned merchandise, including damaged, seasonal,
restock, salvage, recall, or excess inventory
Green initiatives such as recycling packaging materials/containers
Reconditioning, refurbishing, remanufacturing of returned product
Disposition of obsolete inventory
Hazardous materials recovery and electronic waste disposal
 Figure 10.1 Logistics and reverse logistics processes
So, depending on the specific reasons for the process existing in the first
place within an organization, the reverse logistics network can be used for a
variety of purposes, such as refilling, repairs, refurbishing, remanufacturing,
and so on, depending on the nature of the product, unit value, sales volume,
and distribution channels.
Let’s look at some of the major reasons mentioned here in some more detail.

Repairs and Refurbishing

Repair is a regular feature in service-based products under a warranty period,
and almost all consumer durables need repairs on a regular basis.
Refurbishing, in contrast, is applied to goods returned because of damage,
defects, or below-promised performance during the warranty period.
Manufacturers may establish the reverse logistics system not only for
offering free service during the warranty period but also for extending the
services beyond the warranty period on a chargeable basis.
The system usually operates through the company’s service centers where
repair and refurbishing takes place.
The physical collection of defective products is performed through a dealer
network. The collected products are sent to the nearest service center for
overhaul, repairs, or refurbishing.

Refilling
Reverse logistics is integrated to an organization’s supply chain in the cases
of the reusable nature of packages such as glass bottles, plastic containers,
print cartridges, and so on.
In case of large refillable water bottles, for example, the delivery truck
delivers filled bottles to and collects the same number of empty bottles from
them for delivery to the factory. No extra transportation costs are involved in
the process because the same delivery truck originates and terminates its
journey at the factory where these reusable bottles are refilled for redelivery
to customers.
Typically, this type of arrangement is accomplished via a hub-and-spoke
distribution system (that is, a centralized distribution system where inventory
is shipped from a central location to smaller locations or directly to
consumers, similar to a bicycle hub-and-spoke configuration).

Recall
This is an emergency situation where the products distributed in the market
are called back to the factory because of any of the following reasons:
Product not giving the guaranteed performance
Quality complaints from many customers
Defective products causing harm to human life
Products beyond expiry date
Products with defective design
Incomplete product
Violation of government regulations
Ethical considerations
Save the company image
A product recall puts a large financial burden on a company, but in the
competitive scenario, the companies consider recall as an opportunity to
increase customer satisfaction.

Remanufacturing
Manufacturers in developed countries are putting in practice a relatively new
concept of remanufacturing because during the usage of the product, it
undergoes wear and tear. During remanufacturing, worn-out parts are
replaced with new ones, and the performance of the product is upgraded to
the level of a new one.
Similarly, equipment sold can be checked after use to the remanufacturing
process and be brought back to the remanufacturing unit.
The investment in remanufacturing and related reverse logistics supply chain
can be justified on the basis of economies of scale.

Recycling and Waste Disposal

Leftover materials, used product, and package waste are causing
environmental pollution and creating problems for disposal.
In many countries, governments are devising regulations to make
manufacturers responsible to minimize waste by recycling products.

Returns Vary by Industry

In some industries, returns are the major reason for a reverse logistics
system; percentages can range from as low as 2% to 3% (chemicals) to more
than 50% (magazine publishing).
Let’s look at some industries to examine why the return rates are so high.

Publishing Industry
The publishing industry has the highest rate of unsold copies (28% on
average). This has been partially a result of the growth of large chain stores
requiring more books and magazines. To secure a prominent display in
superstores, publishers must supply large numbers of books. The fact is that
superstores sell less than 70% of books they order, and they have a relatively
short shelf life.
Computer Industry
Computers have a relatively short lifecycle, so there are opportunities to
reuse and create value out of computer equipment. They contain what is
known as e-waste, such as lead, copper, aluminum gold, plastics, and glass.
E-waste not only comes from computers but also televisions, cell phones,
audio equipment, and batteries.
For example, in the remanufacturing of toner cartridges, there are 12,000
remanufacturers, employing 42,000 workers, that sell nearly $1 billion worth
of remanufactured cartridges annually.

Automotive Industry
There are three primary areas for reverse logistics in the automotive
industry:
Components in working order are sold as is (for example, parts from
junkyards).
Components such as engines, alternators, starters, and transmissions
are refurbished before they can be sold.
Materials are reclaimed through crushing or shredding.
Automotive recyclers handle more than 37% of the nation’s metal scrap, and
the remanufactured auto parts market is estimated at $34 billion annually.

Retail Industry
Profit margins in retail are so slim that good return management is critical
because returns reduce the profitability of retailers marginally more than
manufacturers. In fact, returns reduce the profitability of retailers by 4.3%
(Rogers & Tibben-Lembke, 1998).

Reverse Logistic Costs

Reverse logistics costs come from a variety of activities, such as
merchandise credits to the customers, transportation costs of moving the
items from the retail stores to the central returns distribution center,
repackaging of the serviceable items for resale, the cost of warehousing the
items awaiting disposition, and the cost of disposing of items that are
unserviceable, damaged, or obsolete.
Besides those tangible costs, there are intangibles that greatly impact the
customer, such as increased customer wait times, loss of confidence in the
supply system, and the placement of multiple orders for the same items.

Reverse Logistics Process

There are five steps to the product returns process, no matter what industry
you are in: receive, sort and stage, process, analyze, and support (Stock,
Speh, & Shear, 2006).

Receive
Product returns are received at a centralized location, usually a warehouse or
distribution center (usually after being gathered from retail locations or
returned by the end user themselves). In many cases, a first step in this
process is to provide a return acknowledgment.
The returns may arrive via many carriers and in a variety of packages, either
on full pallets or individual containers.
The concept of pre-postponement can be useful in this process, where
companies such as Sauder Woodworking Company, which makes ready-to-
assemble furniture, processes returns as close as possible to the point of sale
so as to determine quickly which returns were recoverable and which were
not.

Sort and Stage

In this stage, returned products are received and sorted for further staging in
the returns process.
The sorting can be based on how the items have been returned (that is,
pallets, cartons, packets) or the type, size, or number of the return. This
process generally takes 3 days or less to accomplish.

Process
Returned products are then subsorted into items, based on their stock
keeping unit (SKU) number. They can then be returned to inventory. If they
are vendor returns, they are sorted by vendor.
There is usually some kind of processing station where they are processed by
order of their receipt, type of product, customer type or location, physical
size of the items, and so forth.
Paperwork that came with the return is separated from the item and
compared with the electronic records to identify any discrepancies.

Analyze
The value of the returned item is determined by trained employees to see
whether it should be repaired or refurbished and which are allowable versus
nonallowable returns, for example.
The last part of this step is the marketing of products that have been
repackaged, repaired, refurbished, or remanufactured, which are usually
shipped to secondary markets.

Support
At this point, returns in good condition such as back-to-stock or -store items
are returned to inventory. If the items require repair, refurbishment, or
repackaging, then diagnostics, repairs, and assembly/disassembly operations
are performed as needed.

Reverse Logistics as a Strategy

As opposed to looking at reverse logistics as a cost center to be minimized
(because the reality is that it is only around 4% of total supply chain costs),
some forward-looking companies have started looking at it as a strategic
weapon to positively impact revenue.

Using Reverse Logistics to Positively Impact Revenue

A recent UPS white paper on reverse logistics found some key areas where
companies can positively impact revenue with reverse logistics activities.
They are as follows (Greve & Davis, 2012):
Returns-to-revenue: Companies that ensure timely delivery and
processing of returns position themselves to save more or earn more
from the returned product. From refurbishing, repackaging, and
reselling to parts reclamation and recycling, returned products are
often untapped sources for revenue. With the secondary, discount
market for products continuing to grow, there is even more reasons to
think about returns as revenue opportunities.
 Protecting profits: Handling returns properly and tracking all
activities is critical to help companies avoid fines and penalties from
various government regulatory agencies such as the FDA, the
Consumer Product Safety Commission, and other state and federal
agencies.
Customer loyalty: According to a nationwide survey conducted in
2005, 95% of customers will not buy from a company if they have a
bad returns experience. This, in part, explains why companies
considered best in class in reverse logistics enjoy a 12% advantage in
overall customer satisfaction over their competition
Disposal benefits: Knowing what is returned and where it ends up
makes it easier for companies to deal with regulatory issues and
evaluate returned stock for possible secondary sales channels.
There are also other beneficial byproducts to disposing of products,
such as avoiding excess inventory carrying costs, avoiding excess
taxes and insurance, and managing staff levels.
Maximize recovery rates: Mishandled or completely misplaced
returns affect the efficiency of any reverse logistics process, but it also
means that products could end up a being a total loss for a company
instead of an opportunity for resell or a spare parts resource.

Other Strategic Uses of Reverse Logistics

Reverse logistics can also be strategically used to reduce the risk from
buying products that may not be hot-selling items, by adjusting return rates
based on popularity of an item.
It can also be used to increase the switching costs of changing suppliers to
lock customers in by taking back unsold or defective merchandise quickly,
while crediting the customer without delay. Many retailers and
manufacturers have liberalized their return policies in recent years due to
competitive pressures. One e-tailer, Zappos.com, even encourages returns as
a way to increase customer loyalty.
Many companies use reverse logistics to clean out customer inventories, so
that they can purchase more new goods. That way, fresher inventories can
demand better prices, which in turn protects margin.
Still others use reverse logistics as a form of good corporate citizenship,
using the process for altruistic reasons, such as philanthropy. These activities
enhance the value of the brand and are a marketing incentive to purchase
their products.
There is also the opportunity to recapture value and recover assets, as in
some cases a large portion of bottom-line profits is derived from asset
recovery programs. The profit comes from materials that were previously
discarded.
Legal disposal issues can create a concern because landfill fees are
increasing and the options for the disposal of hazardous material are
decreasing. So, legally disposing of nonsalvageable materials becomes more
difficult (and may be subject to fines if not done properly) (Rogers &
Tibben-Lembke, 1998).

Reverse Logistics System Design

The success of reverse logistics system in achieving the desired objectives
depends on the efficiency and effectiveness of a number of subsystems, as
covered in the following subsections.

Product Location
The first step in the callback process is to identify the product location in the
physical distribution system of the firm. Product location becomes more
difficult after it is sold and handed over to the customer.
It is a bit easier in the case of industrial or high-value products because of
the limited number of customers and personal interaction with the clients
due to direct selling.

Product Collection System

Once the product location is identified, the collection mechanism gets into
operation.
This can be done either through company’s field force, channel members, or
third party. However, proper instructions have to be given to motivate the
customer for returning the products.
Third parties are often used if it is not an area of expertise for a company and
the third party can do it cheaper and more efficiently.
For example, Best Buy (a major electronics retailer) created a business unit...
to focus on developing sales of consumer electronics into the secondary
markets... No longer was the handling of customer returns, return to vendor,
and overstock a cost center sitting in a dark corner, but now it was
transformed into a profit center... at Best Buy, maximizing profit in the
reverse logistics business is involving partnerships with both new and
existing customers as well as manufacturers and third-party service
providers (3PSs).
Online stores and auctions: With product testing, inventory
management, listing, payment collection, and order fulfillment, Best
Buy has built an integrated supply chain to take returned product from
the stores and resell it to its value-seeking customers through eBay, a
private online store, and other online channels. Best Buy recently
acquired Dealtree, its provider of these services.
Trade-in, an online program was launched in 2007, offering customers
a fast and easy alternative to selling online themselves, or just letting
working products sit in a drawer. It allows customers to recapture
economic value, and through the Dealtree technology, Best Buy has
instant access to current market value of products.
Refurbishment: Working with a variety of 3PSs, Best Buy has been
integrating refurbished products into its warranty replacement program
and selling direct to consumers.
Recycling: In 2008, Best Buy began testing offering free recycling in
several markets. They have been building up a network of local
certified recyclers and plan to roll nationwide in 2009 (Reverse
Logistics Magazine, 2009).

Recycling or Disposal Centers

These may be the company’s plants and warehouses or some fixed location
in the reverse logistics network.
The called-back products are inspected before they are further processed for
further repairs, refurbishing, remanufacturing, or waste disposal.
Investments in facilities for these activities depend on the objectives of the
system, cost implication, complexity of the operations, and expected gains.
Documentation System
Tracing the product location becomes easier if proper documentation is
maintained at each channel level. However, at the time of handing over the
product to the customer, the detailed information, if collected through proper
documentation, can form a good database that can be used in case of product
callbacks.

Reverse Logistics Challenges

There are many challenges to running and maximizing the efficiency of the
reverse logistics process, including those discussed in the following
subsections.

Retailer-Manufacturer Conflict
Inefficiencies in a reverse logistics process can lengthen the time for
processing returns, such as the condition and value of the item and the
timeliness of response. The buyer and seller have to develop a good working
partnership to derive mutual benefit.

Problem Returns and Their Symptoms

Unprocessed returns are easy to observe but some of these other symptoms
are not as easily observed, such as the following:
Returns arriving faster than processing or disposal.
Large amount of returns inventory held in the warehouse.
Unidentified or unauthorized returns.
Lengthy processing cycle times.
Unknown total cost of the returns process.
Customers have lost confidence in the repair activity.
Lack of information about the reverse logistics process can result in the
process being out of control. As the saying goes, “If you aren’t measuring it,
you can’t manage it.”
Cause and Effect
Poor data collection can lead to uncertainty about return causes. By
improving the return process, it is possible to decreases costs. It is important
to be able to see defective product by problem code in an information
system, thus making it possible to track return issues.

Reactive Response
In recent years, government regulation or pressure from environmental
agencies has forced companies to begin to focus on an area that is not one of
their core competencies. It has not been possible to justify a large investment
in improving reverse logistics systems and capabilities. Some have been able
to see it as a win-win game by developing strategies mentioned previously
such as good corporate citizenship and recapturing value and recovering
assets.
Overall, in many companies, management inattention and the lack of
importance of reverse logistics, especially handling returns and nonsalable
items, has resulted in restrictive policies in this regard. This may be in part
due to not wanting their returns being used to cannibalize existing sales.
Recently, there seems to be a trend toward reducing or eliminating restrictive
policies and attempting to handle returns more effectively to recover value
from what can be a valuable resource (Rogers & Tibben-Lembke, 1998).

Managing Reverse Logistics

A research team at the Reverse Logistics Executive Council identified key
reverse logistics management elements and examined the return flow of
product from a retailer back through the supply chain toward its original
source or to some other disposition (see Figure 10.2) (Rogers & Tibben-
Lembke, 1998).
 Figure 10.2 Key reverse logistics management elements
These elements, depending on how they are handled, can either positively or
negatively impact a company’s profitability. The elements are as discussed
in the following subsections.

Gatekeeping
Gatekeeping is the screening of defective or unwarranted returned
merchandise at the beginning of the reverse logistics process.
It is the first critical factor to ensure that the entire reverse flow is both
manageable and profitable. In the past, companies have put most resources
into the forward logistics process and have given very little time and effort
into the reverse process.
While liberal return policies, like those at L.L. Bean, Walmart, and Target,
may draw customers, they can also encourage customer abuse, such as the
return of items lightly used for an event or one occasion.
So, it is important to have a solid gatekeeping process. For example, the
electronic gaming company Nintendo will rebate retailers if they register the
game player sold to the consumer at the point of sale. By doing this,
Nintendo and retailers can determine whether the product is under warranty,
and also if it is being returned inside the allowed time window. The impact
from this new system on their bottom line was substantial: an 80% drop in
return rates.

Compacting the Distribution Cycle Time

One of the major goals of the reverse logistics process once an item has
entered it is to reduce the amount of time to figure out what to do with
returned products once they arrive. This includes return product decisions,
movement, and processing.
Therefore, it is important to know beforehand what to do with returned
goods. Often when material comes back in to a distribution center, it is not
clear whether the items are defective or can be reused or refurbished or need
to be sent to a landfill. The challenge of running a distribution system in
reverse is difficult: Employees have difficulty making decisions when the
decision rules are not clearly stated and exceptions are often made.

Reverse Logistics Information Technology Systems

One of the most serious problems that the companies face in the execution of
a reverse logistics is the scarcity of good information systems. To work well,
a flexible reverse logistics information system is required.
The system should create a database at store level so that the retailer can
begin tracking returned product and follow it all the way back through the
supply chain.
The information system should also include detailed information programs
about important reverse logistics measurements, such as returns rates,
recovery rates, and returns inventory turnover.
Useful tools such as radio frequency (RF) are helpful. New innovations such
as two-dimensional barcode and radio frequency identification (RFID)
license plates may soon be in use extensively.

Centralized Return Centers

Having centralized return centers (CRCs) can offer many benefits to an
organization, including the following:
Consistency in disposition decisions and minimizes errors.
A space-saving advantage for retailers who want to dedicate as much
of the shop floor to salable merchandise as possible.
Labor cost reductions due to their specialization, because CRC
employees can typically handle returns more efficiently than retail
clerks can.
Transportation cost reductions because empty truckloads returning
from store deliveries are used to pick up return merchandise.
A convenient selling tool for the easy disposition of returned items.
This can be an appealing service to retailers, and may be a deal maker
for obtaining or retaining customers.
Faster disposition times allow the company to obtain higher credits and
refunds, because items stay idle for smaller periods of time, thus losing
less value.
Easier to identify trends in returns, which is an advantage to
manufacturer, who can detect and fix quality problems sooner than if
these returns were handled entirely by customer service personnel.

Zero Returns
A company may have a program that does not accept returns from its
customers. Rather, it gives the retailer an allowable return rate and proposes
guidelines as to the proper disposition of the items. Such policies are usually
accompanied by discounts for the retailer.
This type of policy passes the returns responsibility onto the retailer, while
reducing costs for the manufacturer or distributor.
The drawback is that the manufacturer loses some control over its
merchandise.
Remanufacture and Refurbishment
The advantage of remanufacturing and refurbishment is using reworked
parts, resulting in a cost savings.
There are five categories of remanufacture and refurbishment:
Make the product reusable for its intended purpose:
1. Repair
2. Refurbishing
3. Remanufacturing
Retrieve reusable parts from old or broken products:
4. Cannibalization
Reuse parts of products for different purpose:
5. Recycling

Asset Recovery
Asset recovery is the classification and disposition of returned goods,
surplus, obsolete, scrap, waste and excess material products, and other
assets. It tries to maximize returns to the owner, while minimizing costs and
liabilities for the dispositions.
The objective of asset recovery is to recover as much of the economic (and
ecological) value as is possible, thus reducing the final quantities of waste.
This can be a good cash-generating opportunity for companies, who can sell
these goods that would otherwise end up in landfills.

Negotiation
Negotiation is a key element for all parties of the reverse logistics process.
Because of the inherent lack of expertise on product returns, negotiations
usually are informal and approached without formal pricing guidelines.
Firms often do not maximize the residual value of returned product.

Financial Management
This is one of the most difficult parts of reverse logistic and also one of the
most important.
Returns are sometimes charged against sales. Sales department personnel
may tend to fight returns and delay them as much as possible. Accounts
receivables are also impacted by returns.

Outsourcing
As mentioned previously, reverse logistics is usually not a core competence
of the firm. In many cases, it may make more sense for the firm to outsource
their reverse logistics functions than keep those in-house.

Reverse Logistics and the Environment

In the past, most companies were concerned primarily with the forward
logistics processes and to some degree as it relates to returning product to
their suppliers. Today, many companies also have a focus on reverse
logistics issues because of environmental concerns and, as mentioned before,
how it can both add value to the customer and to the bottom line.
Now and into the future, environmental considerations will have a greater
impact on many logistics decisions.

Supply Chain Sustainability

As a result of this shifting focus, the term supply chain sustainability has
become fairly common and refers to the management of environmental,
social and economic impacts, and good governance practices throughout the
lifecycles of goods and services.
The objective of supply chain sustainability is to create, protect, and grow
long-term environmental, social, and economic value for all stakeholders
involved in bringing products and services to market.

Green Logistics
Another term has emerged as a result called green logistics, which refers to
minimizing the ecological impact of logistics. An example of this is a
reduction in the energy usage of logistics activities and reduction in the
usage of materials. Reducing the carbon footprint in a supply chain is a
sustainability priority for logistics.
Environmental considerations have a greater impact on many logistics
decisions. For example, many products can no longer be placed in landfills,
and as a result, many companies must take back their products at the end of
their useful lifetime. At the same time, there is a decrease of landfill
availability resulting in an increase in landfill costs.
Many products are banned from being placed in a landfill either because
they present a health risk, such as cathode ray tubes (CRTs) in old TVs and
computer monitors, or because they take up too much space.
Products that are banned from landfills include the following: motor oil,
household batteries, household appliances, paper products, tires, and some
medical and electrical equipment. Product bans represent a new reverse
logistics opportunity, because when companies are forced to take their
products back when they are banned, they reuse the products and recapture
their value. The firm is also looked upon as an environmentally friendly
company.
Many companies, such as Hewlett-Packard and Xerox, have adopted an
extended product responsibility (EPR) program, which focuses on the total
life of the product, looking for ways to prevent pollution and reduce resource
and energy usage through the product’s lifecycle.
Programs and processes like product takeback and EPR are part of a strategy
that has become known as closed-loop supply chains, which are designed
and managed to encompass both forward and reverse flows activities in a
supply chain.
The reverse logistics activities of reuse, remanufacturing, refurbishing, and
recycling have become to be known as the four R’s of sustainability. The R’s,
while different, are now being used by many organizations together in a
broad program where they complement to each other.
Other examples of companies using green concepts in supply chain to their
advantage include the following:
Walmart, which anticipates its goal of a 5% reduction in packaging by
2013, will produce $3.4 billion in direct savings and roughly $11
billion in savings across the supply chain.
Johnson & Johnson’s energy-efficiency program resulted in an
estimated $30 million in annualized savings over the 10 years prior to
the company’s 2006 sustainability report.
Nestlé, through a combination of packaging source reduction, reuse,
recycling, and energy recovery, saved $510 million, worldwide,
between 1991 and 2006 (Futin, 2010).
The emergence of global supply chains has presented challenges, risks, and
opportunities for both forward and reverse flows, including environmental or
green laws, which is the topic of our next chapter.
11. Global Supply Chain Operations and Risk
Management

In the late 1980s, a considerable number of companies began to integrate

global sources into their core business, establishing global systems of
supplier relationships and expansion of their supply chains across national
boundaries and into other continents around the globe.
The globalization of supply chain management in organizations had the
goals of increasing their competitive advantage, adding value to the
customer, and reducing costs through global sourcing.
In addition to sourcing globally, many companies sell globally or compete
with other companies that do.
Ultimately, global supply chain management is about sourcing,
manufacturing, transporting, and distributing products outside of your native
country. It ensures that customers get products and services that they need
and want faster, better, and more cost-effectively either locally or from
around the world.
Therefore, we can define global supply chains as worldwide networks of
suppliers, manufacturers, warehouses, distribution centers, and retailers
through which raw materials are acquired, transformed, and delivered to
customers.

Growth of Globalization
In recent years, we have seen a change in how firms organize their
production into global supply chains, with companies increasingly
outsourcing some of their activities to third parties and locating parts of their
supply chain outside their home country (known as offshoring).
They are also increasingly partnering with other firms through strategic
alliances and joint ventures, enabling not only large but also smaller firms
and suppliers to become global.
These types of global business strategies have allowed firms to specialize on
core competencies to sustain their competitive advantage.
This is not limited to just outsourcing manufacturing and supply chain
operations but also includes business process outsourcing (BPO) and
information technology (IT) services that are supplied from a large number
of locations as well as other knowledge-intensive activities such as research
and development (R&D).

Factors Influencing Globalization

Some key factors influence the growth of globalization, including the
following:
Improvements in transportation: Larger container ships mean that
the cost of transporting goods between countries has decreased.
Economies of scale are found as the cost per item can reduce when
operating on a larger scale. Transportation improvements also mean
that both goods and people can travel more quickly.
Freedom of trade: There are a number of organizations like the World
Trade Organization (WTO) that promote free trade between countries,
helping to remove barriers between countries.
Improvements of communications: The Internet and mobile
technology has allowed greater communication between people in
different countries.
Labor availability and skills: Less-developed nations in Asia and
elsewhere have lower labor costs and, in some cases, also high skill
levels. Labor-intensive industries such as clothing can take advantage
of cheaper labor costs and reduced legal restrictions in these less-
developed countries.
Transnational corporations: Globalization has resulted in many
businesses setting up or buying operations in other countries. When a
foreign company invests in a country, by building a factory or a shop,
this is sometimes called inward investment. Companies that operate in
several countries are often referred to as multinational corporations
(MNCs) or transnational corporations (TNCs). The U.S. fast-food
chain McDonald’s is a large MNC, having nearly 30,000 restaurants in
119 countries.
Many multinational corporations not only invest in other economically
developed countries but also invest in less-developed countries as well. (For
example, Ford Motor Company makes a large numbers of cars in the United
Kingdom and in India.)
Reasons for a Company to Globalize
The reasons a company may choose to globalize vary, but are usually
influenced by global, technological, cost, political, and economic influences.
Reasons to globalize within each of these influences include the following:
Global market forces
Foreign competition in local markets
Growth in foreign demand
Global presence as a defensive tool
Companies forced to develop and enhance leading-edge technologies
and products
Technological forces
Knowledge diffusion across national boundaries, hence the need for
technology sharing to be competitive
Global location of R&D facilities
Close to production (as product cycles get shorter)
Close to expertise (for example, Indian programmers)
Global cost factors
Availability of skilled or unskilled labor at lower cost
Integrated supplier infrastructure (as suppliers become more involved
in design)
Capital-intensive facilities utilize incentives such as tax breaks, price
breaks, and so on, which can influence the make versus buy decision
Political and economic factors
Trade protection mechanisms such as tariffs, quotas, voluntary export
restrictions, local content requirements, environmental regulations, and
government procurement policies (discount for local)
Customs duties, which differ by commodity and the level of assembly
Exchange rate fluctuations and operating flexibility
Global Supply Chain Strategy Development
Today, in most industries, it is necessary to develop a global view of your
organization’s operations to survive and thrive. However, many companies
find it difficult to transition from domestic to international operations,
despite the fact that there have been significant improvements in
transportation and technology over the past 25 years.
To be successful in the global economy, a company must have a supply
chain strategy. This should include significant investments in enterprise
resource planning (ERP) and other supply chain technology to prepare them
to optimize global operations by linking systems across their businesses
globally, thus helping them to better manage their global supply chains.
Earlier in this book, we discussed organizational strategies and how the
supply chain must support them. It is no different when discussing a global
supply chain. In general, an organization should have their global supply
chain set up to maximize customer service at the lowest possible cost.
Kauffman and Crimi, in their paper “A Best-Practice Approach for
Development of Global Supply Chains” (2005), suggest that developing a
global supply chain not only requires the same information as when
developing one domestically, but also requires additional information on
international logistics, law, customs, culture, ethics, language, politics,
government, and currency. Cross-functional teams should be utilized that are
supplied with detailed information, including the what, when, and where of
the global supply chain as well as quantity demand forecasts. Supplier
evaluations must include the ability for them to handle international
operations and subsequent requirements.
To actually implement a global supply chain for your business, after
identifying your supply chain partners, the team should document and test
the required processes and procedures before implementing. All participants
must be trained in the processes and procedures with metrics established to
manage and control the global operations. The team must establish a project
plan with responsibilities and milestones for the implementation.
The actual step-by-step approach for developing global supply chains
recommended by Kauffman and Carmi is as follows:
1. Form a cross-functional global supply chain development team.
Include all affected parties, internal and external.
 The team composition may change as development and
implementation proceeds.
2. Identify needs and opportunities for supply chain globalization.
Determine the requirements your supply chain must meet:
Commodities, materials, services required... dollar value of
materials and services... importance of commodities, materials, and
services...
Performance metrics for qualification and evaluation of suppliers.
Determine the current status of your supply chain as is:
Existing suppliers of materials and services
Customers...
Commodity markets...
Current performance, problem areas
Competitiveness...
Fit of your current supply chain with your operational requirements.
The main components of this particular framework... should include all
operational dimensions of supply chains, which must be identified,
considered, and included in any determination of requirements and
assessment of current status of supply chains.
3. Determine commodity/service priorities for globalization
consideration based on needs and opportunities.
4. Identify potential markets and suppliers and compare to markets,
suppliers, and supply chain arrangements, operations, and results.
5. Evaluate/qualify markets and suppliers, identify supplier pool
(determine best ones based on likely total cost of ownership (TCO),
and best potential to meet or exceed expectations and requirements).
6. Determine selection process for suppliers (request for proposal [RFP],
negotiation, and so on).
7. Select suppliers or confirm current suppliers.
8. Formalize agreements with suppliers.
9. Implement agreements.
10. Monitor, evaluate, review, and revise as needed.
Whatever your company’s global strategy, it must be supported by a strong
transportation network.

International Transportation Methods

The primary methods of international transportation are ocean and air
between countries and motor and rail within overseas countries.

Ocean
Ocean transport is perhaps the most common and important global shipment
method and accounts for approximately two-thirds of all international
movements. Some of the advantages of this mode of international
transportation are low rates and the ability to transport a wide variety of
products and shipment size.
It breaks up into three major categories of 1) liner services, which have
regular routes and operate to a schedule and operate as a common carrier,
and 2) charter vessels, which are for hire to carry bulk (dry or liquid) or
break bulk (cargoes with individually handled pieces) to any suitable port in
the world, and 3) private carriers.

Air
International air transportation is primarily used for premium or expedited
shipments due to its fast transit times. However, as explained previously, this
mode is subject to high transportation rates.

Motor
When in a foreign country, like domestically, motor carrier is one of the
most popular forms of transportation because its standardization reduces
complexity. For example, motor transport is the primary form of
transportation when shipping goods to between the United States and
Mexico or Canada and is common in Europe. It also plays a major role in
intermodal shipments, especially at ports when unloading container ships.

Rail
International railroad use is also highly similar to domestic rail use, and
intermodal container shipments by rail are increasing.
Global Intermediaries
In addition to the global intermediaries such as freight forwarders and
customs brokers discussed in Chapter 7, “Transportation Systems,” there
may be the need for storage and packaging expertise.

Storage Facilities
What are known as transit sheds can provide temporary storage while the
goods await the next portion of the journey in a foreign land. In some cases,
the carrier may provide storage on-dock, free of charge until the vessel’s
next departure date. Public warehouses are available for extended storage
periods.
Bonded warehouses, mentioned in Chapter 8, “Warehouse Management and
Operations,” operate under customs agency’s supervision and can be used to
store, repack, sort, or clean imported merchandise entered for warehousing
without paying import duties while the goods are in storage.

Packaging
Export shipments moving by ocean transportation typically require stricter
packaging than domestic shipments because the freight handling involves
many firms and the firms are located in different countries. As a result, the
shipper may find settling liability claims for damage to export goods
difficult.

Global Supply Chain Risks and Challenges

The global supply chain is fraught with risks and challenges.
As operations become more complex, logistics becomes more challenging,
lead times lengthen, costs increase, and customer service can suffer. With a
global footprint, different products are directed to more diverse customers
via different distribution channels, requiring different supply chains.
There are many other, additional issues to address, such as the identification
of sources capable of producing the materials in the quality and quantity
required; the protection of a firm’s intellectual property; import/export
compliance issues; communication with suppliers and transportation
companies; differences in time zones; language and technology; and product
security while in transit.
Questions to Consider When Going Global
All of this raises some initial questions that companies need to consider as
their operations globalize, as was pointed out in a PWC-MIT forum on
supply chain innovation (PWC.com, 2013).
The questions and findings from the forum were as follows:
What are the drivers of supply chain complexity for a company with
global operations?
Supply chains are exposed to both domestic and international risks.
The more complex the supply chain, the less predictable the likelihood
and the impact of disruption. Over recent years, the size of the supply
chain network has increased, dependencies between entities and
between functions have shifted, the speed of change has accelerated,
and the level of transparency has decreased.
Overall, developing a product and getting it to the market requires
more complex supply chains, needing a higher degree of coordination.
What are the sources of supply chain risk?
Risks to global supply chains vary from controllable to uncontrollable
ones and include the following:
Raw material price fluctuation
Currency fluctuations
Market changes
Energy/fuel prices volatility
Environmental catastrophes
Raw material scarcity
Rising labor costs
Geopolitical instability
What parameters are supply chain operations most sensitive to?
Respondents replied that their supply chain operations were most
sensitive to reliance on skill set and expertise (31%), price of
commodities (29%), and energy and oil (28%). For example, when
U.S. diesel prices rose significantly in 2012, shippers rapidly adjusted
budgets to offset the increased costs higher fuel prices produce.
How do companies mitigate against disruptions?
 A great majority of respondents (82%) said they had business
continuity plans ready. Nissan, for example, had a well-thought-out
and exercised business continuity plan ready to kick into action to
facilitate a quick recovery. Other major strategies by respondents
included the following:
Implement dual sourcing strategy
Use both regional and global strategy
Pursue (first- and second-tier) supplier collaboration
Pursue demand collaboration with customers

Key Global Supply Chain Challenges

According to a survey by PRTM consultants for Supply Chain Digest
(SCDigest Editorial Staff, 2010), key global supply chain challenges include
the following:
Supply chain volatility and uncertainty have permanently
increased: Market transparency and greater price sensitivity have led
to lower customer loyalty. Product commoditization reduces true
differentiation in both the consumer and business-to-business (B2B)
environments...
Securing growth requires truly global customer and supplier
networks: Future market growth depends on international customers
and customized products. Increased supply chain globalization and
complexity need to be managed effectively...
Market dynamics demand regional, cost-optimized supply chain
configurations: Customer requirements and competitors necessitate
regionally tailored supply chains and product offerings. End-to-end
supply chain cost optimization will be critical...
Risk management involves the end-to-end supply chain: Risk and
opportunity management should span the entire supply chain—from
demand planning to expansion of manufacturing capacity—and should
include the supply chains of key partners...
Existing supply chain organizations are not truly integrated and
empowered: The supply chain organization needs to be treated as a
single integrated organization. To be effective, significant
improvements require support across all supply chain functions.
Risk Management
An organization’s supply chain is greatly impacted by globalization and its
inherent logistical complexity. This has resulted in having risk beyond just
the demand and supply variability, limited capacity, and quality issues that
domestic companies have traditionally faced, to now include other trends
such as greater customer expectations, global competition, longer and more
complex supply chains, increased product variety with shorter lifecycles, and
security, political, and currency risks.
As a result, it is important for global supply chain managers to be aware of
the relevant risk factors and build in suitable mitigation strategies.

Potential Risk Identification and Impact

Before planning for risks in your supply chain, you must first identify
potential risks and their impact.
To accomplish this, many companies use a vulnerability map or risk matrix
to visualize unforeseen and unwanted events, as shown in Figure 11.1
(Sheffield & Rice, Jr., 2005).
 Figure 11.1 Vulnerability map
This type of analysis has two dimensions: disruption probability and
consequences. Obviously, risks with a high disruption probability and severe
consequences should be given a great deal of attention.
One problem with this method is that it relies heavily on risk perception,
which can vary depending on recent events, a person’s experience and
knowledge, their appetite for risk, and their position in the organization,
among other things.

Sources of Risk
Before determining a risk management strategy for your organization, it is
important to consider the possible sources of risk. There are five sources of
risk in a supply chain, some of which are internal, others external to your
organization (see Figure 11.2) (Christopher & Peck, 2005).
 Figure 11.2 Sources of risk in the supply chain

Internal Risks
Process risk refers to the value-adding and managerial activities undertaken
by the firm and to disruptions to these processes. These processes are usually
dependent on internally owned or managed assets and on the existing
infrastructure, so the reliability of supporting transportation, communication,
and infrastructure should be carefully considered.
Control risks are the rules, systems, and procedures that determine how
organizations exert control over the processes and are therefore the risks
arising from the use (or misuse) of these rules. For the supply chain, they
include order quantities, batch sizes, safety stock policies, and so on and any
policies and procedures that cover asset and transportation management.

External Risks
Demand and supply risk are external to the organization, but are internal to
the networks through which materials, products, and information flow
between companies. The organization should consider potential disruptions
to the flow of product and information from within and between all parties in
the extended supply chain network and at least understand and monitor the
potential risks that may affect other supply chain partners.
Supply risk is the upstream equivalent of demand risk and relates to potential
or actual disturbances to the flow of product or information from within the
network, upstream of your organization.
Environmental risks are disruptions that are external to the network of
organizations through which the products flow. This type of event can
impact your organization directly, on those upstream or downstream, or on
the marketplace itself.
Environmental-related events may affect a particular product (for example,
contamination) or place through which the supply chain passes (for example,
an accident, direct action, extreme weather, or natural disasters). They may
also be the result of sociopolitical, economic, or technological events far
removed from your firm’s own supply chains, with the effects often reaching
other industry networks. In some cases, the type or timing of these events
may be predictable (for example, regulatory changes), and many will not be,
but their potential impact can still be evaluated (Christopher & Peck, 2005).

Supply Chain Disruptions

Supply chain disruptions are the actual occurrence of risks, including the
categories mentioned earlier, and are unplanned and unanticipated events
that disrupt the normal flow of goods and materials within a supply chain.
A triggering event usually happens, followed by the situation (with its
consequences) that occurs afterward.
Disruptions that a company has to deal with come primarily, although not
always as previously mentioned, from customers, suppliers, or the supply
chain. The consequences can be immense to your company and can include
higher costs, poor performance, lost sales, lower profits, bankruptcy, and
damage to your organization.
The actual characteristics of the supply chain structure you have may
determine the drivers of your supply chain’s vulnerability.
These characteristics may including the following:
Complexity of the supply chain (for example, global versus domestic
sourcing).
Density of the supply chain. (That is, using these high-density regions
leads to higher vulnerability of supply chains.)
Single or sole sourcing versus multiple vendors for the same item.
 Lean and just-in-time (JIT) production philosophies require precise
timing.
Centralization of warehouse/manufacturing locations results in lengthy
lead times due to distance issues.
Dependency on major suppliers/customers (that is, the all “your eggs
in one basket” syndrome).
Dependency on IT infrastructure, electricity, and so on.
Flexible, secure supply chains with a diversified supplier base are less
vulnerable to disruptions than those that are not.
Therefore, to a great degree, potential disruptions are the result of conscious
decisions regarding how you design the supply chain. Risk management is
about using innovative planning to reduce potential disruptions by preparing
responses for negative events.

Risk Mitigation
Depending on the type of supply chain risk, what follows are some common
supply chain risks and tactics for risk mitigation (Heizer & Render, 2013):
Supplier failure to deliver: Use multiple suppliers with contracts with
containing penalties. When possible, keep subcontractors on retainer.
Example: McDonald’s planned its supply chain many years before
opening stores in Russia. All plants are monitored closely to ensure
strong links.
Supplier quality failure: Ensure that you have adequate supplier
selection, training, certification, and monitoring processes.
Example: Darden Restaurants (that is, Olive Garden restaurants) uses
third-party audits and other controls on supplier processes and logistics
for reduction of risk.
Logistics delays or damage: Have multiple or backup transportation
modes and warehouses. Make sure that you have secure packaging and
execute contracts with penalties for nonconformance.
Example: Walmart always plans for alternative origins and delivery
routes bypassing problem areas when delivering from its distribution
centers to its stores with its private fleet.
Distribution: Have a detailed selection and management process when
using public warehouses. Make sure that your contracts have penalties
for nonconformance.
Example: Toyota trains its dealers on improving customer service,
logistics, and repair facilities.
Information loss or distortion: Always backup databases within
secure information systems. Use established industry standards and
train of supply chain partners on the understanding and use of
information.
Example: Boeing utilizes a state-of-the-art international
communication system that transmits engineering, scheduling, and
logistics data to Boeing facilities and suppliers worldwide.
Political: Companies can purchase political risk insurance. This is also
the situation where you may decide to go the route of franchising and
licensing with your business.
Example: Hard Rock Cafe restaurants try to reduce political risk by
franchising and licensing in countries where they deem that the
political and cultural barriers are great.
Economic: Hedging, the act of entering into a financial contract to
protect against unexpected, expected, or anticipated changes in
currency exchange rates, can be used to address exchange rate risk.
Example: Honda and Nissan have moved some of its manufacturing
processes out of Japan since the exchange rate for the yen has made
Japanese-made automobiles more expensive.
Natural catastrophes: In many cases, natural disasters can be planned
for by taking out various forms of insurance (for example, flood
insurance). Companies may also consider alternate sourcing for
example.
Example: Toyota, after the 2011 earthquake and tsunami, has
established at least two suppliers, in different geographic regions, for
each component.
Theft, vandalism, and terrorism: Again, in some cases, there is
insurance available for these types of risk. Companies also enforce
patent protection and use security measures such as radio frequency
identification (RFID) and Global Positioning System (GPS).
 Example: Domestic Port Radiation Initiative. The U.S. government has
established radiation monitors at all major U.S. ports that scan
imported containers for radiation.
One reason that risk exists in a supply chain, global or domestic, is that, due
to its complexity, many companies choose to outsource many services. Risk
of this type can be minimized if managed properly, which is the topic of the
next chapter.
Part IV: Supply Chain Integration
and Collaboration
12. Supply Chain Partners

The supply chain and logistics function is always a prime candidate for
outsourcing. Strategically speaking, most successful companies stay with
their core competencies and let outside entities help with the rest.
This can range from sourcing of functional areas such as materials,
transportation/warehouse services, and manufacturing, to most of an
organization, known as a virtual company.
There are actually four major ways to get things done in business:
Internally: Processes that are core competencies are usually the best
way to perform an activity.
Acquisition: Gives the acquiring firm full control over the way the
particular business function is performed. Can be difficult and
expensive (culture/competitors).
Arm’s-length transactions: Most business transactions are of this
type. These are short-term arrangements that meet a particular business
need but don’t lead to long-term strategic advantages.
Strategic alliances: Longer-term multifaceted partnerships between
two companies that are goal oriented. There are both risks and rewards
to an alliance, which are shared, but alliances can lead to long-term
strategic benefits for both partners. Strategic alliances in the supply
chain include third-party (3PL) and fourth-party (4PL) logistics
services.

Outsourcing
Outsourcing is the contracting out of a business process to a third-party
where an organization transfers some internal activities and resources of a
firm to outside vendors. It is really an extension of the subcontracting and
contract manufacturing of product, which have both existed for a very long
time. Outsourcing includes both foreign and domestic contracting, and can
include offshoring (that is, relocating a business function to another country).
Most firms outsource some functions where they don’t feel that they have a
competency, such as the fulfillment of orders, as in the printing industry, or
using for-hire motor carriers for delivery to customers, which is common in
many industries.
In the 1990s, to reduce costs, companies began to outsource a variety of
services, such as accounting, human resources, technology, internal mail
distribution, security, and facility maintenance.
From a supply chain standpoint, a variety of functions may be candidates for
outsourcing, such as warehousing, transportation, freight audit and payment,
procurement, and customer service/call centers.
In today’s global economy, organizations look for long-term strategic
partnerships for functions and services, some that might even be considered
core competencies, to gain a strategic advantage. The rapid increase in
outsourcing can at least partially be attributed to increased technological
expertise, more-reliable and less-costly transportation service, and
advancements in telecommunications and computer systems.

Reasons to Outsource
Reasons to outsource include the following:
Lower operational and labor costs: These are usually the primary
reasons why companies choose to outsource. When properly executed,
it has a defining impact on a company’s revenue and can deliver large
savings.
Company focus: So that a company can continue to focus on core
business processes while delegating less-important, time-consuming
processes to external partners.
Knowledge: It can enable companies to leverage a global knowledge
base and have access to world-class capabilities.
Freeing up internal resources: They can be put to more effective use
for other purposes.
Access to resources not available internally: Companies may have
internal resource constraints.
Specialists for hard-to-manage areas: By delegating responsibilities
to external agencies, companies can hand off functions that are
difficult to manage and control while still realizing their benefits.
Risk mitigation: Outsourcing, and especially offshoring, helps
companies to mitigate risk.
 Reengineering: Can enable companies to realize the benefits of a
reengineering process.
New markets: Some companies may outsource to help them expand
and gain access to new market areas, by moving the point of
production or service delivery closer to their end users.

Steps in the Outsourcing Process

Outsourcing, which in many ways is similar to any sourcing (of goods or
services) initiative, must follow a distinct process to be successful. A good
example of one methodology is encompassed in the following steps:
1. Plan initiatives.
Establish cross-functional teams to assess the risks and resources. The
team sets objectives, deliverables, and timetables and is responsible for
achieving critical management buy-in.
This step should also include sharing the information with employees.
If not, employees may assume the worst, causing a lowering of morale.
2. Explore strategic implications.
This is the step in which outsourcing is used as a strategic tool where
one examines current and future organizational structures and
considering current and future core competencies of an organization. It
is a long-term view to see whether the solution is a good fit.
3. Analyze cost and performance.
The organization must next make sure that all costs needed to support
the activity, direct and indirect, are considered. Current performance
must also be measured and analyzed to establish a baseline against
which to measure improvement.
4. Select providers.
Finding potential providers can be done in a variety of ways, including
the use of references from business associates, directories,
advertisements, RFIs (request for information), and so on.
After you have narrowed the list of potential outsource partners, you’ll
need to develop and send out requests for proposals (RFPs). The RFPs
should at least include what is required of the outsourcer in the way of
both services and information. Once returned, RFPs should be
evaluated in terms of both qualifications and cost.
 5. Negotiate terms.
You should next map out with the provider the services to be provided
and pricing (including how changes in scope or volume will be
handled), as well as performance standards, management issues, and
transition and termination provisions. A clear, well-documented
understanding during this process can contribute greatly to the success
of the relationship. The organization also needs to consider worst-case
scenarios, which outline a plan of action should the outsourcing
relationship fail.
6. Transition resources.
One of the biggest challenges to the staff of the organization is
managing the impact of the potential change and the actual transition.
Open communication from the start is critical.
Human resource issues should be carefully addressed, and with
sensitivity. Any staff that are about to be terminated because their jobs
have been outsourced should be treated with sensitivity and respect.
This will have an impact on how the remaining employees, who were
not outsourced, contribute in the future. So, providing terminated
employees such benefits as outplacement services is a good idea when
possible.
7. Manage the relationship.
Outsourcing requires a different set of skills, as besides scheduled
meetings and reports, unforeseen things may come up. So in addition
to monitoring performance and evaluating results, a relationship of
trust that enables problem solving is critical with your outsourcing
partner (Greaver, 1999).

Supply Chain and Logistics Outsourcing Partners

As supply chain and logistics is an area commonly considered for
outsourcing, there are a variety of options available to an organization. We
will examine some of the major options below.

Traditional Service Providers

In the supply chain and logistics function, the two traditional service
providers are in the area of transportation and warehousing, the
characteristics of which were discussed earlier in this book.
To recap, the for-hire transportation industry has thousands of carriers who
specialize in product movement between geographic locations who provide
an assortment of services in various modes of transportation with related
technology.
For-hire transportation companies offer specialization, efficiency, and scale
economies to their customers. The choice for users of these services is to
invest in and operate the vehicles themselves or use for-hire services at a
negotiated (or standard) rate.
Public warehouses also offer storage and value-added services on a
contracted basis, with the customer having similar choices as was mentioned
for transportation (that is, invest capital or “pay as you go”).
The main benefits of using public versus private warehousing is that there is
no capital investment required for the building and equipment (and no
employees to hire and manage) and the potential to consolidate small
shipments with products of other firms that use the same public warehouse
for combined delivery at a lower transportation rate. The warehouse charges
are both time (that is, storage) and/or transaction (that is, handling and
specialized services) based, as stated in the contract.

Third-Party Logistics Providers

A third-party-logistics provider (3PL) is an external supplier that performs
all or part of its customers outsourced logistics functions and is usually asset
based (although not always, as in the case of a financial, forwarder, or
information systems-based firm).
Most typically, 3PLs specialize in integrated operation, warehousing, and
transportation services based on its customers’ needs, which may vary based
on market conditions and delivery service requirements for their products
and materials.
In the 1970s and 80s, mostly operational, repetitive, transactional operations
were outsourced in the logistics function that required use of the service
provider’s transportation management system (TMS) and warehouse
management system (WMS) (see Figure 12.1).
 Figure 12.1 Evolution of third-party logistics service providers
By 2009, the 3PL industry had grown to almost $107 billion in size, and in
addition to basic warehouse and transportation services, many 3PLs now
offer value-added services related to the production or procurement of goods
such as order fulfillment, labeling, packaging, assembly, kitting, reverse
logistics, information technology services, customs brokering, cross-
docking, and forwarding.
As a result of its far-reaching impact, the relationship between an
organization and a 3PL vendor is a strategic, long-term, multifunctional
partnership.

Advantages and Disadvantages of a 3PL

The use of 3PLs can offer both advantages and disadvantages. It is up to
each organization to consider the risks and rewards before proceeding.

Advantages
There are many advantages to using 3PL service providers, including the
following:
 Focus on core strengths: Allows a company to focus on its core
competencies and leave logistics to the experts.
Provides technological flexibility: Technology advances are adopted
by better 3PL providers in a quicker, more cost-effective way than
doing it yourself. 3PLs may already have the capability to meet the
needs of a firm’s potential customers.
Flexibility: The use of a 3PL offers companies flexibility in
geographic locations, service offerings, resources, and workforce size.
Cost savings: 3PLs offer the economic principle of specialization by
building up logistical infrastructures, methodologies, and computer-
based algorithms to maximize shipping efficiency to cut a client’s
logistics costs.
Capabilities: Smaller companies have to make large investments to
expand their logistic capabilities. It may be more cost-effective and
quicker to add capabilities through 3PLs.

Disadvantages
Disadvantages of using 3PLs include the following:
Loss of control in outsourcing a particular function: As most 3PLs
are on the outbound side, they heavily interact with an organization’s
customers. Knowing that, many 3PL firms work very hard to address
these concerns by doing things such as painting client company logos
on the sides of trucks, dressing 3PL employees in the uniforms of the
hiring company, and providing extensive reporting on each customer
interaction.
Pricing models: By handing logistics over to a 3PL service, a
company may be missing the possibility that an in-house logistics
department could come up with a cheaper and more efficient solution.
Dependency: If a 3PL is not working out as expected, switching a
company’s logistical support can cost the company a great deal in
unanticipated costs resulting from the changes in pricing or
unsatisfactory service reliability from the 3PL service.
Logistics is one of the core competencies of a firm: In this case, it
makes no sense to outsource these activities to a supplier who may not
be as capable as the firm’s in-house expertise.
Example
Ryder is one of the largest and most recognizable 3PL brand names. They
are a lead logistics provider for most General Motors plants and services,
Chrysler/Fiat, Toyota, and Honda, plus a multitude of tier-one suppliers.
Among their services, they run inbound supply chain management,
sequencing centers, and just-in-time (JIT) and dedicated contract carriage
operations for clients.
Results that Ryder has had with clients include the following:
Apria Healthcare: In 2012, Apria contracted with Ryder Supply
Chain Services (SCS) to provide dedicated contract carriage
(DCC) dry-van truckload transportation services for products
moving from its seven distribution centers (DCs) and cross-dock
to its branch operations. As part of the operation, Ryder SCS also
manages unattended deliveries, hazardous materials, product
segregation, and vendor returns.
The following actions were taken:
The majority of inbound supplier shipments consolidated onto
full truckloads. (More than 75% shipments now move at
truckload rates.)
Supplier shipment frequency reduced to one to two times per
week to each Apria DC.
Expedited freight greatly reduced, and the standard shipment
method is now truckload and less than truckload.
The network has been optimized by filling Ryder’s dedicated
operation’s backhaul lanes with inbound shipments from
suppliers to Apria DCs.
Carrier Corporation (Mexico): Ryder supports three Carrier air
conditioner-related operations in and around Monterrey.
At the Carrier residential air conditioner factory in Monterrey,
Ryder has 110 employees integrated with 1,100 Carrier
employees. Ryder’s personnel handle receiving, manufacturing
(JIT/Kanban), support, and shipping. Ryder does all phases of
the materials management for Carrier, including sequencing,
kitting, picking, and packing. Ryder also handles a large portion
 of inbound material with dedicated and managed transportation
for the facility (Armstrong & Associates, Inc., 2007 and 2013).

Fourth-Party Logistics Service Providers

A fourth-party logistics service provider (4PL) is an integrator that
assembles not only the resources (including possibly 3PLs) but also the
planning capabilities and technology of its own organization and other
organizations to design, build, and run comprehensive supply chain solutions
for clients.
This is as opposed to a 3PL service provider that typically targets a single
function. A 4PL targets management of the entire process. In some ways, a
4PL can be thought of as a general contractor that manages other 3PLs,
transportation companies, forwarders, custom house agents, and so on, and
therefore takes responsibility of a complete process for the customer (see
Figure 12.2).

Figure 12.2 Fourth-party logistics service provider

The key difference between 4PL and other approaches to supply chain
outsourcing is a unique ability to deliver value to client organizations across
the entire supply chain.
4PL service providers are able to combine multiple clients spend to take
advantage of high-volume discounts, which in turn enables them to provide
affordable services to businesses of all sizes, ranging from small e-
commerce start-ups to multinational manufacturers.
4PLs come in many varieties. For example, UPS now offers 4PL service that
includes global supply chain design and planning, logistics and distribution,
customs brokerage and international trade services, as well as freight
services via ocean, air, or ground.
This is opposed to a 3PL service provider, which usually focuses on one or
two areas of expertise, such as warehousing, distribution, or freight
forwarding, often resulting in multiple 3PLs being used to complete the
supply chain.

Players
The players involved in creating a 4PL organization are as follows:
The client, who provides start-up equity, some assets, working capital,
operational expertise, staff, and, of course, procures logistics services
from the 4PL organization
3PL service providers (primarily for transportation services and
distribution facilities)
The 4PL partner, who may provide a range of resources, including
logistics strategy, reengineering skill, benchmarks, IT development,
customer service, and supplier management and logistics consulting
The typical 4PL organization is hybrid, in that it is formed from a number of
different entities and typically established as a joint venture (JV) or long-
term contract.
The goals of partners and clients are aligned through profit sharing, and the
4PL is responsible for the management and operation of the entire supply
chain, with a continual flow of information between partners and the 4PL
organization.

Components Required for Success

The components required for a successful 4PL strategy are as follows:
Leadership: Must be a bit of a supply chain visionary and deal maker
with a multiple-customer relationship. This component acts as the
project manager as well as a service, systems, and information
integrator.
 Management: Experienced in logistics operations, optimization, and
continuous improvement to run day-to-day operations and make
important decisions. This component must also manage multiple 3PLs.
Information technology (IT) support: The “brains” of the operation,
with full integration and support of all systems in the supply chain.
Assets: Transportation and warehouse assets as well as outsourced
contract manufacturing and co-packing and procurement services.

Example
Menlo Worldwide Logistics (www.con-way.com) is a leader in 4PL that
specializes in the integration of all functions across the supply chain, from
sourcing of raw materials, through product manufacturing, to the distribution
of finished goods.
Menlo acts as a neutral single point of control for your supply chain by
managing the procurement, optimization, information analytics, and
operations of your supply chain network. They help their clients to create
flexible supply chain solutions that support their corporate strategy while
increasing supply chain savings and service improvements. They act as a
change agent to ensure the success of a client’s supply chain transformation.
They provide the following:
Deployment of Lean tools and methodologies
Self-funding initiatives
Delivery of flexible supply chains built to withstand business change
and improve velocity
Delivery of best-of-breed and customer-specific business solutions
To get an idea of what kind of success companies can have implementing a
4PL strategy, here are some results from some Menlo clients (Con-way,
2014):
Automotive customer: Managed more than 12,000 locations, $4
billion logistics spend with $648 million in savings. Utilized business
case methodology to identify and measure savings.
High-tech customer: More than $30 million in savings throughout
engagement, $9 million cost reduction through network rationalization
and optimization in year one, and integration of regional operations
into enterprise-wide network.
 Heavy equipment customer: Support $400 million global logistics
network, on track to achieve a 25% reduction in supply chain spend.
Cross-business-unit solutions, including the following:
Global transportation networks
Regional infrastructure requirements
New landed cost modeling
Many of the same career opportunities covered in the transportation and
warehousing chapters are also available with 3PLs and 4PLs. These include
operations, management, consulting, and sales. The field has grown
significantly in the past 25 years, and so it is a great source for supply chain
and logistics careers.
Next, we will discuss collaborative relationships that are primarily between
the major players in the supply chain—retailers, distributors, manufacturers,
and suppliers—who are primarily focused on the sharing of information to
improve planning and management of inventory throughout the entire supply
chain.
13. Supply Chain Integration Through
Collaborative Systems

Supply chain integration refers to the degree to which the firm can
strategically collaborate with their supply chain partners and collaboratively
manage the intra- and interorganization processes to achieve the effective
and efficient flows of product and services, information, money, and
decisions (see Figure 13.1). The objective of this integration is to provide the
maximum value to the customer at low cost and high speed.

Figure 13.1 Major types of integration

Integration is not the same as collaboration, as integration is the alignment
and linking of business processes and includes various communication
channels and connections within a supply network. Collaboration, in
contrast, is a relationship between supply chain partners that is developed
over time. Integration is possible without collaboration, but it can be an
enabler of collaboration.
There are two general categories of business integration: internal and
external, which we will now explore.

Internal and External Integration

Internal Integration

Understanding the entire supply chain of an organization begins with

understanding its internal processes, because an integrated firm presents a
united front to customers, suppliers, and competitors.
As the saying goes, “A chain is only as strong as its weakest link.” So, it is
critical that there are good communications, policies, and procedures that
link not only the internal supply chain processes with each other but also
with the other major functions within the organization.
In general, purchasing, operations, and logistics are responsible for
delivering the product to the customer. Purchasing is a gatekeeper for
process inputs, operations transform raw materials into final product, and
logistics is responsible for physical transfer and delivery.
Internal supply chain integration therefore is a process of interaction and
collaboration in which manufacturing, purchasing, and logistics work
together in a cooperative manner to arrive at mutually acceptable outcomes
for their organization.
It is important to integrate communications and information systems so as to
optimize their effectiveness and efficiency, and this can be achieved by
structuring the organization and the design and implementation of
information systems where non-value-adding activity is minimized; costs,
lead times, and functional silos are reduced; and service quality is improved.
Many organization’s today use process improvement tools such as Lean and
Six Sigma (and the combination of the two known as Lean Six Sigma,
covered later in this book) to analyze existing organizational structures,
eliminate non-value-adding activities, and implement new work structures so
that the organization is optimally aligned.
An integrated enterprise resource planning (ERP) is a key enabler of internal
integration, often exposing remaining non-value-added activities in the
organization and allowing for better communication and collaboration
through a common database.
Internal integration needs more than a system and proper organization. It
also needs the following:
Shared goals: Which refers to the extent to which the manager of each
key function (purchasing, operations, and logistics) is familiar with the
strategic goals of each of the other two focal functions
Cooperation: Measured by the frequency of requests from other focal
functions fulfilled by the members of each focal function
Collaboration: Defined as the frequency at which a member of a key
function actively works on issues with members from the other key
functions
External Integration

External or interorganization integration involves the sharing of product and

service information and knowledge between organizations in a supply chain.
Like internal integration, it also requires shared goals, cooperation, and
collaboration to work successfully.
This enables all stages of the supply chain to take actions that are aligned
and increase total supply chain surplus (that is, the difference between
revenue less cost to produce and deliver product to the customer).
It requires that each stage in the entire supply chain share information and
take into account the effects of its actions on the other stages.
If the objectives of the different stages conflict with each other or
information moving between stages is delayed or distorted, lack of
coordination will result, resulting in the bullwhip effect described earlier in
Chapter 2, “Understanding the Supply Chain.”
Successful collaboration relies on the development of mutual trust between
you and your partners, as well as the willingness to share information
(electronically and manually) that can benefit all the members of your
collaborative team. The goal is to treat all suppliers, outsourcing partners,
customers, and service providers as an extension of your organization.

Supply Chain Collaboration by Industry

Many industries are experimenting with supply chain collaboration, adapting
the concept to fit their specific needs.
For example, consumer products and retail companies are implementing
safety stock levels across their entire supply chains. Using point of sale
(POS) and other information sources, these companies have increased
service levels all the way to the store level.
Pharmaceutical and automotive industries have used collaboration to prevent
counterfeit products from getting into their supply chains. For example,
pharmacies are using radio frequency identification (RFID) to better manage
the shelf life of perishable coded products.
High-tech space are looking to get production visibility beyond purchase-
level response, to better control quality, cost, and availability to improve
measurements of customer service such as customer request date.
Capital equipment and manufacturing companies are leveraging
collaboration technologies to extend Lean supply chain principles across the
enterprise by extending electronic kanban processes (that is, Lean technique
to visually replenish inventory based on downstream demand) to suppliers.

Levels of External Collaboration

Across all industries, supply chain collaboration operates at the strategic,
tactical, and execution level:
Strategic: At this level, organizations and their partners make joint
decisions on strategic issues such as production capacities, product
design, production facility and fulfillment network expansion,
portfolio joint marketing, and pricing plans.
Tactical: This level involves sharing information with partners on
topics such as forecasts, production, and transportation plans and
capacities, bills of material, orders, product descriptions, prices and
promotions, inventory, allocations, product and material availability,
service levels, and contract terms such as supply capacity, inventory,
and services.
Execution: At this level, organizations and their partners engage in an
integrated exchange of key transactional data such as purchase orders,
production/work orders, sales orders, POS information, invoices, credit
notes, debit notes, and payments (SAP, 2007).

Types of External Collaboration

External collaboration can range from relatively simple to very complex
based on the amount of dependency and information sharing between parties
(see Figure 13.2).
 Figure 13.2 Range of external supply chain relationships
The simplest form of collaboration is contracting, which adds a time
dimension to traditional buying and selling (that is, having price, service,
and performance expectations over specific period).
The next level of collaboration is outsourcing, which shifts the focus from
just buying materials to actually performing a specific service or activity.
After that comes what could be referred to as managed types of
collaboration, where a dominate company uses a command and control
system to direct the partner and there is limited sharing of strategic
information and limited joint planning. This type of relationship has no
specific time frame to it (that is, termination/rebid).
The most advanced forms of collaboration are alliances such as we’ve seen
with Dell and its suppliers in a just-in-time (JIT) environment, where the
parties voluntarily work together both strategically and operationally and
there is an integration of human, financial, operational, and technical
resources. There is an extensive amount of joint planning and anticipation of
a long-term relationship.
As companies move along this path toward alliances, trust is a key
component. Trust does not occur overnight; it requires ongoing interaction
among organizations. It is necessary to first see reliability in operations and
then a gradual sharing of all information for the relationship to function
properly. Trust can be maintained by being open and honest with regard to
key decisions (often referred to somewhat tongue in cheek as opening your
kimono).
It is helpful to look at the types of external collaboration in terms of those
with both suppliers and customers and the importance of integrating the
sales & operations planning (S&OP) process to include information from
both sources.

Supplier Collaboration
Some of the types of supplier collaboration include the following:
Kanban: A signal-based replenishment process used in Lean or JIT
production that uses cards or other visual signals such as a line on a
wall to signal the need for replenishment of an item.
Using collaborative technologies, the kanban process allows customers
to electronically issue the kanban replenishment signals to their
suppliers, who can then determine requirements and see exceptions.
Dynamic replenishment: This is a process that where suppliers
compare customer forecasts or production schedules with their own
production plans to match supply and demand. It allows suppliers to
adjust to changes in customer requirements or supply shortages.
Invoicing processes: Automating invoicing and related processes
gives the visibility to the vendor for the entire supply side, including
purchase orders, releases, supplier-managed inventory, kanbans, and
dynamic replenishment.
Outsourced manufacturer collaboration: When managing
outsourced manufacturing relationships or contract manufacturers, you
must shift your focus from owning and organizing assets to working
collaboratively with partners.
The collaborative efforts should help simplify processes such as product
development and reduce manufacturing costs and improve reaction to
response to customer demand.
Any efforts to automate these processes should support information sharing,
collaboration, and monitoring activities that are needed to effectively
manage the relationship with a contract manufacturer.

Customer Collaboration
Customer collaboration involves the receiving demand signals and
automatically replenishing the customer’s inventory based on actual
demand. This is seen primarily in consumer products and other industries
that have downstream distribution systems that extend to retailers.
This type of integration and collaborative effort enables manufacturers to
shift from a push system to a demand pull supply chain while combining
both forecasts and actual customer demand.
Collaborative replenishment processes are more responsive than purely
forecast-based processes, and because they are driven largely by actual
customer demand and also provide visibility in out-of-stock situations,
manufacturers and retailers can react more quickly. Several of these are
discussed later in the chapter and go by the names quick response (QR) and
efficient consumer response (ECR). POS information can add visibility
across the entire supply chain, as well, when included in a collaborative
replenishment process.
Another type of customer collaboration that focuses on forecasts is known as
collaborative planning, forecasting, and replenishment (or CPFR, which is a
trademark of the Voluntary Inter-industry Commerce Standard Association
[VICS]). It is an outgrowth from some of the earlier customer replenishment
initiatives such as QR and ECR.
In general, CPFR is an attempt to reduce supply chain costs by promoting
greater integration, visibility, and cooperation between trading partners’
supply chains. It combines the intelligence of multiple trading partners in the
planning and fulfillment of customer demand.
Figure 13.3 shows collaborative or vendor-managed inventory
configurations in terms of the level of sophistication or complexity. Levels 1
and 2 have been implemented in various industries and would include
programs such as QR and ECR. Levels 3 and 4 are more advanced and
would include CPFR-like programs.
 Figure 13.3 Types of collaborative or vendor-managed inventory in
supply chains

Sales & Operations Planning

S&OP, discussed in Chapter 4, “Inventory Planning and Control,” allows
you to introduce collaborative information into the decision-making process,
and when used as part of your collaborative efforts, it enables better
communications between cross-functional groups and trading partners, both
customers and suppliers.
Globalization and outsourcing generate a lot of information that can impact
an organization’s decision-making process externally to the enterprise. As a
result of this, a comprehensive S&OP process is even more important. The
S&OP process makes sure that your business is continually managed to meet
organizational strategies, goals, and commitments, despite ongoing changes
in your environment.

Benefits to Collaboration
Increased connectivity and collaboration between companies and their
trading partners creates many benefits for both suppliers and your customers,
such as the following:
 Higher inventory turns
Lower fulfillment (transportation and warehousing) costs
Lower out-of-stock levels and improved customer service
Shorter lead times
Early identification of changes to demand and improved market
intelligence
Visibility into customer demand and supplier performance
Earlier and faster decision making (SAP, 2007)

Supply Chain Collaboration Methods: A Closer Look

A variety of supply chain collaboration methods or models have been used
during the past 25 years or so. Some overlap exists between some of them,
and there is some confusion as to their (somewhat subtle) differences.
The following subsections describe some of the major methods.

Quick Response
Quick response (QR) was an apparel manufacturing initiative that started
primarily in the United States during the mid-1980s. The main objective of
QR was to drastically reduce lead times and setup costs to allow the
postponement of ordering decisions until right before, or during, the retail
selling season, when better demand information might be available.
Implementation of QR is typically used in conjunction with information
technologies such as electronic data interchange (EDI; a standardized format
for businesses to exchange data electronically), barcodes, and RFID (the
wireless use of radio frequency signals to transfer data to identify and track
tags attached to objects).
A QR strategy can result in efficiencies such as maximized diversity of
offering, quicker deliveries, faster inventory turns, fewer stock-outs, fewer
markdowns, and lower inventory investment.
This type of strategy can also reduce the time between the sale and
replacement of goods on the retailer’s shelf because it places an emphasis on
flexibility and product velocity to meet the changing requirements of a
highly competitive and dynamic marketplace.
Efficient Consumer Response
Efficient Consumer Response (ECR), launched in 1984, is a grocery sector
joint trade and industry organization with the goal of making the industry
more responsive to consumer demand and to remove unnecessary costs from
the supply chain.
The thinking is to improve the efficiency of a supply chain as a whole
beyond the wall of retailers, wholesalers, and manufacturers, so that they can
gain larger profits than each pursuing their own business goals.
One of the main practices used in ECR is to place smaller orders more often
to shorten lead times, improve inventory turns, and reduce stock outs (see
Figure 13.4). ECR is similar to QR except that it is targeted toward the
grocery industry, where the supplier takes responsibility of monitoring and
replenishing the retailer’s distribution center inventories with approval of the
retailer.
 Figure 13.4 Efficient consumer response
In the 1990s, when I was with Church and Dwight (Arm & Hammer
products), we successfully implemented an ECR program to both place
orders for and manage the inventory of our products at the distribution
centers of a number of our grocery clients, including Wakefern (that is,
ShopRite) and H. E. Butt.
Like QR, ECR is highly dependent on technology, using tools such as EDI,
forecasting, and distribution requirements planning (DRP) software and
point-of-sale (POS) data to manage the process.
The use of sophisticated technology like this as well as the lack of
capabilities (both skill and technology related), the resistance of wholesalers,
retailers, and manufacturers toward collaboration, and the attitudes of
company personnel can all be barriers to a successful implementation of an
ECR (or QR) type of program. It is well worth the effort, though, and can
prove to be a win-win for all involved, because forecast accuracy tends to
improve for the manufacturer and the retailer is relieved of managing the
replenishment of some of its over 50,000+ stock keeping units (SKUs) while
reducing stock-outs and inventory and ordering costs.

Collaborative Planning, Forecasting, and Replenishment

Collaborative planning, forecasting, and replenishment (CPFR) is a form of
collaboration that combines knowledge and information from multiple
trading partners to reduce supply chain costs and improve efficiencies by
linking sales and marketing best practices to supply chain planning and
execution processes. Its overall objective is to increase customer service
while reducing inventory, transportation, and logistics costs.
CPFR has its roots in efficient consumer response (ECR) and is an attempt
to improve marketing, production, and replenishment functions, resulting in
increased value to the consumer while at the same time improving supply
chain performance for producers and retailers.
The Voluntary Inter-industry Commerce Solutions (VICS) association has
defined both a framework and guidelines for CPFR, including elements for
strategy and planning used for the development of joint business plans and
the forms of collaboration, supply chain management focusing on
forecasting and order planning, execution for the fulfillment of
replenishment orders, and analysis for exceptions and performance metrics.
The benefits of CPFR can include the following:
Improved forecast accuracy
Smoother ordering patterns
 Increased sales revenues
Higher order-fill rates
Decrease in safety stock inventory levels
Reduction in cost of goods sold (COGS) as a result of improved
visibility of end-consumer demand, more accurate forecasts, and more
stable production schedules
Similarly to QR and ECR, CPFR requires the use of technology, which can
be shared technology, for planning, execution, and measurement.
As in most cases of intercompany integration and collaboration, besides
having sophisticated supply chain processes and technology, the key is to
have the proper organization alignment and training (see Figure 13.5).
 Figure 13.5 CPFR teams
On the supplier side, there will need to be CPFR teams made up of supply
chain, sales, and customer service employees. On the customer side, which
can be either the distributor or retailer, representatives from the purchasing,
marketing, and merchandising functions will also need to be organized into a
focused CPFR team.
Internal processes such as S&OP will have to be integrated with the CPFR
process, and education initiatives are needed to make sure everyone
understands and buys in to CPFR and its processes, as well as the
implications of the coming change, benefits of CPFR, and the strategic
importance of this type of initiative (Andrews, 2008).
Now that you understand how technology is a critical enabler of an effective
supply chain (as discussed throughout the whole book), it is now time to take
a closer look in the next chapter.
14. Supply Chain Technology

There really isn’t any aspect of supply chain and logistics that isn’t touched
by technology in today’s world. Thanks to both advances in software and
hardware technologies and the Internet, companies of all sizes can automate
and integrate internal processes and connect with customers and suppliers
with ease.
Up to this point, we have briefly discussed technology applications in
various aspects of supply chain and logistics management, including
forecasting, inventory planning, production scheduling, and beyond. In this
chapter, we go into a bit more depth in terms of understanding both the
information flows and the systems used to make decisions at all levels of an
organization, from longer-term decisions such as where to locate plants and
warehouses, down to short-term decisions such as how many cases of
product to ship to an individual warehouse on a given day.

Supply Chain Information

First, it should be made clear that there are subtle differences between data
and information. Data are the facts from which information is derived to
make decisions. Pieces of data are rarely useful alone; for data to become
information, it needs to be put into context. That is the purpose of
information systems.
According to Simatupang and Sridharan (2001):
An interactive view of information enables people to define the
level of information they need to solve problems or make
decisions. Depending on the decisions, some people can use data
to answer the questions, but others need to extract information
from the same data to solve their problems. This interactive view
also enables people to trace the source of knowledge from the
available data, or to specify the required data based on their
explicit knowledge (see Figure 14.1).
 Figure 14.1 Interactive view of information
An information system is used to collect, process, and
disseminate information to make it available for decision makers
at the right time. Traditionally, an information system deals with
transferable data through plain media of communication such as
EDI and the Internet. The recent advance of information
technology offers a rich variety of media such as video
conferencing and online decision support systems that enable
decision-makers to convert tacit knowledge into explicit
knowledge and to share explicit knowledge.
An organization’s information requirements in general are that it needs to be
easy to access, relevant to them, accurate, and timely.
Thus, the information technology used will have a direct impact on a
company’s performance, both internal and external through integration,
which will enable collaboration (see Figure 14.2).

Figure 14.2 Internal and external supply chain information flows

The bullwhip effect, which was discussed earlier, is largely the result of poor
information management in the supply chain and therefore can lead to
excess inventory levels. By having greater demand visibility throughout the
supply chain, inventory levels can be reduced. As mentioned earlier, it is
possible to substitute information for excess inventory through the use of
information systems.
McDonnell, Sweeney, and Kenny (2004) proposed four supply chain
information technology solution categories:
Point solutions: Used to support the execution of one link (or point) in
the chain (for example, warehouse management systems [WMSs]).
Best of breed solutions: Where two or more existing standalone
solutions are integrated, usually using what is known as middleware
technology to connect them.
Enterprise solutions: Based on the logic of enterprise resource
planning (ERP), these solutions attempt to integrate all departments
and functions across a company into a single computer system that can
serve all those different departments’ particular needs.
Extended enterprise solutions (XES): Refers to the collaborative
sharing of information and processes between the partners along the
supply chain using the technological underpinnings of ERP.
Since the 1990s, there has been movement away from point solutions toward
enterprise solutions, partially reflecting the shift from internal and functional
to an external management orientation.
This has been at least partially driven by other technologies, primarily
electronic data interchange (EDI) and the Internet, which have enabled
supply chain partners to use common data. This enables supply chain
partners to act on actual demand, thus reducing the negative bullwhip effect
to some degree.

Supply Chain Information Needs

SCM information systems use technology to more effectively manage
supply chains.
Because there are so many applications in today’s global supply chain, it is
best to look at the technology from strategic, tactical, and execution
viewpoints, as suggested by Bozarth and Handfield (2008). The viewpoints
are as follows:
Strategic: Develop long-term decisions that help to meet the
organization’s mission and focus on strategic plans for meeting such as
new products or markets as well as facility capacity decisions.
Tactical: Develop plans that coordinate the actions of key supply chain
areas customers and suppliers across the tactical time horizon. They
focus on tactical decisions, such as inventory or workforce levels.
They plan, but don’t carry out, the actual physical flows.
Routine: Support rules-based decision making. Usually in short time
frames, where accuracy and timeliness are important to the user.
Execution: Typically more transactional oriented, where they record
and retrieve transaction processing data and execute control physical
and financial information flow. These systems usually have very short
time frames, are highly automated, and use standardized business
practices.
All these types of supply chain systems may also link both downstream with
customers and upstream with suppliers.

Supply Chain Software Market

Today, most companies have implemented at least some components of
supply chain systems, such as warehouse management or forecasting. The
organizations that have taken an integrated, extended supply chain approach
to these systems are the ones who get the greatest benefit.
Supply chain management (SCM) software is also benefiting from what is
known as supplier relationship management (SRM) software, customer
relationship management (CRM), and product lifecycle management (PLM)
software.
SRM software is a subsystem of SCM software that helps to automate,
simplify, and accelerate the procurement-to-pay processes for goods and
services.
CRM software originally was a standalone system directed at sales force
automation, marketing, and customer service. More recently, it is becoming
more integrated with supply chain software such as ERP systems.
PLM software helps companies to collaborate and manage the entire
lifecycle of a product efficiently and cost-effectively, from ideation, design,
and manufacture, through service and disposal. It is where applications such
as computer-aided design (CAD), computer-aided manufacturing (CAM),
computer-aided engineering (CAE), and product data management (PDM)
come together.
According to Gartner (2013), the supply chain software market was $8.3
billion in 2012, which was a 7.1% increase over the prior year. This
particular software market is very fragmented. (The top 20 vendors account
for over half of the market, with the largest 2 vendors, SAP and Oracle,
having a 38% combined share, and there are literally hundreds of vendors
overall.) Driving this large investment has been the need to be more
competitive, reduce risk, operate in the global market, and meet various
government regulations and industry standards.
SCM systems can be viewed in terms of planning (SCP) and execution
(SCE).
In general, SCP applications apply algorithms to predict future requirements
of various kinds and help to balance supply and demand.
SCE software applications usually monitor physical movement and status of
goods as well as the management of materials and financial information of
all participants in the supply chain.

Supply Chain Planning

SCP software vendors address short- to long-term planning and focus on
demand, supply, and the balance of demand and supply together usually in
the form of a sales & operational planning (S&OP) process described in
more detail later:
Demand management: There are three main functions of demand
management software, which are 1) predicting demand, 2) using
“what-if” analysis to create sales plans, and 3) using what-if analysis to
shape demand. Forecasts are typically a rolling 24–36 months. Modern
supply chain systems have moved toward a demand “pull”-driven
model, so demand management has moved from a purely forecasting
tool to one that optimizes and shapes demand to some extent.
Supply management: This area helps meet demand with minimal
resources at the lowest cost. Software functionality typically found in
 this area includes supply network planning or optimization (SNP),
production scheduling (sometimes referred to as advanced planning
systems or APS), distribution requirements planning (DRP),
replenishment, and procurement.
Sales & operational planning: S&OP, as mentioned earlier in this
book, facilitates monthly executive planning meetings to tie together
sales, operation, and financial plans, along with the related tasks. Input
is collected from demand, capacity, and financial plans, culminating in
a consolidated sales and operational plan.

Supply Chain Execution

SCE systems primarily include warehouse management software (WMS)
and transportation management software (TMS) and feature planning,
scheduling, optimizing, tracking, and performance monitoring:
Warehouse management systems: WMS controls the flow of goods
through the warehouse and interfaces to the material handling
equipment. They also typically include automated processing of
inbound and outbound shipments and the storage of goods.
Administrative features can include processing of EDI transactions,
planning shipments, resource management, and performance tracking.
Transportation management systems: A TMS helps to manage
global transportation needs, including air, sea, ground, and carrier
shipments. In terms of transportation acquisition, and dispatching, a
TMS may also handle the planning, scheduling, and optimizing of
shipments. They also provide tracking of vehicles, including exception
management, constraints, collaborating with partners, and monitoring
of freight. Administrative features can include cost allocations, freight
auditing, and payment and contract management.
Enterprise resource systems (ERP): Some might not include ERP
systems as SCM tools, but a great deal of the functionality is supply
chain and logistics related. ERP systems are an extension of an MRP
system to tie in all internal processes as well as customers and
suppliers. It allows for the automation and integration of many
business processes, including finance, accounting, human resources,
sales and order entry, raw materials, inventory, purchasing, production
scheduling, shipping, resource and production planning, and customer
 relationship management. An ERP shares common databases and
business practices and produces information in real time and
coordinates business from supplier evaluation to customer invoicing.
E-businesses must also keep track of and process a tremendous amount of
information, and therefore have realized that much of the information they
need to run an e-business, such as stock levels at various warehouses, cost of
parts, and projected shipping dates, can already be found in their ERP
system databases. As a result, a significant part of the online efforts of many
e-businesses involve adding web access to an existing ERP system.
ERP systems have the potential to reduce transaction costs and increase the
speed and accuracy of information, but can also be expensive and time-
consuming to install.

Other Supply Chain Technologies

Other categories of software are also often used in the supply chain,
including the following:
Supply chain event management: These are software applications
that enable companies to track orders across the supply chain in real
time between trading partners, providing managers with a clear picture
of how their supply chain is performing. The information provided by
these systems allows a company to sense and respond to unanticipated
changes to planned supply chain operations. This breed of systems
conveys information regarding supply chain processes at a specific
event level, such as a handoff from one supply chain entity to another,
the commitment of a product to an order, the movement of a shipment
between two logistics network nodes, or the placement of a product
into storage.
Business intelligence (BI): This category is made up of applications,
infrastructure, tools, and best practices, providing analysis of
information to improve and optimize decisions and performance. BI
tools help to sort through the vast amount of data that has become
available through the continuing adoption of SCM technologies.
In addition, there are related tools for supply chain collaboration, data
synchronization, and spreadsheets and database software.
In fact, many smaller companies today still operate their primary planning
functions using spreadsheets and run their day-to-day operations with
accounting systems such as Quick-Books and Peachtree rather than spend
the resources on a full-blown ERP system.

SCM System Costs and Options

The final cost of supply chain management software can be three to five
times the cost of the software license because it also includes planning,
implementation, training, customization, interfaces, hardware, and
configuration of the software. SCM software vendors also typically charge a
15% to 20% annual fee for maintenance and technical support.
A new alternative to installed software is what has become known
alternatively as software-as-a-service (SaaS), on-demand, or cloud supply
chain software.
Cloud supply chain systems may reduce or eliminate upfront software
acquisition costs by offering subscription fees for web-based applications,
allowing you to “pay as you go” because fees are based on usage. In this
model, there are typically no installation or maintenance costs for the
customer.
The major concern of most potential users is security, which may or may not
be as big a risk as imagined. Nevertheless, cloud software represents the
single highest growth sector in the enterprise software market, and some
software vendors are expanding into the cloud by offering some of their
SCM modules as SaaS.
According to Gartner (2013), “Software as a service (SaaS) SCM offerings
showed above-market growth (13 percent in 2012), while perpetual new
licenses experienced slower growth of 3.5 percent, as organizations focused
on fast implementation at a lower upfront cost.”

Best-in-Class Versus Single Integrated Solution

For more specialized types of supply chain applications such as network
optimization and forecasting, choosing a best-in-class solution may be the
way to go because supply chain vendors with a single integrated solution are
limited to larger vendors such as SAP and Oracle. In many cases, companies
may select one vendor for SCP and another for SCE.
When licensing best-in-class software, costs may be greater to implement
because they require additional interfaces when having multiple vendor
relationships. An application known as an enterprise application interface
(EAI) system can reduce some of the integration cost.
The benefits of one integrated solution are many, including having a single
point of contact, common user interface, and common IT architecture.

Consultants
The three types of supply chain consultants involved in the technology
selection and implementation process are as follows:
SCM experts or management consultants: SCM experts help with
the planning and modeling
Software vendor consultants: Consultants employed by the software
vendor who are application software subject matter experts (SME) and
help implement the software
IT consultants: Information technology (IT) consultants who help
with infrastructure, interfaces, and custom programming
(Erpsearch.com, 2014)
The number and mix of consultants in an SCM software implementation
project will vary depending on the size and scope of the project.

Current and Future Trends in Supply Chain Software

Technology is evolving at an ever increasing rate. This was never more true
than in the world of supply chain and logistics management. As a result, it is
important that we look at some of the short term and emerging trends in
supply chain software.

Short-Term Supply Chain Technology Trends

The 2010 annual Gartner supply chain study (Gilmore, 2010 and 2013)
looked at supply chain application areas and where companies say they stand
in terms of adoption.
The top application area fully implemented (not including ERP systems)
were WMSs, which were fully deployed by only 39% of respondents. That
was followed by SCP (32%), S&OP (29%), and TMSs (28%).
The top-three obstacles to achieving their company’s supply chain goals
were forecast accuracy/demand variability (59%), supply chain network
complexity (42%), and lack of internal cross-functional collaboration and
visibility (39%).
According to the study, the investment priorities when it came to supply
chain technology were “improving planning processes,” with 20% of
respondents, followed by “aligning corporate and supply chain strategies”
and “improving supply chain visibility,” both at 11%.
Interestingly, in the 2013 study, partially due to continued sluggish economic
growth, the focus on using the supply chain to drive business growth was the
top priority of companies surveyed, with customer service in the second
spot.
The obstacles to reaching supply chain goals, however, were similar to the
ones mentioned previously from the 2010 survey.

Emerging Supply Chain Technology Trends

Although the types of software applications in a supply chain probably
won’t drastically change, the methods for gathering data and using and
sharing applications will.
Major areas of innovation most recently include the following:
Cloud computing: As mentioned previously, this method, also
referred to as software-as-a-service or SaaS, delivers a single
application through the browser to thousands of customers “on
demand,” thus avoiding costly licensing, implementation, and
maintenance costs. It allows companies to focus on their core
competencies while allowing a third party to manage technical
elements. Salesforce.com is probably the best-known example among
enterprise applications, but it is also common for HR and ERP
applications as well as some “desktop” applications such as Google
Apps.
Mobile computing: Supply chain execution and event management is
becoming more mobile with basic visibility and traceability available
on smartphones and other mobile devices.
Third-party logistics providers (3PLs) providing technology: Cost
is a big driver of this because 3PLs can offer economies of scale,
especially for small and mid-size companies.
 Radio frequency identification (RFID): An automatic identification
method using electronic tags with an embedded microchip and
antenna. RFIDs can be utilized in a variety of forms within the supply
chain (for example, they can be embedded in between the cardboard
layers in a carton or product packaging).
To become more widespread (the 2010 Gartner study showed 51% of the
companies surveyed not doing anything with RFID), RFID costs will need to
continue to decline to make it more economically feasible. There are also
equipment issues that will need to improve, such as reader range, sensitivity,
and durability.
An example of the use of RFIDs is with Intel (Harrington, 2007), the global
semiconductor manufacturer that needs to know where its product is at all
times. They are embarking on a joint effort with DHL, utilizing sensors to
monitor the condition of containers as they move around the world. Intel has
another project, in Costa Rica, using RFID technology to minimize handheld
scanning of inbound and outbound shipments. They have achieved labor
savings of 18+% as a result of faster processing and have also eliminated
steps in these processes (Harrington, 2007).
Examples of Emerging Technologies in Use Today
Stanley Steemer
A national carpet cleaning franchise founded in 1947, they have
automated route operations at two of their branches, with mobile
computers with integrated wide-area wireless connectivity, GPS, and
a magnetic stripe reader to process credit card payments in real time
when service is finished.
Dispatching dynamically is enabled by the GPS and real-time two-
way communication. This allowed them to improve efficiency so that
they were able to eliminate one full-time dispatcher position at each
branch, each of which has significantly reduced paperwork processing
time.
Mission Foods
Mission Foods is one of the world’s largest producers of tortillas, with
its products sold throughout the United States in a direct-store-
delivery environment with supermarkets and retailers. They switched
from manual invoicing to invoicing with a handheld computer and
printing a copy for the customer with a mobile printer. Invoices are
sent electronically in real time to Mission headquarters over a wide-
area wireless network.
This has eliminated the need for Mission Foods to scan and process
thousands of paper invoices (not to mention savings in ink, as a
thermal printer will be used). The small wearable printers will save
drivers time and fatigue from climbing in and out of the vehicle to
print invoices.
The application is a good example of the value of converged wireless.
Lighthouse for the Blind
Lighthouse for the Blind is a nonprofit organization that trains and
employs non-sighted workers. They were able to improve their
warehouse picking accuracy by 25% with a new speech-recognition
system. This system has an audible confirmation of picked items,
which allows the blind workers to accurately pick orders.
 Social Security Administration
The U.S. Social Security Administration (SSA) has implemented
RFID systems in one of its warehouses, enabling them to track
inventory and ship more efficiently to branch offices. This resulted in
a 39% productivity improvement and a $1 million annual savings as
well as a 70% labor savings (Intermec Technologies Corporation,
2007).

There is also emerging supply chain technology being developed now that
will have a major impact in the near future, including the following:
Multi-enterprise visibility systems: These are systems providing a
comprehensive and timely view of processes, solutions, and metrics
across the entire value chain. When implementing collaborative
programs such as VMI (vendor-managed inventory), outsourcing, or
JIT (just-in-time), it is important to also implement the infrastructure
or processes necessary to manage inventory in this extended supply
chain. This type of emerging solution offers a 360-degree view of
supply chain events.
People-enabling software: This is technology that empowers people
to analyze, find, use, collaborate, and to share data to maximize
efficiency and workflow. ERP and other enterprise software solutions
help enable and automate business processes, but they only alert users
when problems occur; they don’t help solve the problems themselves.
Technology companies are coming out with productivity tools that
enable people to combine unstructured information and business
processes with the structured business processes that ERP applications
provide. This type of technology platform would enable users to
handle multiple alerts to a smartphone; for example, empowering them
to put the fires out on the spot by connecting customer,
manufacturer/distributor, and supplier systems on a mobile device.
Execution-driven planning solutions: These are tools that utilize data
from current executed processes to drive future planning and
forecasting. Over the years, it has been common for many companies
to have a disconnect between planning and execution. These systems
will use information as to the current state of a business to help drive
planning decisions for the next planning period in real time. This will
 enable users to consolidate and aggregate massive amounts of data in
meaningful ways by applying machine learning techniques to data-
mining algorithms to detect data trends. This will give businesses the
chance to respond to problems and take advantage of opportunities
much faster than before.
Human supply chain technology: These are solutions that apply
supply chain technology to the management of human resources (that
is, the labor supply chain) and allow companies to standardize job
descriptions, capture spend and labor rates, and improve their hiring
practices.
At this point, you should have a fundamental understanding of the supply
chain and logistics function as well as the technology used to enable it. We
will now take a step back to examine the more strategic concept of supply
chain and logistics network design and its impact on cost and efficiency.
Part V: Supply Chain and Logistics
Network Design
15. Facility Location Decision

As the saying goes, “In retail, the three most important factors for success
are location, location, and location.” This is not only true in retail but also
for manufacturers because it plays a major role in both the cost and service
of the organization.
Unfortunately, it is usually not considered often enough in the case of
manufacturers or, in many cases, in enough detail, and can potentially lead to
catastrophe.
Location is a strategic, long-term decision in nature that is not easily
changed in the short term and applies to raw material sourcing,
manufacturing, distribution, and retail.
Strategically, the major goal or priority of the location decision for a
manufacturer is to minimize cost, whereas retailers look to maximize
revenue where possible.

The Importance of Facility Location When Designing a Supply

Chain
To remain competitive in today’s global economy, the efficient movement of
goods from raw material sites to processing facilities, manufacturers,
distributors, retailers, and customers is critical.
Unlike transportation and inventory decisions, location decisions tend to be
less flexible because many of the costs are fixed in the short term.
Picking the wrong manufacturing or distribution location can have a long-
term impact on the total cost of a product. This decision can be heavily
influenced by transportation costs; they can average 3% to 5% of sales, with
warehousing costs being 1% to 2% on average, historically.
Because this is a supply chain book, we primarily concentrate on the
distribution facility location decision, which is important because it is a key
driver of the overall profitability of a firm because it affects both supply
chain cost and what the customer experiences directly.
The distribution network can be used to achieve a variety of supply chain
objectives discussed earlier in this book, such as a cost- or responsiveness-
focused strategy.
For example, Dell computer primarily ships directly to consumers, whereas
other PC manufacturers such as Asus sell through retailers. So, although the
Dell customer may have to wait several days to get a highly customized PC,
retail customers can take their more standardized PC home the day they buy
it locally.
Large household and personal-care companies such as Colgate distribute
directly to the larger supermarket chains, whereas small retailers have to buy
Colgate products from distributors because they buy in smaller quantities.

Supply Chain Network Design Influencers

Like many aspects of the supply chain, there are many tradeoffs. In terms of
supply chain network design, there is the major tradeoff of cost versus
service.
From the customer perspective, service may be viewed in a variety of ways,
including the following:
Lead time: The amount of time for a customer to receive an order.
Product variety: The number of different products offered by a
distribution network.
Product availability: The likelihood of a product being in stock when
the customer places their order.
Customer experience: This may have many dimensions, including
how easy it is for customers to place and receive orders as well as how
much the experience is customized.
Time to market: The time it takes to develop new product and bring
them to market.
Order visibility: The ability of customers to track orders from time of
placement to delivery.
Returnability: How easy it is for a customer to return merchandise
and the efficiency of the network to handle these returns.
In general, companies selling to customers who can handle a relatively long
response time may require only a few locations, far from the customer. In
these cases, companies may concentrate on increasing the capacity of each
location.
However, companies that sell to customers who are looking for short
response times, and maybe even picking up product with their own vehicles,
need to locate facilities close to them. These companies typically have many
facilities, each with relatively low capacity.
So, the tradeoff here is that faster response times required to meet customer
demand increases the number of facilities required in the network, and,
conversely, a decrease in the response time increases the customer’s desire
and the number of facilities required in the network (see Figure 15.1).

Figure 15.1 Relationship between number of warehouses and response

time
Changing the distribution network design affects other supply chain costs
(see Figure 15.2), such as the following:
Inventories: The more locations, the harder to accurately forecast
demand because there are smaller and smaller demand groupings,
making the target smaller and harder to hit. As a result, safety stock
requirements go up almost exponentially (that is, the square root rule
discussed in Chapter 8, “Warehouse Management and Operations”).
Transportation: Ideally, we want a long in and short out to gain
economies in transportation on the inbound end (that is, full truckloads
versus less-than-truckload [LTL]), but this, of course, can reach a point
 of diminishing returns because it will increase inventory and
warehouse operating costs.
Facilities and handling (that is, warehouse operations): Certain
economies of scale are gained by operating fewer warehouses, whether
company owned or outsourced by consolidating volume. This can
result in lower unit handling and storage costs, with fewer facilities,
and must be analyzed thoroughly. However, the use of local public
distribution centers (DCs) may enable a company to have their
products combined with other companies’ products to gain some local
transportation savings.

Figure 15.2 The number of warehouses and the impact on cost

There is also the fact that as the number of distribution facilities increases,
the amount of information to manage increases. This can be somewhat
mitigated by having efficient and integrated information technology systems.

Types of Distribution Networks

Keeping the previously mentioned influences in mind, a company can
distribute its products in a variety of ways, as discussed throughout this
section.
Manufacturer Storage with Direct Shipping
In this type of distribution network design (see Figure 15.3), product is
shipped directly from the manufacturer to the end customer, bypassing the
retailer or seller (who takes the order and initiates the delivery request). This
is also referred to as drop shipping, where product is delivered directly from
the manufacturer to the customer. This tends to work for a large variety of
low-demand, high-value items where customers are willing to wait for
delivery and accept several partial shipments.

Figure 15.3 Manufacturer storage with direct shipping (drop shipping)

Impact on Costs
In general, this type of network has lower costs because of aggregation,
which works best with low-demand and high-value items. Transportation
costs are greater because of increased distance and individual item shipping.
Facility costs are lower due to this aggregation of demand, and there may be
some saving on handling costs if the manufacturer can directly ship these
small orders from the production line. However, this type of design requires
a fairly large investment in information infrastructure because the
manufacturer and retailer need to be tightly integrated.

Impact on Service
In terms of service, this type of distribution network design requires fairly
long response times of 1 to 2 weeks because of increased distance and the
two stages for order processing. The response time may vary by product,
which may complicate receiving. Product variety and availability are
relatively easy to provide due to aggregation at the manufacturer. Home
delivery may result in high customer satisfaction, but this can be negatively
affected if orders from multiple manufacturers are sent as partial shipments.
This type of network can help to get products to market fast, with the
product available as soon as the first unit is produced. However, customer
visibility and product returnability may be more difficult and expensive.

Manufacturer Storage with Direct Shipping and In-Transit

Merge
In-transit merge by a carrier combines pieces of an order coming from
different locations so that the customer gets a single delivery (see Figure
15.4).
 Figure 15.4 Manufacturer storage with direct shipping and in-transit
merge
For example, when a customer orders a PC from Hewlett Packard (HP)
along with a Samsung monitor, the package carrier picks up the PC from the
Samsung factory and the monitor from the HP factory; it then merges the
two together at a hub before making a single delivery to the customer.
This type of network works best for low- to medium-demand, high-value
items that a retailer is sourcing from a relatively low number of
manufacturers.
Impact on Costs
The inventory costs associated with this type of distribution network are
similar to drop shipping. However, handling and information investment
costs may be higher than drop shipping, but transportation costs and
receiving costs at the customer are somewhat lower than drop shipping. As a
result of more coordination required to combine shipments, the information
investment is somewhat higher than for drop shipping.

Impact on Service
The impacts on service, such as response time, variety, availability, visibility,
and returnability, are all similar to drop shipping. However, the customer
experience may be better than drop shipping because a single order has to be
received rather than multiple orders.

Distributor Storage with Carrier Delivery

When using the distributor storage with carrier delivery option (see Figure
15.5), inventory is not held by manufacturers at the factories but instead is
held by distributors/retailers in intermediate warehouses, and package
carriers are used to transport products from the intermediate location to the
final customer. This works well for medium- to fast-moving items. It also
makes sense when customers want delivery faster than is offered by
manufacturer storage but do not need it immediately.
 Figure 15.5 Distributor storage with carrier delivery

Impact on Costs
In this type of configuration, inventory and warehouse operations costs are
higher than manufacturer storage with direct shipping and in-transit merge.
Transportation costs are lower than manufacturer storage, with a simpler
information infrastructure required when compared to manufacturer storage.
Impact on Service
Distributor storage with carrier delivery typically has faster response time
than manufacturer storage with drop ship, but offers less product variety and
higher product availability costs. The customer experience, order visibility,
and product returns are better than manufacturer storage with drop shipping.

Distributor Storage with Last-Mile Delivery

Last-mile delivery refers to the distributor/retailer delivering the product to
the customer’s home instead of using a package carrier (see Figure 15.6).

Figure 15.6 Distributor storage with last-mile delivery

In areas with high labor costs, distributor storage with last-mile delivery is
hard to justify on the basis of efficiency or improved margin and can be
justified only if there is large enough demand that is willing to pay for this
convenience.
It is always a good idea to group last-mile delivery with an existing
distribution network to gain economies of scale and to improve asset
utilization.

Impact on Costs
Distributor storage with last-mile delivery inventory costs more than
distributor storage with package carrier delivery. Warehouse operations costs
are greater than manufacturer storage and distributor storage but lower than
the costs of a retail chain. The transportation costs are greater than any other
distribution network option. Information costs are similar to distributor
storage with package carrier delivery.

Impact on Service
Service response times are very quick and in some cases can be same-day to
next-day delivery, with a very good customer experience, particularly for
bulky items. Product variety is less than distributor storage with package
carrier delivery but greater than retail stores, with availability being more
expensive to provide than any other option except retail stores. There is less
of an issue of order traceability than manufacturer storage or distributor
storage with package carrier delivery, and returnability is easier to
implement than other options, except perhaps a retail network.

Manufacturer or Distributor Storage with Customer Pickup

Manufacturer or distributor storage with customer pickup (see Figure 15.7),
involves inventory being stored at the manufacturer or distributor warehouse
but customers placing their orders online or on the phone and then having to
travel to designated pickup points to collect their merchandise. Orders are
shipped from the storage site to the pickup points as needed. Such a network
is likely to be most effective if existing locations, such as coffee shops,
convenience stores, or grocery stores, are used as pickup sites, because this
type of network improves the economies from existing infrastructure.
 Figure 15.7 Manufacturer or distributor storage with customer pickup

Impact on Costs
Manufacturer or distributor storage with customer pickup is similar to the
other distribution configurations in terms of inventory costs. Transportation
costs are on the low side because there is not a great use of package carriers,
especially if using an existing delivery network (plus customers pickup
themselves). Warehouse operations costs can be high if new facilities have to
be built, and lower if existing facilities are in place (and handling costs at the
pickup site can be fairly high). Information costs to provide infrastructure in
this option can be very high as well.
Impact on Service
Response times are similar to package carrier delivery with manufacturer or
distributor storage with same-day delivery possible when items are already
stored locally at pickup sites. Product variety and availability are similar to
other manufacturer or distributor storage options. Order visibility is
extremely important and can be greatly aided with the help of technology.
Product returns are somewhat easier because pickup locations can typically
process returns. The customer experience may be lower than the other
options due to the lack of home delivery, but in densely populated areas, the
loss of convenience may be small.

Retailer Storage with Customer Pickup

Retailer storage with customer pickup is, of course, the most common form
of distribution network, where inventory is stored locally at retail stores.
Inventory can be supplied to the stores from the retailer warehouse in the
case of a chain, a distributor/wholesaler warehouse, or even direct to the
store from the manufacturer (factory or warehouse) for larger retailers.
Customers walk into the retail store or place an order online or by phone and
pick it up at the retail store. This option is best for faster-moving items or
items for which customers want quick response.

Impact on Costs
Retailer storage with customer pickup has the highest inventory and
warehouse operations costs and lowest transportation costs of all the options.
There may be an increase in handling cost at the pickup site for online and
phone orders, which may also require some investment in infrastructure.

Impact on Service
Response times are the quickest of the options, because same-day pickup is
possible for items stored locally at the retail location. Product variety,
although great, is lower than the other options, and availability is more
expensive to provide than all other options. The customer experience may be
considered positive or negative based on how shopping is viewed by
customer. Order visibility really only applies for online and phone orders,
and returnability is easier than other options, given that retail locations can
handle returns.
Impact of E-Business on the Distribution Network
Operating via an e-business can have both cost and service impacts on the
distribution network.

Cost Impacts
An e-business can reduce its inventory levels and costs by improving supply
chain coordination to better match supply and demand. Also, when
customers are willing to wait for delivery of online orders, e-business can
enable a firm to aggregate inventories remotely from customers.
An e-business can reduce network facility costs (that is, costs related to the
number of facilities in a network) by centralizing operations, thereby
decreasing the number of facilities required. In addition, they can also lower
operating costs by allowing customer participation in selection and order
placement.
In general, aggregating inventories, often the case with e-businesses,
increases outbound transportation costs relative to inbound transportation
costs. If a firm’s product is in a form that can be downloaded, the Internet
will allow it to save on the cost and time for delivery (for example,
downloadable music and software).
An e-business can share demand information throughout its supply chain to
improve visibility more readily than a bricks-and-mortar business. This can
help reduce overall supply chain costs and better match supply and demand.

Service Impacts on the Distribution Network

Response time to customers for products that can be downloaded, such as a
mutual fund prospectus or music, are generally very fast. However, e-
businesses without a physical retail outlet selling physical products take
longer to fulfill a customer request than a retail store because of the shipping
time involved.
An e-business can offer a much larger selection of products than a bricks-
and-mortar store because a retail store requires a large location with a large
amount of inventory to offer the same variety.
Because e-businesses have greater speed with which information on
customer demand is shared throughout the supply chain, they tend to have
more timely and accurate forecasts, resulting in a better match between
supply and demand.
An e-business affects customer experience in terms of access, customization,
and convenience and allows access to customers who may not be able to
place orders during regular business hours and access to customers who are
located far away. The Internet is ideal to organizations that focus on mass
customization to help customers select a product that more closely suits their
needs. On top of that, customers have the benefit of not having to leave
home or work to make a purchase.
The Internet makes it possible to provide visibility of order status, especially
important for an online order because there is really no way to match a
customer shopping in person.
The proportion of returns for online orders is typically much higher (and
expensive because they are usually shipped from a central location) because
customers cannot touch and feel the product before their purchase arrives. To
counteract this effect, there is now the fairly common practice of
showrooming, where customers examine merchandise in a traditional brick-
and-mortar retail store and then buy it online, sometimes at a lower price.
Having an e-business also allows manufacturers and other members of the
supply chain that do not typically have direct contact with customers in
traditional channels to increase revenues by skipping intermediaries and
selling directly to customers in some cases. However, great caution must be
taken by the manufacturers so as not to directly compete with its distribution
and retail customers. So, in many cases, this may be used as a way to run out
discontinued, excess, or even to sell new/different items.
It is also fairly easy for an e-business to adjust prices at the click of a button
on their website. In this way, they can maximize revenues by setting prices
based on current inventories and demand. (For example, Amazon.com often
adjusts book prices, up and down, based on rankings and other demand
criteria.) Not to mention that e-businesses can enhance revenues by speeding
up collection versus the 60- to 90-day payment terms found in traditional
channels for manufacturers and distributors.
Finally, e-businesses can introduce new products more quickly than
organizations that use traditional physical channels because they can rapidly
introduce a new product by making it available on the website, versus a
traditional manufacturer who faces a lag to fill their distribution channel
pipelines.
Location Decisions
There are a set of decisions that an organization must go through in order to
make the best facility location decisions for their supply chain(s). They
range from strategic decisions to ensure the locations fit an organizations
competitive strategy to more tactical one that involve identifying specific
geographic locations and sites.

Strategic Considerations
The first thing you need to think about in terms of the location decision is
your particular organization’s competitive strategy, which will drive the
design of your supply chain network. For example, a strategy of cost
leadership will result in a very different supply chain network than one that
is primarily based on responsiveness or product differentiation.
The objective of location strategy is to maximize the benefit of location to
the firm. In the case of a manufacturer or distributor, you want to focus on
cost minimization while meeting service goals. For retail, it is more about
maximizing revenue.
Other things to consider at a more strategic level are identifying your key
competitors in each target market as well as your capital constraints.
As you grow, you need to consider whether to reuse existing facilities, build
new facilities, or partner with other companies (or all of these).

Selecting a New Facility

When selecting a new facility location, it is important to go through some
general steps, as follows (see Figure 15.8):
1. Identify the important location factors and categorize them as key
success factors (KSFs) or secondary factors.
2. Consider alternative countries, and then narrow them down to
alternative regions/communities and then finally to specific sites.
3. Collect data on the location alternatives.
4. Analyze the data collected, starting with quantitative factors.
5. Merge the qualitative and quantitative factors relevant to each site into
the evaluation.
 Figure 15.8 Steps in a new facility location decision
Steps 1 and 2 in the location decision can also be accomplished by starting at
a predetermined country level, working your way down to the local or site
decision.

Location Decision Hierarchy

An organization’s location decision, whether in goods or service, may be at
the national (within a continent), regional (within a country), or a local
selection level (Heizer & Render, 2013). This will vary depending on where
you are in the location decision for your business. Each decision may be
different.
The criteria (KSFs) used to determine the best location will vary based on
the levels previously mentioned.

Country Decision
The country decision, especially in today’s global economy, may involve a
wide range of factors to consider, including the following:
Tariffs and tax incentives
Infrastructure factors
Exchange rate fluctuations and currency risk
 Demand and supply risk
Competitive environment
Political risks, government rules, attitudes, and incentives
Cultural and economic issues
Location and demand of markets
Labor talent, attitudes, productivity, costs
Availability of supplies, communications, and energy

Regional Decision
Once the country decision has been made, an organization must determine
which region is best for its new location.
Factors to consider include the following:
Corporate desires
Attractiveness of region
Labor availability and costs
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs
We’ve all seen states competing against each other to land a new large
manufacturing facility, offering all kinds of incentives such as tax
reductions/postponement, rebates, and so on. So, some of these listed factors
may be artificially modified to influence this decision.

Local Decision
After a company has settled on a location within a relatively small
metropolitan area, it must consider which specific site location is best for its
needs. Factors in the site decision process include the following:
Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Proximity of services/supplies needed
 Environmental impact issues
The relative importance of these factors will vary depending on the size and
industry of your organization. For example, some towns are zoned only for
light industry, or your company might need easy access to major highways
and airports for inbound and outbound transportation needs.
Certain types of factors are more important in the goods versus services
location decision.

Dominant Factors in Manufacturing

The factors most important to the manufacturing location decision include
the following:
Favorable labor climate
Proximity to markets
Impact on environment
Quality of life
Proximity to suppliers and resources
Proximity to the parent company’s facilities
Utilities, taxes, and real estate costs

Dominant Factors in Services

The major factors to consider in the service location decision include the
following:
Impact of location on sales and customer satisfaction
Proximity to customers
Transportation costs and proximity to markets
Location of competitors
Site-specific factors
Location Techniques
Steps 3 through 5 in the new facility selection decision process, as outlined
in Figure 15.8, involve gathering quantitative data and then combining
qualitative and quantitative data to determine the specific site location. You
can use a variety of techniques to accomplish this, as discussed throughout
this section.

Location Cost-Volume Analysis

A relatively simple location decision tool is known as cost-volume (CV)
analysis. It can be represented either mathematically or graphically and is
basically the same as a traditional breakeven analysis or crossover chart used
in a variety of situations in business. The general idea is based on a future
volume forecast with fixed and variable costs known for each location, to
determine which candidate location can be justified by the predicted
throughput volume.
CV involves three steps:
1. For each location alternative, determine the fixed and variable costs.
2. For all locations, plot the total cost lines on the same graph.
3. Use the lines to determine which alternatives will have the highest and
lowest total costs for expected levels of output.
In addition, you want to keep four assumptions in mind when using this
method (making it rather simplistic, but often giving a close enough answer
to determine the best facility from a list of candidates):
Fixed costs are constant.
Variable costs are linear.
Required level of output can be closely estimated.
Only one product is involved.
The location with the lowest total cost [(Fixed cost + (Variable cost ×
Volume)] is the location selected.
Table 15.1 shows an example of location cost-volume analysis. It assumes a
selling price of $100/unit with an expected volume of 5,000 units.
 Table 15.1 Location Cost-Volume Example Data
The crossover point from Ho Chi Minh City to Singapore (that is, justifying
Singapore) would be:
200,000 + 100(x) = 400,000 + 75(x).
25(x) = 200,000
(x) = 8,000 units
The crossover point from Singapore to Hong Kong would be:
400,000 + 75(x) = 700,000 + 50(x)
25(x) = 300,000
(x) = 12,000 units
Graphically, this can be expressed as shown in Figure 15.9.

Figure 15.9 Location cost-volume analysis example

Of course, like with many of these tools, this is dependent upon a volume
forecast. So, it is wise to do what-if analysis with different levels of cost and
volumes to see the impact on the decision.

Weighted Factor Rating Method

The weighted factor rating method compares a number of locations using
both quantitative and qualitative criteria.
The first step is to identify the factors that are key to the success of the
facility at the location. Then you assign a weight as to the importance of
each factor (the total of which must sum to 100%).
The next step is to determine a score for each factor. Usually, a
multifunctional team is involved in this process. At this point, a lot of data
has been gathered on the potential sites from research, visits to the sites, and
even presentations by the communities, states, or countries extolling the
virtues (and incentives) to choose them.
You then multiply the factor score by the weight and sum the weighted
scores. The location with the highest total weighted score is the
recommended location.
This is often a useful tool in whittling down a list of candidates and
potentially selecting one. Often, other factors may come into play, some
logical (for example, extra tax incentives) and some not so logical. (The
owner of the company has a vacation home in the state or country that came
in second, for example.)
The example in Table 15.2 illustrates the weighted factor rating method.

Table 15.2 Weighted Factor Rating Method Example

Center of Gravity Method
The center of gravity method of location analysis is a technique used in
determining the location of a facility that will either reduce travel time or
lower shipping costs. Specifically, it determines the location of a DC that
minimizes distribution costs while considering the location of markets,
volume of goods shipped to those markets, and shipping cost (or distance).
In this model, distribution costs are seen as a linear function of the distance
and quantity shipped. The center of gravity method uses a visual map and a
coordinate system. The x and y coordinate points are placed on an XY chart
with an arbitrary starting point, but located in similar positions for each
location because they would be on a map and are treated as a set of numeric
values when calculating averages. If the quantities shipped to each location
are the same (rarely the case), the center of gravity is found by taking the
averages of the x and y coordinates; if the quantities shipped to each location
are different (more typical), a weighted average must be applied (the weights
being the quantities shipped).
Years ago, I’m told, this method was actually demonstrated using strings and
weights and thus the name center of gravity.
This method is best described graphically using the following example.
If a retailer has four stores located in the following cities with the listed
demand, what would be the best location, or center of gravity, for a DC that
minimizes shipping costs (see Table 15.3 for demand by location)?

Table 15.3 Center of Gravity Example

We will need to first need to determine the x and y coordinates for each of
the store locations using an XY chart (see Figure 15.10).
 Figure 15.10 XY chart for center of gravity method example
Next, we will use the x and y coordinates as well as the retail location
demand to calculate the center of gravity for the DC location.
The calculation is [(Sum of shipping volume * x or y coordinate) / Total
system shipping volume] and is the same to calculate the center of gravity
for the x and y coordinates (of course, using the appropriate coordinates each
time).
So, in this example, when we solve for x and y, we find the following:
x coordinate = (60 * 5,000) + (210 * 4,000) + (160 * 3,000) +
(100 * 2,500) / (5,000 + 4,000 + 3,000 + 2,500) = 129.0
y coordinate = (175 * 5,000) + (160 * 4,000) + (75 * 3,000) +
(100 * 2,500) / (5,000 + 4,000 + 3,000 + 2,500) = 137.2
The center of gravity solution can then be placed on the XY chart (see
Figure 15.11). The actual physical location can be approximated by placing a
map over the chart (or using your own geographic knowledge to
approximate the location) to get you down to the site location decision.

Figure 15.11 Solved XY chart for center of gravity method example

The Transportation Problem Model

The transportation problem is a special class of the linear programming
model that deals with the distribution of goods from several points of supply
(that is, sources) to a number of points of demand (that is, destinations).
Usually, we are given the capacity of goods at each source and the
requirements at each destination as well as a variety of costs for materials,
manufacturing, transportation, and warehousing.
Typically, the objective of the transportation problem with linear
programming is to minimize total transportation and production costs while
maintaining specified inventory and service-level targets.
Fairly complex software solutions are available today that, using this or
other algorithms, will provide a solution that can not only be the optimal
solution in terms of the number and location of distribution facilities in your
network but also, through the use of what-if analysis, test multiple scenarios
looking at changes in demand, transportation, and material costs, for
example.
In many cases, these types of studies are performed by external consultants
for fees of up to $100,000 for medium- to large-size organizations. The
payoff, however, can be in the tens of millions, so it is well worth the cost of
doing one of these studies every 3 to 5 years.
Getting started and gathering information can sometimes be the most
daunting task because much data needs to be gathered, including material,
manufacturing, warehousing, and transportation costs and demand. Once the
data is in the model, it must be validated against previous periods to make
sure that it matches actual costs and service. Next, a baseline or base case
model is developed with future projections with the organization’s current
supply chain network. This baseline is then run against various optimization
parameters such as lowest cost, fewest DCs, and so on. Finally, rather than
just running with the revised network, various what-if scenarios should be
run to make sure that a decision, although optimal, is also reasonable if
conditions change. This may indicate taking a more gradual wait-and-see
approach to distribution consolidation or expansion for example.

Technology
A variety of network optimization solutions are available today. They range
from standalone systems to modules of larger supply chain systems and can
be installed or on-demand cloud software systems.
JDA, JD Edwards (Oracle), SAP, and Logility all have network optimization
modules that are integrated with their other supply chain planning and
execution modules.
Other systems, such as IBM ILOG LogicNet Plus XE and Logistix Solutions
(see Figure 15.12), offer a standalone system (on demand in the case of
Logistics Solutions) for lower upfront costs, but because they are not
integrated with other supply chain planning and execution modules, they are
perhaps a bit more data intensive.

Figure 15.12 Logix screenshot (copyright Logistix Solutions, LLC, Map

Data 2014 Google INEGI)

Careers
Although there is no specific career path for supply chain network analysis,
in many cases, as mentioned, consultants perform this type of study. There
are also software vendors who both license and train users at organizations
to use it for their company. In many cases, this responsibility falls on the
shoulders of an internal logistics analyst to run the numbers and do the
analysis with recommendations. The actual decisions are usually made by
senior management.
After the location decision has been made, some effort both upfront and on
an ongoing basis must be given to having a safe and efficient layout, which
we cover in the next chapter.
16. Facility Layout Decision

After selecting a facility’s location, the next major decision is to design the
best physical layout for the facility. The available space needs to be assessed
with workstations, equipment, and storage; and other amenities need to be
arranged. The goal is to create the most efficient workflow necessary to
produce its goods or services at the highest level of quality with the lowest
possible cost.
Layout planning is organizationally important not only for efficient
operations but also for other functions that are impacted as well, such as
marketing, which is affected by layout when clients come to the site, human
resources because layout impacts people, and finance because layout
changes can be costly endeavors.
The layout decision can determine how efficient a facility is. In the case of
the supply chain, this is primarily focused in the warehousing function, in
both the warehouse itself and various other areas, including office and
maintenance areas.
Layout should be considered in a variety of situations, including when a new
facility is being constructed, when there is a significant change in demand or
throughput volume, when a new good or service is introduced to the
customer benefit package, or then different processes, equipment, or
technology are installed.
The focus of layout improvements is to minimize delays in materials
handling and customer movement, maintain flexibility, use labor and space
effectively, promote high employee morale and customer satisfaction,
provide for good housekeeping and maintenance, and enhance sales as
appropriate in manufacturing and service facilities.

Types of Layouts
Managers can choose from five primary types of workflow layouts:
Product layout: Production line (for example, an automobile
assembly plant)
Process layout: Arranged in departments (for example, hospitals,
printer)
 Hybrid layout: A combination of both product and process layouts
Fixed-position layout: Building a large item (for example, airplane,
cruise ship)
Cellular layout: Reorganizes people and machines into groups to
focus on single products or product groups
We will now discuss each in some detail.

Product Layouts
Product arrangements are based on the sequence of operations that are
performed during the manufacturing of a fairly standardized good or
delivery of a service. Typically, workstations and equipment are located
along the line of production, as with an assembly line, for example. Batches
of semi-finished (that is, work in process) goods are passed to the next
station in a production line.
Some examples of this type of layout include the following: winemaking
industry, credit card processing, submarine sandwich shops, paper
manufacturers, insurance policy processing, and automobile assembly lines.
Advantages of product layouts include lower work-in-process inventories,
shorter processing times, less material handling, lower labor skills, and
relatively simple planning and control systems.
Disadvantages include that a breakdown at one workstation can cause the
entire process to shut down or a change in product design and the
introduction of new products may require major changes in the layout,
resulting in limited flexibility.

Process Layouts
Process layouts usually have a functional grouping of equipment or activities
that perform similar work.
Examples of process layout including the following: legal offices, print
shops, footwear manufacturing, and hospitals.
Advantages of process layouts may include a lower investment in equipment
and that the diversity of jobs can lead to increased worker satisfaction.
Disadvantages may include high movement and transportation costs, more
complex scheduling and control systems, longer total processing time,
higher in-process inventory or waiting time, and higher worker skill
requirements.

Warehouse (Process) Layout Considerations

The objective in warehouse (and really all process type) layout is to optimize
the tradeoffs between handling costs and costs that are associated with
warehouse space while at the same time minimizing damage and spoilage to
the product.
When considering warehouse layouts, it is most effective to arrange work
centers or functional process areas so as to minimize the total costs of
material handling between departments or work centers.
The basic cost elements involved in this load distance (LD) minimization
calculation are as follows:
The number of loads (or people) moving between centers
The distance loads (or people) moved between centers
Once estimating these elements for all possible combinations, a total load x
distance is calculated for the current state. You can then look for improved
layout arrangements that reduce the total load x distance by evaluating
various number and distance (can use cost, which will vary by distance
traveled) of load combinations between the elements. This can be estimated
manually in a simple spreadsheet, or for more optimal results, you can use
packaged software such as Factory Flow, Proplanner, and CRAFT.

Maximizing Density
By maximizing the total cube or space of a warehouse, you are able to better
utilize its full volume while maintaining low material handling costs.
Material handling costs include all costs associated with a transaction, such
as incoming transport, storage, finding and moving material, outgoing
transport, equipment, people, material, supervision, insurance, and
depreciation.
Warehouse density also tends to vary inversely with the number of different
items stored. Although this might sound counterintuitive, you must realize
that each item or stock keeping unit (SKU) will have its own set of
dimensions. So, if you carried one single item in a warehouse, you would be
able to use almost every inch of storage space. However, most warehouses
have hundreds if not thousands of items, all with different dimensions,
making it more difficult to maximize the use of storage space.
That’s where the concept of random stocking can be used, allowing for the
more efficient use of warehouse space. Random stocking can be greatly
aided by the use of a warehouse management system (WMS; described in
Chapter 8, “Warehouse Management and Operations”).
Key tasks in random stocking include maintaining a list of open locations,
keeping accurate inventory records, the sequencing of items to minimize
travel and picking time, combining of picking orders, and assigning classes
of items to particular areas.

Minimizing Travel Time to Maximize Warehouse Efficiency

The concept of velocity slotting helps to minimize travel time, which is
critical to productivity in a warehouse, as it tries to locate at least some of
the faster moving A type items closer to the shipping area and slower
moving items further away and higher up.
The use of automated storage and retrieval systems (ASRS) can significantly
improve warehouse productivity.
Dock location is also a key design element. The primary decision is where to
locate each department relative to the dock. It is important to organize
departments so as to minimize travel time (can be thought of as a load x
distance total for measurement purposes).
The usage of cross-docking, discussed in Chapter 8, modifies the traditional
warehouse layouts. Cross-dock facilities tend to have more docks, less
storage space, and less order picking because materials are moved directly
from receiving to shipping and are not placed in storage in the warehouse.
Cross-docking requires tight scheduling and accurate shipments; barcode or
radio-frequency identification (RFID) is used for advanced shipment
notification as materials are unloaded. They also typically require automatic
identification systems (AISs) and information systems such as a warehouse
management system (WMS).
The location of value-added activities performed at the warehouse, which
can enable low-cost and rapid-response strategies, must be factored into the
layout decision. These can include the assembly of components, repairs, and
customized labeling and packaging, among other activities.
Office (Process) Layout Considerations
When we look at an office (process) layout, we consider the grouping of
workers, their equipment, and the space required to provide comfort, safety,
and flow of information.
One way to evaluate office layout is by using a relationship matrix (see
Figure 16.1) in which you can look at the relative importance to various
people and functions and, based on the results, revise the layout.

Figure 16.1 Office relationship matrix

The movement of information is a large factor, but it is constantly changing
because of frequent technological advances. In fact, certain advances, like
the use of electronic documents, may make the movement of information a
nonfactor.
Much of the American workforce works in an office environment, including
those carrying out many supply chain and logistics administrative functions.
In this environment, human interaction and communication are the primary
factors in designing office layouts.
When considering layout in an office, you need to account for both the
physical environment and psychological needs of the organization.
One key layout tradeoff is between proximity and privacy. Some companies
have gone to a more open-office concept, with no walls and with sound-
absorbing ceiling panels. Open-concept offices promote understanding and
trust, but may not be appropriate depending on job functions and privacy
issues.
Flexible layouts can incorporate what is known as office landscaping to help
solve the privacy issue in open-office environments. Office landscape
involves furniture and desk placement, usually in open-plan office settings.
It often also involves the selection and placement of plants, the creative use
of natural light, and the use of artwork to create ambiance.

Hybrid Layouts
Hybrid or combination layouts combine elements of both product and
process layouts. They tend to keep some of the efficiencies of product
layouts while maintaining some of the flexibility of process layouts.
For example, a business may have a process layout for the majority of its
process but also have an assembly line in one particular area. Alternatively, a
firm may utilize a fixed-position layout (described later) for the assembly of
its final product, but use assembly lines to produce the components and
subassemblies that make up the final product (for example, a cruise ship).

Cellular (or Work Cell) Layouts

This type of layout design is not usually established according to functional
characteristics of equipment, but instead by creating self-contained groups of
equipment (called work cells; see Figure 16.2) and dedicated operators
needed for producing a particular family of goods or services (by family, we
mean one or more items or services that have mostly the same steps or
processes).
 Figure 16.2 Assembly line (top) versus work cell (bottom) layout
The concept of cellular manufacturing or group technology classifies parts
into families so that efficient mass-production types of layouts can be
designed for the families of goods or services.
Cellular layouts are used to centralize people expertise and equipment
capability and are usually laid out in a horseshoe shape rather than as a long
assembly line. This is to gain better flow, improve use of equipment,
maintain smaller batch size (that is, make one, pass one), and require fewer
more cross-trained operators.
Work cells, although common in manufacturing, can be applied strategically
in offices (for example, processing orders) and warehouses (for example,
kitting). Additional examples might include group legal or medical
specialties.
Benefits and advantages of work cells include the following:
Reduced work in process, raw material, and finished goods inventory.
Less use of floor space.
Reduced direct labor cost.
 Heightened sense of employee participation as a result of the high level
of training, flexibility, and empowerment of employees, which results
in improved morale and increased productivity.
Increased equipment and machinery utilization.
Because they are essentially self-contained, they have their own
equipment and resources.
Tests such as a poka-yoke, which is a foolproof testing device, are
commonly used at stations in work cell to improve quality.

Fixed-Position Layout
A fixed-position layout consolidates resources necessary to manufacture a
good or deliver a service, such as people, materials, and equipment, at one
physical location. Because the fixed-position layout is typically used with
project types of processes, where the product that is too large or too heavy to
move, required resources must be portable so that they can be taken to the
job for on-the-spot performance.
Production of large items such as heavy machine tools, airplanes, buildings,
locomotives, and ships is usually accomplished in a fixed-position layout.
Service-providing firms often use fixed-position layouts, such as major
hardware and software installations, sporting events, and concerts.
Due to the nature of the product, the user has little choice in the use of a
fixed-position layout.
Disadvantages can include those related to limited space on the site resulting
in a work area being crowded, which can also cause material handling
problems and administration difficulties, because the span of control can be
narrow, making coordination unwieldy.

Facility Design in Service Organizations

Service organizations can use product, process, cellular, or fixed-position
layouts to organize different types of work.
Process Layout Examples
There are many examples of process layout in service organization. They
can be seen in libraries, which place reference materials, serials, and
microfilms into separate areas; hospitals, which group services by function
such as maternity, emergency room, surgery, and x-ray; and insurance
companies, which have office layouts in which claims, underwriting, and
filing are individual departments.

Product Layout Examples

Service organizations that deliver very standardized services tend to use
product layouts. For example, the kitchen at a fast-food restaurant that has
both dine-in and delivery will tend to be arranged in an assembly line type of
layout, with some pre-prepared items such as cooked hamburgers, sliced
tomatoes, and so on for easier assembly.
Some eyeglass chains use both process and product layouts; the customer
contact area may be arranged in a process layout, but the lab area, where
lenses are manufactured, may be in a product layout.

Designing and Improving Product Layouts

There are some fairly common techniques used for the design and
improvement of product layouts, which we will now describe in some detail.

Assembly Line Design and Balancing

An assembly line is a product layout dedicated to combining the components
of a good or service. Typically, parts are added as the semi-finished item to
be assembled moves from workstation to workstation. Parts are added in
sequence until the final assembly is produced.
Assembly line balancing is a procedure where tasks along the assembly line
are assigned to an individual workstation so that each has roughly the same
amount of work.
When designing product layouts in this type of situation, you need to
consider the sequence of tasks to be performed by each workstation, a
logical order to assemble the finished item, and the speed of each process.
Examples of processes that use assembly line layout include the automobile
industry, winemaking industry, credit card processing, sandwich shops,
paper manufacturers, and insurance policy processing.
There are a number of steps required in the line balancing process, as
follows:
1. Identify tasks and immediate predecessors in the assembly line
process.
2. Determine output rate required of the final item.
3. Determine cycle time, which is the longest time that an item can be at
any one workstation. (Note that a workstation can be made up of one
or more individual tasks or processes.)
4. Compute the theoretical minimum number of workstations.
5. Assign individual tasks to workstations. (That is, balance the line to
make sure that the process is flowing smoothly and that no bottlenecks
slow up the process.)
6. Compute efficiency and idle time and balance or eliminate any delays
or bottlenecks identified.

Assembly Line Balancing Example

Step 1: Identify tasks and immediate predecessors (perfume spray filling and
packaging line example in Table 16.1).

Table 16.1 Perfume and Packaging Line Balancing Example: Tasks and
Predecessors
Step 2: Determine output rate of final item (for example, 600 bottles per
hour with 8 hours per shift).
Step 3: Determine cycle time (the amount of time each workstation is
allowed to complete its tasks).
The throughput or capacity of this process is limited by the bottleneck task
(the longest task in a process), which can be calculated as follows:

Step 4: Compute the theoretical minimum number of stations (that is, the
number of stations needed to achieve 100% efficiency where every available
second is used).

Note that you should always round up when calculating the number of
workstations.
Step 5: Assign tasks to workstations.
Start at the first station and choose the longest eligible task following
precedence relationships (that is, A must precede B, G must follow both E
and F, and so on; see Table 16.2). Continue adding the longest eligible task
that fits without going over the desired cycle time. Once no additional tasks
can be added within the desired cycle time, assign the next task to the
following workstation until finished.

Table 16.2 Perfume and Packaging Line Balancing Example: Assign

Tasks to Workstations
Step 6: Compute efficiency and balance delay.
The percent efficiency is the ratio of total task times divided by the number
of workstations times the largest assigned cycle time (6 seconds for
workstation 4).
Balance delay is the percentage by which the assembly line falls short of
100%.

Balance delay = 100% – 86.1% = 13.9%

Work Cell Staffing and Balancing

As discussed earlier, a work cell reorganizes people and machines into
groups to focus on single products or product groups that have similar
characteristics and process steps or tasks. To justify a cell, there must be
sufficient volume, but the cells can be reconfigured as design or volume
changes.
When staffing and balancing a work cell, you must first determine the Takt
time, which the rate at which a finished product needs to be completed to
meet customer demand. It is computed as (Total work time available / Units
required).
It is also important when setting up a work cell to determine staffing needs.
That calculation is (Total operation time required / Takt time), which will
determine the number of operators required for the cell.

Work Cell Staffing and Balancing Example

If a picture frame manufacturer requires 650 frames of a specific size per
day to be produced and is running an 8-hour shift, and if the manufacturing
process requires the operations (and time required) shown in Figure 16.3, we
can then calculate the cell Takt time, number of workers required, as well as
identify any bottlenecks in the process.
 Figure 16.3 Work cell staffing and balancing example
The Takt time in this case is as follows:
(8 hrs × 60 mins) / 650 units = .74 min = Produce 1 unit every
44 seconds
The workers required for the cell are as follows:
155 seconds / 44 = 3.5 or 4 (round up)
By calculating the Takt time and staffing requirements of the work cell, we
can now also see whether there is any imbalance in the operations caused by
a bottleneck.
In this example, the assembly operation, which takes 55 seconds per picture
frame (see Figure 16.3), is the bottleneck, as our Takt time is 44 seconds.
The result of this is that the operations downstream will either be waiting on
the assembly operation or we will have to run overtime in assembly to keep
the other processes running. This will incur both higher costs and increased
inventory carrying costs.
There are a variety of options to relieve this bottleneck besides running
overtime, such as cross-training of operators to shift them to assembly,
buying faster or additional assembly equipment, and so on.
Warehouse Design and Layout Principles
Some basic guidelines specifically apply to warehouse layout and design. In
general, they include the following: use one-story facilities where possible,
always try to move goods in a straight line, use the most efficient materials
handling equipment, minimize aisle space, and use the full building height.
(That is, land is expensive; many buildings can go as high as 65 feet.)
When designing a warehouse, other things you need to consider include the
following:
Cubic capacity utilization
Protection
Efficiency
Mechanization
Productivity

Design and Layout Process

The first major decision in this process is to determine the size of the
individual warehouse facility. In addition to specifying the space needed for
storage and handling, a location may be needed for processing rework and
returns. All warehouses require office space for administrative and clerical
activities, so space must be planned for these and other miscellaneous
requirements.
The calculation to determine storage space requirements starts with a
demand forecast for the facility in question.
After you have arrived at that, you then need to determine each item’s order
quantity (inbound and outbound), which is converted from units into cubic
footage requirements to determine not only storage requirements but also
other functional area requirements such as for order picking, shipping,
receiving, office space, and so on, as mentioned previously (see Figure
16.4).
 Figure 16.4 Warehouse design and layout considerations
Some of the most important functions of a warehouse actually occur at the
receiving and shipping docks, so it is critical not to neglect these areas
during this process.
You should consider the materials received and shipped to help determine
dock bay requirements and configuration as well as staging area
requirements. There are other miscellaneous requirements for the dock areas
that need to be considered, such as office space, receiving hold area, trash
disposal, empty pallet storage, a trucker’s lounge area, and even yard space
for vehicles outside.
Of course, a lot of thought needs to go into storage space planning, which
requires you to do the following:
Define the materials to be stored: Define what and how much
material will be stored and how the materials are to be stored.
Select a storage philosophy: Consider whether selecting a fixed
location is necessary. If so, determine what specific location each
individual SKU is stored in (even if that means that location may be
empty sometimes). If a random location storage philosophy will be
used instead, determine where any SKU may be assigned to any
available storage location.
Consider space requirements for aisle space and honeycombing
storage: It is necessary within a storage area to allow accessibility to
the material being stored, so an aisle space allowance (that is, a
percentage) must be calculated. The amount of aisle allowance
 depends on the storage method, which determines the number of aisles
required and the material handling method, which in turn helps to
determine the size of aisles.
Thought must also be given to an effect known as honeycombing
storage, which is a percentage allowance of storage space lost
whenever a storage location is only partially filled with material and
may occur both horizontally and vertically. The unoccupied area
within the storage location is honeycombing space.
In addition, there must be an allowance for growth and adequate aisle space
for materials handling equipment.

Technology
As mentioned earlier in this chapter, the design and layout of an office or
warehouse can be determined manually by hand, with a spreadsheet, or for
more optimal results, by using packaged software such as Factory Flow,
Proplanner, and CRAFT.

Careers
Whereas other functions like industrial engineering may have more say in
terms of the details of warehouse design and layout, supply chain
management has great input, if not the final say, for most, if not all, of the
layout decisions mentioned in this chapter.
At this point, we have covered the major functional areas of supply chain
and logistics management in terms of planning and managing them. Next,
we look at how to control these processes.
 Part VI: Supply Chain and
Logistics Measurement, Control,
and Improvement
17. Metrics and Measures

As the saying goes, “If you don’t measure something, you can’t manage (or
improve) it.” This was never truer than in the supply chain and logistics
management field. As discussed throughout this book, an assortment of
tradeoffs exist in a supply chain (for example, cost versus service), which
must be counterbalanced against each other to be successful for the long
term.
It is important to match your supply chain performance measures to fit your
company’s mission and strategy, keeping in mind that performance measures
can affect the behavior of managers and employees.
It is also vital to target and measure supply chain performance to meet
customer expectations, improve supply chain capability, improve asset
performance, motivate the workforce, and provide stakeholders with a
satisfactory return on their investment.
Although technology today makes it much easier to gather and analyze data,
there is a lot more of it available, making it all the more important to
measure only the right things and to avoid wasted effort; otherwise, you
might fall under the dreaded phenomena of paralysis by analysis. The results
of analysis should be used effectively.

Measurement and Control Methods

To have an efficient and effective supply chain requires a set of standards to
compare to actual performance. These standards are referred to as metrics.
There are a variety of established metrics for the supply chain, such as those
defined by the SCOR model mentioned in Chapter 1, “Introduction,” but
determining the appropriate metrics for your organization can be a complex
problem.
Selecting and measuring the wrong set of metrics can lead your company to
follow the wrong goals because metrics tend to drive behavior.
In supply chain and logistics management, cost metrics need to focus on the
entire extended supply chain (internal and external), not on just one function
or one link.
The Evolution of Metrics
Historically, businesses would focus on manufacturing costs as a measure of
efficiency. That was eventually extended to transportation costs in the 1970s.
In the 1980s and 1990s, this view was expanded to look at the broader
performance of distribution and logistics costs, which were supplemented
with more meaningful performance indicators such as the delivery rate and
percentage of order fulfillment as a more customer-based focus emerged.
The advent of the global supply chain, the Internet, and enterprise resource
planning (ERP) systems allowed organizations to take an even broader view
of both their extended supply chains and more easily gather, measure, and
analyze cost and service information.
Today, relying on traditional supply chain execution systems is becoming
increasingly more difficult, with a mix of global operating systems, pricing
pressures, and ever-increasing customer expectations. There are also recent
economic impacts such as rising fuel costs, the global recession, supplier
bases that have shrunk or moved offshore, as well as increased competition
from low-cost outsourcers. All of these challenges potentially create waste in
your supply chain. That’s where data analytics comes in.

Data Analytics
Data analytics is the science of examining raw data to help draw conclusions
about information. When applied to the supply chain, it is often described as
supply chain analytics. It is used in many industries to allow companies and
organization to drive insight, make better business decisions and actions, as
well as the sciences to verify (or disprove) existing models or theories.
One way to look at data analytics is to break it into four categories:
Descriptive analytics: Uses historical data to describe a business; also
described as business intelligence (BI) systems. In supply chain,
descriptive analytics help to better understand historical demand
patterns, to understand how product flows through your supply chain,
and to understand when a shipment might be late.
Diagnostic analytics: Once problems occur in the supply chain, an
analysis needs to be made of the source of the problem. Often this can
involve analysis of the data in the systems to see why the company
was missing certain components or what went wrong that caused the
problem.
 Predictive analytics: Uses data to predict trends and patterns; often
associated with statistics. In the supply chain, predictive analytics
could be used to forecast future demand or to forecast the price of a
product.
Prescriptive analytics: Using data to select an optimal solution. In the
supply chain, you might use prescriptive analytics to determine the
optimal number and location of distribution centers, set your inventory
levels, or schedule production.
Traditional measures tend to be based on historical data and not focused on
the future, do not relate to strategic, nonfinancial performance goals such as
customer service and product quality, and do not directly tie to operational
effectiveness and efficiency.

Measurement Methods
A number of measurement methods have been developed or enhanced in
recent times, including the following:
The balanced scorecard: A strategic planning and management
system that aligns business activities to the vision and strategy of the
organization, improves internal and external communications, and
monitors organization performance against strategic goals. It adds
strategic nonfinancial performance measures to traditional financial
metrics to give managers and executives a more balanced view of
organizational performance.
The Supply Chain Council’s SCOR model: Metrics in this model
provide a foundation for measuring performance and identifying
priorities in supply chain operations.
Activity-based costing (ABC): A costing and monitoring
methodology that identifies activities in an organization and assigns
the cost of each activity with resources to all products and services
according to actual consumption by each product and service.
Economic value analysis (EVA): The value created by an enterprise,
basing it on operating profits in excess of capital utilized (through debt
and equity financing). These types of metrics can be used to measure
an enterprise’s value-added contributions within a supply chain (not as
useful for detailed supply chain measurements).
No matter, which method you use, it is a good idea that the metrics are
consistent with overall corporate strategy, focused on customer needs, and
that expectations are prioritized and focused on processes and not functions.
Furthermore, metrics should be implemented consistently throughout the
supply chain, with actions and rationale communicated to everyone.
It is also a good idea to use some kind of balanced approach when selecting
and developing metrics, using precise costs to measure improvement (in
detail and in the aggregate), which can be greatly aided by the use of
technology.

Measurement Categories
Each method has its own specifics, but it is important to at least include the
measurement categories of time, quality, and cost in one form or another:
Time: Includes on-time delivery and receipt, order cycle time, and
variability and response time.
Quality: Measures customer satisfaction, processing and fulfillment
accuracy, including on-time, complete, and damage-free order delivery,
as well as accurate invoicing. Also includes planning (including
forecasting) and scheduling accuracy.
Cost: This category includes financial measurements such as inventory
turns, order-to-cash cycle time, and total delivered costs broken up by
cost of goods, transportation, carrying, and material handling costs.
Another way of looking at supply chain measurement categories is in terms
of where they will be applied:
Strategic level: Measures include lead time against industry norm
(that is, benchmarking, as discussed later in this chapter), quality level,
cost-saving initiatives, and supplier pricing against market.
Tactical level: Measures include the efficiency of purchase order cycle
time, booking-in procedures, cash flow, quality assurance
methodology, and capacity flexibility.
Operational level: Measures include ability in day-to-day technical
representation, adherence to developed schedule, ability to avoid
complaints, and achievement of defect-free deliveries.
Now let’s look at several of the major models for measuring the supply
chain: the balance scorecard approach and the SCOR model.
Balanced Scorecard Approach
When using the balanced scorecard approach to the supply chain, you need
to consider it from four different perspectives:
Customer perspective: How do customers see us?
Internal business perspective: What must we excel at?
Financial perspective: How do we look to shareholders?
Innovation and learning perspective: Can we continue to improve
and create value?
Next we must put it in a framework that integrates the organization’s overall
goals and strategies with selected supply chain metrics in the categories of
customer service, operations, and finance (see Figure 17.1).
 Figure 17.1 Supply chain metrics framework
It is always critical that supply chain and logistics metrics connect to the
overall business strategy. For example, if a company uses a cost strategy, as
described in Chapter 1, a financial metric like inventory turnover would be
critical. If they employ a response strategy, inventory turns might not be as
critical as, say, delivery time.

Customer Service Metrics

Customer service metrics indicate a company’s ability to satisfy the needs of
customers by meeting customer’s needs on a timely basis and creating
exceptional values to the customers (see Table 17.1).
 Table 17.1 Customer Service Supply Chain Metrics

Operational Metrics
Operational metrics come from internal processes, decisions, and actions
needed to meet or exceed customer expectations. They are drivers of future
financial performance (see Table 17.2).

Table 17.2 Operational Supply Chain Metrics

Financial Metrics
Financial metrics indicate whether the company’s strategy, implementation,
and execution create value for the shareholders by contributing to
improvements in profitability (see Table 17.3).

Table 17.3 Financial Supply Chain Metrics

SCOR Model
Another, relatively newer approach to measuring the supply chain is the
SCOR model that was discussed in Chapter 1. To recap, the SCOR model
was designed to help companies to communicate, compare, and learn from
competitors and companies both within and outside of their industry. It
measures an organization’s supply chain performance and the effectiveness
of and supply chain improvements and can also help to test and plan future
process improvements.
The SCOR model contains over 200 process elements, 550 metrics, and 500
best practices, including risk and environmental management, and is
organized around the 5 primary management processes of plan, source,
make, deliver, and return (see Figure 17.2).

Figure 17.2 The SCOR model

The model is based on three major pillars:
Process modeling: To describe supply chains that are very simple or
very complex using a common set of definitions, SCOR provides three
levels of process detail. Each level of detail assists a company in
defining scope (level 1), configuration or type of supply chain (level
2), and process element details, including performance attributes (level
3). Below level 3, companies decompose process elements and start
implementing specific supply chain management practices. It is at this
stage that companies define practices to achieve a competitive
advantage and adapt to changing business conditions.
Performance measurements: SCOR metrics are organized in a
hierarchical structure. Level 1 metrics are at the most aggregated level
and are typically used by top decision makers to measure the
performance of the company’s overall supply chain. Level 2 metrics
 are primary, high-level measures that may cross multiple SCOR
processes.
Best practices: Once the performance of the supply chain operations
has been measured and performance gaps identified, it becomes
important to identify what activities should be performed to close those
gaps. More than 430 executable practices derived from the experience
of Supply Chain Council (SCC) members are available.
Also, as mentioned in pillar 1 earlier, SCOR levels range from broadest to
narrowest and are defined as follows:
Level 1. Scope: Defines business lines, business strategy, and
complete supply chains
Level 2. Configuration: Defines specific planning models such as
make to order (MTO) or make to stock (MTS), which are basically
process strategies
Level 3. Activity: Specifies tasks within the supply chain, describing
what people actually do
Level 4. Workflow: Includes best practices, job details, or workflow
of an activity
Level 5. Transaction: Specific detail transactions to perform a job
step
Furthermore, all SCOR metrics have five key strategic performance
attributes. A performance attribute is a group of metrics used to express a
strategy. An attribute itself cannot be measured; it is used to set strategic
direction.
The five strategic attributes are as follows:
Reliability: The ability to deliver on-time, complete, in the right
condition and packaging and with the correct documentation to the
right customer
Responsiveness: The speed at which products and services are
provided
Agility: The ability to change (the supply chain) to support changing
(market) conditions
Cost: The cost associated with operating the supply chain
 Assets: The effectiveness in managing assets in support of demand
satisfaction
Table 17.4 shows some strategic metrics for level 1.

Table 17.4 SCOR Model Strategic Metrics

At lower levels of detail, the SCOR model sets a variety of specific, standard measures that can be
used by an organization. Table 17.5 lists some examples under the performance attribute of supply
chain responsiveness for the deliver component of the SCOR model.

Table 17.5 Supply Chain Responsiveness Delivery Cycle Time Example

Supply Chain Dashboard and KPIs

Source: S&OP Excel Template, published with permission of Logistics Planning Associates, LLC
One way to measure, analyze, and manage supply chain performance is with
the use of a dashboard. The dashboard can range from data that is manually
collected and put into a spreadsheet with some graphs, to a more automated
visual dashboard generated by an ERP system.
A supply chain dashboard helps in decision making by visually displaying in
real time (or close to it) leading and lagging indicators in a supply chain
process perspective. It can help to you visualize trends, track performance
targets, and understand the most critical issues facing your company’s
supply chain.

Indicators
Metrics used in performance dashboards are typically called key
performance indicators (KPIs). Having a standardized set of KPIs allows
you to review supply chain operations efficiently across regions, business
units, and plants (and even brands and channels).
KPIs usually fall into one of three categories:
Leading indicators: Have a significant impact on future performance
by measuring either current state activities (for example, the number of
 items produced today) or future activities (for example, the number of
items scheduled for production this week)
Lagging indicators: Measures of past performance, such as various
financial measurements, or in the case of the supply chain,
measurements in areas such as cost, quality, and delivery
Diagnostic: Areas that may not fit under lead or lagging indicators but
indicate the general health of an organization (Myerson, 2012)

Benchmarking
After you have established what KPIs to measure, you need to determine
how to gauge yourself against them. This is known as benchmarking, which
is the process of comparing one’s business processes and performance
metrics to industry bests or best practices from other companies. The
dimensions that are typically measured are quality, time, and cost. There is
both internal and external benchmarking.
Internal benchmarking can be used when the organization is large enough
and data is fairly accessible. For example, a company like General Electric
with over 100 business units can compare some KPIs across businesses.
External benchmarking is a process where management identifies the best
firms in their industry, or in another industry where similar processes exist,
comparing the results and processes of those target companies to their own
results and processes. This allows them to learn how well the targets perform
and, more importantly, the best practice business processes that help to
explain why these firms are successful.
The process of selecting best practices to use as a standard for performance
involves the following general steps:
1. Determine what to benchmark. What processes are most important
to measuring the success of your supply chain? Can be based on your
company’s overall and supply chain strategies, goals, and objectives.
In some cases, you may want to be best in class, and in others, being
average may be just fine.
2. Form a benchmark team. Select those with some skin in the game.
3. Identify benchmarking partners. Should be a combination of those
involved in the day-to-day processes as well as those affected and
management (can also include customers and suppliers).
4. Collect and analyze benchmarking information. There are many
sources of best practice metrics. In many cases, companies can pay for
this information from consultants or through associations that they
belong to.
5. Take action to match or exceed the benchmark. This involves
process improvement, the topic of the next chapter.
18. Lean and Agile Supply Chain and Logistics

It is the goal of every business to be both profitable and efficient. Over the
past 25 years or so, one method has emerged as a way to focus on customer
needs to improve processes and profitability; it is known as Lean, which is
discussed in this chapter, and can be applied throughout the supply chain and
logistics function.

Lean and Waste

By definition, Lean is a team-based form of continuous improvement to
identify and eliminate waste through a focus on exactly what the customer
wants. Lean supplies the customer with exactly what they want when they
want it, through continuous improvement. Lean is driven by the pull of the
customer’s order.
This is in contrast to just-in-time (JIT), which is a philosophy of continuous
and forced problem solving that supports Lean production. JIT is one of the
many tools of Lean. When implemented as a comprehensive strategy, JIT
and Lean sustain competitive advantage and result in greater returns for an
organization.
To successfully execute a Lean strategy, the supply chain needs to also be
very agile, meaning that it must be designed to be flexible and fast when
dealing with unique products with unpredictable demand.
So, not surprisingly, that’s where the idea of having a hybrid strategy comes
into play. A hybrid supply chain strategy is a combination of Lean and agile
concepts, where a manufacturer operates with flexible capacity that can meet
surges in demand along with a postponement strategy, where products are
partially assembled to a forecast and then completed to the actual order when
and even where it arrives.
In the end, your supply chain strategy (and capabilities) must support your
organization’s overall strategy, and typically, in today’s world, that means
being Lean and agile.
This chapter describes the methodology and some of the tools used to enable
a Lean and agile supply chain and logistics function.
History of Lean

Figure 18.1 History of Lean

Early concepts like labor specialization (Smith), where an individual was
responsible for a single repeatable activity, and standardized parts (Whitney)
helped to improve efficiency and quality.
At the turn of the 20th century, the era of scientific management arrived,
where concepts such as time and motion studies (Taylor) and Gantt charts
(Gantt) allowed management to measure, analyze, and manage activities
much more precisely.
During the early 1900s, the era of mass production had arrived. Concepts
such as the assembly line, economies of scale (producing large quantities of
the same item to spread fixed costs), and statistical sampling were utilized.
Today, this is referred to as a push process, which is the opposite of demand
pull (by the customer) used in a Lean philosophy.
Lean, originally applied to the manufacturing industry, was developed by the
Japanese automotive industry, largely Toyota, while rebuilding the Japanese
economy after World War II. Material was scarce, and they realized that to
compete with the U.S. auto companies, they would have to work smarter.
The concept of Lean was little known outside Japan until the 1970s
(generally known as JIT as the actual term Lean didn’t come about until the
1990s). England had early experience with Lean manufacturing from the
Japanese automotive plants in the United Kingdom.
Up until the 1990s, only the automotive industry had adopted Lean
manufacturing, and that was primarily on the shop floor. Since then, it has
spread into aerospace and general manufacturing, consumer electronics,
healthcare, construction, and, more recently, to food manufacturing and meat
processing, in addition to other processes such as the administrative and
support functions as well as the supply chain.
In today’s global economy, companies source product and material
worldwide, looking for the best quality at the lowest cost. E-commerce and
enterprise resource planning (ERP) systems have made for easy entry to the
global economy for smaller companies, as well, allowing them to compete
against much larger competitors.
This has led to the concept of mass customization, which is the ability to
combine low per-unit costs of mass production with the flexibility associated
with individual customization (for example, Dell computers, which can
configure, assemble, test, and ship your customized order within 24 hours).

Value-Added Versus Non-Value-Added Activities

To understand the Lean concept of waste, it is first important to understand
the meaning of value-added versus non-value-added activities.
Any process entails a set of activities. The activities in total are known as
cycle or lead time. Lead time required for a product to move through a
process from start to finish includes queues/waiting time and processing
time.
The individual activities or work elements that actually transform inputs (for
example, raw materials) to outputs (for example, finished goods) are known
as processing time. In general, processing adds value from the customer’s
standpoint. Processing time is the time that it takes an employee to go
through all of their work elements before repeating them. It is measured
from the beginning of a process step to the end of that process step.
If we think of a simple example such as taking raw lumber and making it
into a pallet of 2x4s, the value added to the customer is the actual processing
that transforms the raw lumber into the final pallet of 2x4s. This would
include activities such as washing, trimming, cutting, and so on, and are a
relatively small part of the cycle time. (That is, it might only take 1 hour to
process the raw material into a finished pallet, but the entire cycle time may
be 1 week.)
In Lean terms, the non-value-added time is actually much greater than just
the lead time. We include current inventory on the floor (that is, raw, work in
process [WIP] and finished goods), and using a calculated Takt time for a
specific value stream (a single or family of products or service, as discussed
later in this chapter), convert those quantities to days of supply. Doing so can
expand the non-value-added time from days to weeks (or even months).
It is common for many processes (or value streams) to only have 5% to 10%
value-added activities. However, there are some non-value-added but
necessary activities, such as regulatory, customer required, and legal
requirements, which although they do not add value, are considered waste.
Because they are necessary, we cannot eliminate them, but should try to
apply them as efficiently as is possible.
It is fairly normal for management to focus primarily on speeding up
processes (often value-added ones such as the stamping speed on a press).
From a Lean perspective, the focus moves to non-value-added activities,
which in some cases may even result in slowing down the entire process to
balance it, and removes bottlenecks and increases flow.

Waste
In Lean terms, non-value-added activities are referred to as waste. Typically,
when a product or information is being stored, inspected or delayed, waiting
in line, or is defective, it is not adding value and is 100% waste.
These wastes can be found in any process, whether it is manufacturing,
administrative, supply chain and logistics, or elsewhere in your organization.
Listed here are the eight wastes. One easy way to remember them is that
they spell TIM WOODS:
Transportation: Excessive movement of people, products, and
information.
Inventory: Storing material or documentation ahead of requirements.
Excess inventory often covers for variations in processes as a result of
high scrap or rework levels, long setup times, late deliveries, process
downtime, and quality problems.
 Motion: Unnecessary bending, turning, reaching, and lifting.
Waiting: For parts, information, instructions, and equipment.
Overproduction: Making more than is immediately required.
Overprocessing: Tighter tolerances or higher-grade materials than are
necessary.
Defects: Rework, scrap, and incorrect documentation (that is, errors).
Skills: Underutilizing capabilities of employees, delegating tasks with
inadequate training.
There are a variety of places to look for waste in your supply chain and
logistics function.
One way to consider where waste might exist in the supply chain is in terms
of the SCOR model:
Plan: It all starts (and ends) with a solid sales & operations planning
(S&OP) process (or lack thereof). If there is not one in an organization,
there is probably plenty of waste in the supply chain.
Source: Because purchasing accounts for approximately 50% (or
more) of the total expenditures, using sound procurement approaches
discussed earlier in this book such as economic order quantity (EOQ)
and the use of just-in-time (JIT) principles (including vendor-managed
inventory, or VMI) can go a long way toward reducing waste,
especially excess inventory. Partnerships, collaborations, and joint
reviews with suppliers can also help to identify and reduce waste.
Make (and store): Activities such as (light) manufacturing, assembly,
and kitting, much of which is done in the warehouse or by a third-party
logistics supplier (3PL) these days, can have a huge impact on material
and information flow, impacting productivity and profitability.
Within the warehouse, waste can be found throughout the receiving,
putaway, storage, picking, staging, and shipping processes, including the
following:
Defective products, which create returns
Overproduction or over shipment of products
Excess inventories, which require additional space and reduce
warehousing efficiency
Excess motion and handling
 Inefficiencies and unnecessary processing steps
Transportation steps and distances
Waiting for parts, materials, and information
Information processes
Each step in the warehousing process should be examined critically to see
where unnecessary, repetitive, and non-value-added activities might be so
that they may be eliminated:
Deliver: Transportation optimization (especially important with high
fuel prices). This includes routing, scheduling, and maintenance,
among other things.
Return: Shipping mistakes, returns, and product quality and warranty
issues often ignored or an afterthought.
There are a variety of Lean tools available, as discussed briefly in this
chapter. However, it is most important to first have a Lean culture and
support that is conducive to success, because Lean is more of a journey than
any individual project.

Lean Culture and Teamwork

To be successful for the long term, any type of program has some key
success factors (KSF). In the case of Lean, they include the following:
Train the entire organization and make sure that everyone understands
the Lean philosophy and understands that it may be a cultural change
for the organization.
Ensure that top management actively drive and support the change
with strong leadership.
Everyone in the organization should commit to make it work.
Find a good, experienced change agent as the champion.
Set a kaizen (that is, continuous improvement project) agenda and
communicate it and involve operators through empowered teams.
Map value streams.
Apply Lean tools and begin as soon as possible with an important and
visible activity.
Integrate the supporting functions and build internal customer and
supplier relationships.
Lean Teams
Teamwork is essential for competing in today’s global arena, where
individual perfection is not as desirable as a high level of collective
performance.
In knowledge-based enterprises, teams are the norm rather than the
exception. A critical feature of these teams is that they have a significant
degree of empowerment, or decision-making authority.
There are many different kinds of teams: top management teams, focused
task forces, self-directed teams, concurrent engineering teams,
product/service development and/or launch teams, quality improvement
teams, and so on.
It is no different in Lean. As a result, it is important to establish Lean teams
that can develop a systematic process that consistently defines and solves
problems utilizing Lean tools.
Lean teams are a great way to share ideas and create a support system
helping to ensure better buy-in for implementation of improvements.
Successful teams realize the power of teamwork and teamwork culture and
that the goal is more important than anyone’s individual role. However,
teams must be in a risk-free environment but have leadership, discipline,
trust, and the tools and training to make things happen.
To make teamwork happen, it is important that executive leaders
communicate the clear expectation that teamwork and collaboration are
expected and that the organization members talk about and identify the value
of a teamwork culture. Teamwork should be rewarded and recognized, and
important stories and folklore that people discuss within the company should
emphasize teamwork.

Kaizen and Teams

The work kaizen, which literally means improvement in Japanese, refers to
activities that continually improve all functions and involve all employees.
Kaizen events are a big part of a successful Lean program. A typical kaizen
event involves a team of people for a period of 3 to 10 days. They typically
focus on a working (or proposed) process with the goal of a rapid, dramatic
performance improvement. Typically, the event starts with training on topic
of the event to ensure common understanding.
Team and Kaizen Objectives
Once teams have been established and basic training has begun to start a
Lean philosophy, it is important for any projects undertaken by teams to
have proper objectives to ensure success. So, you need to ask questions such
as the following:
What is the customer telling you in terms of the cost, service, and
quality of your products/services?
What objectives and goals have been established by your company to
address market needs?
What processes immediately impact the performance of these products
and services?
Who needs to support this effort?
How can the business objectives be used to garner support?
By asking these types of questions, it is not hard to link Lean projects to
overall and functional objectives and metrics for improvement.

Value Stream Mapping

Before discussion specific Lean tools, it is first important to understand the
current processes to be examined. Lean has a visual, relatively high, and
broad-level method for analyzing a current state and designing a future state
for the series of activities (both value-added and non-value-added) required
to produce a single or family of products or services for a customer known
as a value stream map (VSM).
A VSM is typically labeled a paper and pencil tool, although it may be
constructed digitally and is a value management tool designed to create two
separate visual representations (that is, maps).
The first map illustrates how data and resources move through the value
stream during the production process, and is used to identify wastes, defects,
and failures (see Figure 18.2); the second map, using data contained in the
first, illustrates a future state map of the same value stream with any waste,
defects, and failures eliminated (see Figure 18.3).
 Figure 18.2 Current state value stream map

Figure 18.3 Future state value stream map

The two maps are used to create detailed strategic and implementation plans
to enhance the value stream’s performance.
A VSM is usually one of the first steps your company should take in creating
an overall lean initiative plan.
Developing a visual map of the value stream allows everyone to fully
understand and agree on how value is produced and where waste occurs.
VSM Benefits
Benefits of VSM include the following:
Highlights connections among activities and information and material
flow that impact the lead time of your value stream.
Helps employees understand your company’s entire value stream
rather than just a single function of it.
Improves decision-making process of all work teams by helping team
members to understand and accept your company’s current practices
and future plans.
Allows you to separate value-added activities from non-value-added
activities and then measure their lead time. Provides a way for
employees to easily identify and eliminate areas of waste.
As was previously discussed and is displayed in Figure 18.4’s House of
Lean, the foundation for a Lean enterprise (including the supply chain and
logistics areas) is to have a Lean culture and infrastructure as well as a way
to set and measure objectives and performance.
 Figure 18.4 House of Lean
After performing basic Lean training and establishing teams, one or more
value stream map studies are typically performed to identify areas for
improvement. However, it is not uncommon for teams to brainstorm to come
up with ideas for future kaizen events in addition to or instead of value
stream mapping events. (Figure 18.5 shows an example of a kaizen form for
brainstorming ideas.)

Figure 18.5 Cost reduction kaizen implementation form

Next, we will look at some of the tools that can be used by Lean teams in
pursuit of continuous improvement.

Lean Tools
There are a variety of tools that are now included under the “umbrella” of
Lean. Some are unique to Lean and others come from various improvement
methodologies such as Total Quality Management (TQM) and Six Sigma.

Standardized Work
Standardization refers to best work practices—that is, as the work is actually
routinely (and best) performed in real life. The purpose of standardization is
to make operations repeatable and reliable, ensuring consistently high
productivity and reduced variability of output.
It ensures that all activities are safely carried out, with all tasks organized in
the best known sequence using the most effective combination of people,
material, machines, and methods.
It is important, where possible, to make standard work more of a visual job
aid that is easy to understand and follow (for example, a laminated
simplified list of standard instructions supplemented with digital
photographs).
In the supply chain and logistics function, standardized work (preferably
visual) can applied nearly everywhere. The office and warehouse are the
most common places they are found and can include order processing,
invoicing, and drawings. Out on the warehouse floor itself, most of the basic
activities of receiving, putaway, picking, packing, loading, and shipping can
benefit from standardized work in the form of visual job aids.

5S-Workplace Organization System

5S is a philosophy that focuses on effective workplace organization and
standardized work procedures. It is a great, general activity to start a Lean
program with because it is easy to understand and implement throughout a
business.
5S simplifies your work environment and reduces waste and non-value
activity while improving quality efficiency and safety. It ensures that the
workplace that is clean, organized, orderly, safe, efficient, and pleasant; and
it results in the following:
Fewer accidents
Improved efficiency
Reduced searching time
Reduced contamination
Visual workplace control
A foundation for all other improvement activities
A 5S project begins with the selection of a specific area (usually one that is
fairly disorganized) and a multifunctional team that includes at least one
member from the selected area.
Next, the team goes to the selected area to perform a workplace scan, which
involves activities such as taking before pictures, drawing a spaghetti
diagram showing locations of materials and equipment as well as product
flow, and the performance of some kind of 5S audit. (Various forms are
readily available on the Internet.)
The steps in 5S (and what the actual S’s stand for) are as follows:
 Sort: Unneeded items are identified and removed. Only needed parts,
tools, and instructions remain.
Set in order: Everything has a place; everything is in its place. Create
visual controls to know where items belong and when they are missing
as well as how much to keep on hand in the area.
Shine: Do an initial spring cleaning. This can include scouring as well
as some painting.
Standardize: Routine cleaning becomes a way of life. Preventive
maintenance is routinely performed. Standards are created to maintain
the first three S’s.
Sustain: This is perhaps the hardest part of 5S, where it has to become
a routine way of life. Root causes are routinely identified and dealt
with.

Visual Controls
Simple visual signals give the operator the information to make the right
decision. They are efficient, self-regulating, and worker managed.
Examples include visual job aids mentioned previously, kanbans, andon
lights (that is, green = process working; red = process stopped), and color-
coded dies, tools, pallets, and lines on the floor to delineate storage areas,
walkways, work areas, and so on.

Facility Layout
Considering optimal facility layout, like standardized work, is nothing new.
However, as a tool of Lean, it is focused primarily on maximizing flow and
eliminating wastes such as transportation and motion. If used properly, it can
result in the following:
Higher utilization of space, equipment, and people
Improved flow of information, materials, or people
Improved employee morale
Improved customer/client interface
Increased flexibility
Batch Size Reduction and Quick Changeover
The concepts of batch size reduction and quick changeover (sometimes also
referred to as setup reduction) are highly intertwined.
When material is pushed through a supply chain and operations process, you
produce, store, and ship in large quantities to spread your fixed costs among
a large number of items, thus minimizing your costs per unit. In pull, you
schedule what the downstream customer actually wants, using a JIT
approach. The goal is one-piece flow (or at least a reduction in batch or lot
size).
Long changeovers tend to create larger batch sizes, resulting in higher
inventory costs, longer lead times, and potentially larger quality issues; and
that is why we focus on reducing changeover times through setup reduction
kaizen events.
In supply chain and logistics processes, we often see the results of batching
in production to cover manufacturing wastes that result in excess inventory,
and in purchasing to obtain economies of scale. In addition, there is a large
amount of batching of paperwork in the office, which if reduced, can
encourage improved flow and getting orders out faster, resulting in a shorter
order-to-cash cycle.
In warehouse operations, there are setups everywhere, including receiving,
picking, staging, loading, and shipping (especially during shift startups).

Quality at the Source

Also known as source control, the idea with this concept is that the next step
in the process is your customer, and as a result, you need to ensure perfect
product for your customer.
One major technique used in source control is known as poka-yoke, which is
the concept of using foolproof devices or techniques designed to pass only
acceptable product. Poka-yokes can range from simple tools such as a cutout
to ensure proper dimensions, to a scale at a packing station that checks the
weight of an item (and if it is outside of the proper range, software would
prevent a label from printing).
Quality at the source can eliminate or reduce final inspections, reduce
passed-on defects, eliminate non-value-added processing, increase
throughput, and increase employee satisfaction.
Quality at the source helps to reduce the total cost of quality, which looks at
the true impact of defective work as it moves toward the customer. This
includes the following:
Prevention costs: Reducing the potential for defects (for example,
poka-yokes)
Appraisal costs: Evaluating products, parts, and services (for
example, quality control sampling)
Internal failure: Producing defective parts or service before delivery
(for example, final inspection)
External costs: Defects discovered after delivery (for example,
returns)
Obviously, the further along a quality issue gets, the greater impact (cost and
otherwise) it has on an organization.
Other techniques such as standardized work, visual workplace, and 5S are all
tools of implementing quality at the source.

Point-of-Use Storage
Point-of-use storage is the storing of raw materials and supplies needed by a
work area that will use them nearby. It works best if the supplier can deliver
frequent, on-time, small deliveries. It can simplify the physical inventory
tracking, storage, and handling processes.

Total Productive Maintenance

Total productive maintenance (TPM) is often used interchangeably with the
concept of preventive maintenance. Although preventive maintenance may
be involved, TPM is actually a team-based systematic approach to the
elimination of equipment-related waste. It involves the charting and analysis
of equipment performance to identify the root cause of problems, then
implementing permanent corrective actions.
TPM is a shared responsibility that involves not only mechanics but also
operators, engineers, and employees from other functional area.
Ultimately, in addition to creating countermeasures using techniques such as
poka-yokes, TPM develops preventive maintenance plans that utilize the
best practices of operators, maintenance departments, and depot service. It
also involves the training of workers to operate and maintain their own
machines, often referred to as autonomous maintenance.
Although the supply chain and logistics function might not have as many or
as complicated equipment as in manufacturing, there is plenty of equipment
that must run at peak performance, including forklifts and carousels in a
warehouse, trucks on the road, and office equipment such as computer
hardware and software.

Pull/Kanban and Work Cells

As mentioned before, a push system produces product, using forecasts or
schedules, without regard for what is needed by the next operation, whereas
a pull system is a method of controlling the flow of resources by indirectly
linking dissimilar functions, through the use of visual controls (for example,
kanbans), replacing only what has been consumed at the demand rate of the
customer.
A pull system is a flexible and simple method of controlling and balancing
the flow of resources and eliminates the waste of handling, storage,
expediting, obsolescence, rework, facilities, equipment, and excess
paperwork. It consists of processing based on actual consumption, low and
well-planned work in process (paperwork), and management by sight, with
improved communication.
One of the main tools in a pull system is a kanban, in which a user removes
a standard-sized container, and a signal is seen by the producing/supplying
department as authorization to replenish. The signal can be a card or even
something as simple as a line on a wall.
Another Lean tool is known as a work cell, covered in Chapter 16, “Facility
Layout Decision,” which reorganizes people and machines that typically
would be dispersed in various departments into a group so that they can
focus on making single product or group of related items. Work cells are
usually U shaped versus a traditional linear assembly line type of format.
Work cells require the identification of families of products or services and
require a high level of training and flexibility on the part of employees and
in many cases utilize poka-yokes at each station in the cell.
Work cells can be found in a variety of industries on the shop floor, in a
warehouse, and in the office. In the warehouse, there may be more limited
opportunities than elsewhere, but they are usually found in areas such as
packaging or in value-added activities performed by 3PLs such as packaging
of kits for a customer or a staging location to organize outgoing shipments.

Lean and Six Sigma

In recent years, Lean has often been combined with Six Sigma to become
Lean Six Sigma in many companies. The concept of Six Sigma was
originated by Motorola in the early 1980s, and is now used in many
industries. Six Sigma attempts to improve the quality of process outputs by
identifying and removing the causes of defects (errors) and minimizing
variability in manufacturing and business processes, thus the term Six Sigma,
which refers to a process that has 99.99966% of products produced free of
defects.
Lean and Six Sigma are complementary because Lean uses relatively simple
concepts to make improvements and covers the entire process or value
stream, beginning with the customer end upstream to suppliers, and Six
Sigma is a tool (heavily statistical) that looks at individual steps in the
process and attempts to identify and remove defects and variability. In
general, Lean tries to reduce waste in the production process, and Six Sigma
tries to add value to the production process (Myerson, 2012).
The concept of Lean in the supply chain has been gaining increasing
popularity during the past 5+ years as it is an ideal way to create an
improved supply chain which is focused on adding value to the customer.
19. Outlook for Supply Chain and Logistics
Management

It is truly an exciting time to work in supply chain and logistics

management in today’s global economy. Over the past 25 years, the field of
supply chain has risen in importance in a variety of organizations to the
point where many now have “C” level supply chain executives.

Supply Chain and Logistics Career Outlook

Supply chain managers have a great impact on the success of an
organization. As described in this book, they are involved in every aspect of
a business, including planning, purchasing, production, transportation,
storage and distribution, customer service, and beyond. Their performance
helps organizations to control expenses and increase sales and profits.
Many organizations today rely on new technologies and the coordination of
processes to expedite the distribution of goods. The use of computers to
analyze work routines to optimize the use of available labor has led to
increases in productivity. As a result, there is now a new set of integrated
operations management functions, which require tech-savvy highly trained
managers of supply chains, resource managers of material or manufacturing
resources planning (MRP), and process and inventory control managers.
Business school graduates who are competent and well prepared, and who
have solid knowledge in supply chain and logistics management, are in high
demand across all industries. Supply chain management students are
prepared for positions such as procurement/sourcing manager, logistics
planner, supply management analyst, acquisition project analyst, marketing
analyst, and sales/distribution managers. Industries such as pharmaceutical
and healthcare companies are investing heavily in creating and supporting
supply chains that achieve new heights of efficiency and productivity.
In fact, according to the Bureau of Labor Statistics (BLS), supply chain
management is projected to be one of the fastest growing industries in the
coming years, with employment increasing 83% since 2008. Furthermore,
the BLS states that the employment of “logisticians” is projected to grow
22% from 2012 to 2022, much faster than the average for all occupations;
employment growth will be driven by the important role logistics plays in
the transportation of goods in a global economy (source: www.bls.gov).
The Institute for Supply Chain Management’s (ISM) 2011 survey showed
that the average salary for supply chain management professionals is
$103,664, up from $98,200 a year earlier. The average entry-level
professional supply management salary is about $49,500, but the average
salary of those with 5 or fewer years of experience is $83,689, up from
$72,908 in 2010, an increase of nearly 15% (source: www.ism.ws).
While we know the outlook for careers in supply chain and logistics
management is promising, it is also important to consider future trends in
the field because they will significantly impact both education and business
practices.

Trends in Supply Chain and Logistics Management

In a rapidly changing world, it is important to observe and understand
trends in supply chain and logistics management, processes, and
technology.

Supply Chain Trends

According to an SCM World report (scmworld.com, 2014), supply chain
strategists will most likely need to change from their traditional cost
reduction, standardized process views because efficiency no longer wins on
its own. They will now also need to be prepared for increased uncertainty
and volatility with an efficient and agile supply chain.
Trends that the report noted include the following:
Customer centricity: Customer-centric supply chains are created by
integrating point-of-sale, channel, and social data to help determine
both short-term and long-term demand. Integrating this data with a
view of supply enables demand management to shift customers to the
most profitable solutions while maximizing customer satisfaction.
Digital demand and omni-channel: Almost universally, digital
demand is a major supply chain disruptor, and for some businesses,
progress has been made in this area. Studies indicate that the majority
of supply chain organizations continue to support direct-to-customer
delivery in response to e-commerce and mobile demand, either via
third parties or in-house fulfillment.
Distribution networks: Customer demand volatility and the trend
toward mass customization is a major factor impacting distribution
and logistics network design decisions.
Manufacturing strategies: Since the 1980s, outsourced
manufacturing was a major focus for supply chain strategists. There is
somewhat of a trend today toward a return to in-house production.
This, of course, has a major impact on supply chain cost and efficient
operations.
Design for profitability: Many businesses still aren’t totally open and
collaborative in terms of new product development and launch.
Because much of a product’s costs are locked in during the initial
design phase, there needs to be a shift in this thinking toward greater
involvement of supply chain personnel, suppliers, and partners (and
customers in some cases).
Sourcing and supplier management: The increased importance of
supplier management and partnering, as opposed to traditional
transactional-focused purchasing, is similar to the increased
complexity we see in manufacturing and product design.
Sales and operations planning: Most companies have understand the
necessity and importance of S&OP, but are light on the actual
execution and long-term vision of the process.
Risk management: Supply chain risk management is still a rather
immature discipline, but with major weather, energy, and terrorist
disruptions during the past few years, many companies have started to
take it more seriously and invest in developing internal risk
management capabilities.
Sustainability: There has been a steady increase in the use of cost
savings as a justification for investments in sustainability initiatives.
Transformation and talent: A company’s strategy to talent
development, acquisition, and retention has to be integrated into the
broader strategic plan of the supply chain organization.
Logistics Trends
Trends that may impact the future of global logistics, as indicated in an
article from SupplyChainDigital.com (Nabben, 2014), include the
following:
Growth patterns: Growth in the logistics industry is no longer driven
primarily by imports. It will come from elsewhere, and will be more
fragmented, more unpredictable, and more volatile.
Flexibility: Meeting consumer requirements at multiple locations
with multiple transport modes at different times requires a flexible
supply chain that can adapt easily to unexpected changes and
circumstances.
Globalization: International, mature, and emerging markets have
become a part of the overall business growth strategy for many
companies.
Near shoring: As labor costs in Asia and transportation costs rise,
increasing amounts of manufacturing are being brought closer to the
end user.
Multichannel sourcing: End consumers increasingly source via
multiple channels, ranging from brick-and-mortar shops to e-
commerce supported by the logistics industry.
Information technology: The growing complexity and dynamism of
supply chains requires increasingly advanced information technology
solutions.
Continuity: For speed to market and to reduce risk of delays,
alternative transport modes and routes are required to support the
continuing trend of outsourcing of logistics services.
Sustainability: Customers increasingly prefer products that minimize
businesses’ social, economic, and environmental impact on society
and enhancing positive effects.
Partnerships: Manufacturers continuously search for supply chain
innovations and gains through partnerships with logistic service
providers.
End-to-end visibility: Complete visibility of the entire supply chain
aspires to achieve true demand-driven planning, allowing efficient
 response to changes in sourcing, supply, capacity, and demand.
Complexity: Supply chains are becoming increasingly complex and
dynamic, with sourcing locations being changed increasingly quickly
and purchase orders becoming smaller and more frequent.

Supply Chain Leadership Trends

Companies that have strong supply chain visibility and analytics
capabilities are almost twice as likely to be in the top 20% of business
growth than firms that don’t, according to CSC’s ninth annual Global
Survey of Supply Chain Progress (CSC, 2014).
Furthermore, the study identified the following “best practice” trends found
in industry leaders:
In most companies, supply chains have gradually shifted from defense
and survival since the great recession of 2007 toward contributing to
profitable growth.
Supply chain leaders are more likely to put logistics and supply chain
management into the hands of top officers. (that is, they are more
likely to make the supply chain chief one of the C-level executives),
and are twice as likely to have the supply chain manager report
directly to a corporate officer.
Supply chain visibility is a key advantage for leaders, who rated their
visibility higher than the rest in the survey. This meant that they had
the best visibility into their customers’ sales information, promotional
plans, and demand forecasts; and their suppliers’ inventory, order lead
times, and delivery dates.
Leaders were found to be twice as likely as laggards to be experienced
users of data analytics software, and as a result, they are able to
extract more useful information from their supply chain visibility
data.
Supply chain leaders are also flexible enough to quickly change their
supply chain solutions to respond to new threats or opportunities.
It was also found that businesses with high supply chain visibility had
greater cost reduction.
Additional standout trends for supply chain leaders according to “The
Gartner Supply Chain Top 25 for 2014” (Aronow, Hofman, Burkett, Nilles,
& Romano, 2014) are as follows:
Understanding and supporting the fully contextualized customer:
“An enduring trait of leading companies is that customer needs and
behaviors serve as the starting point for go-to-market and operational
support strategies. The best of them present simple, elegant solutions
to their customers, driven by conscious supply chain orchestration
behind the curtain. Their center-led cultures enable consistently high-
quality customer experiences tailored, where important, to local
tastes.”
A convergence of digital and physical supply chains delivering
total customer solutions: “Leading companies have moved past
selling only discrete products or services to their customers and are
now focused on delivering solutions. Regardless of industry, these
companies want their customers to be loyal subscribers to their
solutions. Several of the leading consumer product companies on this
year’s list are offering e-commerce subscriptions for their products, in
partnership with retailers, to create a seamless multichannel
experience. This approach offers convenience and privacy to end
customers that would normally buy these products in a physical store
and might switch to another consumer brand during any given store
shopping visit.”
Supply chain as trusted and integrated partner: “Growth is a top
priority for the C-suite in 2014, with 63 percent of senior executives
picking growth as a top imperative in Gartner’s 2014 CEO Survey.
Leading supply chains are enabling this growth both organically and
through successful M&A integration. At the same time, supply chain
leaders are emerging as trusted and integrated partners to business
groups. Their focus on profitable growth often leads to smarter, more
conscious decision making, saving business groups from spiraling out
of control in the drive to maximize revenue.”

Supply Chain Technology Trends

Over the past 30 years, technology has been an enabler of supply chains,
especially as the supply chain has extended globally. It is pervasive in all
aspects of planning and execution, as can be seen throughout this book.
The Capgemini Consulting Institute conducted a Supply Chain
Management Trend Study that looked at the impact of the latest technology
trends toward SCM. They identified six major elements that they believe
will have a great impact on SCM in the next few years (Schneider-Maul,
2014):
Emerging technologies: The advance in this area is machine-to-
machine communication supported by sensors and content
information. Production processes can be accelerated with more
transparency available for more informed management and operation
decision making. This will lead to cost improvements based on
avoidance of wasteful troubleshooting activities due to the unknown
status of material.
Analytics and simulation: These tools will be a major element of
future supply chain control. In the future, decisions will be based
more on real-time information instead of assumptions and only
historical data and will therefore enable decision makers at all levels
to envision future scenarios easily and quickly.
Supply chain segmentation: Instead of the common “one size fits
all” concepts of the past, supply chain segmentation allows companies
to address customer-specific requirements. To implement a
segmentation-oriented planning process, it is necessary to use
simulation technology and create scenarios to define the appropriate
supply chain by segment.
Service orientation: This is strongly related to the segmentation
trend, but also linked to the implementation of supply chain service
and control centers to ensure that service level targets are met. The
key to success is the centralized integration of global supply chain
event information. This enables the supply chain control group or
teams in the supply chain service centers to react to supply chain
events quickly to make the right decisions.
Optimization of supply chains: This strategic task is already
supported by supply chain network optimization tools that are already
available in the market. They apply scenario modeling and simulation
to define the best possible supply chain configuration. In addition,
procurement optimization software supports material cost and spend
analysis and generates improvement suggestions. Tools for inventory
 and production process optimization are on the market. The area of
optimization based on operations research is the most advanced and
mature area in supply chain management IT supported functions.
Sustainability: This has become a top trend on the agenda of senior
executives as the idea that sustainability can have positive effects on
the cost side has gained ground. More efficient return and recycle
processes, energy-efficient supply chain networks, and waste-
avoiding processes have led to significant cost reductions. Technology
can help to achieve improvements with sustainable and efficient
network design supported by planning and optimization, which
enables supply chain planners to define efficient, energy-cost-
reducing, and sustainable supply chain structures. Optimization
software for supply chain network design that supports green logistics
will also gain increasing market share.

Conclusion
There can be no denying the fact that over the past 30 years, the field of
supply chain and logistics management has come into its own. There are
even commercials on TV that say “I love logistics” (for example, UPS) and
mention the importance of a good supply chain (for example, IBM). Thanks
to trends such as globalization, outsourcing, the Internet, e-commerce,
enterprise resource planning (ERP) systems, and so on, the world has
become a smaller place and is much more interconnected.
The outlook for the function and profession is very bright. After reading
this book, whether you are interested in the field as a profession or just want
to know what it’s all about, you should now have a good fundamental
understanding of both its operation and importance in the world of business.
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Chapter 7
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Chapter 10
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SCDigest (2010). The Five Challenges of Today’s Global Supply Chains.
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Sheffield, Y., and Rice Jr., J. B. (2005). A Supply Chain View of the
Resilient Enterprise, MIT Sloan Management Review, 47(1), 41–48.

Chapter 12
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SAP (2007). Supply Chain Collaboration: The Key to Success in a Global
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Supply Chain Management, 2nd edition. Pearson, 516–518.
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Earpsearch (2014). Supply Chain Management Software. White paper.
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McGraw-Hill Professional, 163.
Chapter 18
Myerson, P. (2012). Lean Supply Chain & Logistics Management.
McGraw-Hill Professional, 11–16.

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Aronow, S., Hofman, D., Burkett, M., Nilles, K., and Romano, J. (2014).
The Gartner Supply Chain Top 25 for 2014. Retrieved from
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Index

Numbers
3PLs (third-party-logistics providers), 193-196
advantages, 194
disadvantages, 194-195
Ryder case study, 195-196
4PLs (fourth-party-logistics providers), 196-198
components for success, 197
Menlo Worldwide Logistics case study, 197-198
players, 197
5S, 288-289
80/20 rule, 61

A
ABC method, 267
demand planning, 46-47
inventory planning, 61-63
accumulation warehouses, 133-134
accuracy (order-filling), 149
acquisition, 189
Act to Regulate Interstate Commerce, 104
activity, 6
activity-based costing. See ABC method
aggregate planning and scheduling, 55, 295
collaboration, 206
demand options, 76-77
integrated business planning, 76
MPS (master production schedule), 78-80
MRP (Material Requirements Planning), 80-83
BOM (bill of materials), 80-81
mechanics, 81-83
 overview, 69
processes, 74-76
production strategies, 79
S&OP processes, 74-76
short-term scheduling, 83-86
FCS (finite capacity scheduling), 85
sequencing, 84-85
service scheduling, 85-86
types of scheduling, 84
typical planning and scheduling process, 83
strategies, 78
supply capacity options, 77
technology, 86
agility, 6
air carriers
domestic transportation, 108
international transportation, 177
Air Deregulation Act of 1978, 104
air waybill, 122
allocation, warehouses and, 134
American Production and Inventory Control Society (APICS), 29, 67
American Society for Transportation & Logistics (AST&L), 103
analytics, 298
APICS (American Production and Inventory Control Society), 29, 67
approving invoices, 100
Apria, 195
Ariba, 101
arm’s-length transactions, 189
assemble-to-order (ATO), 79
assembly line design and balancing, 256-258
asset recovery, 170
assets, 6
associative forecasting models
 correlation, 45
least squares method, 44
multiple regression, 46
overview, 40
seasonality, 45-46
assortment warehouses, 133-134
AST&L (American Society for Transportation & Logistics), 103
ATO (assemble-to-order), 79
automated warehouses, 130
automotive industry, return rates in, 160-161
averages
moving averages, 43
weighted moving average, 43

B
backorders, 76
backward scheduling, 84
balanced scorecard approach, 267-270
customer service metrics, 269
financial metrics, 270
operational metrics, 269
batch orders, 149
batch size reduction and quick changeover, 289-290
benchmarking, 274-275
Best Buy, 164-165
best of breed solutions, 213
best-in-class software, 217
BI (business intelligence), 216
bid and auction, 99
bidding, 97
bill of lading (B/L)
domestic B/L, 117-118
international B/L, 121-122
bill of materials (BOM), 73, 80-81
billing, 114
bills. See documents
B/L (bill of lading)
domestic B/L, 117-118
international B/L, 121-122
BOM (bill of materials), 73, 80-81
bonded warehouses, 129-130, 178
break-bulk warehouses, 128, 132-133
bullwhip effect, 23, 212
business intelligence (BI), 216

C
capacity, FCS (finite capacity scheduling), 85
career outlook
facility layout, 262
inventory planning, 67
supply chain and logistics management, 26-29, 293-294
supply chain network analysis, 247
carnet, 120
Carrier Corporation (Mexico), 195-196
carrying or holding costs, 54
catalog retailer warehouses, 128
categories (measurement), 267-268
causal forecasting models. See associative forecasting models
cellular layouts, 253-254
center of gravity analysis, 243-245
centralized return centers (CRCs), 168-169
certificates
certificate of free sale, 120
certificate of inspection, 120
certificate of insurance, 120
certificate of manufacture, 120
 certificate of origin, 119
certification programs, 24-29, 89
Certified Production and Inventory Management (CPIM), 29
Certified Professional in Supply Management (CPSM), 29, 89
Certified Supply Chain Professional (CSCP), 29
challenges
GSCM (global supply chain management), 178-180
reverse logistics, 165-166
SCM (supply chain management), 23-26
channels of distribution, 52
chase plans, 78
claims (freight), 119
Class I railroads, 106-107
classifications (freight), 115
clean B/L (bill of lading), 122
climate-controlled warehouses, 130
cloud computing, 219
COFC (container on a rail flatcar), 108
Colgate, 226
collaboration
benefits of, 206
collaboration methods, 206
CPFR (collaborative planning, forecasting, and replenishment), 208-
210
ECR (Efficient Customer Response), 207-208
QR (quick response), 206-207
customer collaboration, 204-205
versus integration, 199
levels of external collaboration, 202-203
S&OP (sales & operational planning), 206
supplier collaboration, 25, 204
supply chain collaboration by industry, 202
types of external collaboration, 203-204
collaborative planning, forecasting, and replenishment (CPFR), 205,
208-210
collecting, 114
commodity rates, 116
common carriers, 110
competition, 24-25
competitive advantage, 9-10
competitive bidding, 97
complexity, 296
computer industry, return rates in, 160
configuration, 6
consolidation, 114
consolidation warehouses, 128, 132-133
consultants, 218
container on a rail flatcar (COFC), 108
continuity, 296
continuous production, 127
contract carriers, 110
contract manufacturing, 77
contract warehouses, 129
contracting, 203
control risks, 182
co-operative warehouses, 130
corporate purchase cards, 99
correlation, 45
costs, 6
cost strategy, 9
cost-based pricing, 97
distribution network types
distributor storage with carrier delivery, 231
distributor storage with customer pickup, 234
distributor storage with last-mile delivery, 232
e-business impact, 235
 manufacturer storage with direct shipping, 229
manufacturer storage with direct shipping and in-transit merge, 230
retailer storage with customer pickup, 234-235
facilities, 226-227, 240-242
inventory, 53-55
carrying or holding costs, 54
ordering costs, 54
setup costs, 54-55
total cost minimized, 55
reverse logistics, 161
supply chain software market, 217
transportation, 105
cost elements, 113-114
cost factors, 111-112
rates charged, 114-116
cost-volume (CV) analysis, 240-242
Council of Supply Chain Management Professionals (CSCMP), 4, 67,
103
counter seasonal demand, 77
CPFR (collaborative planning, forecasting, and replenishment), 205,
208-210
CPIM (Certified Production and Inventory Management), 29
CPSM (Certified Professional in Supply Management), 29, 89
CR (critical ratio), 85
CRCs (centralized return centers), 168-169
CRM (custom relationship management)
customer service, 150
internal versus external metrics, 152-153
levels of focus, 153
managing, 153-154
multifunctional dimensions of, 151
overview, 150-151
service failure and recovery, 153-154
 service quality and metrics, 152
transactional elements of, 151-152
OMSs (order management systems), 155-156
overview, 147-148, 150
software, 214
cross-docking warehouses, 128
CSCMP (Council of Supply Chain Management Professionals), 4, 103
CSCP (Certified Supply Chain Professional), 29
cube rates, 116
cube utilization (warehouses), 136
culture (Lean), 281-283
customer centricity, 294
customer classification of warehouses, 127-128
customer collaboration, 204-205
customer loyalty with reverse logistics, 163
customer relationship management. See CRM (custom relationship
management)
customer service, 150
internal versus external metrics, 152-153
levels of focus, 153
managing, 153-154
multifunctional dimensions of, 151
overview, 150-151
service failure and recovery, 153-154
service quality and metrics, 152
transactional elements of, 151-152
customer service metrics, 269
customer-facing metrics, 142-143
customers brokers, 109
CV (cost-volume) analysis, 240-242
cycle counting, 63-64

D
dashboards, 273-274
data analytics, 266-267
data versus information, 211-212
DCs (distribution centers), 128
decline (product lifecycle), 41-42
defects, 280
delivery, 99, 150. See also transportation systems
Dell Computer, 10-11, 226
Delphi method, 39
demand and supply risk, 182
demand drivers, 36-37
external demand drivers, 37
internal demand drivers, 36
demand options, 76-77
demand planning
demand management, 215
forecasting, 37-38
ABC method, 46-47
associative models, 40, 44-46
Delphi method, 39
demand drivers, 36-37
forecasting realities, 35-36
forecasting software, 46-47
history of, 34-35
jury of executive opinion, 39
knowledge of products, 38-39
metrics, 46-48
process steps, 37-38
product lifestyles and, 40-42
pyramid approach to, 34-35
quantitative versus qualitative models, 38-40
time series models, 40, 42-43
types of forecasts, 36
 overview, 23, 33-34
technology and best practices, 46-47
typical planning and scheduling process, 33
demand planning cross-functional meetings, 74
demand time fence (DTF), 80
density
density rates, 116
transportation costs and, 112
dependent demand inventory, 51-53
deregulation, effects on pricing, 115
descriptive analytics, 266
design
distribution network types, 228
distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-
230
retailer storage with customer pickup, 233-234
facility layout
assembly line design and balancing, 256-258
career outlook, 262
cellular layouts, 253-254
facility design in service organizations, 255-256
fixed-position layouts, 255
hybrid layouts, 253
overview, 249-250
process layouts, 250-252
product layouts, 250
technology, 261
warehouse design and layout, 260-261
 work cell staffing and balancing, 258-259
facility location
careers in supply chain network analysis, 247
center of gravity analysis, 243-245
cost versus service, 226-227
CV (cost-volume) analysis, 240-242
dominant factors in manufacturing, 240
dominant factors in services, 240
importance of, 225-226
location decisions hierarchy, 238-240
network optimization solutions, 246-247
overview, 225
strategic considerations, 237-238
transportation problem model, 245-246
weighted factor rating analysis, 242-243
for profitability, 295
reverse logistics systems, 162-164
documentation, 165
product collection system, 164-165
product location, 164
recycling or disposal centers, 165
deterioration, 140
diagnostic analytics, 266
diagnostic indicators, 274
digital demand, 294
direct procurement, 93
discrete orders, 98
dispersion, 114
disruptions in supply chain, 183
distance, transportation costs and, 111
distributed order management (DOM) system, 155
distribution centers (DCs), 128
distribution networks, 228, 294
 distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-230
retailer storage with customer pickup, 233-234
distribution requirements planning (DRP), 61, 66-67
distribution warehouses, 125
distributor storage
with carrier delivery, 230-231
with customer pickup, 233-234
with last-mile delivery, 232-233
diversion, 113
documents
B/L (bill of lading), 117-118
freight bills, 118
freight claims, 119
international B/L (bill of lading), 121-122
international transport documents, 121
reverse logistics documentation, 165
sales documents, 119-120
terms of sale, 116-117, 120-121
DOM (distributed order management) system, 155
domestic transportation documents, 116-119
B/L (bill of lading), 117-118
freight bills, 118
freight claims, 119
terms of sale, 116-117
DRP (distribution requirements planning), 61, 66-67
DTF (demand time fence), 80
dynamic replenishment, 204
E
earliest due date (EDD), 85
e-business impact on distribution networks, 235-236
Economic Order Quantity (EOQ) inventory model, 55-57
economic value analysis (EVA), 267
economics
transportation
cost elements, 113-114
cost factors, 111-112
shipping patterns, 112
transportation economics, 110-111
warehouses
economic benefits, 131-135
economic needs for warehousing, 126-127
ECR (Efficient Customer Response), 207-208
EDD (earliest due date), 85
EDI (electronic data interchange), 99
Efficient Customer Response (ECR), 207-208
EFT (electronic funds transfer), 99
electronic data interchange (EDI), 99
electronic funds transfer (EFT), 99
emerging supply chain technology trends, 219-221
employees
hiring, 77
laying off, 77
part-time workers, 77
subcontracting, 77
temporary workers, 77
end-to-end visibility, 296
engineer-to-order (ETO), 79
enterprise resource systems (ERP), 216
enterprise solutions, 213
environmental considerations for reverse logistics, 170-172
environmental risk, 182
EOQ (Economic Order Quantity) inventory model, 55-57
EPR (extended product responsibility) programs, 171
e-procurement, 99
ERP (enterprise resource systems), 216
error measurement, forecasting, 46-48
mean absolute deviation (MAD), 47
mean absolute percent error (MAPE), 47-48
mean squared error (MSE), 47
tracking signals, 48
ETO (engineer-to-order), 79
EVA (economic value analysis), 267
evaluating vendors, 96
event management, 216
exception rates, 116
execution
execution viewpoint, 214
execution-driven planning solutions, 221
execution-level collaboration, 203
supply chain execution, 215-216
executive opinion, jury of, 39
expediting, 114
exponential smoothing, 43
extended enterprise solutions (XES), 213
extended product responsibility (EPR) programs, 171
external demand drivers, 37
external integration, 201-206
benefits of, 206
collaboration methods, 206
CPFR (collaborative planning, forecasting, and replenishment), 208-
210
ECR (Efficient Customer Response), 207-208
QR (quick response), 206-207
 customer collaboration, 204-205
levels of external collaboration, 202-203
S&OP (sales & operational planning), 206
supplier collaboration, 204
supply chain collaboration by industry, 202
types of external collaboration, 203-204
external risks (GSCM), 182-183

F
facilities
distribution network types, 228
distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-
230
retailer storage with customer pickup, 233-234
layout
assembly line design and balancing, 256-258
career outlook, 262
cellular layouts, 253-254
facility design in service organizations, 255-256
fixed-position layouts, 255
hybrid layouts, 253
Lean, 289
overview, 249-250
process layouts, 250-252
product layouts, 250
technology, 261
warehouse design and layout, 260-261
work cell staffing and balancing, 258-259
 location
careers in supply chain network analysis, 247
center of gravity analysis, 243-245
cost versus service, 226-227
CV (cost-volume) analysis, 240-242
dominant factors in manufacturing, 240
dominant factors in services, 240
importance of, 225-226
location decisions hierarchy, 238-240
network optimization solutions, 246-247
overview, 225
strategic considerations, 237-238
transportation problem model, 245-246
weighted factor rating analysis, 242-243
factory warehouses, 127
failure in customer service, 153-154
FAK (freight-all-kinds) rates, 116
FCFS (first come, first served), 85
FCS (finite capacity scheduling), 85
few suppliers, 92
financial management for reverse logistics, 170
financial metrics, 270
finished goods, 53
finite capacity scheduling (FCS), 85
firm infrastructure, 8
first come, first served (FCFS), 85
Fixed-Period model, 60-61
fixed-position layouts, 255
Fixed-Quantity model, 57-60
probabilistic safety stock, 58-60
rule of thumb safety stock calculations, 60
safety stock, 58
flexibility strategy, 10, 295
F.O.B. destination, 117
F.O.B. origin, 117
focus, levels of, 153
forecasting
ABC method, 46-47
associative models, 40
correlation, 45
least squares method, 44
multiple regression, 46
seasonality, 45-46
Delphi method, 39
demand drivers, 36-37
external demand drivers, 37
internal demand drivers, 36
forecasting realities, 35-36
history of, 34-35
jury of executive opinion, 39
knowledge of products, 38-39
market surveys, 39
metrics, 46-48
mean absolute deviation (MAD), 47
mean absolute percent error (MAPE), 47-48
mean squared error (MSE), 47
tracking signals, 48
overview, 33-34
process steps, 37-38
product lifestyles and, 40-42
decline, 41-42
growth phase, 41
introduction phase, 41
maturity, 41
pyramid approach to, 34-35
quantitative versus qualitative models, 38-40
 technology and best practices, 46-47
time series models, 42-43
components, 42-43
exponential smoothing, 43
moving average, 43
naive approach, 43
overview, 40
weighted moving average, 43
types of forecasts, 36
form utility, 15
forward scheduling, 84
foul B/L (bill of lading), 122
fourth-party-logistics (4PL) providers, 196-198
components for success, 197
Menlo Worldwide Logistics case study, 197-198
players, 197
free sale, certificate of, 120
freedom of trade, 174
freight bills, 118
freight brokers, 109
freight claims, 119
freight classifications, 115
freight forwarders, 109
freight-all-kinds (FAK) rates, 116
full-truckload carriers, 107

G
gatekeeping, 167-168
general warehouses, 125
global intermediaries, 109-110, 178
global supply chain management. See GSCM (global supply chain
management)
globalization, 24, 295
 benefits of, 174-175
growth of, 173-175
government warehouses, 130
green logistics, 171-172
growth
of globalization, 173-175
growth phase (product lifecycle), 41
in logistics industry, 295
GSCM (global supply chain management), 11
challenges, 178-180
growth of globalization, 173-175
international transportation methods, 177-178
overview, 173
questions to ask when going global, 179-180
risk management, 181-185
external risks, 182-183
internal risks, 182
potential risk identification and impact, 181
risk mitigation, 184-185
supply chain disruptions, 183
strategy development, 175-177

H
hardware inventory planning, 67
Hewlett-Packard, 171
for-hire carriers, 107, 110
for-hire transportation industry, 192
hiring employees, 77
history
forecasting, 34-35
Lean, 278-279
logistics, 13-14
transportation systems, 103-105
 warehouse management, 126
human resource management, 8
human supply chain technology, 221
hybrid layouts, 253

I
IBM ILOG LogicNet Plus XE, 246-247
ICC (Interstate Commerce Commission), 104
identifying risk, 181
idle time, 77
import licenses, 120
inbound logistics, 7
Incoterms, 120-121
independent versus dependent demand inventory, 51-53
indicators, 273-274
indirect procurement, 93
industry framework, 18
influence demand, 76
information
versus data, 211-212
flows, 212
information utility, 15
needs, 213-214
information technology systems (reverse logistics), 168
in-sourcing, 91
inspection, certificate of, 120
Institute of Business Forecasting & Planning, 34
Institute for Supply Management (ISM), 29, 89
insurance, certificate of, 120
integrated business planning, 76
integration. See supply chain integration
interchange, 114
intermodal carriers, 108
internal demand drivers, 36
internal integration, 200-201
internal metrics (warehouses), 143
internal processes, 19
internal risks (GSCM), 182
international B/L (bill of lading), 121-122
International Commercial Terms, 120-121
International Society for Logistics (SOLE), 103
international transportation documents, 119-122
international B/L (bill of lading), 121-122
sales documents, 119-120
terms of sale, 120-121
transport documents, 121
Interstate Commerce Commission (ICC), 104
introduction phase (product lifecycle), 41
inventory control and accuracy, 63-64
inventory planning
ABC method, 61-63
career outlook, 67
channels of distribution, 52
costs of inventory, 53-55
carrying or holding costs, 54
ordering costs, 54
setup costs, 54-55
total cost minimized, 55
cycle counting, 63-64
EOQ (Economic Order Quantity) inventory model, 55-57
hardware, 67
independent versus dependent demand inventory, 51-53
inventory control and accuracy, 63-64
metrics, 64-65
overview, 51
ROP (Reorder Point) models, 57
 Fixed-Period model, 60-61
Fixed-Quantity model, 57-60
Single-Period model, 61
software, 65-67
types of inventory, 53
typical planning and scheduling process, 51
inventory waste, 280
invoice approval, 100
invoicing processes, 204
ISM (Institute for Supply Management), 29, 89

J
JIT (just-in-time) programs, 92
Johnson & Johnson, 92, 172
joint ventures, 92
jury of executive opinion, 39
just-in-time (JIT) programs, 92

K
kaizen, 283
Kanban, 204, 291-292
key performance indicators (KPIs), 273-274
knowledge of products, 38-39
KPIs (key performance indicators), 273-274

L
lagging indicators, 274
laying off employees, 77
layout
facility layout
assembly line design and balancing, 256-258
career outlook, 262
cellular layouts, 253-254
facility design in service organizations, 255-256
 fixed-position layouts, 255
hybrid layouts, 253
Lean, 289
overview, 249-250
process layouts, 250-252
product layouts, 250
technology, 261
warehouse design and layout, 260-261
work cell staffing and balancing, 258-259
warehouse layout, 137-140
deterioration, 140
material handling, 138-139
pallet positioning, 139
pilferage, 140
leadership, trends in, 296-297
leading indicators, 274
Lean, 26, 201
culture and teamwork, 281-283
history of, 278-279
kaizen, 283
non-value-added activities, 279-280
overview, 277
tools, 286-287
5S, 288-289
batch size reduction and quick changeover, 289-290
facility layout, 289
point-of-use storage, 291
pull systems/kanban, 291-292
quality at the source, 290
Six Sigma, 292
standardized work, 288
TPM (total productive maintenance), 291
visual controls, 289
 work cells, 291-292
value-added activities, 279-280
VSMs (value stream maps), 283-286
waste, 280-281
least squares method, 44
legal types of carriage, 110-111
for-hire carriers, 110
private carriers, 110-111
less-than-truckload (LTL) carriers, 107
level plans, 78
levels (SCOR model), 6
leveraging effect (supply chain), 8-9
lifecycles (product)
forecasting and, 40-42
decline, 41-42
growth phase, 41
introduction phase, 41
maturity, 41
overview, 25
Lighthouse for the Blind, 219
line haul, 113
linear regression, 44
loading orders, 149
local line haul carriers, 107
location (facility)
careers in supply chain network analysis, 247
center of gravity analysis, 243-245
cost versus service, 226-227
CV (cost-volume) analysis, 240-242
distribution network types, 228
distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
 e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-
230
retailer storage with customer pickup, 233-234
dominant factors in manufacturing, 240
dominant factors in services, 240
importance of, 225-226
location decisions hierarchy, 238-240
network optimization solutions, 246-247
overview, 225
strategic considerations, 237-238
transportation problem model, 245-246
weighted factor rating analysis, 242-243
location cost-volume analysis, 240-242
logistics. See also reverse logistics
career outlook, 293-294
green logistics, 171-172
history of, 13-14
inbound logistics, 7
outbound logistics, 7
percentage of U.S. GDP (gross domestic product), 3
trends in, 295-296
Logistix Solutions, 246-247
longest processing time (LPT), 85
lot sizing, 149
LPT (longest processing time), 85
LTL (less-than-truckload) carriers, 107

M
MAD (mean absolute deviation), 47
maintenance, repair, and operations (MRO), 53
make versus buy, 90
make-to-order (MTO), 79
make-to-stock (MTS), 79
managerial focus, 19
manufacture, certificate of, 120
manufacturer storage
with direct shipping, 228-229
with direct shipping and in-transit merge, 229-230
manufacturing, trends in, 294-295
many suppliers, 92
MAPE (mean absolute percent error), 47-48
market presence, warehouses and, 135
market surveys, 39
market-based pricing, 97
marketing, 8
master production schedule (MPS), 73, 78-80
material handling, 138-139
Material Requirements Planning. See MRP (Material Requirements
Planning)
maturity (product lifecycle), 41
maximizing recovery rates with reverse logistics, 163
mean absolute deviation (MAD), 47
mean absolute percent error (MAPE), 47-48
mean squared error (MSE), 47
measurement. See metrics
meetings
demand planning cross-functional meetings, 74
pre-S&OP meeting, 74
supply planning cross-functional meeting, 74
Menlo Worldwide Logistics case study, 197-198
Merck, 92
metrics
ABC method, 267
balanced scorecard approach, 267, 268-270
 customer service metrics, 269
financial metrics, 270
operational metrics, 269
benchmarking, 274-275
customer service
internal versus external metrics, 152
service quality and metrics, 152
data analytics, 266-267
EVA (economic value analysis), 267
forecasting, 46-48
ABC method, 46-47
mean absolute deviation (MAD), 47
mean absolute percent error (MAPE), 47-48
mean squared error (MSE), 47
tracking signals, 48
history of, 266
inventory planning, 64-65
measurement categories, 267-268
overview, 265
procurement, 100-101
SCOR model, 6-7, 267, 270-272
supply chain dashboard and KPIs, 273-274
transportation systems, 122
warehouse management, 142-143
Mission Foods, 219
mission statement, 15-16
mitigating risk (GSCM), 184-185
mixing warehouses, 133-134
MNCs (multinational corporations), 174
mobile computing, 219
models
SCOR model, 5-6
illustration, 5
 metrics, 6-7
Value Chain model, 7-8
modes of transportation, 105-110
air carriers, 108
global intermediaries, 109-110
intermodal carriers, 108
motor carriers, 107
pipeline, 108-109
rail, 106-107
shipment characteristics, 106
motion waste, 280
Motor Carrier Act of 1980, 104
motor carriers
domestic transportation, 107
international transportation, 178
Motorola, 292
moving averages, 43
MPS (master production schedule), 73, 78-80
MRO (maintenance, repair, and operations), 53
MRP (Material Requirements Planning), 80-83
BOM (bill of materials), 80-81
mechanics, 81-83
MSE (mean squared error), 47
MTO (make-to-order), 79
MTS (make-to-stock), 79
multichannel sourcing, 296
multi-enterprise visibility systems, 220-221
multifunctional dimensions of customer service, 151
multinational corporations (MNCs), 174
multiple regression, 46

N
naive approach (time series models), 43
National Motor Freight Classification (NMFC), 115
near shoring, 295
near sourcing, 92
negotiable B/L (bill of lading), 122
negotiation
price, 97-98
reverse logistics, 170
Nestlé, 172
network design
distribution network types, 228
distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-
230
retailer storage with customer pickup, 234-235
facility layout
assembly line design and balancing, 256-258
career outlook, 262
cellular layouts, 253-254
facility design in service organizations, 255-256
fixed-position layouts, 255
hybrid layouts, 253
overview, 249-250
process layouts, 250-252
product layouts, 250
technology, 261
warehouse design and layout, 260-261
work cell staffing and balancing, 258-259
facility location
careers in supply chain network analysis, 247
 center of gravity analysis, 243-245
cost versus service, 226-227
CV (cost-volume) analysis, 240-242
dominant factors in manufacturing, 240
dominant factors in services, 240
importance of, 225-226
location decisions hierarchy, 238-240
network optimization solutions, 246-247
overview, 225
strategic considerations, 237-238
transportation problem model, 245-246
weighted factor rating analysis, 242-243
new demand, 77
NMFC (National Motor Freight Classification), 115
non-value-added activities, 279-280
non-vessel-operating common carriers (NVOCCs), 110
notified bill of lading, 117
NVOCCs (non-vessel-operating common carriers), 110

O
ocean bill of lading, 122
ocean transport, 177
omni-channel marketing, 10, 294
OMSs (order management systems), 155-156
operational metrics, 269
operational-level measurement, 268
operations
defined, 7
GSCM (global supply chain management), 11
challenges, 178-180
growth of globalization, 173-175
international transportation methods, 177-178
overview, 173
 questions to ask when going global, 179-180
risk management, 181-185
strategy development, 175-177
procurement
delivery, 99
direct procurement, 93
few versus many suppliers, 92
indirect procurement, 93
invoice approval, 100
joint ventures, 92
make versus buy, 90
metrics, 100-101
near sourcing, 92
outsourcing, 90-91
overview, 89-90
price negotiation, 97-98
process overview, 93
purchase orders, 98-99
purchasing, 89
receipt of goods, 100
requirements, 93-94
in-sourcing, 91
specifications, 94-95
strategic sourcing, 89-90
supplier selection, 95-96
technology, 101
vertical integration, 92
virtual companies, 92-93
reverse logistics
challenges, 165-166
costs, 161
environmental considerations, 170-172
managing, 166-170
 overview, 157-158
process steps, 161-162
recall, 159
recycling and waste disposal, 160
refilling, 159
remanufacturing, 159-160
repairs and refurbishing, 158
return rates by industry, 160-161
strategic uses of, 162-164
system design, 162-164
transportation systems
costs, 105
domestic transportation documents, 116-119
for-hire carriers, 110
history, 103-105
international transportation documents, 119-122
international transportation methods, 177-178
legal types of carriage, 110-111
metrics, 122
modes, 105-110
overview, 103
private carriers, 110-111
rates charged, 114-116
TMS (transportation management systems), 122
transportation economics, 110-111
warehouse management
distribution warehouses, 125
economic benefits, 131-135
economic needs for warehousing, 126-127
facility layout, 137-140
general warehouses, 125
history of, 126
metrics, 142-143
 overview, 125-126
packaging, 141-142
picking, 141
putaway, 140, 143
receiving, 141
shipping, 141
size of facility, 135-137
storage, 141
types of warehouses, 127-131
WMS (warehouse management system), 143-144
YMS (yard management system), 145
opportunities in SCM (supply chain management), 23-26
optimization of supply chains, 298
order batching, 149
order bill of lading, 117
to order B/L (bill of lading), 122
order management
OMSs (order management systems), 155-156
order delivery, 150
order placement, 148
order preparation and loading, 149
order processing, 148-149
order-filling accuracy, 149
overview, 147-148
process, 148
order management systems (OMSs), 155-156
ordering costs, 54
origin, certificate of, 119
outbound logistics, 7
outsourcing, 25, 90-91
3PLs (third-party-logistics providers), 193-196
advantages, 194
disadvantages, 194-195
 Ryder case study, 195-196
4PLs (fourth-party-logistics providers), 196-198
components for success, 197
Menlo Worldwide Logistics case study, 197-198
players, 197
outsourced manufacturer collaboration, 204
overview, 189-190
reasons to outsource, 190-191
reverse logistics, 170
steps in outsourcing process, 191-192
traditional service providers, 192-193
overprocessing, 280
overproduction, 280
overtime, 77
ownership type (warehouses), 129-130

P
packaging, 141-142, 178
pallet positioning, 139
Pareto principle, 61
partnerships, 296
part-time workers, 77
pCards, 99
people-enabling software, 221
performance attributes (SCOR model), 6
periods of supply (POS), 65
physical distribution, 13
picking, 141
pickup and delivery, 113
pilferage, 140
pipeline, 108-109
place utility, 15
placing orders, 148
planning
aggregate planning and scheduling
demand options, 76-77
integrated business planning, 76
MPS (master production schedule), 78-80
MRP (Material Requirements Planning), 80-83
overview, 69
production strategies, 79
S&OP processes, 74-76
short-term scheduling, 83-86
strategies, 78
supply capacity options, 77
technology, 86
demand planning. See demand planning
forecasting
ABC method, 46-47
associative models, 40, 44-46
Delphi method, 39
demand drivers, 36-37
forecasting realities, 35-36
history of, 34-35
jury of executive opinion, 39
knowledge of products, 38-39
market surveys, 39
metrics, 46-48
overview, 33-34
process steps, 37-38
product lifestyles and, 40-42
pyramid approach to, 34-35
quantitative versus qualitative models, 38-40
technology and best practices, 48-49
time series models, 40, 42-43
types of forecasts, 36
 inventory planning
ABC method, 61-63
career outlook, 67
channels of distribution, 52
costs of inventory, 53-55
cycle counting, 63-64
EOQ (Economic Order Quantity) inventory model, 55-57
hardware, 67
independent versus dependent demand inventory, 51-53
inventory control and accuracy, 63-64
metrics, 64-65
overview, 51
ROP (Reorder Point) models, 57-61
software, 65-67
types of inventory, 53
typical planning and scheduling process, 51
supply chain planning, 215
planning time fence (PTF), 80
players, 4PLs (fourth-party-logistics providers), 197
PLM (product lifecycle management) software, 214
point solutions, 213
point-of-use storage, 291
pooling, 113
Porter, Michael, 7
POS (periods of supply), 65
possession utility, 15
postponement, warehouses and, 134
predictive analytics, 266
prenegotiated blanket orders, 98
prenegotiated vendor-managed inventory (VMI), 98
preparing orders, 149
pre-S&OP meeting, 74
prescriptive analytics, 266
price negotiation, 95-96
price stabilization, 127
pricing
competitive bidding, 97
cost based, 97
deregulation and, 115
market based, 97
price negotiation, 97-98
price stabilization, 127
priorities
priority rules, 85
processing, 149
private carriers, 110-111
private warehouses, 129
probabilistic safety stock, 58-60
processes
forecasting process steps, 37-38
internal processes, 19
process layouts, 250-252
procurement
delivery, 99
invoice approval, 100
price negotiation, 97-98
process overview, 93
purchase orders, 98-99
receipt of goods, 100
requirements, 93-94
specifications, establishing, 94-95
supplier selection, 95-96
reverse logistics, 161-162
analysis, 162
processing, 162
receiving, 161
 sorting and staging, 161-162
support, 162
risk, 182
S&OP processes, 74-76
processing
orders, 148-149
priorities, 149
reverse logistics, 162
Proctor and Gamble, 36
procurement
defined, 8
delivery, 99
direct procurement, 93
few versus many suppliers, 92
indirect procurement, 93
invoice approval, 100
joint ventures, 92
make versus buy, 90
metrics, 100-101
near sourcing, 92
outsourcing, 90-91
overview, 89-90
price negotiation, 97-98
process overview, 93
purchase orders, 98-99
purchasing, 89
receipt of goods, 100
requirements, 93-94
in-sourcing, 91
specifications, 94-95
strategic sourcing, 89-90
supplier selection, 95-96
technology, 101
 vertical integration, 92
virtual companies, 92-93
product collection system (reverse logistics), 164-165
product flow (warehouses), 136-137
product layouts, 250
product lifecycle management (PLM) software, 214
product lifecycles
forecasting and, 40-42
decline, 41-42
growth phase, 41
introduction phase, 41
maturity, 41
overview, 25
product location (reverse logistics), 164
production economies of scale, 127
Production Quantity EOQ model, 56
production strategies, 79
profitability, design for, 295
protecting profits with reverse logistics, 163
PTF (planning time fence), 80
public warehouses, 129, 192-193
publishing industry, return rates in, 160
pull systems, 291-292
purchase orders, 98-99
purchasing, 89
putaway, 140, 143
pyramid approach to forecasting, 34-35

Q
QR (quick response), 206-207
qualitative forecasting models
Delphi method, 39
jury of executive opinion, 39
 knowledge of products, 38-39
market surveys, 39
quantitative versus qualitative models, 38-39
quality
customer service, 152
quality at the source, 290
strategy, 9
quantitative forecasting models
associative models, 40
correlation, 45
least squares method, 44
multiple regression, 46
quantitative versus qualitative models, 39-40
seasonality, 45-46
time series models, 42-43
components, 42-43
exponential smoothing, 43
moving average, 43
naive approach, 43
overview, 40
weighted moving average, 43
Quantity Discount EOQ model, 57
quick response (QR), 206-207

R
radio frequency identification (RFID), 67, 219
rail
domestic transportation, 106-107
international transportation, 178
rates (transportation), 114-116
effects of deregulation on pricing, 115
freight classifications, 115
rate determination, 116
raw materials, 53
recall, 159
receipt of goods, 100
receiving, 141, 161
reconsignment, 113
recovery, customer service, 153-154
recycling and waste disposal, 160, 165
refilling, 159
refurbishing, 158, 169-170
regional railroads, 107
regression
linear regression, 44
multiple regression, 46
reliability, 6
remanufacturing, 159-160, 169-170
Reorder Point models. See ROP (Reorder Point) models
repairs, 158
request for quotation (RFQ), 95
requests for proposals (RFPs), 95, 191
responsiveness, 6
retail industry
retail distribution warehouses, 127
retailer storage with customer pickup, 233-234
return rates, 160-161
S&OP (sales & operational planning), 76
return rates by industry, 160-161. See also reverse logistics
automotive industry, 160-161
computer industry, 160
publishing industry, 160
retail industry, 160-161
returns-to-revenue, 162
revenue, positively impacting with reverse logistics, 162-164
reverse logistics
challenges, 165-166
costs, 161
environmental considerations, 170-172
managing, 166-170
asset recovery, 170
CRCs (centralized return centers), 168-169
financial management, 170
gatekeeping, 167-168
information technology systems, 168
negotiation, 170
outsourcing, 170
remanufacture and refurbishment, 169-170
zero returns, 169
overview, 157-158
process steps, 161-162
analysis, 162
processing, 162
receiving, 161
sorting and staging, 161-162
support, 162
recall, 159
recycling and waste disposal, 160
refilling, 159
remanufacturing, 159-160
repairs and refurbishing, 158
return rates by industry, 160-161
automotive industry, 160-161
computer industry, 160
publishing industry, 160
retail industry, 160-161
strategic uses of, 162-164
system design, 162-164
documentation, 165
 product collection system, 164-165
product location, 164
recycling or disposal centers, 165
warehouses, 129
RFID (radio frequency identification), 67, 219
RFPs (requests for proposals), 95, 191
RFQ (request for quotation), 95
risk management
GSCM (global supply chain management), 181-185
external risks, 182-183
internal risks, 182
potential risk identification and impact, 181
risk mitigation, 184-185
supply chain disruptions, 183
overview, 295
risk matrix, 181
ROP (Reorder Point) models, 57
Fixed-Period model, 60-61
Fixed-Quantity model, 57-60
probabilistic safety stock, 58-60
rule of thumb safety stock calculations, 60
safety stock, 58
Single-Period model, 61
routine viewpoint, 213
rule of thumb safety stock calculations, 60
rules, priority, 85
Ryder, 195-196

S
S&OP (sales & operational planning). See aggregate planning and
scheduling
S&T (switching and terminal) carriers, 107
SaaS (software-as-a-service), 217, 219
safety stock
explained, 58
probabilistic safety stock, 58-60
rule of thumb safety stock calculations, 60
sales, 8
sales & operational planning (S&OP). See aggregate planning and
scheduling
sales documents, 119-120
Sawtooth model, 56
SCC (Supply Chain Council) SCOR model, 5-6
illustration, 5
metrics, 6-7
scheduling. See aggregate planning and scheduling
SCM (supply chain management), 4, 13
career outlook, 26-29, 293-294
certification programs, 24-29
competitive advantage, 9-10
CRM (custom relationship management)
customer service, 150-154
OMSs (order management systems), 155-156
overview, 147-148, 150
defined, 4-5
GSCM (global supply chain management), 11
history of, 13-14
leveraging effect, 8-9
opportunities and challenges, 23-26
optimization of supply chains, 298
order management
order delivery, 150
order placement, 148
order preparation and loading, 149
order processing, 148-149
overview, 147-148
 process, 148
SCOR model, 5-6
illustration, 5
metrics, 6-7
segmentation, 10-11
strategy, 15
elements and drivers, 17-19
methodology, 19-23
mission statement, 15-16
strategic choices, 17
SWOT analysis, 16-17
trends
logistics trends, 295-296
supply chain leadership trends, 296-297
supply chain trends, 294-295
technology trends, 297-299
value as utility, 14-15
Value Chain model, 7-8
scope, 6
SCOR model, 5-6, 267, 270-272
illustration, 5
metrics, 6-7
seasonality
overview, 45-46
seasonal demand, 127
seasonal production, 126
segmenting supply chain, 10-11, 298
selecting suppliers, 95-96
sequencing, 84-85
services
defined, 8
service orientation, 298
service scheduling, 85-86
 service utility, 15
setup costs, 54-55
shipment characteristics by mode of transportation, 106
shipment consolidation, 149
shipping, 112, 114, 141
shortest processing time (SPT), 85
short-term scheduling, 83-86
FCS (finite capacity scheduling), 85
sequencing, 84-85
service scheduling, 85-86
types of scheduling, 84
typical planning and scheduling process, 83
short-term supply chain technology trends, 218
signals (tracking), 48
simulation, 298
single integrated solution software, 217
Single-Period model, 61
Six Sigma, 26, 201, 291-292
size of warehouses, 135-137
cube utilization, 136
number of stories, 135
product flow, 136-137
skills waste, 280
small-package carriers, 107
Social Security Administration (SSA), 219
software
aggregate planning and scheduling, 86
forecasting software, 46-47
inventory planning, 65-67
procurement, 101
software market (SCM software), 214-218
best-in-class versus single integration solution, 217
BI (business intelligence), 216
 consultants, 218
costs, 217
emerging trends, 219-221
short-term trends, 218
supply chain event management, 216
supply chain execution, 215-216
supply chain planning, 215
software-as-a-service (SaaS), 217, 219
TMS (transportation management systems), 122
SOLE (International Society for Logistics), 103
sorting and staging (reverse logistics), 161-162
source control, 290
sources of risk, 182-183
sourcing, 295
multichannel sourcing, 296
in-sourcing, 91
specifications (procurement), 94-95
SPT (shortest processing time), 85
SRM (supplier relationship management) software, 214
SSA (U.S. Social Security Administration), 219
stabilization of prices, 127
standardized work, 288
STB (Surface Transportation Board), 115
stopping in transit, 113
storage
distribution network types, 228
distributor storage with carrier delivery, 230-231
distributor storage with customer pickup, 233-234
distributor storage with last-mile delivery, 232-233
e-business impact, 235-236
manufacturer storage with direct shipping, 228-229
manufacturer storage with direct shipping and in-transit merge, 229-
230
 retailer storage with customer pickup, 233-234
global intermediaries, 178
point-of-use storage, 291
warehouse storage, 141
stories (warehouse), 135
stowability, transportation costs and, 112
straight bill of lading, 117
strategic alliances. See supply chain partners
strategy, 15
aggregate planning and scheduling, 78
elements and drivers, 17-19
GSCM (global supply chain management) strategy development, 175-
177
methodology, 19-23
mission statement, 15-16
reverse logistics, 162-164
strategic choices, 17
strategic collaboration, 202
strategic sourcing, 89-90
strategic viewpoint, 213
strategic-level measurement, 268
SWOT analysis, 16-17
subcontracting, 77
supplier relationship management (SRM) software, 214
suppliers
collaboration with, 25
few versus many suppliers, 92
selecting, 95-96
supplier collaboration, 204
supplier management, 295
supplier relationship management (SRM) software, 214
supply capacity options, 77
supply chain collaboration, 25
Supply Chain Council SCOR model. See SCC (Supply Chain Council)
SCOR model
supply chain dashboard and KPIs, 273-274
supply chain defined, 4
supply chain disruptions, 183
supply chain execution, 215-216
supply chain integration. See also supply chain partners
collaboration methods, 206
CPFR (collaborative planning, forecasting, and replenishment), 208-
210
ECR (Efficient Customer Response), 207-208
QR (quick response), 206-207
external integration, 201-206
benefits of, 206
customer collaboration, 204-205
levels of external collaboration, 202-203
S&OP (sales & operational planning), 206
supplier collaboration, 204
supply chain collaboration by industry, 202
types of external collaboration, 203-204
internal integration, 200-201
overview, 199-200
supply chain partners
3PLs (third-party-logistics providers), 193-196
4PLs (fourth-party-logistics providers), 196-198
overview, 189-190
reasons to outsource, 190-191
steps in outsourcing process, 191-192
traditional service providers, 192-193
technology, 211
best of breed solutions, 213
bullwhip effect, 212
customer relationship management (CRM) software, 214
 data versus information, 211-212
enterprise solutions, 213
information needs, 213-214
point solutions, 213
product lifecycle management (PLM) software, 214
supplier relationship management (SRM) software, 214
supply chain information flows, 212
supply chain software market, 214-218
XES (extended enterprise solutions), 213
supply chain management. See SCM (supply chain management)
supply chain operations
GSCM (global supply chain management), 11
challenges, 178-180
growth of globalization, 173-175
international transportation methods, 177-178
overview, 173
questions to ask when going global, 179-180
risk management, 181-185
strategy development, 175-177
procurement
delivery, 99
direct procurement, 93
few versus many suppliers, 92
indirect procurement, 93
invoice approval, 100
joint ventures, 92
make versus buy, 90
metrics, 100-101
near sourcing, 92
outsourcing, 90-91
overview, 89-90
price negotiation, 97-98
process overview, 93
 purchase orders, 98-99
purchasing, 89
receipt of goods, 100
requirements, 93-94
in-sourcing, 91
specifications, 94-95
strategic sourcing, 89-90
supplier selection, 95-96
technology, 101
vertical integration, 92
virtual companies, 92-93
reverse logistics
challenges, 165-166
costs, 161
environmental considerations, 170-172
managing, 166-170
overview, 157-158
process steps, 161-162
recall, 159
recycling and waste disposal, 160
refilling, 159
remanufacturing, 159-160
repairs and refurbishing, 158
return rates by industry, 160-161
strategic uses of, 162-164
system design, 164-165
transportation systems
costs, 105
domestic transportation documents, 116-119
for-hire carriers, 110
history of, 103-105
international transportation documents, 119-122
international transportation methods, 177-178
 legal types of carriage, 110-111
metrics, 122
modes, 105-110
overview, 103
private carriers, 110-111
rates charged, 114-116
TMS (transportation management systems), 122-123
transportation economics, 111-114
warehouse management
distribution warehouses, 125
economic benefits, 131-135
economic needs for warehousing, 126-127
facility layout, 137-140
general warehouses, 125
history of, 126
metrics, 142-143
overview, 125-126
packaging, 141-142
picking, 141
putaway, 140, 143
receiving, 141
shipping, 141
size of facility, 135-137
storage, 141
types of warehouses, 127-131
WMS (warehouse management system), 143-144
YMS (yard management system), 145
supply chain partners. See also supply chain integration
3PLs (third-party-logistics providers), 193-196
advantages, 194
disadvantages, 194-195
Ryder case study, 195-196
4PLs (fourth-party-logistics providers), 196-198
 components for success, 197
Menlo Worldwide Logistics case study, 197-198
players, 197
overview, 189-190
reasons to outsource, 190-191
steps in outsourcing process, 191-192
traditional service providers, 192-193
supply chain planning, 215
supply chain segmentation, 298
supply chain strategy, 15
elements and drivers, 17-19
methodology, 19-23
mission statement, 15-16
strategic choices, 17
SWOT analysis, 16-17
supply chain technology, 211
best of breed solutions, 213
bullwhip effect, 212
customer relationship management (CRM) software, 214
data versus information, 211-212
emerging trends, 298
enterprise solutions, 213
information needs, 213-214
point solutions, 213
product lifecycle management (PLM) software, 214
supplier relationship management (SRM) software, 214
supply chain information flows, 212
supply chain software market, 214-218
best-in-class versus single integration solution, 217
BI (business intelligence), 216
consultants, 218
costs, 217
emerging trends, 219-221
 short-term trends, 218
supply chain event management, 216
supply chain execution, 215-216
supply chain planning, 215
trends in, 297-299
XES (extended enterprise solutions), 213
supply chain trends, 294-295
supply management, 215
supply planning cross-functional meeting, 74
supply risk, 182
support, reverse logistics, 162
Surface Transportation Board (STB), 115
surveys, market surveys, 39
sustainability, 171, 295-299
switching and terminal (S&T) carriers, 107
SWOT analysis, 16-17
system design, reverse logistics, 162-164
documentation, 165
product collection system, 164-165
product location, 164
recycling or disposal centers, 165

T
tactical collaboration, 202
tactical viewpoint, 213
tactical-level measurement, 268
talent development, 295
TAPS (Trans-Alaska Pipeline System), 108
teams (Lean), 281-283
technology, 211
aggregate planning and scheduling, 86
best of breed solutions, 213
bullwhip effect, 212
 customer relationship management (CRM) software, 214
data versus information, 211-212
development, 8
emerging trends, 298
enterprise solutions, 213
facility layout, 261
information needs, 213-214
network optimization solutions, 246-247
OMSs (order management systems), 155-156
point solutions, 213
procurement, 101
product lifecycle management (PLM) software, 214
reverse logistics, 168
supplier relationship management (SRM) software, 214
supply chain information flows, 212
supply chain software market, 214-218
best-in-class versus single integration solution, 217
BI (business intelligence), 216
consultants, 218
costs, 217
emerging trends, 219-221
short-term trends, 218
supply chain event management, 216
supply chain execution, 215-216
supply chain planning, 215
technology trends, 297-299
transportation systems, 122
warehouse management
WMS (warehouse management system), 143-144
YMS (yard management system), 145
XES (extended enterprise solutions), 213
temporary workers, 77
terminal handling, 114
terminals, 105
terms of sale, 116-117, 120-121
third-party-logistics (3PL) providers, 193-196
advantages, 194
disadvantages, 194-195
Ryder case study, 195-196
time series forecasting models, 42-43
components, 42-43
exponential smoothing, 43
moving average, 43
naive approach, 43
overview, 40
weighted moving average, 43
time strategy, 9
time utility, 15
TMS (transportation management systems), 122, 215-216
TNCs (transnational corporations), 174
TOFC (trailer on a flatcar), 108
tools (Lean), 286-287
5S, 288-289
batch size reduction and quick changeover, 289-290
facility layout, 289
point-of-use storage, 291
pull systems/kanban, 291-292
quality at the source, 290
Six Sigma, 292
standardized work, 288
TPM (total productive maintenance), 291
visual controls, 289
work cells, 291-292
total cost minimized, 55
total productive maintenance (TPM), 291
Toyota, 278
TPM (total productive maintenance), 291
tracing, 114
tracking signals, 48
traditional service providers, 192-193
trailer on a flatcar (TOFC), 108
transactional elements, customer service, 151-152
transactions, 6
Trans-Alaska Pipeline System (TAPS), 108
transit privilege, 113
transit sheds, 178
transnational corporations (TNCs), 174
transportation management systems (TMS), 122, 215-216
transportation problem model, 245-246
transportation systems
costs, 105
domestic transportation documents, 116-119
B/L (bill of lading), 117-118
freight bills, 118
freight claims, 119
terms of sale, 116-117
for-hire carriers, 110
history, 103-105
international transportation documents, 119-122
international B/L (bill of lading), 121-122
sales documents, 119-120
terms of sale, 120-121
transport documents, 121
international transportation methods, 177-178
legal types of carriage, 110-111
metrics, 122
modes, 105-110
air carriers, 108
global intermediaries, 109-110
 intermodal carriers, 108
motor carriers, 107
pipeline, 108-109
rail, 106-107
shipment characteristics by mode of transportation, 106
overview, 103
private carriers, 110-111
rates charged, 114-116
effects of deregulation on pricing, 115
freight classifications, 115
rate determination, 116
TMS (transportation management systems), 122
transportation economics, 110-111
cost elements, 113-114
cost factors, 111-112
shipping patterns, 112
transportation waste, 280
trends in supply chain management
logistics trends, 295-296
supply chain leadership trends, 296-297
supply chain trends, 294-295
technology trends, 297-299

U
UFC (Uniform Freight Classification), 115
uniform bill of lading, 117
Uniform Freight Classification (UFC), 115
unique value proposal, 19
UPS, 196
U.S. Social Security Administration (SSA), 219
utilities, 14-15

V
Value Chain model, 7-8
value chains, 7-8
value stream maps (VSMs), 283-286
value-added activities, 279-280
value-added networks (VANs), 99
VANs (value-added networks), 99
varying inventory levels, 77
vehicles, 105, 114
vendor evaluation, 96
vertical integration, 92
VICS (Voluntary Inter-industry Commerce Solutions), 208
virtual companies, 92-93
visibility, 296
visual controls, 289
Vizio, 92
Voluntary Inter-industry Commerce Solutions (VICS), 208
VSMs (value stream maps), 283-286
vulnerability maps, 181

W
waiting, 280
Walmart, 172
Warehouse Educational and Research Council (WERC), 126
warehouse management. See also facilities
distribution warehouses, 125
economic benefits, 131-135
accumulation, mixing, and sorting, 133-134
allocation, 134
consolidation, 132-133
market presence, 135
postponement, 134
economic needs for warehousing, 126-127
facility layout, 137-140
deterioration, 140
 material handling, 138-139
pallet positioning, 139
pilferage, 140
general warehouses, 125
history of, 126
metrics, 142-143
overview, 125-126
packaging, 141-142
picking, 141
public warehouses, 192-193
putaway, 140, 143
receiving, 141
shipping, 141
size of facility, 135-137
cube utilization, 136
number of stories, 135
product flow, 136-137
storage, 141
types of warehouses, 127-131
warehouse features, 130
warehouse strategy, 130-131
warehouses by customer classification, 127-128
warehouses by ownership type, 129-130
warehouses by role in supply chain, 128-129
warehouse design and layout, 260-261
WMS (warehouse management system), 65-66, 143-144, 215
YMS (yard management system), 145
warehouse management systems (WMS), 65-66, 143-144, 215
waste (Lean), 280-281
waste disposal and recycling, 160, 165
ways, 105
websites
American Production and Inventory Control Society, 67
 AST&L (American Society for Transportation & Logistics), 103
Council of Supply Chain Management Professionals, 67
Institute of Business Forecasting & Planning, 34
SOLE (International Society for Logistics), 103
WERC (Warehouse Educational and Research Council), 126
weighing, 114
weight, transportation costs and, 111
weighted factor rating analysis, 242-243
weighted moving average, 43
WERC (Warehouse Educational and Research Council), 126
WIP (work in progress), 53
WMS (warehouse management systems), 65-66, 143-144, 215
work cells, 291-292
layouts, 253-254
staffing and balancing, 258-259
work in progress (WIP), 53
workflow, 6

X-Y-Z
Xerox, 171
XES (extended enterprise solutions), 213

yard management system (YMS), 145

YMS (yard management system), 145

zero returns, 169