1

UNIT Suggested time allotment: 8 hours

2 SCM STRATEGIES, CHANNEL STRUCTURES, AND

DEMAND MANAGEMENT

TARGET GOALS FOR THE UNIT

 Make a case analysis of one of the logistics company in Davao City. (App)
 Make a report of how logistic companies are affected during the pandemic. (App)
 Present a video showing the flow of distribution. (C)

VALUES DESIRED: Respect, Fortitude, Accord

LESSON 2.1. CRAFTING BUSINESS AND SUPPLY CHAIN STRATEGIES

I. LEARNING OUTCOMES

 Discuss logistics management (U)

 Point out the different functions of logistics management. (An)

II. INPUT

Defining Business Strategy

The objective of all business enterprises resides in providing products and

service value that enables them not only to compete, but to continually win the
customer’s order. Whether it is manufacturer of toasters or a travel agency, successful
companies develop winning strategies and execute finely-tuned operations plans that
assure the customer that the product or service received possesses outstanding and
unique value.
Before planners begin to develop a supply chain strategy, however, they must
first define the strategy that will be used to run the business. The business strategy
defines what the company is today, where it wants to go, and what will it take to get
there. The output of this process is the mission statement and the business goals that
provide a single, consistent, and coherent direction guiding and coordinating the
company’s activities. The business plan enables strategists to firmly establish the
enterprise’s identity, define the objectives and values by which the company competes,
set realistic goals, and determine how it will measure success.

SCANNING THE EXTERNAL AND INTERNAL BUSINESS ENVIRONMENTS

As illustrated in Exhibit 1, crafting business strategy begins by identifying the

marketplace issues driving the firm’s external environment. This process reveals the
enterprise’s competitive strengths, the forces driving marketplace change, the actions of
competitors, opportunities for future success, and attractiveness of the firm to
customers. An effective understanding of the marketplace enables planners to
 2

understand how closely the business’s strategies, value propositions, products,

services, and supply channel delivery systems match the needs of the customer.
Finally, the firm’s operational functions (sales and order processing, logistics,
production, and finance) are then examined to measure how effectively they execute
the business strategy at a level that not just meets, but far exceeds the competition.

Exhibit 1. Strategic Dynamics

Scanning the External Business Environment

All enterprises operate within a much larger business or external environment. A

revealing way to describe this macro environment is to call it a business ecosystem [1].
The concept of a business ecosystem considers every enterprise as part of a matrix of
intersecting business systems composed of intricate, mutually supportive webs of
customers, products, and information played out on a global scale. The idea that
companies can develop and become successful independent of the ecosystems to
which they belong is a myth.
Today, companies around the globe understand that survival requires
cooperation as well as competition with other ecosystem members that together shape
the destiny of the world’s economic system. In other words, today’s global market
system is being driven not by individual companies but by clusters of allied business
partners who contest, and sometimes cooperate, with other business ecosystems in the
search for competitive advantage.

Understanding a company’s business ecosystem requires identifying the relevant

factors and influences constituting the macro environment. These factors and influences
define not only how a company competes for survival, but how its relation to other
ecosystem members is leveraged to overcome the risks arising from changing
marketplace environments and the threats of competitors. Exhibit 2 illustrates seven
critical factors to be considered by business strategic planners.
 3

Exhibit 2 External Environmental Scanning

 Economic features. The economic features of a marketplace vary by industry, but

there is a measure of significant commonalty. A marketplace’s economic features
consist of such factors as the overall size and growth rate of the markets, global
size, number and strength of competitors, needs and expectations of suppliers
and customers, nature and life cycle of products being sold, use of technologies,
use of economies of scale, and learning and experience curves. It is critical for
strategists to respond to the dominant economic features of their marketplaces if
they are to develop effective strategies that emphasize company strengths and
competitive positioning.

 Competitive environment. The competitive environment in which a business

operates varies by industry. An effective tool for understanding the competitive
environment is Porter’s five-forces model of competition. The five forces consist
of pressures on a business emanating from the following marketplace areas:

1. The natural competition (pricing, market share, product/service value,

advertising, delivery, and others) that occurs between rival companies
competing with similar products for the same customer community.

2. The threat to business ecosystem equilibrium caused by the arrival of a new

player or a disruptive technology or product.

3. Attempts of companies from other ecosystems to capture marketplace share

by introducing substitute products/services currently not found in the
ecosystem.

4. Pressures stemming from the strength of suppliers. Supplier power occurs

when buyers find that the cost of switching suppliers is very high, certain
products possessed by the supplier are hard to get from alternative sources,
 4

there are only a few suppliers of the product, and suppliers threaten to
forward integrate into the businesses of customers.

5. Pressures stemming from the power of the customer. Supplier power

diminishes to the extent that buyers can easily switch to alternate suppliers,
there are a small number of buyers, buyer demand is weak, buyers have
control over what and when they will purchase, and buyers threaten backward
integration into the business of suppliers.

Understanding a company’s strengths and weaknesses relative to the five-forces

model enables planners to gauge the intensity of the competitive environment. Analysis
will yield not only the likelihood of the company’s success but also how to design
strategies to enable it to align strengths with the competitive character of the
marketplace.

 Marketplace forces. All business ecosystem members (customers, suppliers, and

competitors) experience trends and changes to their products, services, and
value propositions. Some of these changes are a result of the migration of
companies from one position in their strategic life cycles to another. Other
changes are driven by important forces that destabilize the competitive
equilibrium of the ecosystem or a company’s immediate industry and competitive
environment.

 Business partner environment. The central feature of business ecosystems is the

opportunity for the coevolution of companies coalescing around commonly
shared strategic visions and mutually supportive competencies. Two essential
dynamics emerge. The first involves companies looking continuously for
innovative ways not just to penetrate existing markets, but to create new sources
of value that, in turn, geminate whole new markets. The second essential
dynamic is the development of strategic relationships with other organizations in
the search for the vision as well as the competencies and resources necessary to
sustain competitive survival. An effective business strategy must contain a
mechanism to enable planners to continuously adapt
 the business to leverage the best ecosystem partners.

 Market position. All companies face the threat posed by competitors in their
market segment. Understanding the position a company occupies in the same
space as competitors is an essential component in external business
environment scanning. An effective technique that can be used to map
competitive positioning is strategic group mapping.

 Actions of competitors. The object of this component of external environmental

scanning is to evaluate competitors in each market area. This step focuses on
three main objectives:
1. Evaluating the content of a competitor’s market strategy.
2. Determining competitors’ resource strengths and weaknesses.
 5

3. Predicting the next moves competitors are likely to make to gain advantage.

This information enables strategists to determine which competitors have the best
and who the weakest strategies, which have strong incentives to make major strategic
changes, which are poised to gain and which to lose market share, which have clearly
defined competitive advantages, and which are likely to enter new geographical
markets. Strategists who fail to closely study competitors risk being disrupted by the
strategic moves of market segment rivals.

 Business prospects. The final area to be explored in external environmental

scanning is defining the competitive factors possessed by an enterprise that
enable it to flourish in its business ecosystem. A starting point is identifying the
key success factors (KSFs), such as level of technology expertise, logistics
networking, products, productive resources, core competencies, competitive
capabilities, past marketplace achievements, and others, that define the firm’s
competitive strengths and weaknesses.

These metrics enable the enterprise to establish strategic factors such as

– The business’s and the industry’s growth potential
– The effect of the competition on the firm’s current and future profitability
– The impact of market forces on profitability
– The level of risk and uncertainty in the industry’s future
– The ability to capitalize on the vulnerability of competitors

Scanning the Internal Business Environment

Most enterprises possess certain competitive attributes in which they excel and
other attributes in which they are weak. The purpose of internal business scanning is to
identify these internal strengths and weaknesses and to understand how companies
can capitalize on the strengths while marginalizing the weaknesses. For example, a
business may have strong R&D and innovative products, but lacks marketing and sales
expertise. It makes sense for such a firm to concentrate on their design and product
strengths in the short run. However, the firm must be careful to continuously search for
ways to increase competencies in marketing and sales if they are to remain competitive
in the long run. Of primary importance is assessing the degree to which the enterprise’s
current internal capabilities match the needs of its market strategies.

Often, the failure of companies to survive and prosper in their business

ecosystem is the result of the failure of their productive resources (people
competencies, capital, plant and equipment, and other assets) to execute the strategies
the firm has elected to pursue in the marketplace. In the end, the goal of internal
business scanning is to measure how far the organization’s resources and internal
strategies are out of synchronization with their external business strategies.

Internal environmental scanning consists of six assessments as illustrated in

Exhibit 3 and detailed below.
 6

Exhibit 3. Internal Environmental Scanning

 Success of internal strategies. In this assessment, planners seek to address

several critical competitive factors driven by the existing internal strategies. The
most obvious is asking whether the internal strategies are succeeding in building
competitive advantage. This assessment asks how well internal competencies
enable the company to outperform competitors; are functional strategies agile
enough to react to marketplace
 changes; is the company growing strong collaborative partnerships and strategic
 alliances; and are detailed strategies driving business functions by providing the
 support necessary to execute the business plan. The assessment should point
out
 synergies as well as gaps in the internal strategies.

 Strength of resources and competencies. An effective process for determining

the strengths and weaknesses of internal resources is to perform a SWOT
analysis. A SWOT analysis consists of three steps. The first is to identify the
strengths, weaknesses, opportunities, and threats to the organization’s future
well-being. Strengths are attributes such as superior products and services,
excellent financial condition and access to capital, strong brand recognition, and
a highly integrated supply chain. Weaknesses are deficiencies, such as no clear
strategic direction, heavy debt, mature product lines that lag behind competitors,
ineffective supply chains, and poor R&D and technology know-how.
Opportunities are potentials such as growing demand, expansion into new
markets, and alliances with partners in new geographical markets. Threats are
risks such as growing competition, loss of sales to substitute products,
governmental restrictions, and increased supplier and customer power.

 The second step in the SWOT analysis is to use the findings from the first step to
draw preliminary conclusions about the relative strengths and weaknesses of the
business, competitive attributes that make it particularly attractive to the
marketplace, and deficiencies that could threaten its competitive position in the
business ecosystem. Finally, in step three, planners translate the findings and
conclusions into an action
 7

 plan for improving the company’s marketplace position. Courses of action include
enhanced synchronization of internal resources with the company’s business
strategy; identification of marketplace opportunities exhibiting the highest
potential; reducing company weaknesses and the magnitude of risk; and limiting
the impact of external threats. The end result should be a clear definition of how
the enterprise’s resources and capabilities are aligned with marketplace
profitability and compare with the strengths of competitors.

 Strength of company value chain. The APICS Dictionary defines a company’s

value chain as “The functions within a company that add value to the goods or
services that the organization sells to customers and for which it receives
payment”. Borrowing from the work of Porter [6], the value chain consists of two
broad categories of value producing activities a company performs internally. The
first consists of the firm’s primary activities, such as supply chain management,
operations, logistics, sales and
 marketing, and customer service that directly create customer value. The second
category consists of support activities, such as product R&D, technologies,
human resources, and general administration that facilitate and enhance the
primary activities. A detailed value chain analysis enables managers to identify
how effectively primary and support functions contribute to the success of the
business strategy, the actual cost structure of internal functions, and resulting
profit margins.

 Benchmarking functional strategies. Another element of internal environmental

scanning
 is benchmarking. Benchmarking permits a company to compare its costs,
products, and services to those of a company thought to have superior
performance. The benchmarking target is often a competitor. It can also be a
company with similar competitive characteristics in a different industry. There are
several goals of the benchmarking process. One goal is to identify how closely
company value-chain activities match acknowledged leaders. Other goals are
learning how best-in-class companies are achieving lower costs and higher
profitability. The end result is to use
 the findings to improve the competitiveness of the company’s primary and
supporting value chain activities.

 Determine performance measurements. Performance measurements indicate

whether an internal process is meeting the objectives that have been assigned to
it by the business strategy. Primary and secondary internal activities are
measured by applying the following five generic performance attributes from the
SCOR reference model: reliability, responsiveness, agility, costs, and asset
management efficiency. These objectives can be further decomposed into
specific measurements, such as order fulfillment cycle time, or aggregated into
higher-level metrics such as customer satisfaction or operations flexibility.
Detailed metrics provide managers visibility into the daily operations of
processes, while aggregate measurements are more strategic and enable
 8

managers to compose an overall picture of company performance. The goal of

internal environmental performance is to uncover gaps between actual and
targeted performance. Possible improvement paths followed are business
process re-engineering, breakthrough (radical improvement), and continuous
improvement.

The purpose of external and internal business scanning is to assess the enterprise’s
existing competitive strengths and weaknesses. The findings that emerge enable
managers to effectively establish exactly what competencies and resources the
enterprise possesses and what competitive gaps have been uncovered. With this
information in hand, planners can then move to establish the goals and strategies that
are likely to promote the firm’s ongoing competitive success in the external
environment.

DEFINING THE ENTERPRISE VISION, MISSION, AND GOALS

Knowledge of the enterprise’s external and internal environments is the prelude to the
development of the corporate business strategy, which in turn, will drive the
development of the supply chain strategy.

Establishing the Enterprise Vision

As illustrated on Exhibit 4, the strategic planning process begins with the formulation of
the business’s strategic vision. The APICS Dictionary defines the strategic vision as “the
shared perception of the organization’s future – what the organization will achieve and a
supporting philosophy. This shared vision must be supported by strategic objectives,
strategies, and action plans to move it in the desired direction.” The strategic vision
establishes the future direction the firm’s management wants the business to go, details
how the firm will leverage its core strengths and competitive advantages to realize
marketplace goals, and shapes organizational identity.

Exhibit 4. Corporate Strategic Model

 9

For example, Coca Cola defines its vision as “serving as the framework for our
Roadmap and guides every aspect of our business by describing what we need to
accomplish in order to continue achieving sustainable, quality growth.

 People: Be a great place to work where people are inspired to be the best they
can be.
 Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate
and satisfy people’s desires and needs.
 Partners: Nurture a winning network of customers and suppliers, together we
create mutual, enduring value.
 Planet: Be a responsible citizen that makes a difference by helping build and
support sustainable communities.
 Profit: Maximize long-term return to shareowners while being mindful of our
overall responsibilities.
 Productivity: Be a highly effective, lean, and fast-moving organization.”
 10

PRACTICE EXERCISE:

1. What is logistics management? (10 points)

2. Enumerate the functions of logistics management and discuss briefly. (20 points)

Suggested time allotment: 6 hours

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Lesson 2.2 CRAFTING THE SUPPLY CHAIN STRATEGY

I. LEARNING OUTCOMES

 Explain the role of distribution channel. (U)

 Evaluate the other functions of distribution channel. (E)

II. INPUT

DEFINING SUPPLY CHAIN STRATEGY

Supply chain strategy has arisen in response to a multitude of factors ranging

from globalization, new technologies, and outsourcing to the growth of channel
partnerships and the “leaning” of channels of supply that affect the business on a
strategic level. Because of the impact of these and other factors, three key facets of the
importance of the supply chain to the success of the business strategy have emerged.
First, the scope of supply chain management is much larger than just the execution of
daily operations functions – it is also concerned with the strategic coordination and
collaboration of the business with supply channel partners.

Second, supply chain management is not limited to just optimizing the

performance of logistics functions – it also is a powerful strategy that both supports and
is capable of driving sustainable competitive advantage. The objective of this dynamic is
creating net value, building a competitive supply and delivery infrastructure,
synchronizing supply with demand, and measuring performance globally.

And third, supply chain strategy is the function where the business’s objectives
and the capabilities of the supply chain network are reconciled. This dynamic is, in fact,
perhaps the central goal of supply chain strategy.

Exhibit 1. Business unit strategy

What is the purpose of a supply chain strategy? Overall, the supply chain
strategy describes how the firm’s capabilities and resources contribute to the attainment
 12

of the business unit strategy. This objective consists of three processes. First, a supply
chain strategy should contain a clear definition of the performance attributes that will
enable other functional strategies and, by extension, the business unit, to compete
successfully in the marketplace.

Second, it should identify the broad strategic decisions that will be used to
assemble supply chain operational competencies, capabilities, and resources. Finally,
the supply chain strategy should establish the performance metrics that indicate the
overall health of the supply chain. Collectively these supply chain strategic elements
articulate how the marketplace requirements detailed in the business unit strategy are
reconciled with the supply chain’s productive and delivery capabilities and assets.

A proactive supply chain strategy begs the question as to how it is to create

value. According to the research of Lee et al. supply chain strategy creates value
through five functions.

 Operating cost reduction. The research indicated that 97 % of respondents felt

that operating cost reduction through effective supply chain management was
crucial to the success of the business strategy. Value creation levers include
supply chain efficiency in old and new markets, response time to react, risk
management plans, and suppliers willing to accept favorable financial terms.

 Value creation through increasing revenues. According to the survey, just over
half of the respondents felt the supply chain had a very important role in
increasing revenues, with 93 % in total considering this function as an important
role. Value creation levers include differentiation from the competition with value-
added services and increasing customer loyalty.

 Competitive advantage through differentiated customer service capabilities.

Scoring almost as equally high is competitive advantage through differentiated
customer service, with almost 90 % of respondents identifying this function as a
means to enhance customer service. Value creation levers include customer
value of on-time, dependable delivery; quick response; flexibility in executing
schedule and order changes; and influencing the customer’s purchasing
decisions.

 Competitive advantage through strategic supplier engagement. Eighty-four

percent of the respondents felt this function to be important or very important.
Value creation levers include strength of collaborative relationships, strength of
supplier loyalty, product development cycle time reduction, on-schedule product
introduction, and fast production ramp up.

 Value creation through long-term equity improvement (e.g. brand equity). Finally,
77 % of respondents assigned significant importance to the supply chain’s ability
to grow the company’s equity in the eyes of the marketplace.
 13

In summary, supply chain strategy performs two crucial roles. The first, and more
historic, is that it provides a supportive role to the overall business strategy by
performing operations functions at the highest efficiency, defined as cost and time.

Second, and a much more contemporary viewpoint, is that the supply chain provides
a proactive role that enables the business to set even higher goals and to expand its
strategic directions. An effective supply chain strategy defines the following
requirements:

1. The performance objectives by which the supply chain both responds to the
business strategy and contributes to increased competitive advantage.

2. How decisions concerning the deployment of supply chain resources will realize
corporate strategies while at the same time drive new areas of enterprise
competitive space.

3. How integrating supply chain performance objectives and decisions regarding

resources provides a roadmap detailing the direction the firm should be moving.

Based on these dynamics, supply chain strategy is defined as a matrix of policies

and procedures through which the requirements of the firm’s corporate strategy are
reconciled with the totality of its supply chain productive and delivery capabilities in the
pursuit of superior competitive advantage.

Exhibit 2 contains a flow chart illustrating the connection between the business and
the supply chain strategies. In turn, the connection between the supply chain strategy
and the supply chain network and its associated processes and resources is shown. As
a summary, the goal of the supply chain strategy is to segment the business into supply
chains networks and then to determine their expected performance.

Next, the supply chain strategy seeks to optimize each channel network by
determining their strategic performance requirements. Finally, each supply chain
network manages their processes to achieve strategic network goals and seek to
continuously align channel resources to meet performance goals.

Exhibit 2. SCM Strategic Journey.

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STAGES OF SUPPLY CHAIN STRATEGY

Similar to the supply chain maturity model supply chain strategy is separated into
four stages of development. The goal of the exercise is to determine the size of the
impact the company’s supply chain has on the overall strategy of the business. At one
end of the scale, a real supply chain strategy has yet to emerge and the supply chain
function is thought to have a neutral effect on business strategy.

At the other end of the spectrum, the supply chain strategy is perceived as a
competitive advantage and actually assists in driving the overall business strategy. A
schema of the four stage supply chain strategy is illustrated in exhibit 3.

Exhibit 3. Four Stage Supply Chain Model

 15

The steps required to move from stage 1 to stage 4 are as follows:

Stage 1: Functional supply chain management. In this stage, supply chain strategy is
very immature. The role of supply chain strategy is reduced to the execution of internal
logistics operations such as inventory management and product delivery. Functions are
inward-looking and reactive to marketplace challenges. There is minimal to no
interaction with logistics functions performed by other business units or external logistics
partners. Inventory and capacity levels are unbalanced leading to poor customer service
and high total costs.

Stage 2: Internal supply chain integration. The migration from stage 1 to stage 2 supply
chain management occurs when logistics functions seek to benchmark their
performance with other organizations in the marketplace in the search for “best
practices” and higher levels of performance. Operations managers begin to implement
basic business unit operating strategies associated with the pursuit of efficiencies and
opportunities arising from the horizontal integration of plants, inventories, distribution
warehouses, and transportation across the internal supply chain.

Stage 3: External supply chain collaboration. Stage 3 strategies are marked by a

significant leap from being externally neutral to the pursuit of cross-functional and cross-
supply channel strategies that elevates them from being logistics-bound to supply chain-
enabled. At this level of strategy, supply chain managers seek to optimize profitability
and cost reduction by integrating customers and suppliers with core business functions.

Stage 4: Dynamic, adaptive supply chain. In Stage 4, SCM moves beyond being
supportive to providing the foundation for competitive success. Supply chains deploying
this level of strategy understand that leadership in profitability, responsiveness, and cost
control constitutes a fundamental driver central to market-winning business strategies.
Companies are fully aligned with their supply chain partners on the key value
dimensions across the extended enterprise.

SUPPLY CHAIN STRATEGY PERFORMANCE ATTRIBUTES

As pointed out above, the development of supply chain strategies consists of three
major components:

 Performance attributes: This component consists of the attributes that describe

the performance of supply chain resources.

 Performance drivers: This component consists of the fundamental activities

performed by supply chain resources that enable it to drive competitive
advantage for the business.

 Performance measurements: This component consists of the performance

metrics that indicate the success of the supply chain strategy. These
 16

measurements are also known as strategic metrics and key performance

indicators (KPIs).

Supply chain performance attributes are briefly defined as a set of values and
actions that guide the efficient use of supply chain resources to satisfy the demand
requirements of the business. Exactly what these performance attributes are can be
debated and various alternatives have been proposed. Despite the differences, there
are many areas of commonality. This text will use the five performance attributes
defined in the SCOR body of knowledge. These attributes are defined in the following
table (Table 1).

Table 1. SCOR Supply Chain Performance Attributes

 17

PRACTICE EXERCISE:

1. What do you think is the role of distribution in this time of pandemic? (10 points)

2. In your point of view, how can you improve the different functions of distribution
channel? (20 points)

Suggested time allotment: 9 hours

LESSON 1.3 Distribution Channel Transaction Flows

 18

I. LEARNING OUTCOMES

 Explain the concept of reverse logistics. (U)

 Illustrate the flow of inventory channel. (An)

II. INPUT

Supply chain intermediaries participate in the performance of transaction flows

linked to products and information as they move through the channel network.
Executing channel transaction flows not only produces a valued service output but also
is associated with a cost.

Channel distributors, on the other hand, exist because of their ability to perform
transaction efficiencies and economies of scale better than other channel members.
Often these intermediaries are used because of their expertise in managing marketing,
sales, logistics, and finance activities for their channel partners. Surrendering parts of
the channel transaction flow enables companies to remain focused on their core
competencies instead of expanding their organization’s resources and shifting their
business focus, organization, and available resources to performing non-value added
functions.

Regardless of who performs them, the following transaction functions must be

performed by one or multiple supply channel entities.

 Product possession. This transaction flow refers to channel activities associated

with product warehousing and transportation. The goal of product possession is
to provide targeted levels of customer service at the lowest carrying cost at all
channel echelons.

 Selling and Promoting. Distribution channels provide an expanded opportunity for

sales and promotion. By providing national and localized marketing and sales
forces, channel intermediaries can sell to a global marketplace as well as target
specific local market segments.

 Ownership. Ownership of goods in the supply chain must be assumed by one or

multiple channel supply points. It is important to note that ownership is not
necessarily the same as possession.

 Risk. Companies in the supply chain taking ownership of goods incur risk. As
channel entities expand stocks of product, the possibility of financial loss caused
by shifts in demand, customer tastes, carrying costs, obsolescence, and spoilage
grow proportionally.
 Negotiations. The transfer of ownership of goods from one business in the supply
chain to another usually involves attaining agreement on price and other sales
terms. The costs involved are mostly composed of the cost of personnel
performing the negotiations. Sometimes the negotiations are performed by a
 19

channel member specializing in this transaction function. Negotiation should

always be supportive of the overall competitiveness of the channel system.

 Ordering Flow. The placement of customer and channel replenishment orders as

well as the gathering of information concerning marketplace trends, occur at all
echelons levels in the supply chain. With the dawning of the Internet Age,
channel members have expanded their order management capabilities by
enabling customers to place and maintain their own orders through the use of
personal computers, tablets, and mobile devices. The transaction functions
involved in channel stock replenishment have similarly been streamlined by the
use of point-of-sale (POS) and automated replenishment systems.

 Payment Flow. The flow of payment proceeds through the distribution channel
from the customer back to the producer. While many channel companies perform
financial settlement functions, often banks and other financial institutions are
used to facilitate channel payment flows. Many companies have also
implemented financial management software that allows direct electronic
payment from buyer to seller, thereby eliminating slower methods, such as bank
drafts and checks.

 Financing. Supply chain members are often involved in financing the distribution
process by purchasing inventories, providing for transportation, managing
accounts receivables, and extending credit to their channel customers.

 Information services. The explosion in information technologies has required

some channel companies to contract with channel specialists who possess the
necessary equipment and technical skills to manage multiple facets of channel
information management.

 Management Services and Consulting. In some instances, companies assist their

channel partners rationalize transaction processes by providing expert advice to
enhance their operations or provide important services.

Channel transaction functions, such as physical possession, ownership, sales, and

promotion, are usually characterized as forward flows, describing the movement of
goods and services from the supplier to the end-customer. Inventory, for example, flows
“down” through the distribution network until it reaches the end-customer. On the other
hand, functions, such as ordering and payment, are backward flows moving from
customer to supply source. Finally, marketing information, negotiating, finance, and risk
taking move in both directions up and down the channel. In addition, negotiation and
ordering are grouped under the term exchange flows because they facilitate the buying
and selling of goods. Inventory possession is described as a logistics flow because the
activities of transportation and storage occur with the transfer of the ownership of
goods.

Distribution Channel Inventory Flows

 20

An important role of supply chains is managing the flow of inventory. The

decision to stock inventory at any particular channel echelon is a serious management
decision that must be carefully considered by cost and service trade-off analysis.
Decisions will be different by supply chain and are affected by the use of management
methods such as lean, make-to order production, structure of the channel warehouse
system, outsourcing of operations, and other factors.

Figure 1. Channel inventory flows

Figure 1, displays the flow of inventory as it moves through the internal

organization. The diagram consists of three major areas: the customer demand flow, the
five possible process stages that inventory passes through, and the type of item found
at each process stage in the inventory flow. The demand flow is normally initiated with a
customer order. If stock is available, the product is picked and packed and shipping
documents authorize the delivery. If inventory is not available, the customer order
continues its backward flow and initiates a replenishment order.

This backward flow is always the case in a make-to-order (MTO) production

environment where no finished goods are inventoried. For a make-to-stock (MTS)
production environment, as demand consumes stock, a planned replenishment order is
created when stocking levels in individual finished goods reach a predetermined reorder
level. Once planners examine the replenishment order, they release it as a production
order to be built in the plant. For a distributor, a finished goods shortage would trigger a
resupply order that would in turn trigger the generation of a move order to be shipped
from supplying warehouses upstream in the supply channel to the linked satellite
warehouse. When the order is ready for shipment, shipping documents authorize the
movement of finished goods into in-transit/delivery as they move to the satellite
warehouse.

The final inventory flow is managing obsolete and damaged inventories. For
products that are to be repaired, a rework order is generated authorizing product
 21

teardown and rebuilding. These products are then returned to finished goods inventory.
For items that are damaged or obsolete, inventory management would generate a
disposal order indicating that the products are salvaged.

Inventory is found in various organizational processes. For a typical production

company, inventory is located in stores (where production inventories received through
a purchase order are kept), production (where the product is made), finished goods
(where the finished goods are staged waiting for customer orders), in-transit/delivery
(orders moving to the customer or to downstream channel warehouses), and
obsolete/damaged/rework (inventory waiting for disposition).

For a distributor, stores and production stages are eliminated unless

postponement processing occurs. Finished goods inventories are purchased and
staged in the distribution pipeline. The inventories located in these various processes
are considered as inventory at rest: no movement occurs unless activated by the
demand pull.

Figure 2. Supply chain inventories and demand flows

Figure 2, displays the flow of inventory outside the organization as it moves

across the various companies found in its supply and delivery channels. In the past, the
management of channel inventories stopped at the shipping dock. Today, the ability to
link the inventory of channel partners back through the supply chain to the raw materials
supplier is one of the central objectives of the science of supply chain management.

As illustrated in Figure 2, the supply channel is divided into three segments

based on the type of inventory and demand flow. The key to understanding the
management of supply chain inventories is recognizing that inventory demand assumes
very different characteristics depending on where in the channel it occurs. All channel
demand has one point of origin and that is independent demand for finished goods
coming from the end-use customer positioned at the end of the supply chain. While
classically a retailer, the purchase point could be a distributor, catalog sales, Internet
sales, or a producer. In all cases the end-use customer determines the true demand for
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the inventory. The channel entity that serves the end-use customer directly experiences
this independent demand.

Substituting Information for Inventory

A fundamental postulate of channel management is that as demand and supply

uncertainty grows, so do pipeline inventories. The roots of channel uncertainty are
found in such conditions as unreliable suppliers, poorly developed and communicated
forecasts, ineffective scheduling, poor quality, process variability, long cycle times,
inaccurate performance metrics, and others. These problems cascade through each
level of the supply network, adding buffer stocks at each channel node, the infamous
bull whip effect.

Viewing supply chain inventories as if they were a single integrated supply function
is the foremost challenge of channel inventory management. Realizing this challenge
requires meaningful responses to the following issues:

 Supply chain integration. Not just point-of-sale nodes, but the strategies and
processes of channel intermediaries and producers, must be integrated and
made responsive to the demands of the marketplace. Achieving strategic and
tactical integration is, by far, the most difficult of the challenges facing channel
constituents.

 Increased flexibility. The effective management of inventories requires flexible

and agile processes that accelerate and add value to materials as they flow
through the channel network. Flexibility goals are achieved by reducing the size
of the channel pipeline, eliminating bottlenecks, shrinking production and
distribution lot sizes, building to customer order, and enhancing postponement
strategies.

 Lower costs. By considering all channel inventories as belonging to a single

supply pipeline, unnecessary supply chain buffers that add carrying costs and
risk obsolescence are removed. Supply chain planning and event management
technologies assist in matching channel supply exactly with demand and
reducing finished goods overstocks and distribution point stocking imbalances
while increasing product variety.

 Telescoping the supply pipeline. Competitive supply chains are concerned about
the length of the supply pipeline. As channel networks grow in length, so
inevitably do transit times and buffer inventories. Today’s best supply chains
seek to continuously shrink channel pipeline size and shave time and inventory
from the channel network through the use of lean, supplier management, and
information technology techniques.

 Channel performance measurements. Metrics that document independently the

performance of each channel supply node yield little information about the
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performance of the channel as a whole. Customer service metrics should

primarily be based on how responsive and cost effective the entire channel is
from raw materials acquisition to customer delivery.

Reverse Logistics

The return of products and disposable wastes has become a critical part of
supply chain management as issues surrounding lean processes and sustainability
grow in importance on a global basis. This channel function is termed reverse logistics
and it is defined in the APICS Dictionary as “a complete supply chain dedicated to the
reverse flow of products and materials for the purpose of returns, repair, remanufacture,
and/or recycling.”

Reverse logistics can be visualized by reversing the forward distribution channel

flow as illustrated on Figure 3. Reverse logistics processes consist of customer service
(marketing in reverse); the movement of products back through channel warehousing
and transportation; and unpackaging, disassembly, and recycling (a return to raw
materials). Products are returned for many reasons including: poor quality; damaged or
defective products; surplus, seasonal, or out-of-date inventories; and product
remanufacturing and refurbishing.

Figure 3. Reverse logistics flows

There are a number of motivating factors driving companies to construct reverse

logistics core competencies.

 Aftermarket savings. Returned products can be “mined” to recover precious

metals, such as gold, cooper, and zinc. Products can be repaired for continued
use, refurbished for resale, and disassembled for their usable components, as
well as conscientiously recycled.

 Competitive edge. Ease of return, repair, and recycling may add to a product’s
value and provide a competitive advantage. In addition, a growing “green”
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consciousness among customers adds to a supplier’s promise of good service

and environmental stewardship.

 Pressure. Consumer and shareholder groups, governmental legislation, and

requirements of foreign trade are pressuring companies to make their products,
processes, and distribution channels more sustainable. Savvy companies have
sensed an opportunity to turn such sentiments into sources of increased
customer loyalty and sales.

 Growing market for environmentally safe products. Today’s consumer is

increasingly demanding products that are simple, clean, and less threatening to
the environment. Some customers will pay a premium for products that promise
to protect their health and their world.

 Environmental awareness. Today’s logistics function must develop strategies that

capture a growing sense of environmental awareness, love of nature, and desire
to preserve the health of the nonhuman world.

Reverse logistics functions can be considered as a hierarchy consisting of five

possible options. Figure 4 illustrates the reverse logistics hierarchy in the form of a
pyramid with the most desirable actions for managing returned and damaged products
at the top and the least desirable at the base of the pyramid.

Figure 4. Reverse logistics hierarchy

 Reduce. Reducing the use of resources is considered the most responsible

option in the reverse logistics hierarchy. Reducing resources is accomplished
through such actions as redesigning products and packaging that use physical
resources more efficiently; reducing the amount of energy needed to run
productive processes; and increasing the efficiency of resources and energy
needed to run channel warehouses and transportation.
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 Reuse. This strategy looks to the design of products so materials and

components are more easily separated for reuse. In addition, intelligently
designed product upgrades can extend the life of durable products if they are
easy to install.
 Recycle. Similar to reuse, recycling seeks to capture wastes in the form of
packaging materials, containers (bottles, barrels, drums, etc.), scrap materials,
and so on, and to reprocess them into other products. Recycling reduces
disposal costs.

 Recover energy. “Trash to energy” refers to the harvesting of forms of energy

contained in products that are no longer usable in their physical form.

 Responsible landfill. Some products and wastes must go to the incinerator or

landfill, but this is the least desirable option. A responsible landfill that prevents
degrading items from leaching into a water source or polluting the air is
preferable.

To monitor progress in using the reverse logistics hierarchy, companies need

measurements that track the financial impact of returns management. Key metrics are:
amount of product reclaimed and resold, percent of material recycled, amount of waste
recycled, percentage of cost recovered, energy used in handling returns, and total cost
of ownership.

Some of the benefits of a carefully designed reverse logistics channel are:

 potential for highly lucrative customer service contracts and extended warranties
to manage end-of-lifecycle products

 mitigation of the unprofitable effects of high-volume returns

 enhanced customer loyalty and corporate reputation

 extraction of valuable raw materials for other industrial users

 development of more efficient products and logistical tactics

 profits from resale of refurbished products and parts that would otherwise go into
 landfills at a cost to the company

 creation of new types of jobs

 more efficient use of energy

 conservation of resources for future generations

 26

 reduced emission of many greenhouse gases and water pollutants

 development of “greener” technologies

 reduced need for new landfills and incinerators

PRACTICE EXERCISE

1. What is reverse logistic? Why is it important? (15 points)

2. Illustrate the flow of inventory channel of a department store inside the box. (20
points)

ASSESSMENT # 1
INTERNATIONAL BUSINESS
 27

Name:______________________________ Program/Year:____________________
Subject: MM2 Distribution Management Student’s Contact #_________
Name of the Instructor: Alladin G. Loro

A. Search on the internet one of Logistics Company in Davao City. Make a case
analysis about the company. (50 points)

 Problems encountered by the company

 Your possible solutions (at least three)
 Your recommendation based on your possible solutions (one
recommendation only).

B. Make a summary report of how logistic companies are affected during the time of
pandemic. (30 points).

C. Make a video showing the flow of distribution of a manufacturing company. (50

points)

RUBRIC

Research Report : Essay/Report

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Teacher Name: Alladin Loro

Student Name: ________________________________________

CATEGORY 4 3 2 1
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Construction include include included related structure was not
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sentence, sentence, were typically not sentences were
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concluding concluding paragraphs.
sentence. sentence.
Organization Information is very Information is Information is The information
organized with organized with organized, but appears to be
well-constructed well-constructed paragraphs are not disorganized. 8)
paragraphs and paragraphs. well-constructed.
subheadings.
Amount of All topics are All topics are All topics are One or more topics
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questions most questions most questions addressed.
answered with at answered with at answered with 1
least 2 sentences least 2 sentences sentence about
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topic. It includes topic. It provides 1- topic. No details do with the main
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details and/or details and/or are given.
examples. examples.
Mechanics No grammatical, Almost no A few grammatical Many grammatical,
spelling or grammatical, spelling, or spelling, or
punctuation errors. spelling or punctuation errors. punctuation errors.
punctuation errors
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