9

Chapter II

Literature Review

2.1 Porter Analysis

2.1.1 SWOT (Strength, Weaknesses, Opportunity and Threat)

SWOT analysis is a simple but powerful tool for sizing up a company’s

resource strengths and competitive deficiencies, its market opportunities, and

the external threats to its future well-being. Also can say that Company’s

internal resources are Strengths and weaknesses, and external are

opportunities and threats. (Gamble and Thompson, 2009)

Table 2.1 SWOT Analysis

Strengths • What do you do well? • What unique resources can

you draw on? • What others see as your

strengths?

Weaknesses • What could you do improve? • Where do you have fewer

resources than others? • What are others likely to see as

weaknesses? Opportunities

• What opportunities are open to you?

• What trends could you take advantage of?

• How can you turn your strengths into opportunities?

Threats • What threats could harm you? • What are your competitors

doing? • What threats do your

weaknesses expose to you?

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2.1.2 Industry Five Forces analysis

The industry five forces analysis is suitable for evaluating a

company’s external environment (Gamble and Thompson, 2009). This tool is

widely used to diagnose a company’s industry and competitive conditions. It

helps to determine whether an industry’s outlook presents a company

sufficiently attractive opportunities for growth and profitability.

• Buyer power

- Buyer bargaining power is stronger when:

Buyers switching costs to competing brands or substitute

products are low,

Buyers are large and can demand concessions when purchasing

large quantities,

Large volume purchases by buyers are important to sellers,

Buyer demand is weak or declining,

There are only a few buyers-so that each one business is

important to sellers,

Identify of buyer adds prestige to the seller’s list of customers,

Quantity and quality of information available to buyer

improves,

Buyers have the ability to postpone purchases until later if they

do not like the prices offered by sellers, and

Some buyers are a threat to integrate backward into business of

sellers.

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- Buyer bargaining power is weaker when:

Buyer purchase the item infrequently or in small quantities,

Buyer switching costs to competing brands or substitutes are

high,

There is a surge in buyer demand that creates a “sellers’

market”,

A seller’s brand reputation is important to the buyer, and

A particular seller’s product delivers quality or performance

that is not matched by other brands.

• Threat of substitutes

- Competitive pressures from substitutes are stronger when:

Good substitutes are readily available or new one are

emerging,

Substitutes are attractively priced,

Substitutes have comparable or better performance features,

End user have low costs in switching to substitutes, and

End users grow more comfortable with using substitutes.

- Competitive pressures from substitutes are weaker when:

Good substitutes are not readily available or don’t exist,

Substitutes are higher priced relative to the performance they

deliver, and

End users have high costs in switching to substitutes.

- Sign of competition from substitutes is strong

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Sales of substitutes are growing faster than sales of the industry

being analyzed (and indication that the sellers of substitutes are

drawing customers away from the industry in question),

Producers of substitutes are moving to add new capacity,

Profits of the producers of substitutes are on the rise, and

• Supplier Power.

- Supplier bargaining power is stronger when:

Industry members incur high costs in switching their purchases

to alternative suppliers,

Needed inputs are in short supply (which gives suppliers more

leverage in setting prices),

A supplier has a differentiated input that enhances the quality,

performance, or image of sellers’ product processes, and

There are only a few suppliers of particular input.

- Supplier bargaining power is weaker when:

The item being supplied is a “commodity” that is readily

available from many suppliers at the going market price,

Seller switching costs to alternative suppliers are low,

Good substitute inputs exist or new ones emerge,

There is a surge in the availability of supplies (thus greatly

weakening supplier pricing power),

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Industry members account for a big fraction of suppliers total

sales and continued high volume purchases are important to the

well being of suppliers, and

Industry members are a threat to integrate backward into the

business of suppliers and to self-manufacture their own

requirements.

• Barriers to entry

- Entry threats are stronger when:

The pool of entry candidates is large and some have resources

that would make them formidable market contenders,

Entry barriers are low or can be ready by hurdled by the likely

entry candidates,

Existing industry members are looking to expand their market

reach by entering product segments or geographic areas where

they currently do not have a presence,

Newcomers can expect to earn attractive profits,

Buyer demand is growing rapidly, and

Industry members are unable (or unwilling) to strongly contest

the entry of newcomers.

- Entry threats are weaker when:

The pool of entry candidates is small,

Entry barriers are high,

Existing competitors are struggling to earn good profits,

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The industry’s outlook is risky or uncertain,

Buyer demand is growing slowly or is stagnant, and

Industry members are strongly contesting the efforts of new

entrants to gain a market foothold.

• Rivalry

- Rivalry generally stronger when:

Competing sellers are active in making fresh moves to improve

their market standing and business performance,

Buyer demand is growing slowly,

Buyer demand falls of and sellers find themselves with excess

capacity and/or inventory,

The number of rivals increases and rivals are of roughly equal

size and competitively capability,

The products of rival sellers are commodities or else weakly

differentiated,

Buyer costs to switch brands are low, and

Outsiders have recently acquired weak competitors and are

trying to turn them into major contenders.

- Rivalry is generally weaker when:

Industry members aren’t aggressive in drawing sales and

market share away from rivals,

Buyer demand is growing rapidly,

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The products of rivals sellers are strongly differentiated and

customer loyalty is high,

Buyer costs to switch brands are high, and

There are fewer than 5 sellers or else so many rivals that any

one company’s actions have little direct impact on rivals’

business.

- Typical weapons for battling rivals and attracting buyers

Lower prices,

More or different features,

Better product performance,

Higher quality,

Stronger brand image,

Wider selection of models,

Bigger/better dealer network,

Low interest rate financing,

Higher levels of advertising,

Better customer service, and

Product customization.

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Figure 2.1 Diagram of Porter’s 5 forces2

2.2 Brand Repositioning

Successful brand repositioning, not only because of competitive pressures,

new channels, and changing customer needs but also should ensure the three steps

below (McKinsey, 2001):

1. Ensure relevance to a customer’s frame of reference

Be fully aware of the brand’s “frame of reference” so that a

repositioning strategy will resonate with customers.

2 Source: http://www.quickmba.com/strategy/porter.shtml

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Look at the combination of customers’ attitudes and the situations

in which the brand is used to obtain the most powerful customers

insights.

2. Secure the customer’s permission for the positioning

Recognize that permission amounts to a reasonable and logical

extension of the brand in the customer’s eyes.

Leverage a brand’s unique emotional benefits to carry customers

from their current brand perception to the intended one.

3. Deliver on the brand’s new promise

Identify the pathway of performance “signals” that will convince

customers of the new brand positioning,

Develop product/service programs to ensure consistent

performance on these signals,

Track and assess performance against customer signals prior to

launching the new positioning, and

Adopt an “interim positioning” to establish brand credibility and

performance.

2.3 Integrating Marketing communications to build brand equity

As figure shows below, marketing communication activities contribute to

brand equity and drive sales in many ways; by creating awareness of the brand;

linking the right associations to the brand image in customers’ memory; eliciting

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positive brand judgments or feelings; and/or facilitating a stronger consumer-brand

connection. (Kotler and Keller, 2009)

Figure 2.2 Diagram Integrating Marketing

2.4 Ansoff’s Matrix

Ansoff Matrix is one of the tools to help businesses decide their product and

market growth strategy. The output from the Ansoff product/market matrix is a series

of suggested growth strategies that set the direction for business strategy.

1. Market Penetration is the name given to a growth strategy where the

business focuses on selling existing products into existing markets. Market

penetration seeks to achieve four main objectives:

Maintain or increase the market share of the current products – this

can be achieved by a combination of competitive pricing strategies,

Sales Promotion

Advertising

Event & Experiences

Public Relations & Publicity

Direct & Interactive Marketing

Word-of- M th Personal

SellingDirect

Marketing

Marketing Communications

Program

Brand Equity

Brand Relationship

Brand Responses

Brand Image

Brand Awareness

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advertising, sales promotion and perhaps more resources dedicated to

personal selling.

Secure dominance of growth market.

Restructure a mature market by driving out competitors; this would

require a much more aggressive promotional campaign, supported by a

pricing strategy designed to make the market unattractive for

competitors.

Increase usage of existing customers.

2. Market development is the name given to a growth strategy where the

business seeks to sell existing products into new markets. There are many

possible ways of approaching this strategy, including:

New geographical markets; for example exporting the product to a new

country.

New product dimensions or packaging.

New distribution channels.

Different pricing policies to attract different customers or create new

market segments.

3. Product development is the name given to a growth strategy where a

business aims to introduce new products into existing markets. This strategy

may require the development of new competencies and requires the business

to develop modified products which can appeal to existing markets

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4. Diversification is the name given to the growth strategy where a business

markets new products in new markets.

Please see figure 2.3 if the product and market is existing we can do Market

penetration, if we have new product and there is an existing market we should do

product development, if we had existing product and wants to gain new markets

we can do market development, and if we had new products and new markets

means diversification.

Figure 2.3 Ansoff’s product/market Matrix3

2.5 Managing Channel Relationships

A marketing channel is more than a set of institutions linked by economic ties

(Charles WL. Et Al., 2009), and a marketing channel system is the particular set of 3 Ansoff Matrix, source: http://tutor2u.net/business/strategy/ansoff_matrix.htm

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marketing channels a firm employs, and decision about it are among the most critical

ones management faces (Kotler and Keller, 2009). Social relationships play an

important role in building unity among channel members. A critical aspect of supply

chain management, therefore, is managing the social relationships among channel

members to achieve synergy. The basic social dimensions of channels are power,

control, leadership, conflict and partnering.

Inequitable channel relationships often lead to channel conflict, which is clash

of goals and methods among the members of distribution channel. Conflict among

channel members can be due to many different situations and factors. Oftentimes,

conflict arises because channel members have conflicting goals. Channel conflict is

generated when one channel member’s action prevent another channel from

achieving its goal. Causes of channel conflict:

Goal incompatibility. For example, the manufacturer may want to achieve

rapid market penetration through a low price policy. Dealers in contrast, may

prefer to work with high margins and pursue short-run possibility.

Unclear roles and rights. For example, territory boundaries and credit sales.

Differences and perception. The manufacturer may be optimistic about the

short term economic outlook and want dealers to carry higher inventory.

Dealer maybe pessimistic.

Intermediaries’ dependence on the manufacturer.

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2.6 The right supply chain for your product

According to Fisher, 1997, choosing the right supply chain for the product is

the main factor in success of supply chain integrity. Nowadays, along with

Information Technology incredible rapid story, it make easier for the company to

implement a good supply chain system. Electronic data interchange as one of IT

product, lets all stages of the supply chain hear that voice and react to it by using

flexible manufacturing, automated warehousing, and rapid logistics. And new

concepts such as quick response, efficient consumer responds, accurate respond, mass

customization, lean manufacturing, and agile manufacturing offer models for

applying the new technology to improve performance.

Not only to choose the right choice for the product but choosing the correct

supply chain partners as well to dysfunctional industry practices such an in

overreliance on price promotions. One recent study of the US food industry estimated

that poor coordination among supply chain partners was wasting $30 billion annually.

Not implement the correct supply chain also made some industries suffer from an

excess of some products and a shortage of others owing to an inability to predict

demand. So before devising a supply chain, consider the nature of the demand for the

products. And recognize them as functional or innovation product.

2.6.1 Functional versus Innovation product

To avoid low margins, many companies introduce innovations

especially in fashion or technology to give customers and additional reason to

buy their offerings. The innovative products makes unpredictable demand, the

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life cycle is short because of the imitators erode the competitive advantage

that innovative product enjoy, companies are forced to introduce a steady

stream of newer innovations. The short life cycles and the great variety typical

of these products further increase unpredictability.

Table 2.2 functional versus innovative product: differences in demand

Functional (Predictable

Demand)

Innovative (Unpredictable

Demand)

Aspects of Demand

Product life cycle More than 2 years 3 Months to 1 year

Contribution margin* 5% to 20% 20% to 60%

Product variety

low(10 to 20 variants per

category)

High(often millions of

variants per category)

Average margin of error in

the forecast at the time

production is committed 10% 40% to 100%

Average stock out rate 1% to 2% 10% to 25%

Average forced end-of-

season markdown as

percentage of full price 0% 10% to 25%

Lead time required for

made-to-order products 6 months to 1 year 1 day to 2 weeks

* The contribution margin equals price minus variable cost divided by price and is

expresses as a percentage

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2.6.2 Physically Efficient versus Market-Responsive supply chains

The predictable demand of functional products makes market

mediation easy because a nearly perfect match between supply and demand

can be achieved; the information technology can help to minimizing inventory

and maximizing production efficiency entire supply chain. The important flow

of information is the one that occurs within the chain as suppliers,

manufacturers, and retailers coordinate their activities in order to meet

predictable demand at the lowest cost.

While the innovation product is market responsive supply chains as their

respond to the fluctuate demand in conjunction with innovative product

behavior which wait for the market signal before we knew the demand

number.

Table 2.3 Physically efficient vs. market responsive

Physically efficient

process

Market-responsive

Process

Primary purpose

supply predictable demand

efficiency at the lowest

possible cost

respond quickly to

unpredictable demand in

order to minimize stocks

out, forced markdowns,

and obsolete inventory

Manufacturing focus

maintain high average

utilization rate

Deploy excess buffer

capacity

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Inventory Strategy

generate high turns and

minimize inventory

throughout the chains

deploy significant buffer

stocks of parts or finished

goods

Lead-time focus

shorten lead time as long

as it doesn't increase cost

invest aggressively in

ways to reduce lead time

Approach to

choosing suppliers

select primarily for cost

and quality

select primarily for

speed, flexibility, and

quality

Product design

strategy

maximize performance and

minimize cost

use modular design in

order to postpone

product differentiation

for as long as possible

. As per seen on table 2.3 where configured the matrix of functional

versus innovative, it shown functional product is match with efficiency supply

chain, and innovative is match with responsive supply chain, or in other

words, functional products require an efficient process; innovative products a

responsive process.

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Figure 2.4 Matrix of matching supply chains with products

2.7 The definition of supply chains

Therefore, before come to that above subject, please take a look a while for

what is management supply chain actually, according to Russell & Taylor, 2009, a

supply chain is the facilities, functions, and activities involved in producing and

delivering a product or service from suppliers (and their suppliers) to customers (and

their customers). (Russell and Taylor, 2009)

And another book said Supply chain management is set of approaches

utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so

that merchandise is produced and distributed at the right quantities, to the right

27

locations, and at the right time, in order to minimize system wide costs while

satisfying service level requirement. (Levi, 2000)

Figure 2.5 Diagram Supply Chain

This definitions lead to several observations. First, supply chain management

takes into consideration every facility that has impact on cost and plays a role in

making the product conform to customer requirements from supplier and

manufacturing facilities through warehouses and distribution centers to retailers and

stores. Indeed, in supply chain analysis, it is necessary to account for the supplier’s

supplier and customer’s customers because they are have an impact on supply chain

performances.

Second, the objective of supply chain management is to be efficient and cost

effective across the entire system; total system wide costs, from transportation to and

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distribution to inventories of raw materials, work in process, and finished goods, are

to be minimized. Thus the emphasis is not simply minimizing transportation cost or

reducing inventories, but rather, on taking a system approach to supply chain

management. Also how to achieve the economic profit in the entire Supply chain

management, please see below figure about economic profit in supply chain, it about

revenue minus expenses, while the expenses we should be efficient cost saving.

Figure 2.6 Economic Profits in Supply Chain Management

On top of that through supply chain integration that the firm can significantly

reduce cost and improves service levels. As per global survey from McKinsey, 2010,

the challenges ahead for supply chain we see the shifting priorities of supply chain

over the past three years it mentioned reducing operating cost about 60% but over

Economic Profits in SCM

Equipment/facilities (l d)

Warehousing t

Lot quantity costs

Information systems costs

Inventory carrying costs

Inventory

Accounts receivable

Customer service levels

Equipment/vehicles ( d)

Land/facilities (owned)

Transportation costs

Fixedassets

Workingcapital

+XCost ofcapital =

Capitalcharge

Expenses

Revenue

-Net OperatingProfit After Taxes

(NOPAT)

- Economic

Profit

Labor costs

29

the next 5 years will shifted to 41%, and reducing overall inventory level shifted from

30% to 12%. This is shifting caused due to increment in priorities of improving the

quality of products or services, improving customer service and getting products or

service to market faster. It means, for over next 5 years company’s supply chain will

focus on how to deliver the promise to the customer rather than thinking their internal

issues such operating cost and inventory level.

Figure 2.7 Shifting Priorities in SCM

Unfortunately, the supply chain integration is difficult for two main reasons:

1. Different facilities in supply chain may have different, conflicting, objectives.

2. The supply chain is a dynamic system that evolves over time.

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2.8 The key issues in supply chain

There are certain issues that may arise at firm activities according to Levi (2000),

which will describe as follows:

• The operational level refers to day to day decisions such as scheduling,

lead time quotations, routing, and truck loading.

• The tactical level includes the decision which are typically updated

anywhere between once every quarter and once every year. These include

purchasing and production decisions, inventory policies, and

transportation strategies including the frequency with which customers are

visited.

• The strategic level deals with decisions that have a long-lasting effect on

the firm. This includes decision regarding the number, location, and

capacity of warehouses and manufacturing plants, and the flow of material

through the logistic network.

2.8.1 Distribution Network configuration

Based on, Russell and Taylor (2009), distribution and network

configuration will include following division:

• Procurement

Definition of procurement is the purchase of goods and

services from suppliers. In attempt to minimize inventory levels,

companies frequently require that their suppliers provide:

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1. On demand/Direct respond, requires the supplier to deliver

goods when demanded by the customer.

2. Continuous replenishment, supplying orders in a short period

of time according to a predetermined schedule.

Type of procurement:

o Sourcing and outsourcing, where sourcing is the selection of

suppliers, and outsourcing is the purchase of goods and services from

an outside supplier.

o E-procurement, direct purchase from suppliers over the

internet.

o E-market places, website where companies and suppliers

conduct business to business activities.

o Reverse auctions, a company posts orders on the Internet for

suppliers to bid on.

• Distribution centers/warehousing and transportation

Distribution encompasses all of the channels, processes, and

functions, including warehousing and transportation, which a product

passes through on its way to the final customer (end user) and the most

important factor in transportation and distribution is speed. And

distribution and transportation are also often referred to as Logistics.

And, to improve speed we requires real time information about

carrier location, schedules and capacity, so in other words the key of

speed is information.

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2.8.2 Forecast and Inventory control

Below flowchart is configuring steps of the forecasting process.

(Russell and Taylor, 2009)

Figure 2.8 Steps of the forecasting process

1. Identify the purpose of forecast

2. Collect historical data

3. Plot data and identify patterns

4. Select a forecast model that seems approriate for data

5. Develop/compute forecast for period of historical data

6. Check forecast accuracy with one or more measures

7. Is accuracy of forecast acceptable

8a. Forecast over planning horizon

9. Adjust forecast based on additional qualitative information and insight

10. Monitor results and measure forecast accuracy

8b. Select new forecast model or adjust parameters of existing model

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• Forecasting, divided to be two types:

1. Qualitative (subjective methods) based on past experience,

opinion, judgment or best guesses to make forecast.

2. Quantitative based on mathematical formulas such time series and

regression.

• Inventory

Inventory is kept between stages of a production process,

inventory must be sufficient to provide high-quality customer service

in quality management, so inventory itself is a stock of items kept to

meet demand and inventory management is how much and when to

order. As demand is usually uncertain, it is not possible to produce

exactly the amount of demanded. An additional amount of inventory,

called safety, or buffer, stocks is kept on hand to meet variation in

product demand. The distortion of information demand will lead to

bullwhip effect where will explain later on in this literature theory.

Therefore, inventory also spoke about costs, the cost is

carrying cost, ordering cost, and shortage cost. The one of supply

chain essential is effective cost, therefore inventory and distribution

cost will be a major issue in the supply chain.

Also per Russell and Taylor-2009, Efficiency of activities

measured from the ability to improve sales forecast, predict supply and

34

demand will resulting lower inventory level that will be measurable

from:

Inventory turnover: [COGS/Ag Inventory]

How many timers company’s inventory is sold and replaced over a period

2.8.3 Distribution strategies

On distribution strategies we will have different approaches to meeting

customer demand, as the availability of information plays and important role

in the design of the supply network.

Direct shipment. In this strategy, items are shipped directly from the

supplier to the retail stores without going through distribution centers

Warehousing. This is the classical strategy in which warehouses keep

stock and provide customers with items as required

Cross-docking. In this strategy, items are distributed continuously

from suppliers through warehouses to customers. However the

warehouses rarely keep the items for more than 10-15 hours

Logistic is a major part of supply chain. In addition to producing or

providing the good or service a customer wants, it is very important to deliver

the product-service bundle in the quantities and particularly, timing

requirements set by customer. Improvement of the supply-chain implies

customization of the logistic network.

35

There are logistic challenges that are shared by both the operating

company and its supplier to ensure that the right services, along with the right

technical configurations are delivered at the well site at the appropriate time.

2.8.3.1. Push-Based Supply Chain

In a Push-Based supply chain, production decisions are based

on long-term forecast, but it will take much longer for a Push-based

supply chain to react the changing marketplace. This can lead to:

• The inability to meet changing demand patterns,

• The obsolescence of supply chain inventory as demand for certain

products disappear,

• Excessive inventories due to the need for the large safety stocks,

• Larger and more variable production batches,

• Unacceptable service levels, and

• Product obsolescence.

Specifically as observed in the bullwhip effect at subsection

2.9.2, it leads to inefficient resource utilization, because the planning

and managing is much more difficult. The manufacturer is not clear

how to determine production capacity, either it should be based on

peak season and making idle for low season or how to plan

transportation capacity. Thus, it will increase transportation cost, high

inventory levels, and high manufacturing cost due to the need for

emergency production changeovers.

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Figure 2.9 Push-based Supply Chain

Figure 2.9 Push-Based Supply Chain

2.8.3.2 Pull-Based Supply Chain

In a pull system supply chain, production is demand driven so

that it is coordinated with the actual customer demand rather than a

forecast. For this purpose, the supply chain uses fast information flow

mechanism to transfer information about customer demand to the

manufacturing facilities. This lead to decrease in:

• Lead times achieved through the ability to better anticipate

incoming orders from the retailers,

• Inventory at the retailers since inventory levels at these

facilities increase with lead times,

• Variability in the system and, in particular, variability faced

by manufacturers due to lead time reduction, and

• Inventory at the manufacturer due to reduction in

variability.

Therefore, pull-based supply chain will significantly reduce the

System inventory level. Enhance ability to manage resources, and the

Product

External Demand

Orders

37

reduction in systems costs when compared with an equivalent push-

based system. However, the pull-based system is difficult to

implement when it has long lead times as it is impractical to react to

demand information.

ProductManufacturer Retailer

External Demand

Orders

Figure 2.10 Pull-Based Supply Chain

2.8.4 Supply chain integration and partnering

Footwear industry has a similar characteristic with Fashion industry,

as footwear is subordinate from fashion product. The fashion supply chain is

always agile due to seasonal rhythm, inventory fast turn over, quick respond

to customers due to trend. Based on the fluctuation it make difficult in

forecast as the demand and the short life-cycles found. As per Martin C.,

Robert L., Helen P. (2004), due to the nature of fashion markets: (1) Short life

cycles, (2) High volatility, (3) Low predictability, (4) High impulse

purchasing, there are three logistic critical lead-time for successfully in

fashion market:

1. Time to market – How long does it take the business to recognize a

market opportunity and to translate this into a product or service and to

bring it to market?

38

Below is figure how shorter life-cycles making timing crucial, it

shown that market can not achieved if late entrant, high in stock, inventory

cost and will make less time to make profit even can make the profit

reduce due to can not catch the right time and made missed sales.

Figure 2.11 shorter life-cycles making timing crucial

2. Time-to-serve how long does it take to capture a customer’s order and to

deliver the product to the retail customer’s satisfaction?

Traditionally in fashion industries orders from retailers have had to be

placed on suppliers many months ahead of the season. But more longer

the supply chain process will made the risk of stock out is high as well as

the significant inventory carrying cost that inevitably is incurred

somewhere in the supply chain as a result of the lengthy pipeline.

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3. Time to react – how long does it take to adjust the output of the business

in response to volatile demand? Can the “tap” can be turned on or off

quickly?

Ideally in many market, an organization would want to be able to meet

any customer requirement fro the products on offer at the time and place

the customer needs them.

Clearly some of the major barriers to this are those highlighted in the

previous paragraphs, i.e. time to market and time-to-serve. However, a

further problem that organization faces as they seek to become more

responsive to demand is that they are typically slow to recognize changes

in real demand in the final market place. The challenge to any business in

a fashion market is to be able to see ‘real’ demand. Real demand is what

consumers are buying or requesting hour-by-hour, day-by-day. Because

most supply chains are driven by orders (i.e. batched demand) which

themselves are driven by forecast and inventory replenishment.

Below figure is shown how the hide demand can influenced the inventory

level as there are pipeline between manufacturer-wholesaler-supplier,

every pipeline consume a bunch of time before the good came to

customers.

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Figure 2.12 Inventory hide demand

Based on those volatilities and factors that fashion supply chain, it has

been suggested that an agile supply chain has a number of characteristics.

Especially the agile supply chain:

Market sensitive – it is closely connected to end-user trends,

Virtual – it relies on shared information across all supply chain

partners,

Network based – it gains flexibility by using the strengths of

specialist players, and

Process aligned – it has a high degree of process interconnectivity

between the network members.

Figure below suggest that there are a number of practical ways in which

these four key dimensions can be brought into play to create an agile

supply chain for organizations competing in fashion industries.

41

Figure 2.13 the foundations for agility in fashion business

And to minimize all the minus factors the organization can do vertical

integration to prevent it. According to Clinton, “A case series of today’s

vertical integration”, Journal of Business Case Studies-July 2008, vertical

integration potentially offers many advantages. Some of the most

substantial benefits are as follows:

1. Reduce transportation costs if common ownership results in

closer geographic proximity.

2. Improve supply chain coordination.

3. Provides more opportunity to differentiate by means of

increased ownership over inputs.

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4. Captures upstream and downstream profit margins.

5. Gains access to downstream distribution channels or otherwise

would be inaccessible.

2.8.5 Product Design

We must know exactly what our product behavior, such we already

discussed in above at 2.7 the right supply chain for your product, if we can

define correctly for our product, we can design the right distribution and

forecasting for our product, therefore the time and cost effective as per

diagram economic profit in SCM will be proven.

2.8.6 IT: Supply chain enabler

As per Applegate, Lynda M. Corporate Information Strategy, “IT and

the Boards of Directors”, eight edition, 2009 is mention that if one firm wants

to choose the right Information Technology for their system enabler they

should recognize where their position in business strategy now. And the

changes should be as boards and Directors commitment not only management

and staffs.

Below are The Four modes to recognize where the company position in their

IT:

(1) Support mode (Defensive).

(2) Factory Mode (Defensive).

(3) Turnaround Mode (Offensive).

(4) Strategic Mode (Offensive).

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Table 2.4 the four modes

2. Information and customer value

2.8.7 Customer Value

Because customer value is based on customer perceptions, it requires measures

that start with the customer. Customer value it classified (Levi, 2000) as follows:

1. Service level, usually related to the ability to satisfy a customer’s delivery

date, the percent of all orders sent on or before the promised delivery date.

2. Customer Satisfaction is customer loyalty.

3. Supply Chain performance measures, the supply chain operation reference

(SCOR) is one of the supply chain measurement; it uses a process reference model.

SCOR is a good example of supply chain metrics. It has the additional advantage of

DEFFENSIVE

OFFENSIVE

Factory mode

• If the system fail for a minute or more, there's an immediate loss of business

• Decrease in response time beyond one second has serious consequences for both internal and internal users

• Most core business activities are online • systems works is mostly maintenance • System work provides little strategic

differentiation or dramatic cost reduce

Strategic Mode

• If system fail for a minute or more, there’s an immediate losses of business

• Decrease in response time beyond one second has serious consequences for both internal and external users

• New systems promise major process and service transformations

• New system promise major cost reduction • New system will close significant cost,

service, or process performance gap with competitors

Support Mode

• Even with repeated service interruptions of up to 12 hours there are no serious consequences

• User response time can take up to five seconds with online transactions

• Internal systems are almost invisible to suppliers and customers. There’s little need for extranet capability

• Company can quickly revert to manual procedures for 80% of value transactions

• System works is mostly maintenance

Turnaround Mode

• New systems promise major process and service transformations

• New systems promise major cost reductions

• New systems will close significant cost, service, or process performance gap with competitors

• IT constitutes more than 50% of capital spending

• IT makes up more than 15% of total corporate expenses

LOW TO HIGH NEED FOR NEW INFORMATION TECHNOLOGY

LOW TO HIGH NEED FOR RELIABLE IT

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possibly becoming an industry standard. However, every company needs to

understand its own unique environment and determine its measure based on that

insight.

Table 2.5 SCOR level 1 Matrix

Perspective Metrics Measure

supply chain reliability On time delivery Percentage

Order fulfillment Days

Fill rate Percentage

Perfect order fulfillment Percentage

Flexibility and responsiveness Supply chain response time Days

Upside production flexibility Days

Expenses Supply chain management cost Percentage

Warranty cost as percentage of

revenue Percentage

Value added per employee Dollars

Assets/Utilization Total inventory days of supply Days

Cash-to-cash cycle time Days

Net assets turns Turns

2.9 The value of information

The value of information in information era is one of the key successes for supply

chain process (Levi, 2000). Database, Electronic Data interchange ( EDI ), decision

support systems, the internet are just a few technologies to support supply chain

process to be more valuable, and information changes the way supply chain can and

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should be effectively managed, and these changes may lead to, among other things,

lower inventories.

As per figure out on supply chain definition there is a flow of information

through out the chains. Information changes the way of supply chain can and should

be effectively managed and these changes may lead to, among other things, lower

inventories. By effectively harnessing the information available one can design and

operate the supply chain much more effectively and efficiently. The supply chain

performance can be improved by having accurate information about inventory levels,

orders, production, and delivery status throughout the supply chain.

2.9.1. And the uses of information

- Helps reduce variability in the supply chain,

- Helps suppliers make better forecast, accounting for promotions and

market changes,

- Enable the coordination of manufacturing and distribution systems and

strategies,

- Enables retailers to better serve their customers by offering tools for

locating desired items,

- Enable retailers to react and adapt to supply problems more rapidly, and

- Enables lead time reductions.

2.9.2 Bullwhip effect

The bullwhip effect is the increment of variability in the supply chain

(Levi, 2003). The variability control as follows:

• Demand forecasting

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A mistake in forecasting demand can lead the bullwhip effect,

although since beginning actually the rules of forecasting are the

forecast always wrong, the longer the forecast horizon, the worse the

forecast, aggregate forecast are more accurate. Nevertheless,

forecasting is a critical tool in the management tools, as bad in

forecasting means will caused the negative impact up to end process.

Usually managers use standard forecast smoothing techniques

to estimate average demand and demand variability. An important

characteristic of all forecasting techniques is that as more data

observed, the more we modify the estimates of the mean and the

standard deviation (or variability) in customer demands. Since safety

stock, as well as the order-up-to level, strongly depends on these

estimates, the user is forced to change order quantities, thus increasing

variability.

• Lead time

Increase in variability will follow longer in lead time, as the

longer lead time will come up the changes in safety stock and

inventory level, leading to a significant change in order quantities.

• Batch ordering

A firm that is faced with fixed ordering costs needs to apply

the min-max policy, which leads to batch ordering cost need to apply

the min-max inventory policy, where as happened the wholesaler will

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observe a large order, followed by several periods of no orders, follow

by another large order and so on. Thus the wholesaler sees a distorted

and highly variable pattern of orders. And it will give impact result

unusually large order which may be is not valid data.

• Price fluctuation

If price fluctuate, retailers often attempt to stock up when

prices are lower or when the firm offering discount in a certain time

means the demand assumed to be increased they also stock up

increase.

• Inflated orders

In example when the retailers and distributors suspect that a

product will be in short supply, and therefore to anticipating it they

will increase the supply in short period time than move it back to

normal when the order going back to normal again, it will lead to all

kinds of distortions and variations in demand estimates.

Those subjects can be eliminated by following factors:

• Reducing uncertainty

By centralizing demand information may give result reducing

uncertainty, however even if each stages uses the same data, each may

still employ different forecasting methods and different buying

practices, both of which may contribute to bullwhip effect.

• Reducing variability

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The bullwhip effect can be diminished by reducing the variability

inherent in the customer demand process. For example, if we can

reduce the variability of the customer demand seen by the retailer, then

even if the bullwhip effect occurs, the variability of the demand seen

by the wholesaler will also be reduced.

• Lead-time reduction

Increasing lead time can have on the variability at each stage of supply

chain. Therefore, lead time reduction can significantly reduce the

bullwhip effect throughout a supply chain. Observe that lead times

typically include two components: order lead times and information

lead time, where order lead time can be reduce by cross-docking while

information lead time can be reduced by EDI (Electronic Data

Interchange).

• Strategic partnership

The bullwhip effect can be eliminated by engaging in any of a number

of strategic partnerships. The strategic partnership can change the way

of information is shared and inventory is managed within a supply

chain, possibly eliminating the impact of the bullwhip effect.