IVIANAGINGSUPPLY CHAINSA LOGISTICS APPROACH WITH Sf UDENT 6b

C. John Langley, Jr.Georgia Institute of Technology

John J. CoyleThe Pennsylvania State University

Brian J. GibsonAuburn University

Robert A. NovackThe Pennsylvania State University

Edward J. BardiThe University of Toledo

SOUTH-WESTERNfe CENGAGE Learning-

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Contents

Parti

Preface xxi

About the Authors xxv

Chapter 1 Supply Chain Management: An Overview 3SUPPLY CHAIN PROFILE: SAB Distribution: A Sequel 4

Introduction 6What Forces Are Driving the Rate of Change 7

Globalization 7Technology 9Organizational Consolidation 9The Empowered Consumer 10Government Policy and Regulation 11

ON THE LINE: Malt-O-Meal Company: Going National 13

The Supply Chain Concept 14Development of the Concept 14

Major Supply Chain Issues 21Supply Chain Networks 21Complexity 22Inventory Deployment 22Information 22

J ON THE LINE: How Supply Chain Variation Impacts ShareholderValue 23

Cost/Value 23Organizational Relationships 24Performance Measurement 24Technology 24Transportation Management 24

SUPPLY CHAIN TECHNOLOGY: Transforming Supply Chain IT into

"Business Technology" 25

Supply Chain Security 26Summary 27Study Questions 27Notes 28Case 1-1: Central Transport, Inc. 29

Chapter 2 Role of Logistics in Supply Chains 30SUPPLY CHAIN PROFILE: Jordano Foods 31

Introduction 32What Is Logistics? 34

Value-Added Roles of Logistics 36ON THE LINE: U.S. Providers Say Logistics in China Is on the Right

Track 38

viii Contents

Logistics Activities 39Scope of Activities 39

ON THE LINE: India's Logistics Challenges in a Nutshell 43

Logistics in the Economy: A Macro Perspective 43Logistics in the Firm: The Micro Dimension 47

Logistics Interfaces with Manufacturing/Operations 47Logistics Interfaces with Marketing 48

Logistics Interfaces with Other Areas 52Logistics in the Firm: Factors Affecting the Cost andImportance of Logistics 53

Competitive Relationships 53Product Relationships 55Spatial Relationships 58

Techniques of Logistics System Analysis 59Short-Run/Static Analysis 59Long-Run/Dynamic Analysis 61

Approaches to Analyzing Logistics Systems 62Materials Management versus PhysicalDistribution 62Cost Centers 64Nodes versus Links 64Logistics Channels 65

SUPPLY CHAIN TECHNOLOGY: Data Scrubbing: It's the Next Big Thing 68

Logistics and Systems Analysis 68Cost Perspective 69Levels of Optimality 69

Summary 72Study Questions 72Notes 73Case 2-1: Senco Electronics Company 74Case 2-2: Peanut Plantation 76

Suggested Readings for Part I 77

Part IIChapter 3 Global Dimensions of Supply Chains 81

SUPPLY CHAIN PROFILE: Red Fish, Blue Fish, LLP 82

Introduction 83Supply Chains in a Global Economy 84ON THE LINE: Adapting to Operating in Low-Cost Regions 85

The Scope and Magnitude of Global Business 87Global Markets and Strategy 88ON THE LINE: Managing the Risk Inherent in Global

Outsourcing 89

Contents

Supply Chain Security: A Balancing Act 91SUPPLY CHAIN TECHNOLOGY: Zara Shows How 9 2

Ports 93North American Free Trade Agreement 93Maquiladora Operations 95Asian Emergence 95New Directions 96

Global Transportation Options 96Ocean 96Air 98Motor 99Rail 99

Strategic Channel Intermediaries 99Foreign Freight Forwarders 99Non-Vessel-Operating Common Carriers 100Export Management Companies 101Export Trading Companies 101Customs House Brokers 101

Storage Facilities and Packaging 102Storage Facilities 102Packaging 102

Summary 104Study Questions 104Notes 105Case 3-h Red Fish, Blue Fish, LLP:A Sequel 106

Chapter 4 Supply Chain Relationships 107SUPPLY CHAIN PROFILE: Supply Chain Relationships-There Is No"Magic Bullet" 108

Introduction 109Logistics Relationships 109

Types of Relationships 109Intensity of Involvement 110Model for Developing and Implementing SuccessfulSupply Chain Relationships 111Need for Collaborative Relationships 115

Third-Party Logistics—Industry Overview 117ON THE LINE: Don't Underestimate the Importance of Guanxi 118

Definition of Third-Party Logistics 119Types of 3PL Providers 1193PL Market Size and Scope 121

Third-Party-Logistics Research Study—IndustryDetails 122

Profile of Logistics Outsourcing Activities 124Strategic Role of Information Technology 126Management and Relationship Issues 127

Contents

SUPPLY CHAIN TECHNOLOGY: 3PLs Need to Fill an Expanded Role inToday's Supply Chains 128

Customer Value Framework 129Logistics Strategic View and the Role of 3PLs 131

Summary 135Study Questions 135Notes 136Case 4-1: CoLinx, LLC 138Case 4-2: Ocean Spray Cranberries, Inc. 140

Chapter 5 Supply Chain Performance Measurement andFinancial Analysis 141SUPPLY CHAIN PROFILE: CLGN Book Distributors.com 142

Introduction 144Dimensions of Supply Chain Performance Metrics 145ON THE LINE: Measuring Supply Chain Success 147

Developing Supply Chain Performance Metrics 151Performance Categories 152The Supply Chain-Finance Connection 157The Revenue-Cost Savings Connection 158The Supply Chain Financial Impact 159ON THE LINE: What Drives CEOs? 161

Financial Statements 164Financial Impact of Supply Chain Decisions 165Supply Chain Service Financial Implications 170SUPPLY CHAIN TECHNOLOGY: Metrics for Measuring Your Software's

Success 177

Summary 180Study Questions 180Notes 182Case 5-1: CPDW 183Case 5-2: DVD4LESS.com 184

Appendix 5A Financial Terms 185

Chapter 6 Supply Chain Technology—Managing InformationFlows 187SUPPLY CHAIN PROFILE: Respect the Bottom Line 188

Introduction 189The Role of Information in the Supply Chain 189

Information Requirements 190Information Technology Capabilities 191Information Technology Challenges 193

A Framework for Managing Supply ChainInformation 195

Foundation Elements 195Key Requirements 196

Contents xi

Differentiating Capabilities 197SCM Software 199

Planning 199Execution 200Event Management 201Business Intelligence 202Enterprise Resource Planning (ERP) 203Related Tools 204

Supply Chain Technology Implementation 205Needs Assessment 206Software Options 206Technical Issues 208

ON THE LINE: Software Gets "Friendlier" 209

Asking the Right Questions 211Supply Chain Technology Innovations 213

Radio-Frequency Identification (RFID) 213Adaptive Supply Chain Networks 214Pervasive Automation 215

Summary 217Study Questions 217Notes 218Case 6-1: Catnap Pet Products 221

Suggested Readings for Part II 223

Part IIIChapter 7 Demand Management and Customer Service 229

SUPPLY CHAIN PROFILE: How Scan-Based Trading Changed DistributionatDreyer's 230

Outbound-To-Customer Logistics Systems 230Examples of Successes 231Organization of This Chapter 232

Demand Management 232ON THE LINE: Ingram Micro—A Demand Chain Leader 233

Traditional Forecasting 235Collaborative Planning, Forecasting, andReplenishment 237Order Fulfillment and Order Management 238SUPPLY CHAIN TECHNOLOGY: Midwest Pharmaceuticals 240

The Order-Management System 241Order and Replenishment Cycles 242 ~E-Commerce Order-Fulfillment Strategies 247

Customer Service 247The Logistics/Marketing Interface 248Defining Customer Service 249Elements of Customer Service 251Performance Measures for Customer Service 255

xii Contents

Implementing Customer Service Standards 257Summary of Customer Service 258

Expected Cost of Stockouts 258Back Order 259Lost Sales 259Lost Customer 260Determining the Expected Cost of Stockouts 260

Channels of Distribution 260The Growth and Importance of Channels ofDistribution 262

Summary 264Study Questions 264Notes 265Case 7-1: Walton Seed Company 267

Chapter 8 The Transportation System 269SUPPLY CHAIN PROFILE: Victoria's Secret for Success 270

Introduction 271The Role of Transportation in Logistics 271The Transport Selection Decision 272

The Transportation-Supply Chain Relationship 273The Carrier Selection Decision 273Carrier Selection Determinants 274The Pragmatics of Carrier Selection 276

The Basic Modes of Transportation 277Railroads 278Motor Carriers 280

ON THE LINE: It's the Service, Stupid 281

Water Carriers 284Air Carriers 287Pipelines 288Performance Rating of Modes 288

Legal Classifications of Carriers 289Common Carrier 289Regulated Carrier 290Contract Carrier 291Exempt Carrier 291Private Carrier 291

Intermodal Transportation 292SUPPLY CHAIN TECHNOLOGY: The Virtual Freight Marketplace 293

Containerization 295Piggyback 296International Shipments 296

Indirect and Special Carriers 297Small-Package Carriers 297Consolidators 298Freight Forwarders 298

Contents XIII

Shippers Associations 298Brokers 298Intermodal Marketing Companies 299

Summary 301Study Questions 301Notes 302Case 8-1: Double D Trucking 303

Chapter 9 Transportation Management 305SUPPLY CHAIN PROFILE: Mastering the Art of Advance Planning

Introduction 306Management Strategy 307

Proactive Management Approach 307Reducing the Number of Carriers 308Negotiating with Carriers 308Contracting with Carriers 309Consolidating Shipments 310Monitoring Service Quality 311

Federal Regulation 313ON THE LINE: Transportation: The Forgotten Factor 314

Documentation—Domestic 315Bill of Lading 315Freight Bill 318Claims 318F.O.B. Terms of Sale 319

Documentation—International 320Sales Documents 320Terms of Sale 321Transportation Documents 323Improving Documentation 325

Bases for Rates 326Cost of Service 326Value of Service 327Distance 327Weight of Shipment 329

Transportation Services 329Terminal Services 329Line-Haul Services 331

SUPPLY CHAIN TECHNOLOGY: The Home Delivery Portal 332

Summary 333Study Questions 334Notes 335Case 9-1: Specialty Metals Company 335

306

Appendix 9A The Pragmatics of Carrier PricingClass Rates 337Exception Ratings (Rates) 341Commodity Rates 342

336

XIV Contents

Other Rates 343Study Questions 345

Chapter 10 Inventory Decision Making 346SUPPLY CHAIN PROFILE: Micros and More: The Sequel 347

Introduction 348Fundamental Approaches to Managing Inventory 348

Key Differences among Approaches to ManagingInventory 349Principal Approaches and Techniques for InventoryManagement 351

ON THE LINE: Cancer Society Cures Inventory Clog 352

Fixed Order Quantity Approach(Condition Of Certainty) 353

Inventory Cycles 353Simple EOQ Model 354Reorder Point 361A Note Concerning the Min-Max Approach 361Summary and Evaluation of the Fixed Order QuantityApproach 361

Fixed Order Quantity Approach(Condition Of Uncertainty) 362

Reorder Point—A Special Note 364Uncertainty of Demand 364Uncertainty of Demand and Lead Time Length 368

Fixed Order Interval Approach 370Summary And Evaluation Of EOQ Approaches ToInventory Management 371Additional Approaches To Inventory Management 372

The Just-in-Time Approach 372Materials Requirements Planning 377Summary and Evaluation of MRP Systems. 381Distribution Resource Planning 382

Inventory At Multiple Locations—The SquareRoot Law 384A Special Note On Inventory For OutboundSystems 386Demand Pull Approaches To Managing Inventory 387SUPPLY CHAIN TECHNOLOGY: Inventory Management: Balancing Act 390

Summary 391Study Questions 392Notes 393Case 10-1: Beierlein Distributors 394Case 10-2: Nittany Fans 395

Appendix 10A Special Applications of the EOQ Approach 396

Contents XV

Adjusting the Simple EOQ Model for Model ChoiceDecisions—The Cost of Inventory in Transit 396Adjusting the Simple EOQ Model for VolumeTransportation Rates 399Mathematical Formulation 400Transportation Rate Discount Example 402Adjusting the Simple EOQ Model for PrivateCarriage 403Adjusting the Simple EOQ Model for theEstablishment and Application of In-ExcessRates 403Summary 407

Chapter 11 Warehousing Decisions 408SUPPLY CHAIN PROFILE: Redesigning Distribution Centers 409

Introduction 410The Nature and Importance of Warehousing 411The Role of the Warehouse in the Logistics System: ABasic Conceptual Rationale 411Basic Warehousing Decisions 414

The Ownership Decision 416Public Warehousing 419Contract Warehousing 421The Number of Warehouses 422

Basic Warehouse Operations 425ON THE LINE: Homemade Warehousing 429

Warehouse Layout and Design 429Layout and Design Principles 431Layout and Design Objectives 433

Materials Handling 434Objectives of Materials Handling 435Guidelines and Principles for Materials Handling 437

SUPPLY CHAIN TECHNOLOGY: RF Helps Hasbro Get Ahead of the

Game 439

Packaging 440The Role of Packaging 441What Is Packaging? 442Packaging Materials 442Bar Coding 443

Summary 446Study Questions 446Notes 447Case 11-1: Vanity Products 448

Appendix 11A Material-Handling Equipment 450Dock Equipment 450Other Material-Handling Equipment 453

xvi Contents

Order-Picking and Storage Equipment 456Types of Material-Handling Equipment—A DesignPerspective 459Equipment Selection Factors 460

Suggested Readings for Part III 462

Part IVChapter 12 Network Design and Facility Location 467

SUPPLY CHAIN PROFILE: Need for Speed Turns Guadalajara into aHigh-Tech Hub 468

Introduction 468The Need for Long-Range Planning 470The Strategic Importanceof Logistics Network Design 470

Changing Customer Service Requirements 470Shifting Locations of Customer and/or SupplyMarkets 471Change in Corporate Ownership 471Cost Pressures 472Competitive Capabilities 472Corporate Organizational Change 472

Logistics Network Design 473Step 1: Define the Logistics Network DesignProcess 474Step 2: Perform a Logistics Audit 474Step 3: Examine the Logistics NetworkAlternatives 475Step 4: Conduct a Facility Location Analysis 475Step 5: Make Decisions Regarding Networkand Facility Location 475Step 6: Develop an Implementation Plan 476

Major Locational Determinants 476Key Factors for Consideration 477

ON THE LINE: Tennessee—Site for Expanded ManufacturingCapacity 479

Current Trends Governing Site Selection 480Modeling Approaches 480

Optimization Models 481Simulation Models 483Heuristic Models 485Potential Supply Chain Modeling Pitfalls toAvoid 485Example of a Heuristic Modeling Approach:The Grid Technique 486

SUPPLY CHAIN TECHNOLOGY: Toyota Motor Sales USA, Inc. 4 8 8

Transportation Pragmatics 494Summary 498

Contents XVII

Study Questions 498Notes 500Case 12-1: Fireside Tire Company 501

Chapter 13 Procurement and Supply Management 505SUPPLY CHAIN PROFILE: CBL Plastic Company 506

Introduction 506Inbound Logistics Along the Supply Chain 507Materials Management 509

Procurement 509Importance of Item and Service Purchased 513

ON THE LINE: How Dell Defines Direct 516

The Special Case of Procurement Price 520Other Materials-Management Activities 523

SUPPLY CHAIN TECHNOLOGY: BibNet Links Michelin's Tire Dealers 527

Electronic Procurement 528Advantages 528Disadvantages 530Common Applications 530

Types of E-commerce Models 530Summary 532Study Questions 532Notes 533Case 13-1: Durable Vinyl Siding Corp. 534

Chapter 14 Operations—Producing Goods and Services 537SUPPLY CHAIN PROFILE: No One Does Lean Like

the Japanese 538

Introduction 539The Role of Production Operations inSupply Chain Management (SCM) 540

Production Process Functionality 541Production Tradeoffs 542Production Challenges 543

Operations Strategy and Planning 544Production Strategies 544Production Planning 550

Production Execution Decisions 552Assembly Processes 553Production Process Layout 554

ON THE LINE: Fast, Furious, and Flexible 555

Packaging 558Production Metrics 560

Total Cost 561Total Cycle Time 561Delivery Performance 561Quality 562Safety 562

xviii Contents

Production Technology 562SUPPLY CHAIN TECHNOLOGY: What Real-Time Manufacturing LooksLike 564

Summary 566Study Questions 566Notes 567Case 14-1: Team HDX 569

Chapter 15 Managing Reverse Flows in the Supply Chain 571SUPPLY CHAIN PROFILE: Trash to Treasure Foundation 572

Introduction 573Importance and Magnitude of Reserve Flows 574ON THE LINE: Returns Management: Making Order Out of Chaos 575

Reverse Logistics Systems versus Closed Loops 576Customer Returns 578Environmental Challenges 579Economic Value 579

ON THE LINE: R-E-V-E-R-S-E—Spells "Headache Relief" 580

Achieving a Value Stream for Reverse Flows 581SUPPLY CHAIN TECHNOLOGY: Improving Reverse Flows with

Technology 582

Managing Reverse Flows in a Supply Chain 583Summary 585Study Questions 585Notes 586Case 15-1: Fitness Retreads, LLP 587

Suggested Readings for Part IV 588

Part VChapter 16 Strategic Challenges and Change for Supply

Chains 593SUPPLY CHAIN PROFILE: Best Buy's Supply Chain Transformation 594

Introduction 595Principles of Supply Chain Management 595

Principle 1: Segment Customer Based onService Needs 595Principle 2: Customize the Logistics Network 595Principle 3: Listen to Signals of Market Demand andPlan Accordingly 595Principle 4: Differentiate Products Closer tothe Customers 596Principle 5: Source Strategically 596Principle 6: Develop a Supply Chainwide TechnologyStrategy 597Principle 7: Adopt Channel-Spanning PerformanceMeasures 597

Contents xix

Focus of Supply Chain Management 597Getting to Growth: Think Beyond Cost 598Develop World-Class Collaboration Skills 600Grow Your Leadership Capabilities 600

ON THE LINE: Transplanting SCM from One Company to Another 601

Supply Chain Strategies 602Differentiation Strategies 602

Time-Based Strategies 602SUPPLY CHAIN TECHNOLOGY: Quick Change Supply Chains 603

Reducing Cycle Time 604Time-Reduction Logistics Initiatives 604

Financial Strategies 605Inventory Productivity 605Facility Utilization 606Equipment Utilization Strategies 606Outsourcing 606

Technology-Based Strategies 607The Supply Chain Management ApplicationsMarket 607

Relationship-Based Strategies 609Collaboration 609Impact of Collaboration on Business Processes 611Financial vs. Nonfinancial Benefits ofCollaboration 611

Global Strategies 612Best Buy 612Tommy Hilfiger—Li & Fung 613

Supply Chain Transformation 614Motorola 614

Summary 616Study Questions 616Notes 617Case 16-1: Peerless Products, Inc. 618Case 16-2: South Face 619Cases AhZingPC 621

Subject Index 631Name Index 648