Explain why sourcing and procurement activities are an important part of supply chain management.

Explain why sourcing and procurement activities are an important part of supply chain management.

C H A P T E R 9 Using Supply Chains to Create Value for Customers Suppose you have developed a great new product like Ghostbusters: The Video Game. Not only is the game terrific,

but you’ve managed to maximize to get it sold in every marketing channel you can. The product is selling at

GameStop, Walmart, Best Buy, and Amazon, and it’s slated to come out on Sony’s PlayStation Portable console.

That’s the end of the story, right? Not quite. Sooner rather than later, in addition to focusing on the firms

“downstream” that sell your product, you will also look “upstream” at your suppliers and “sideways” at potential firms

to partner with. It’s only natural. (Or in the case of Ghostbusters: The Video Game, should we say supernatural?)

Video Clip

Who Ya Gonna Call? Mark Randel, John O’Keefe, and Brendan Goss, the founders of the company that produced the new Ghostbusters video game, say they had to satisfy two types of customers with the product—gamers and fans of the original Ghostbusters movie. Check out the demo.

As we explained in Chapter 8, your product’s supply chain includes not only the downstream companies that

actively sell the product but also all the other organizations that have an impact on it before, during, and after it’s

produced. Those companies include the providers of the raw materials your firm uses to produce it, the

transportation company that physically moves it, and the firm that helped build the Web pages to promote it. If

you hired a programmer in India to help write computer code for the game, the Indian programmer is also part of

the product’s supply chain. If you hired a company to process copies of the game returned by customers, that

company is part of the supply chain as well. Large organizations with many products can have literally thousands of

supply chain partners. Service organizations also need supplies to operate, so they have supply chains, too.

As you learned at the end of the last chapter, the process of designing, monitoring, and altering supply chains

to make them as efficient as possible is called supply chain management. The term supply chain management was

first coined by an American industry consultant in the early 1980s, but it’s an old idea. Part of Henry Ford’s strategy

View the video online at: http://www.youtube.com/v/xGgHJdz8WT8

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value chain

A term that is sometimes used interchangeably with the term supply chain. The idea behind the value chain is that your supply chain partners should do more for you than perform just basic functions.

FIGURE 9.1 There are no fuddy-duddy fashions at Zara stores. Out with the old, in with the new—or whatever is selling well.

© 2010 Jupiterimages Corporation

in the early 1900s was to extract as much efficiency (and money) as he could by taking ownership of the supply

chains for his automobiles. Ford owned the foundries that converted raw iron ore to steel for his cars. He also

owned the plantations from which rubber was extracted to produce his automobiles’ tires, and the ships on which

the materials and finished products were transported.[1]

Today, many companies still take a narrow view of their supply chains; they look at supply chains mainly in

terms of the costs they can save. Cost reduction is definitely an important part of supply chain management. After

all, if your competitors can produce their products at a lower cost, they could put you out of business.

Keep in mind, however, that a firm can produce a product so cheaply that no one will buy it because it’s

shoddy. That’s why smart companies view their supply chains as an integral part of their marketing plans. In other

words, these companies also look at the ways their supply chains can create value for customers so as to give their

firms a competitive edge.

Today, the term value chain is sometimes used interchangeably with the term supply chain. The idea behind

the value chain is that your supply chain partners should do more for you than perform just basic functions; each

one should help you create more value for customers as the product travels along the chain—preferably more

value than your competitors’ supply chain partners can add to their products.

Zara, a trendy but inexpensive clothing chain in Europe, is a good example of a company that

has managed to create value for its customers with smart supply chain design and execution.

Originally, it took six months for Zara to design a garment and get it delivered to stores. To get the

hottest fashions in the hands of customers as sooner, Zara began working more closely with its

supply chain partners and internal design teams. It also automated its inventory systems so it

could quickly figure out what was selling and what was not. As a result, it’s now able to deliver its

customers the most cutting-edge fashion in just two weeks. Not only that, but the company set a

new standard for the clothing industry in the process.[2]

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sourcing

The process of evaluating and hiring individual businesses to supply goods and services to your organization.

procurement

The process of purchasing goods and services for your organization.

outsource

Hiring an organization to do a task your firm previously performed.

freight forwarder

An organization whose duties include consolidating small loads of freight, negotiating rates for their shipment, and booking space for them on transportation vehicles and in warehouses.

third-party logistics (3PLs) firms

Firms to which other companies outsource their entire order processing and shipping departments.

offshoring

Outsourcing work to a company abroad.

  1. SOURCING AND PROCUREMENT

L E A R N I N G O B J E C T I V E S

  1. Explain why sourcing and procurement activities are an important part of supply chain management.
  2. Describe the reasons why the use of outsourcing and offshoring has grown. 3. Explain some of the drawbacks companies face when they outsource their activities.

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager’s job in recent years, in part because businesses keep becoming more specialized. Just like Ford’s workers became more efficient by perform- ing specialized tasks, so, too have companies.

Ford Motor Company no longer produces its own tires for its cars. It buys them from tire produ- cers like Michelin and Goodyear. It’s still possible to “own” your supply chain, though. The diamond company DeBeers owns its own mines, distributorships, and retail diamond stores. The problem is that it’s very costly to own multiple types of companies and difficult to run them all well, too.

Firms look up and down their supply chains and outside them to see which companies can add the most value to their products at the least cost. If a firm can find a company that can add more value than it can to a function, it will often outsource the task to that company. After all, why do something yourself if someone else can do it better or more cost-effectively?

Rather than their own fleets of trucks, ships, and airplanes, most companies outsource at least some of their transportation tasks to shippers such as Roadway and FedEx. Other companies hire freight forwarders to help them. You can think of freight forwarders as travel agents for freight.[3] Their duties include negotiating rates for shipments and booking space for them on transportation vehicles and in warehouses. A freight forwarder also combines small loads from various shippers into larger loads that can be shipped by more economically. However, it doesn’t own its own transportation equipment or warehouses.

Other companies go a step further and outsource their entire order processing and shipping de- partments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of 3PLs. A 3PL is one-stop shipping solution for a company that wants to focus on other aspects of its business. Firms that receive and ship products internationally often hire 3PLs so they don’t have to deal with the head- aches of transporting products abroad and completing import and export paperwork for them.

1.1 The Growth of Outsourcing and Offshoring Beginning in the 1990s, companies began to outsource a lot of other activities besides transportation.[4] Their goal was twofold: (1) to lower their costs and (2) to focus on the activities they do best. You might be surprised by the functions firms outsource. In fact, many “producers” of products no longer produce them at all but outsource their production instead.

Most clothing companies, including Nike, design products, but they don’t make them. Instead, they send their designs to companies in nations with low labor costs. Likewise, many drug companies no longer develop their own drugs. They outsource the task to smaller drug developers, which in recent years have had a better track record of developing best-selling pharmaceuticals. The Crest SpinBrush (toothbrush) wasn’t developed by Procter & Gamble, the maker of Crest. A small company called Church & Dwight Co. developed the technology for the SpinBrush, and P&G purchased the right to market and sell the product.

Outsourcing work to companies abroad is called offshoring. Figure 9.2 shows the percentage of supply chain functions three hundred global manufacturers and service organizations say they now offshore and the percentages these organizations expect to offshore by 2010.

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social responsibility

The idea that companies should manage their businesses not just to earn profits but to advance the well-being of society.

environmental sustainability

The idea that firms should engage in business practices that have the least impact on the environment so that it is sustained for future generations.

FIGURE 9.2 Percentage of Supply Chain Functions Offshored in 2008[5]

Some of the Ins and Outs of Outsourcing

A company faces a number of tradeoffs when it outsources an activity. The loss of control—particularly when it comes to product quality and safety—is one of them. Just ask Mattel. Beginning in 2007, Mattel was forced to recall tens of millions of toys it had outsourced for production because they were tainted with lead. But Mattel isn’t the only company to experience problems. In a recent global survey, more than one-fifth of the companies that outsource their production said they have experienced “frequent” and “serious” quality problems.[6]

The U.S. Consumer Products Safety Commission randomly inspects products, but there is no way the commission’s personnel can begin to test them all. To protect their customers, many companies either test their suppliers’ products themselves or contract with independent labs to do so. For ex- ample, if you sell a product to Walmart, you need to be prepared to send it to such a lab, should Wal- mart ask you to.[7] Companies also do on-site audits, or checks, of their suppliers. Other companies sta- tion employees with their suppliers on a permanent basis to be sure that the quality of the products they’re producing is acceptable.

The loss of control of their technology is another outsourcing risk that companies face. Some countries are better about protecting patented technologies and designs than others, and some supply chain partners are more trustworthy than others. How can you be sure your supply chain partner won’t steal your technology? A few years ago, General Motors began working with a Chinese firm to produce a car called the Spark for the Chinese market. But before GM could even get the automobile plant up and running, the U.S. automaker alleged that the design of the car had been stolen, sold to another company, and knockoffs of it were being driven around China’s streets.[8]

Another aspect of outsourcing relates to the social responsibility and environmental sustainability companies exhibit in terms of how they manage their supply chains. Social responsibility is the idea that companies should manage their businesses not just to earn profits but to advance the well-being of society. Both issues are becoming increasingly important to consumers. Environmental sustainabil- ity is the idea that firms should engage in business practices that have the least impact on the environ- ment so that it’s sustained for future generations.

To demonstrate to consumers they are socially responsible, Starbucks and other companies have joined the Fair Trade movement. Members of the Fair Trade movement pay farmers and other third- world producers higher prices for their products so they don’t have to live in poverty. The prices con- sumers pay for products with fair-trade labels are often higher, but one Harvard study has showed that consumers expect them to be and that sales actually increased when the prices of them went up.[9]

The push for environmental sustainability is also having an impact on supply chains, partly be- cause the stricter environmental laws in many counties are demanding it. But companies are seeing the upside of producing “greener” products and disposing of them in ethical ways. First, it improves a company’s image and makes it stand out among its competitors. Second, many consumers are willing to pay more for green products, even during a recession.[10] Walmart recently announced that it’s plan- ning to require its suppliers to measure the environmental costs of producing their products. The “green” ratings will then be put on the products labels.[11] Figure 9.3 shows the reasons why firms “go green” with their supply chains.

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FIGURE 9.3 Why Firms Say They Are “Going Green” with Their Supply Chains[12]

The outdoor clothing company Patagonia takes both social responsibility and environmental sustain- ability seriously. Patagonia tries to design, source, produce, and recycle its products so they cause the least environmental damage possible. The company also audits it supply chain partners to ensure they treat workers fairly.

Video Clip

Hewlett-Packard = Hazardous Products Not going green can be hazardous to a company’s reputation. After Hewlett-Packard (HP) broke a promise to eliminate toxic materials in its computers by 2009, Greenpeace activists painted the words “Hazardous Products” on the roof of the company’s headquarters in Palo Alto, California. Meanwhile, a voicemail message from Star Trek actor William Shatner was delivered to all the phones in the building. “Please ask your leader [HP CEO Mark Hurd]” to make computers that are toxin free like Apple has done, Shatner said in the message. You can hear the message by going to the following link: http://www.greenpeace.org/international/news/ hp-reminder-28-07-09. An HP spokesman said that eliminating the toxic materials would have disrupted the company’s supply chain.

One of the drawbacks of outsourcing is the time it takes for products to make their way to the United States and into the hands of consumers. The time it takes is a big issue because it affects how responsive a company is to its customers. Retailers don’t like to wait for products. Waiting might mean their cus- tomers will shop elsewhere if they can’t find what they want. As we explained in Chapter 8, for this reason and others, some companies are outsourcing their activities closer to home.

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http://www.greenpeace.org/international/news/hp-reminder-28-07-09
http://www.greenpeace.org/international/news/hp-reminder-28-07-09
FIGURE 9.4

Click on the link below to track the environmental and social impact of Patagonia’s various products throughout the supply chain—from their design to their delivery: http://www.patagonia.com/web/us/ footprint/index.jsp.

insourcing

When firms move activities, such as logistics, in-house.

When firms that can’t resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called in- sourcing. Insourcing can actually help set your company apart these days. The credit card company Discover doesn’t outsource its customer service to companies abroad. Perhaps that helps explain why one survey ranked Discover number one in customer loyalty.

1.2 Matching a Company’s Sourcing Strategies with the Needs of Its Customers Your customer should ultimately be the focus of any insourcing and outsourcing de- cision you make. After all, unless the product gets recycled, the customer is the last link in the supply chain. Not all customers have the same product and service requirements, though. It might be acceptable for a company that sells PCs to individual consumers to outsource its tech support, perhaps to a firm in India that can perform the function at lower cost. However, a company that buys an expensive, customized computer network is probably going to want to deal directly with the maker of the product if the network goes down—not another company in another country.

Similarly, if you’re producing an expensive car for Ferrari-type buyers, purchasing bargain-basement-priced parts could leave your customers dissatisfied—especially if

the parts fail and their cars break down. Conversely, if you’re designing a low-end automobile, top-of- the-line parts could make it too expensive for low-end buyers. High-end car buyers are likely to de- mand better after-sales service than low-end car buyers, too.

FIGURE 9.5

Many of Patagonia’s customers are outdoor enthusiasts willing to pay $100 or more for a fleece jacket made from recycled plastic bottles. A customer at Walmart might not be. The trick for Walmart and its green index will be to satisfy customers who want low prices as well as to save the planet.

© 2010 Jupiterimages Corporation

K E Y T A K E A W A Y

Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procure- ment have become a bigger part of a supply manager’s job in recent years, in part because businesses keep becoming more specialized. Companies outsource activities to lower their costs to focus on the activities they do best. Companies face numerous tradeoffs when they outsource activities, which can include a loss of con- trol and product-quality and safety problems. When firms that can’t resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcing. Customer should be the focus of any insourcing and outsourcing decisions companies make.

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http://www.patagonia.com/web/us/footprint/index.jsp
http://www.patagonia.com/web/us/footprint/index.jsp
R E V I E W Q U E S T I O N S

  1. What are some of the supply chain functions firms outsource and offshore?
  2. How does outsourcing differ from offshoring?
  3. Why might a company be better off insourcing an activity?

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  1. DEMAND PLANNING AND INVENTORY CONTROL

L E A R N I N G O B J E C T I V E S

  1. Explain why demand planning adds value to products. 2. Describe the role inventory control plays when it comes marketing products. 3. List the reasons why firms collaborate with another for the purposes of inventory control and

demand planning.

2.1 Demand Planning Imagine you are a marketing manager who has done everything in your power to help develop and promote a product—and it’s selling well. But now your company is running short of the product be- cause the demand forecasts for it were too low. Recall that this is the scenario Nintendo faced when the Wii first came out. The same thing happened to IBM when it launched the popular ThinkPad laptop in 1992.

Not only is the product shortage going to adversely affect the profitably of your company, but it’s going to adversely affect you, too. Why? Because you, as a marketing manager, probably earn either a bonus or commission from the products you work to promote, depending on how well they sell. And, of course, you can’t sell what you don’t have.

FIGURE 9.6

IBM ThinkPads were hard to find in 1992. But NASA didn’t have any trouble getting one. In 1993, astronauts used it to repair the Hubble Space Telescope, which orbits Earth.

© 2010 Jupiterimages Corporation

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demand planning

The process of estimating how much of a good or service customers will buy from you.

production scheduling

The management of the resources, events, and processes need to create an offering.

lead time

The amount of time it takes for a customer to receive a good or service once it’s been ordered.

collaborative planning, forecasting, and replenishment (CPFR)

A practice whereby supply chain partners share information and coordinate their operations.

As you can probably tell, the best marketing decisions and supplier selections aren’t enough if your company’s demand forecasts are wrong. Demand planning is the process of estimating how much of a good or service customers will buy from you. If you’re a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. It will also affect your production scheduling, or the management of the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. Closely related to demand forecasting are lead times. A product’s lead time is the amount of time it takes for a customer to receive a good or service once it’s been ordered. Lead times also have to be taken into account when a company is forecasting demand.

Sourcing decisions—deciding which suppliers to use—are generally made periodically. Forecasting decisions must be made more frequently—sometimes daily. One way for you to predict the demand for your product is to look at your company’s past sales. This is what most companies do. But they don’t stop there. Why? Because changes in many factors—the availability of materials to produce a product and their prices, global competition, oil prices (which affect shipping costs), the economy, and even the weather—can change the picture.

For example, when the economy hit the skids in 2008, the demand for many products fell. So if you had based your production, sales, and marketing forecasts on 2007 data alone, chances are your forecasts would have been wildly wrong. Do you remember when peanut butter was recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut butter products, you would have needed to quickly change your forecasts.

The promotions you run will also affect demand for your products. Consider what happened to KFC when it first came out with its new grilled chicken product. As part of the promotion, KFC gave away coupons for free grilled chicken via Oprah.com. Just twenty-four hours after the coupons were uploaded to the Web site, KFC risked running out of chicken. Many customers were turned away. Oth- ers were given “rain checks” (certificates) they could use to get free grilled chicken later.[13]

FIGURE 9.7

KFC’s new Kentucky Grilled Chicken was finger-lickin’ good—if you could get it. Reportedly, the chain nearly ran out of the birds following a promotion on Oprah.com.

© 2010 Jupiterimages Corporation

In addition to looking at the sales histories of their firms, supply chain managers also consult with mar- keting managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers’ needs are and if those needs are changing.

Firms also look to their supply chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a practice whereby supply chain partners share information and coordinate their operations. Walmart has developed a Web-based CPFR system called Retail Link. Retailers can log into Retail Link to see how well their products are selling at various Walmart stores, how soon more products need to be shipped to the company and where, how any pro- motions being run are affecting the profitability of their products, and so forth. Because different com- panies often use different information technology systems and software, Web-based tools like Retail Link are becoming a popular way for supply chain partners to interface with one another.

Not all firms are wild about sharing every piece of information they can with their supply chains partners. Some retailers view their sales information as an asset—something they can sell to informa- tion companies like Information Resources, Inc., which provides competitive data to firms that willing to pay for it.[14] By contrast, other firms go so far as to involve their suppliers before even producing a product so they can suggest design changes, material choices, and production recommendations.

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supply chain visibility

A situation in which supply chain partners share information with one another so they can see how well the chain is working.

demand-planning software

Software that can synthesize a variety of factors to better predict a firm’s demand.

inventory control

The process of ensuring your firm has an adequate amount of products and a wide enough assortment of them meet your customers’ needs.

stockout

A situation that occurs when a firm runs out of a product a customer wants to buy.

Video Clip

Take a Test Drive of the Tata Nano Priced at about $2,500 the Tata Nano is the least expensive car ever produced in the world. To make a safe, reliable car at such a low cost, Tata Motors, an Indian company, sought new, innovative design approaches from its suppliers. The elimination of one of the car’s two windshield wipers was one result of the collaboration that occurred between Tata and its supply chain partners.[15]

The trend is clearly toward more shared information, or what businesspeople refer to as supply chain visibility. After all, it makes sense that a supplier will be not only more reliable but also in a better pos- ition to add value to your products if it knows what your sales, operations, and marketing plans are—and what your customers want. By sharing more than just basic transaction information, com- panies can see how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating with one another, and the extent to which value is being built in to the product.

Demand-planning software can also be used to create more accurate demand forecasts. Demand- planning software can synthesize a variety of factors to better predict a firm’s demand—for example, the firm’s sales history, point-of-sale data, warehouse, suppliers, and promotion information, and eco- nomic and competitive trends. So a company’s demand forecasts are as up-to-date as possible, some of the systems allow sales and marketing personnel to input purchasing information into their mobile devices after consulting with customers.

Litehouse Foods, a salad dressing manufacturer, was able to improve its forecasts dramatically by using demand-planning software. Originally the company was using a traditional sales database and spreadsheets to do the work. “It was all pretty much manual calculations. We had no engine to do the heavy lifting for us,” says John Shaw, the company’s Information Technology director. In a short time, the company was able to reduce its inventory by about one-third while still meeting its customers’ needs.[16]

2.2 Inventory Control Demand forecasting is part of a company’s overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment of them meet your customers’ needs. One of the goals of inventory management is to avoid stockouts. A stockout occurs when you run out of a product a customer wants to buy. Customers will simply look elsewhere to buy the product—a process the Internet has made easier than ever.

When the attack on the World Trade Center occurred, many Americans rushed to the store to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not replenish them for several days, partly because its inventory tracking system only counted up what was needed at the end of the day. Walmart, on the other hand, took count of what was needed every five minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in so do- ing, completely locked up all their vendors’ flags. Meanwhile, Target was out of flags and out of luck—there were no more to be had.

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safety stock

Backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason.

shrinkage

A term used to describe a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, and supplier fraud.

just-in-time inventory systems

A system in which a firm keeps very little inventory on hand. Instead, its suppliers ship it inventory as needed.

vendor-managed inventory (VMI)

The practice of having your suppliers monitor your inventory levels.

mass customization

Mass producing goods customized to the specifications of individual consumers.

electronic product code (EPC)

A barcode that can distinguish between two seemingly identical products. It contains information about where the product was manufactured and where it was shipped from and bound to.

To help avoid stockouts, most companies keep a certain amount of safety stock on hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason. Maintaining too much inventory, though, ties up money that could be spent other ways—perhaps on marketing promotions. Inventory also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can also become obsolete, deteriorate, spoil, or “shrink.” Shrinkage is a term used to describe a reduction or loss in inventory due to shoplifting, em- ployee theft, paperwork errors, or supplier fraud.[17]

When the economy went into its most recent slide, many firms found themselves between a rock and a hard place in terms of their inventory levels. On the one hand, because sales were low, firms were reluctant to hold much safety stock. Many companies, including Walmart, cut the number of brands they sold in addition to holding a smaller amount of inventory. On the other hand, because they didn’t know when business would pick up, they ran the risk of running out of products. Many firms dealt with the problem by maintaining larger amounts of key products. Companies also watched their supply chain partners struggle to survive. Forty-five percent of firms responding to one survey about the downturn reported providing financial help to their critical supply chain partners—often in the form of credit and revised payment schedules.[18]

2.3 Just-in-Time Inventory Systems To lower the amount of inventory and still maintain they stock they need to satisfy their customers, some organizations use just-in-time inventory systems in both good times and bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they contract with their sup- pliers to ship them inventory as they need it—and even sometimes manage their inventory for them—a practice called vendor-managed inventory (VMI). Dell is an example of a company that utilizes a just-in-time inventory system that’s vendor managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in small warehouses near Dell’s assembly plants worldwide and provide Dell with parts “just-in-time” for them to be assembled.[19]

Dell’s inventory and production system allows customers to get their computers built exactly to their specifications, a production process that’s called mass customization. This helps keep Dell’s in- ventory levels low. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on hand, which can be configured or reconfigured should consumers’ preferences change. Dell can more easily return the parts to its suppliers if at some point it redesigns its computers to better match what its customers want. And by keeping track of its customers and what they are ordering, Dell has a better idea of what they might order in the future and the types of inventory it should hold. Because mass customization lets buyers “have it their way,” it also adds value to products, for which many customers are willing to pay.

2.4 Product Tracking Some companies, including Walmart, are beginning to experiment with new technologies such as elec- tronic product codes in an effort to better manage their inventories. An electronic product code (EPC) is similar to a barcode, only better, because the number on it is truly unique. You have probably watched a checkout person scan a barcode off of a product identical to the one you wanted to buy—perhaps a pack of gum—because the barcode on your product was missing or wouldn’t scan. Electronic product codes make it possible to distinguish between two identical packs of gum. The codes contain information about when the packs of gum were manufactured, where they were shipped from, and where they were going to. Being able to tell the difference between “seemingly” identical products can help companies monitor their expiration dates if they are recalled for quality of safety reasons. EPC technology can also be used to combat “fake” products, or knockoffs, in the marketplace.

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radio-frequency identification (RFID) tag

A tag that emits radio signals that can record and track a shipment as it comes in and out of a facility.

Video Clip

The Basics of RFID and EPC Technology To understand how EPC and RFID technology can help marketers, watch this YouTube video.

Electronic product codes are stored on radio-frequency identification (RFID) tags. A radio-frequency identification (RFID) tag emits radio signals that can record and track a shipment as it comes in and out of a facility. If you have unlocked your car door remotely, microchipped your dog, or waved a toll- way tag at a checkpoint, you have used RFID technology.[20] Because each RFID tag can cost anywhere from $0.50 to $50 each, they are generally used to track larger shipments, such cases and pallets of goods rather than individual items. See Figure 9.8 to get an idea of how RFID tags work.

FIGURE 9.8 How RFID Tagging Works

Some consumer groups worry that RFID tags and electronic product codes could be used to track their consumption patterns or for the wrong purposes. But keep in mind that like your car-door remote, the codes and tags are designed to work only within short ranges. (You know that if you try to unlock your car from a mile away using such a device, it won’t work.)

Proponents of electronic product codes and RFID tags believe they can save both consumers and companies time and money. These people believe consumers benefit because the information embed- ded in the codes and tags help prevent stockouts and out-of-date products from remaining on store shelves. In addition, the technology doesn’t require cashiers to scan barcodes item by item. Instead an electronic product reader can automatically tally up the entire contents of a shopping cart—much like a wireless network can detect your computer within seconds. As a customer, wouldn’t that add value to your shopping experience?

View the video online at: http://www.youtube.com/v/k-w6ZYIo37E

CHAPTER 9 USING SUPPLY CHAINS TO CREATE VALUE FOR CUSTOMERS 193

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K E Y T A K E A W A Y

The best marketing decisions and supplier selections aren’t enough if your company’s demand forecasts are wrong. Demand forecasting is the process of estimating how much of a good or service a customer will buy from you. If you’re a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. Demand forecasting is part of a com- pany’s overall inventory control activities. Inventory control is the process of ensuring your firm has an ad- equate amount of products and a wide enough assortment of them meet your customers’ needs. One of the goals of inventory control is to avoid stockouts without keeping too much of a product on hand. Some com- panies are beginning to experiment with new technologies such as electronic product codes and RFID tags in an effort to better manage their inventories and meet their customers’ needs.

R E V I E W Q U E S T I O N S

  1. Why are demand forecasts made more frequently than sourcing decisions?
  2. How can just-in-time and vendor-managed inventories add value to products for customers?
  3. Why and how do companies track products?

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  1. WAREHOUSING AND TRANSPORTATION

L E A R N I N G O B J E C T I V E S

  1. Understand the role warehouses and distribution centers play in the supply chain. 2. Outline the transportation modes firms have to choose from and the advantages and disad-

vantages of each.

3.1 Warehousing At times, the demand and supply for products can be unusually high. At other times, it can be unusu- ally low. That’s why companies generally maintain a certain amount of safety stock, oftentimes in ware- houses. As a business owner, it would be great if you didn’t have excess inventory you had to store in a warehouse. In an ideal world, materials or products would arrive at your facility just in time for you to assemble or sell them. Unfortunately, we don’t live in an ideal world.

Toys are a good example. Most toymakers work year round to be sure they have enough toys avail- able for sale during the holidays. However, retailers don’t want to buy a huge number of toys in July. They want to wait until November and December to buy large amounts of them.

Consequently, toymakers warehouse them until that time. Likewise, during the holiday season, re- tailers don’t want to run out of toys, so they maintain a certain amount of safety stock in their warehouses.

Some firms store products until their prices increase. Oil is an example. Speculators, including in- vestment banks and hedge funds, have been known to buy, and hold, oil if they think its price is going to rapidly rise. Sometimes they go so far as to buy oil tankers and even entire oil fields.[21]

194 PRINCIPLES OF MARKETING VERSION 2.0

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FIGURE 9.9

You might not know where the tiny town of Cushing, Oklahoma, is. But oil producers and traders around the world do. Cushing is one of the largest oil storage areas in the United States. Storage tanks like these cover more than nine square miles on the outskirts of the town.[22]

© 2010 Jupiterimages Corporation

distribution center

A warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers rather than on storage.

SKU (stock-keeping unit)

A label used to distinguish a product that is unique because of some characteristic, such as manufacturer, size, color, or model.

FIGURE 9.10 An Example of an SKU

© 2010 Jupiterimages Corporation

A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers.[23] A few years ago, companies were moving toward large, centralized warehouses to keep costs down. In 2005, Walmart opened a four-million-square-foot distribution center in Texas. (Four million square feet is about the size of eighteen football fields.)

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