Supply Chain Management A LOGISTICS PERSPECTIVE 9e JOHN J. COYLE The Pennsylvania State University • C. JOHN LANGLEY, JR. The Pennsylvania State University • ROBERT A. NOVACK The Pennsylvania State University • BRIAN J. GIBSON Auburn University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Supply Chain Management: A Logistics Perspective, Ninth Edition John J. Coyle, C. John Langley Jr., Robert A. Novack, Brian J. Gibson Vice President of Editorial, Business: Jack W. Calhoun Editor-in-Chief: Joe Sabatino Senior Acquisitions Editor: Charles McCormick, Jr. Developmental Editor: Daniel Noguera Editorial Assistant: Courtney Bavaro Marketing Manager: Adam Marsh Senior Marketing Communications Manager: Libby Shipp Design Direction, Production Management, and Composition: PreMediaGlobal Media Editor: Chris Valentine Rights Acquisitions Specialist, Text and Image: Deanna Ettinger Manufacturing Planner: Ron Montgomery Senior Art Director: Stacy Shirley Cover Designer: Mike Stratton Cover Image: ©iStock Photo © 2013, 2009 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information network.

1. Supply Chain
Management
A LOGISTICS PERSPECTIVE
9e
JOHN J. COYLE
The Pennsylvania State University
•
C. JOHN LANGLEY, JR.
The Pennsylvania State University
•
ROBERT A. NOVACK
The Pennsylvania State University
•
BRIAN J. GIBSON
Auburn University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain
• United Kingdom • United States
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Supply Chain Management: A Logistics

3. Perspective, Ninth Edition
John J. Coyle, C. John Langley Jr.,
Robert A. Novack, Brian J. Gibson
Vice President of Editorial, Business:
Jack W. Calhoun
Editor-in-Chief: Joe Sabatino
Senior Acquisitions Editor:
Charles McCormick, Jr.
Developmental Editor: Daniel Noguera
Editorial Assistant: Courtney Bavaro
Marketing Manager: Adam Marsh
Senior Marketing Communications
Manager: Libby Shipp
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Management, and Composition:
PreMediaGlobal
Media Editor: Chris Valentine
Rights Acquisitions Specialist, Text and
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Cover Designer: Mike Stratton

4. Cover Image: ©iStock Photo
© 2013, 2009 South-Western, Cengage Learning
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Brief Contents
Preface xxii
About the Authors xxvi
Part I
Chapter 1 Supply Chain Management: An Overview 3
Chapter 2 Role of Logistics in Supply Chains 33
Chapter 3 Global Dimensions of Supply Chains 75
Part II
Chapter 4 Supply Chain Relationships 107
Chapter 5 Supply Chain Performance Measurement
and Financial Analysis 137
Chapter 6 Supply Chain Technology—Managing
Information Flows 179
Part III
Chapter 7 Demand Management 215
Chapter 8 Order Management and Customer
Service 255
Chapter 9 Managing Inventory in the Supply Chain 311
Chapter 10 Transportation—Managing the Flow of the
Supply Chain 395

8. Chapter 11 Distribution—Managing Fulfillment
Operations 459
Part IV
Chapter 12 Supply Chain Network Analysis and
Design 509
Chapter 13 Sourcing Materials and Services 549
Chapter 14 Operations—Producing Goods and
Services 583
Chapter 15 Supply Chain Sustainability 619
Part V
Chapter 16 Strategic Challenges and Change for Supply
Chains 645
Subject Index 673
Name Index 687
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Contents
Preface xxii
About the Authors xxvi
Part I
Chapter 1 Supply Chain Management: An Overview 3
SUPPLY CHAIN PROFILE: SAB Distribution: Another Sequel
4
Introduction 5
What Forces Are Driving the Rate of Change 7
Globalization 7
Technology 10
Organizational Consolidation and Power Shifts 10
The Empowered Consumer 11
Government Policy and Regulation 12
ON THE LINE: Malt-O-Meal Company: Going National 14
The Supply Chain Concept 15
Development of the Concept 15

10. Major Supply Chain Issues 24
Supply Chain Networks 24
Complexity 24
Inventory Deployment 25
Information 25
Cost and Value 25
ON THE LINE: Auto Parts Distributor LKQ Discovers the Key
to Effective
Carrier Management 26
Organizational Relationships 26
Performance Measurement 27
Technology 27
Transportation Management 27
SUPPLY CHAIN TECHNOLOGY: Trends in Retail Distribution
28
Supply Chain Security 28
Summary 29
Study Questions 29
Notes 30
Case 1.1: Central Transport, Inc. 31
Chapter 2 Role of Logistics in Supply Chains 33
SUPPLY CHAIN PROFILE: Jordano Foods: The Sequel 34
Introduction 35
What Is Logistics? 37
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Value-Added Roles of Logistics 39
Form Utility 39
Place Utility 40
Time Utility 40
Quantity Utility 40
Possession Utility 40
ON THE LINE: Building India: Transforming the Nation’s
Logistics
Infrastructure 41
Logistics Activities 41
Transportation 42
Storage 42
Packaging 43
Materials Handling 43
Inventory Control 43
Order Fulfillment 44
Forecasting 44
Production Planning 44
Procurement 44
Customer Service 45
Facility Location 45
Other Activities 45
Logistics in the Economy: A Macro Perspective 45
ON THE LINE: Ce De Candy’s Sweet Transformation 46

12. Logistics in the Firm: The Micro Dimension 49
Logistics Interfaces with Manufacturing or Operations 49
Logistics Interfaces with Marketing 50
Logistics Interfaces with Other Areas 52
Logistics in the Firm: Factors Affecting the Cost and
Importance of Logistics 53
Competitive Relationships 53
Product Relationships 56
Spatial Relationships 59
Techniques of Logistics System Analysis 60
Short-Run/Static Analysis 60
Long-Run/Dynamic Analysis 61
Approaches to Analyzing Logistics Systems 63
Materials Management versus Physical Distribution 63
Cost Centers 64
Nodes Versus Links 65
Logistics Channels 65
SUPPLY CHAIN TECHNOLOGY: Mission Foods’ Wireless
Evolution 68
Logistics and Systems Analysis 68
viii Contents
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Summary 70
Study Questions 70
Notes 71
Case 2.1: Senco Electronics Company: A Sequel 72
Case 2.2: Pete’s 74
Chapter 3 Global Dimensions of Supply Chains 75
SUPPLY CHAIN PROFILE: Red Fish–Blue Fish, LLP: A Sequel
76
Introduction 77
Supply Chains in a Global Economy 79
ON THE LINE: More Deliveries, Same Cost 80
The Scope and Magnitude of Global Business 81
Global Markets and Strategy 83
ON THE LINE: Serving Emerging Markets: A Survival Guide
84
ON THE LINE: Asia’s Widening Middle 86
Supply Chain Security: A Balancing Act 87
SUPPLY CHAIN TECHNOLOGY: Tracing through the Supply
Chain 88
Ports 89
North American Free Trade Agreement 90
Maquiladora Operations 91
Asian Emergence 92
New Directions 93
Global Transportation Options 93
Ocean 93

14. Air 95
Motor 96
Rail 96
Global Intermediaries 96
Foreign Freight Forwarders 96
Airfreight Forwarders 97
Non-Vessel-Operating Common Carriers 97
Export Management Companies 97
Export Trading Companies 98
Customs House Brokers 98
Storage Facilities and Packaging 99
Storage Facilities 99
Packaging 99
Summary 100
Study Questions 100
Notes 101
Case 3.1: Red Fish–Blue Fish, LLP: Another Sequel 103
Contents ix
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Part II

15. Chapter 4 Supply Chain Relationships 107
SUPPLY CHAIN PROFILE: Client Intimacy: A New Mission
for Supply Chain
Managers? 108
Introduction 108
Logistics Relationships 109
Types of Relationships 109
Intensity of Involvement 109
Model for Developing and Implementing Successful
Supply Chain Relationships 111
Need for Collaborative Relationships 115
Third-Party Logistics—Industry Overview 117
ON THE LINE: Collaborative Distribution Can Show You the
Path to Lower
Supply Chain Costs and Carbon Emissions 117
Definition of Third-Party Logistics 119
Types of 3PL Providers 119
3PL Market Size and Scope 121
Third-Party Logistics Research Study—Industry Details 123
Profile of Logistics Outsourcing Activities 123
Strategic Role of Information Technology 124
SUPPLY CHAIN TECHNOLOGY: Technology a Key Driver of
3PL
Competitiveness 125
Management and Relationship Issues 127
Customer Value Framework 129
A Strategic View of Logistics and the Role of 3PLs 130

16. Summary 132
Study Questions 132
Notes 133
Case 4.1: CoLinx, LLC 134
Case 4.2: Ocean Spray Cranberries, Inc. 136
Chapter 5 Supply Chain Performance Measurement and
Financial
Analysis 137
SUPPLY CHAIN PROFILE: CLGN Book Distributors.com 138
Introduction 140
Dimensions of Supply Chain Performance Metrics 140
Developing Supply Chain Performance Metrics 145
Performance Categories 146
The Supply Chain–Finance Connection 151
ON THE LINE: Profit-Focused Supply Chain Planning 152
The Revenue–Cost Savings Connection 153
The Supply Chain Financial Impact 154
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Financial Statements 158

17. ON THE LINE: Leased Assets to Go Back on Your
Books? 159
Financial Impact of Supply Chain Decisions 160
Supply Chain Service Financial Implications 164
Summary 172
Study Questions 172
Notes 174
Case 5.1: CPDW 175
Case 5.2: Paper2Go.com 176
Appendix 5A Financial Terms 177
Chapter 6 Supply Chain Technology—Managing Information
Flows 179
SUPPLY CHAIN PROFILE: The Precision Imperative 180
Introduction 181
The Role of Information in the Supply Chain 182
Information Requirements 183
Information Technology Capabilities 184
Information Technology Challenges 185
A Framework for Managing Supply Chain Information 186
Foundation Elements 186
Key Requirements 188
Differentiating Capabilities 189
SCM Software 190
Planning 191
Execution 192
Event Management 193
Business Intelligence 193
Related Tools 194
Enterprise Resource Planning 195

18. Supply Chain Technology Implementation 195
Needs Assessment 196
Software Selection 196
ON THE LINE: SaaS Capabilities Boost Transportation
Software
Sales 199
Technical Issues 199
Asking the Right Questions 201
Supply Chain Technology Innovations 202
Radio-Frequency Identification (RFID) 202
Cloud Computing 203
Mobile Computing 204
SUPPLY CHAIN TECHNOLOGY: Smartphones and SCM 204
3PLs as Technology Providers 205
Contents xi
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Summary 207
Study Questions 207
Notes 208

19. Case 6.1: Bazinga Licensing Ltd. 210
Case 6.2: Catnap Pet Products 211
Part III
Chapter 7 Demand Management 215
SUPPLY CHAIN PROFILE: LuAnn’s Chocolates 216
Introduction 217
Demand Management 217
Balancing Supply and Demand 220
Traditional Forecasting 221
Factors Affecting Demand 221
Simple Moving Average 222
Weighted Moving Average 223
Exponential Smoothing 225
Adjusting Exponential Smoothing for Trend 225
Seasonal Influences on Forecasts 228
Forecast Errors 229
SUPPLY CHAIN TECHNOLOGY: Delivering APS Value in Six
Months 231
Sales and Operations Planning 234
ON THE LINE: BASF Credits S&OP as a Cornerstone of
Success 236
Collaborative Planning, Forecasting, and
Replenishment 237
Fulfillment Models 240
Channels of Distribution 240
Direct-to-Customer (DTC) Fulfillment 242
Summary 249

20. Study Questions 249
Notes 250
Case 7.1: Tires for You, Inc. 251
Case 7.2: ChipSupreme 253
Chapter 8 Order Management and Customer Service 255
SUPPLY CHAIN PROFILE: Tom’s Food Wholesalers 256
Introduction 256
Influencing the Order—Customer Relationship
Management 258
Step 1: Segment the Customer Base by Profitability 258
Step 2: Identify the Product/Service Package for Each
Customer Segment 259
xii Contents
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Step 3: Develop and Execute the Best Processes 259
Step 4: Measure Performance and Continuously
Improve 260
Activity-Based Costing and Customer Profitability 261

21. Executing the Order—Order Management and Order
Fulfillment 267
Order-to-Cash (OTC) and Replenishment Cycles 268
Length and Variability of the Order-to-Cash Cycle 272
E-Commerce Order Fulfillment Strategies 273
SUPPLY CHAIN TECHNOLOGY: Get Ready to go Mobile 274
Customer Service 275
The Logistics/Marketing Interface 275
Defining Customer Service 277
Elements of Customer Service 277
Performance Measures for Customer Service 281
Expected Cost of Stockouts 283
Back Orders 284
Lost Sales 284
Lost Customer 285
Determining the Expected Cost of Stockouts 285
Order Management Influences on Customer Service 286
Product Availability 286
ON THE LINE: Plus-Sized Customer Service 288
Financial Impact 290
Order Cycle Time 292
Logistics Operations Responsiveness 295
Logistics System Information 298
Postsale Logistics Support 300
SUPPLY CHAIN TECHNOLOGY: Connecting with Big
Customers 302
Service Recovery 303
Summary 305

22. Study Questions 305
Notes 306
Case 8.1: Telco Corporation 307
Case 8.2: The Bullpen 309
Chapter 9 Managing Inventory in the Supply Chain 311
SUPPLY CHAIN PROFILE: Micros and More 312
Introduction 313
Inventory in the U.S. Economy 314
Inventory in the Firm: Rationale for Inventory 315
Batching Economies or Cycle Stocks 317
Uncertainty and Safety Stocks 318
Time/In-Transit and Work-in-Process Stocks 318
Contents xiii
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SUPPLY CHAIN TECHNOLOGY: Logistics Provider Prescribes
Inventory
Management 319
Seasonal Stocks 321
Anticipatory Stocks 322
Summary of Inventory Accumulation 322

23. The Importance of Inventory in Other Functional
Areas 322
Inventory Costs 323
Inventory Carrying Cost 323
Ordering and Setup Cost 328
Carrying Cost Versus Ordering Cost 330
Expected Stockout Cost 331
In-Transit Inventory Carrying Cost 335
Fundamental Approaches to Managing Inventory 336
Key Differences Among Approaches to Managing
Inventory 337
Principal Approaches and Techniques for Inventory
Management 339
Fixed Order Quantity Approach (Condition of Certainty)
339
Fixed Order Quantity Approach (Condition of
Uncertainty) 348
Fixed Order Interval Approach 356
Summary and Evaluation of EOQ Approaches to Inventory
Management 357
Additional Approaches to Inventory Management 357
Just-in-Time Approach 357
ON THE LINE: Inventory Optimization: Show Me the Money
358
Materials Requirements Planning 361
Distribution Requirements Planning 366
Vendor-Managed Inventory 369

24. Classifying Inventory 370
ABC Analysis 371
Quadrant Model 373
Inventory at Multiple Locations—The Square-Root
Rule 374
Summary 377
Study Questions 378
Notes 378
Case 9.1: MAQ Corporation 380
Case 9.2: Baseball Card Emporium 381
Appendix 9A Special Applications of the EOQ Approach 382
Adjusting the Simple EOQ Model for Modal Choice
Decisions—The Cost of Inventory in Transit 382
Adjusting the Simple EOQ Model for Volume
Transportation Rates 385
xiv Contents
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Adjusting the Simple EOQ Model for Private Carriage 388

25. Adjusting the Simple EOQ Model for the Establishment and
Application of In-Excess Rates 389
Summary 393
Chapter 10 Transportation—Managing the Flow of the Supply
Chain 395
SUPPLY CHAIN PROFILE: Economic Recovery and
Transportation
Demand 396
Introduction 397
The Role of Transportation in Supply Chain Management
(SCM) 397
Challenges to Carrying out This Role 398
Modes of Transportation 401
Motor Carriers 401
Railroads 404
Air Carriers 405
Water Carriers 407
ON THE LINE: Piracy: A Modern Day Problem 409
Pipelines 409
Intermodal Transportation 411
Transportation Planning and Strategy 413
Functional Control of Transportation 414
Terms of Sale 415
Decision to Outsource Transportation 416
Modal Selection 418
Carrier Selection 423
Rate Negotiations 424
Transportation Execution and Control 424

26. Shipment Preparation 425
Freight Documentation 426
Maintain In-Transit Visibility 428
Monitor Service Quality 429
Transportation Metrics 429
Transportation Technology 432
SUPPLY CHAIN SUSTAINABILITY: Reducing Empty Miles
433
Transportation Management Systems 433
SUPPLY CHAIN TECHNOLOGY: TMS Shines Light on
Inbound Supply
Chain 435
Summary 438
Study Questions 438
Notes 439
Case 10.1: Supreme Sound Explosion 442
Case 10.2: Bob’s Custom BBQs 444
Contents xv
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Appendix 10A Federal Regulation of the Transportation

27. Industry 446
Economic Regulation 446
Safety Regulation 449
Summary 451
Notes 451
Appendix 10B Basis of Transportation Rates 452
Cost of Service 452
Value of Service 453
Distance 454
Weight of Shipment 455
Commodity Characteristics 455
Level of Service 456
Summary 457
Notes 457
Chapter 11 Distribution—Managing Fulfillment Operations 459
SUPPLY CHAIN PROFILE: Kroger: Grocery Giant Changes the
Game 460
Introduction 461
The Role of Distribution Operations in SCM 462
Distribution Facility Functionality 462
Distribution Tradeoffs 464
Distribution Challenges 467
Distribution Planning and Strategy 467
Capability Requirements 468
Network Design Issues 470
Facility Considerations 474
SUPPLY CHAIN TECHNOLOGY: Walmart’s Environmentally
Friendly
DCs 475

28. Distribution Execution 478
Product-Handling Functions 478
ON THE LINE: Goods-to-Person Puts a Different Spin on Order
Picking 480
Support Functions 483
Distribution Metrics 484
Customer-Facing Measures 484
Internal Measures 485
Distribution Technology 486
Warehouse Management Systems 487
SUPPLY CHAIN TECHNOLOGY: Moving Coca-Cola by Voice
488
Automatic Identification Tools 490
Summary 492
Study Questions 493
Notes 493
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29. Case 11.1: BathKing Industries 495
Case 11.2: Tele-Distributors Incorporated 497
Appendix Materials Handling 499
Appendix 11A Materials Handling 499
Objectives and Principles of Materials Handling 499
Materials-Handling Equipment 500
Summary 506
Notes 506
Part IV
Chapter 12 Supply Chain Network Analysis and Design 509
SUPPLY CHAIN PROFILE: Volkswagen Opens U.S. Production
Facility in
Chattanooga, Tennessee 510
Introduction 511
The Need for Long-Range Planning 512
The Strategic Importance of Logistics/Supply Chain
Network Design 512
Changing Customer Service Requirements 513
Shifting Locations of Customer and/or Supply
Markets 513
Change in Corporate Ownership 514
Cost Pressures 514
Competitive Capabilities 515
Corporate Organizational Change 515
Logistics/Supply Chain Network Design 515
Step 1: Define the Logistics/Supply Chain Network Design
Process 516

30. Step 2: Perform a Logistics/Supply Chain Audit 516
Step 3: Examine the Logistics/Supply Chain Network
Alternatives 517
Step 4: Conduct a Facility Location Analysis 518
Step 5: Make Decisions Regarding Network and Facility
Location 518
Step 6: Develop an Implementation Plan 519
Major Locational Determinants 519
Key Factors for Consideration 520
ON THE LINE: Global Sourcing and Manufacturing Compel
Companies to
Rethink U.S. Distribution Networks 522
Current Trends Governing Site Selection 524
Modeling Approaches 524
Optimization Models 525
Simulation Models 528
Heuristic Models 529
Potential Supply Chain Modeling Pitfalls to Avoid 530
Contents xvii
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31. SUPPLY CHAIN TECHNOLOGY: Supply Chain Network
Design in an Era of
Dynamic Costs 531
Example of a Heuristic Modeling Approach: The Grid
Technique 532
Transportation Pragmatics 539
Summary 543
Study Questions 543
Notes 545
Case 12.1: Johnson & Johnson 546
Case 12.2: Fireside Tire Company 547
Chapter 13 Sourcing Materials and Services 549
SUPPLY CHAIN PROFILE: Achieving Greater Cost Savings for
Global
Manufacturers Through Merger of Supply Chain Service
Providers 550
Introduction 550
Types and Importance of Items and Service Purchased 552
Strategic Sourcing Methodology 555
Step 1: Project Planning and Kickoff 556
Step 2: Profile Spend 556
Step 3: Assess Supply Market 556
Step 4: Develop Sourcing Strategy 557
Step 5: Execute Sourcing Strategy 558
Step 6: Transition and Integrate 559
Step 7: Measure and Improve Performance 560
Managing Sourcing and Procurement Processes 560
Supplier Selection 561

32. ON THE LINE: IBM Achieves Success via Improved Purchasing
and
Strategic Sourcing 563
Supplier/Vendor Evaluation and Relationships 564
Certifications and Registrations 564
The Special Case of Procurement Price 565
Total Landed Cost (TLC) 569
e-Sourcing and e-Procurement 570
Which of These
Solution
s Should Be Considered 571
Advantages 572
Disadvantages 573
SUPPLY CHAIN TECHNOLOGY: Transportation Sourcing –
Innovative
Approaches to Bid Optimization 574
e-Commerce Models 574
Summary 576
Study Questions 576
Notes 577
Case 13.1: South Face 578

33. Case 13.2: Durable Vinyl Siding Corporation 580
xviii Contents
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Chapter 14 Operations—Producing Goods and Services 583
SUPPLY CHAIN PROFILE: Ford: Putting on the Top Hat 584
Introduction 585
The Role of Production Operations in Supply Chain
Management (SCM) 586
Production Process Functionality 586
Production Tradeoffs 587

34. Production Challenges 589
Operations Strategy and Planning 590
Production Strategies 590
ON THE LINE: Whirlpool’s On-Shore Production Decision 595
Production Planning 596
Production Execution Decisions 599
Assembly Processes 599
ON THE LINE: Creating Your Own Chocolate Bar 600
Production Process Layout 602
Packaging 604
SUPPLY CHAIN SUSTAINABILITY: Dell’s Three C’s
Packaging Strategy 606
Production Metrics 607
Total Cost 607
Total Cycle Time 607
Delivery Performance 608
Quality 608
Safety 608

35. Production Technology 608
Summary 611
Study Questions 612
Notes 612
Case 14.1: Elvis Golf Ltd. 615
Case 14.2: Team HDX 617
Chapter 15 Supply Chain Sustainability 619
SUPPLY CHAIN PROFILE: Trash to Treasure Foundation: A
Sequel 620
Introduction 621
Supply Chain Sustainability Framework 622
Reverse Logistics Systems 624
Importance and Magnitude of Reverse Flows 625
ON THE LINE: Staples Shows Business Value of Environmental
Initiatives 627
Reverse Logistics Systems versus Closed Loops 628
Customer Returns 630
Environmental Challenges 631
ON THE LINE: Triple Bottom Line 631
Economic Value 632

36. Contents xix
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Achieving a Value Stream for Reverse Flows 632
Managing Reverse Flows in a Supply Chain 634
SUPPLY CHAIN TECHNOLOGY: Improving Reverse Flows
with
Technology 635
Summary 637
Study Questions 637
Notes 638
Case 15.1: Fitness Retreads, LLP: A Sequel 640

37. Part V
Chapter 16 Strategic Challenges and Change for Supply Chains
645
SUPPLY CHAIN PROFILE: From Bean to Cup: How Starbucks
Transformed
Its Supply Chain 646
Introduction 648
Principles of Supply Chain Management 648
Principle 1: Segment Customers Based on Service
Needs 648
Principle 2: Customize the Logistics Network 648
Principle 3: Listen to Signals of Market Demand and Plan
Accordingly 648
Principle 4: Differentiate Products Closer to the
Customer 649
Principle 5: Source Strategically 649
Principle 6: Develop a Supply Chainwide Technology
Strategy 650

38. Principle 7: Adopt Channel-Spanning Performance
Measures 650
Focus of Supply Chain Management 650
Getting to Growth: Think Beyond Cost 651
Develop World-Class Collaboration Skills 653
Grow Your Leadership Capabilities 653
ON THE LINE: Best Buy’s Supply Chain Transformation 654
Supply Chain Strategies 655
Differentiation Strategies 655
SUPPLY CHAIN TECHNOLOGY: Technology a Key
Requirement for
Supply Chain Success 656
Financial Strategies 658
Technology-Based Strategies 660
Relationship-Based Strategies 661
Global Strategies 664
xx Contents
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39. not be copied, scanned, or duplicated, in whole or in part. Due
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Supply Chain Transformation 666
Motorola 666
Summary 668
Study Questions 668
Notes 669
Case 16.1: Tommy Hilfiger and Li & Fung 670
Case 16.2: Peerless Products, Inc. 671
Subject Index 673
Name Index 687
Contents xxi

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time if subsequent rights restrictions require it.
Preface
Supply chain management and the closely related concept of
logistics are necessary
cornerstones of competitive strategy, increased market share,
and shareholder value for
most organizations. Now more than ever, students who are
currently planning to pursue
a career in business will benefit from a clear understanding of
this field. Practicing man-
agers will also find this text a beneficial and helpful resource
because of its timeliness and
the depth and breadth of the topics covered.

41. With this edition we have tried to cover, as comprehensively as
possible, the changes
in the way business is being done. In fact, the title of this
edition—Supply Chain
Management: A Logistics Perspective—reflects the ever-
changing nature of this rapidly
evolving field. The author team strives to offer you the most
current, comprehensive
thinking on supply chain management, combined with an
authenticated, real-world
logistics perspective. In keeping with the dramatic changes that
have taken place in the
global business environment and in the field of supply chain
management, the organiza-
tion of this edition again provides a logical framework for
achieving a meaningful under-
standing of the concepts and principles of supply chain
management. Additionally, it is
important to understand that a major feature of this text is that
not only is the discipline
of supply chain management viewed from a logistics perspective
but also that logistics is
positioned as a set of key processes and functions that are
viewed as essential to strategic

42. and operational success with the broader supply chain concept.
Part I provides a framework for your understanding of supply
chain management and
some of its important related components. Chapter 1 is devoted
to a comprehensive
introduction to supply chain management. Chapter 2 presents an
overview of all of the
important dimensions of logistics and explains the relationship
of logistics to supply
chain management. Finally, Chapter 3 explores global supply
chains and their relevance
to global trade strategy and success.
Strategic factors are the focus of Part II. Chapter 4 leads off
with a discussion of
supply chain relationships and the use of third-party logistics
services. Chapter 5, a
chapter devoted to performance measurement and financial
analysis, will help you
understand how to use both performance and financial metrics
to gauge efficiency and
effectiveness. And finally, Chapter 6 examines the role and
importance of information
systems in the effective management of supply chains.

43. Part III addresses the key process areas within supply chain
fulfillment. Chapter 7 dis-
cusses demand management, while Chapter 8 addresses the very
closely connected topics
of order management and customer service. Chapter 9 focuses
on one of the most crucial
assets on many companies’ balance sheets—inventory
management—revealing the costs
of inventory and the most effective means of managing
inventory. Transportation and
distribution can be viewed as the glue that holds supply chains
together, and effective
strategies and technologies in these areas are the subjects of
Chapter 10 and Chapter 11.
With Part IV, you’ll be drawn into the world of supply chain
planning, sourcing, and
operations. Chapter 12 will give you the tools needed to
analyze, design, and refine a
supply chain network, while Chapter 13 focuses attention on
key topics and issues
relating to sourcing, procurement, supplier and vendor
relationships, and the latest elec-
tronic technologies to be used in these areas. Chapter 14 on

44. operations and Chapter 15
on reverse flows present entirely new material created for this
edition.
xxii
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The final chapter, in Part V, explores the major macro trends
that will impact
the future of logistics and supply chain management, as well as
strategies for staying
competitive in the future. Among the major types of strategies
discussed are differentia-
tion, financing, technology, relationships, and globalization.
Last, some thoughts are

45. included on the need for organizations of all types to transform
and change their supply
chains as conditions would suggest.
Features
• Learning Objectives at the beginning of each chapter provide
students with an
overall perspective of chapter material and also serve to
establish a baseline for a
working knowledge of the topics that follow.
• Supply Chain Profiles are the opening vignettes at the
beginning of each chapter
that introduce students to the chapter’s topics through familiar,
real-world
companies, people, and events.
• On the Line features are applied, concrete examples that
provide students with
hands-on managerial experience of the chapter topics.
• Supply Chain Sustainability boxes have been added to
highlight the critical
role of supply chain management in conserving resources,
reducing waste, and

46. mitigating the environmental impact of fulfillment operations.
• Supply Chain Technology boxes help students relate
technological developments
to supply chain management concepts and logistics practices.
• End-of-chapter summaries and study questions reinforce
material presented in
each chapter.
• Short cases at the end of each chapter build upon what
students have learned.
Questions that follow the cases sharpen critical thinking skills.
Ancillaries
Instructor’s Resource CD (ISBN 1-111-82299-9) contains three
essential resources:
• The Instructor’s Manual includes chapter outlines, answers to
end-of-chapter
study questions, commentary on end-of-chapter short cases and
end-of-text
comprehensive cases, and teaching tips.
• A convenient Test Bank offers a variety of true/false, multiple

47. choice, and essay
questions for each chapter.
• PowerPoint slides cover the main chapter topics and contain
graphics from the
main text.
Student Resources
A rich library of Student’s Resource are available on the
companion Web site, such as:
• Suggested reading for Part 1 through Part 5
• Directory of Trade and Professional Organizations in Supply
Chain Management
• Additional Cases
• A Guide of Careers in Logistics
• Glossary
• Games and more
Preface xxiii

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to electronic rights, some third party content may be suppressed
from the eBook and/or eChapter(s).
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Acknowledgments
The authors are indebted to many individuals at our respective
academic institutions
as well as other individuals with whom we have had contact in a
variety of venues. Our
university students and our executive program students have
provided an important sound-
ing board for the many concepts, techniques, metrics, and
strategies presented in the book.
Our faculty and corporate colleagues have provided invaluable
insights and appropriate

49. criticism of our ideas. Some individuals deserve special
consideration: Dr. David A. Lindsley
(University of Toledo), Mark J. Basile (DuPont Corporation),
Dr. Joe B. Hanna
(Auburn University), Dr. Chris Norek (Chain Connectors), Ms.
Jessica Volpe (Penn State
University), Mr. Tim Gross (Penn State University), Mr.
Sammie Markham (Penn State
University), Ms. Devin Maguire (Penn State University), and
especially Ms. Jean Beierlein
and Ms. Tracie Shannon (Penn State University). Special thanks
and appreciation to
Dr. Kusumal Ruamsook, Visiting Research Associate for the
Center for Supply Chain
Research at The Pennsylvania State University, for her
invaluable support.
The ninth edition of this text will be the first one that does not
list Dr. Edward Bardi
as one of the co-authors. Ed was one of the two, original co-
authors of the text when it
was published in 1976. It is unusual for an educational book to
have a life cycle that
exceeds 35 years and has gone through many editions. Ed Bardi
played an important

50. role in the success of the text by helping to keep it innovative,
timely and vital. Not
one to postpone or procrastinate, Ed would usually finish his
chapters first, and thereby
provide incentive and pressure for his fellow co-authors to be
more timely in meeting
deadlines. He would also volunteer to do some of the more
tedious and less glamorous
(but important) sections of the text, for example, subject index,
author index, glossary,
etc. We have missed Ed’s participation and contributions this
time and hope that we
have lived up to his expectations and standards. We want to
express our appreciation
and thanks and extend a wish for good health and joy to Ed and
his wife, Carol, and
their family.
We extend our appreciation to the members of our Cengage
Learning team, who have
been very professional and helpful with this textbook: Charles
McCormick, Jr., Senior
Acquisitions Editor; Daniel Noguera, Developmental Editor;
Jennifer Ziegler, Content
Project Manager; Rathi Thirumalai, Senior Project Manager;

51. Gunjan Chandola, Senior
Project Manager; Stacey Shirley, Art Director; Adam Marsh,
Marketing Manager; and
Elaine Kosta, Rights and Acquisitions Specialist.
Special thanks should be given to the following Professors who
served as reviewers
and who provided meaningful input for our ninth edition:
Jeffrey L. Bennett Northwood University
John A. Caltagirone Loyola University Chicago
Adam Conrad Pennsylvania State University
Eddie Davila Arizona State University
Kathryn Dobie North Carolina A&T State University
Matt Drake Duquesne University
S. Altan Erdem Edison Community College
Christopher C. Esgar Penn State University, Mont Alto Campus

52. Paul L. Ewell Virginia Wesleyan College
Ephrem Eyob Virginia State University
Martin Farris University of North Texas
xxiv Preface
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Lou Firenze Northwood University
Michael J. Gravier Bryant University
Joh J. Gregor Washington & Jefferson College

53. Joe Hanna Auburn University
Ahmad Hassan Morehead State University
Balaji Janamanchi Texas A&M International University
Jonatan Jelen Baruch College
Walter Kendall Tarleton State University
Marco Lam York College of Pennsylvania
Ian M. Langella Atkin Shippensburg University
Tenpao Lee Niagara University
Cheng Li California State University, Los Angeles
Walter Martin Wake Tech Community College
John R. Mawhinney Duquesne University
Ron Mesia Florida International University

54. Saeed Mohaghegh Assumption College
Martin Nunlee Delaware State University
Anthony M. Pagano University of Illinois at Chicago
Ann Rensel Niagara University
Paul Skilton Washington State University
Michael J. Stevenson Hagerstown Community College
Robert S. Trebatoski Penn State University
David Vellenga Maine Maritime Academy
Simon Veronneau Quinnipiac University
Haibo Wang Texas A&M International University
William Waxman UHCL
Jon Whitford Rio Hondo College
Linda Wright Longwood University

55. Rick Yokeley Forsyth Technical Community College
Preface xxv
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About the Authors
John J. Coyle is currently director of corporate relations for the
Center for Supply
Chain Research and professor emeritus of logistics and supply
chain management in
the Smeal College of Business at Penn State University. He
holds a BS and MS from

56. Penn State and earned his doctorate from Indiana University in
Bloomington, Indiana,
where he was a U.S. Steel Fellow. He joined the Penn State
faculty in 1961 and attained
the rank of full professor in 1967. In addition to his teaching
responsibilities, he has
served in a number of administrative positions, including
department head, assistant
dean, senior associate dean, special assistant for strategic
planning to the university pres-
ident, and executive director of the Center for Supply Chain
Research. He also served
as Penn State’s faculty representative to the NCAA for 30 years
and to the Big Ten for
10 years. Dr. Coyle was the editor of the Journal of Business
Logistics from 1990 to 1996.
He has authored or coauthored 20 books or monographs and
numerous articles in pro-
fessional journals. He has received 14 awards at Penn State for
teaching excellence and
advising. In addition, he received the Council of Logistics
Management’s Distinguished
Service Award in 1991; the Philadelphia Traffic Club’s Person
of the Year Award in
2003; and the Eccles Medal from the International Society of

57. Logistics for his contribu-
tions to the Department of Defense and the Lion’s Paw Medal
from Penn State for
Distinguished Service, both in 2004. Dr. Coyle currently serves
on the boards of three
logistics and supply chain service companies and on the
Advisory Board of the NLDC
and continues to be active in teaching in the Executive
Education Programs at Penn State.
C. John Langley Jr. is clinical professor of supply chain
management in the Smeal
College of Business at Penn State University and also serves as
director of development
in the Center for Supply Chain Research. Previously, he served
as the John H. Dove dis-
tinguished professor of supply chain management at the
University of Tennessee and
the SCL professor of supply chain management at the Georgia
Institute of Technology.
Dr. Langley is a former president of the Council of Supply
Chain Management
Professionals and a recipient of the Council’s Distinguished
Service Award. He has
been recognized by the American Society of Transportation and

58. Logistics as an honorary
distinguished logistics professional for his long-term
contributions and continuing
commitment to the transportation logistics community, and he is
a recipient of the
Outstanding Alumnus Award from Penn State’s Business
Logistics Program. Dr. Langley
received his BS in mathematics, MBA in finance, and Ph.D. in
business logistics degrees,
all from Penn State University. Dr. Langley has coauthored
several books, including Sup-
ply Chain Management: A Logistics Perspective. Also, he is
lead author of the annual
Third Party Logistics Study and recently completed the 2012
16th Annual 3PL Study.
His research publications have appeared in journals such as the
Journal of Business Lo-
gistics, International Journal of Physical Distribution and
Logistics Management, Interna-
tional Journal of Logistics Management, and Supply Chain
Management Review. Dr.
Langley serves on the Boards of Directors of UTi Worldwide,
Inc., Forward Air Corpo-
ration, and Averitt Express, Inc., in addition to several
involvements on academic advi-

59. sory boards to logistics organizations. He also is a member of
the Program Faculty for
the Kühne Logistics University in Hamburg, Germany, and of
the Industrial and Profes-
sional Advisory Council (IPAC) at Penn State University and
currently serves as educa-
tion advisor for NASSTRAC.
xxvi
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Robert Novack is an associate professor of supply chain
management in the
Department of Supply Chain and Information Systems at Penn
State University. From

60. 1981 to 1984 he worked in operations management and planning
for the Yellow Freight
Corporation in Overland Park, Kansas, and from 1984 to 1986
he worked in planning
and transportation at Drackett Company in Cincinnati, Ohio. Dr.
Novack’s numerous
articles have been published in such publications as the Journal
of Business Logistics,
Transportation Journal, and International Journal of Physical
Distribution and Logistics
Management. He also is a coauthor of Creating Logistics Value:
Themes for the Future.
Active in the Council of Supply Chain Management
Professionals, he has served as over-
all program chair for the annual conference, as a track chair,
and as a session speaker as
well as a member of numerous committees. Dr. Novack holds
the CTL designation from
AST&L and is a member of WERC. He earned a BS degree and
an MBA in logistics
from Penn State University and a Ph.D. in logistics from the
University of Tennessee.
Brian J. Gibson holds the Wilson Family Professorship in
supply chain management

61. and is a program coordinator for the Department of Supply
Chain and Information
Systems Management at Auburn University. Previously, he
served on the faculty of
Georgia Southern University and as a logistics manager for two
major retailers. He has
received multiple awards for outstanding teaching, research, and
outreach, most notably
the Council of Supply Chain Management Professionals’
Innovative Teaching Award in
2009. Gibson’s research has been published in the Journal of
Business Logistics, Supply
Chain Management Review, International Journal of Logistics
Management, International
Journal of Physical Distribution and Logistics Management, and
other leading publica-
tions. He is coauthor of Transportation: A Supply Chain
Perspective, author of the elec-
tronic textbook Supply Chain Essentials, and lead author of the
annual State of the Retail
Supply Chain Report. Dr. Gibson currently serves on key
committees for the Council of
Supply Chain Management Professionals and the Retail Industry
Leaders Association.
Dr. Gibson earned a BS/BA from Central Michigan University,

62. an MBA from Wayne
State University, and a Ph.D. in logistics and transportation
from the University of
Tennessee.
About the Authors xxvii
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63. not materially affect the overall learning experience. Cengage
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time if subsequent rights restrictions require it.
Part I
As indicated in the Preface, the authors decided to reorganize
the
sequence and groupings of the new and revised chapters in the
ninth
edition of the text to be consistent with the changes that have
occurred
in global supply chains. Consequently, Part I now includes a
chapter on
global supply chains as an important part of the discussion and
expla-
nation of the framework for the remaining chapters. This change
was
deemed necessary for the understanding of the overall
complexity, mag-
nitude and importance of global supply chain management for
financial
success in the 21st century. Today’s global economy presents

64. chal-
lenges and opportunities for all organizations: private or public;
small,
medium or large; products or services; and profit or non-profit.
Globali-
zation of the world economy is occurring with increasing speed
that
makes supply chain management ever more important to the
competi-
tive success and financial viability of most organizations.
Thomas Friedman, a staff writer for the New York Times,
concludes in
his bestselling book, “The World Is Flat,” that the world has
been
leveled by ten forces. One of these forces that he describes is
supply
chaining, which is essentially a collaborative approach among
organiza-
tions to coordinate or integrate the flow of goods, information
and cash
to deliver value for consumers or users and efficiency and
effectiveness
for organizations. The collaboration stretches vertically and
horizontally

65. on a global basis to become a cornerstone of competitive
strategy and a
necessary ingredient for competitive success. In keeping with
that logic,
Chapter 1 is focused upon the development and basic tenets of
supply
chain management. Chapter 2 discusses the logistics concept,
which
can be considered as the backbone of an effective supply chain.
Chapter 3
presents the special challenges and issues of global supply
chains and
the relationships to the first two chapters. Overall, these
chapters pro-
vide a solid base for the remaining chapters in the text.
Specifically, Chapter 1 provides an introduction and overview
of
supply chains in the 21st century, and examines the major
external or
exogenous forces driving the rapid rate of change in global
markets.
1
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The chapter explains the development and rationale for supply
chains
on both a domestic and global basis. It provides a thorough
grounding
in the fundamentals and dimensions of supply chains and
discusses
and demonstrates their importance to 21st century
organizations.
Finally, the chapter examines the major challenges and issues
facing
organizations and their global supply chains.
Chapter 2 is focused upon explaining the role and importance of
logistics

67. in the supply chain. As indicated above, logistics is considered
by some
as the backbone of the supply chain since it is so intimately
involved with
the flow of materials and products through the supply chain. A
logistics-
related process is frequently the first and last “touch” in the
supply
chain. Logistics provides the foundation for the material flows,
forward
and backward, in the supply chain. Chapter 2 also examines the
relation-
ship between logistics and the other functional areas in a
business
organization and the factors related to products and markets that
impact logistics costs. A final consideration in the chapter is a
review of
techniques that can be used for examining logistics tradeoffs.
As indicated above, Chapter 3 adds the overall global dimension
to the
discussion and analysis of supply chain management. This
chapter
builds upon the discussions in Chapters 1 and 2 by addressing
the spe-

68. cial challenges related to global supply chains. It is not only
large orga-
nizations but also medium- and small-sized organizations that
have
been or will be impacted by globalization. Consequently,
excellence in
managing supply chains is a requisite for businesses and other
organiza-
tions to succeed. The real special challenge of globalization is
that it
adds time and distance to supply chains that translates usually
to cost,
complexity and more risk—challenges and opportunities.
2 Part I
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69. Chapter 1
SUPPLY CHAIN MANAGEMENT : AN OVERVIEW
Learning Objectives
After reading this chapter, you should be able to do the
following:
• Explain the external change drivers in the global economy and
their impact on
global supply chains.
• Discuss the development of supply chain management in
leading organizations
and understand its contributions to their financial viability.
• Appreciate the significance and role of supply chain
management among private
as well as public or nonprofit organizations.
• Understand the contributions of supply chain management to
organizational

70. efficiency and effectiveness for competing successfully in the
global
marketplace.
• Explain the benefits that can be achieved from implementing
supply chain
best practices.
• Understand the major challenges and issues facing
organizations currently and
in the future.
3
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71. Supply Chain Profile SAB Distribution:
Another Sequel
When Sue Purdum, former president and CEO of SAB
Distribution, “passed the baton” to her
successor, Susan Weber, she had held her leadership role for
over 15 years. She was credited
not only with helping SAB to survive in a highly competitive
economic environment but also
with restoring its profitability through several strategic moves
in the marketplace.
SAB was established as a classic, middle-of-the-supply-chain
organization since it purchased con-
sumer products from major manufacturers such as Kraft,
Kimberly-Clark, Procter & Gamble (P&G),
Unilever, and others and sold them to smaller distributors,
wholesalers, and retailers. When
Susan Weber assumed the role of CEO of SAB, she knew that
its continued survival depended
upon the company reexamining its role in the supply chains and
making appropriate strategic and
tactical changes.
COMPANY BACKGROUND

72. SAB Distribution was established in 1949 in Harrisburg,
Pennsylvania, by three World War II
veterans who had served as supply officers in the U.S. Navy.
They selected Harrisburg because
of its central location in the mid-Atlantic region and because of
its access by rail and highways.
The founders of SAB—Skip, Al, and Bob—recognized the need
for a consumer products whole-
saling company to serve medium- and small-size retailers within
a 200-mile radius of Harris-
burg. Their vision proved to be correct, and the company grew
and prospered in subsequent
years. The company was incorporated in 1978, and a CEO, Pete
Swan, was appointed in 1980
when the founders retired.
SAB’s market area expanded into nearby states, such as New
York, New Jersey, and Delaware,
and its product line was extended from nonperishable consumer
items to include perishables
and additional nonfood consumer products. Ms. Purdum took
over from Pete in 1990 when
the company was at a major crossroads that could have led to
the sale of the company.
Ms. Purdum’s career at SAB was marked by a series of

73. competitive challenges that she navi-
gated successfully. Susan Weber assumed the CEO role in 2005
with the full knowledge that
significant change was necessary if SAB was to survive as a
profitable organization. Essentially,
SAB needed a transformation in the scope of its activities.
CURRENT SITUATION
SAB was faced with a number of challenges to its future
existence. First and foremost, its cus-
tomers had to compete against large retailers like Walmart that
could buy direct from the same
consumer product manufacturers as SAB, that is, with no
middleman. Walmart’s buying advan-
tage had to be offset in some way to keep SAB’s customers
competitive. In addition, globalization
was affecting SAB’s business because of an increase in
imported products for the more diverse
population of the United States and the ongoing search for
lower-priced alternatives. The net
effect was a much more complex and competitive business
environment.
When Sue Purdum assumed the role of CEO in 1990, she
analyzed the competitive environment

74. and understood the need to change SAB’s business practices.
She focused initially upon effi-
ciency in warehouse operations to lower the cost of doing
business. She improved order fulfill-
ment so that customers received their orders faster and with
fewer mistakes, which lowered the
customers’ cost of doing business by reducing their inventory
requirements. She also developed
partnerships with a core group of motor carriers to give them
more volume, which led to lower
rates and better service. Finally, she invested in information
technology since she recognized that
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75. Introduction
The first decade of the twenty-first century was a period of
rapid change for most
organizations, especially businesses. That rate of change has not
slowed down and is
actually increasing in the second decade of the twenty-first
century. The forces of change
require organizations to be much more nimble and responsive;
that is, organizations
need to be able to transform themselves quickly to survive in
the intensely competitive,
global environment. The SAB case is a good example of this
survival mode that forces
companies to transform. SAB would have been driven out of
business in the 1990s if it
had not changed, and it now faces an even more daunting
challenge, which will necessi-
tate still bigger changes.
higher-quality and more timely information would improve
SAB’s forecasting, with consequent
reductions in inventory costs and improved order fulfillment.

76. Initially, Susan Weber continued to improve warehouse
efficiency, order fulfillment and carrier
collaboration, but she knew that she had to transform the
company by attracting larger retailers
as customers. Their current customers, small- to medium-sized
retailers, were losing market
share to the larger retailers which, obviously, negatively
impacted SAB’s profitability.
Susan Weber realized that the large retailers outsourced part of
their operations to third-party
logistics companies that provided them with services such as
warehousing, order fulfillment,
transportation, and so forth more efficiently or more effectively
than the large retailers could
handle those processes themselves. Given SAB’s proficiency in
these areas, she believed that
there were opportunities for SAB to help compress the logistics
operations of existing and poten-
tial customers by eliminating duplicative echelons in their
supply chains. For example, between
the producer’s plant and the retail store, there were often three
or more distribution locations
where products were stored and handled. These circumstances

77. became the focus for Susan
Weber’s strategy to change and grow SAB.
Some SAB executives left the company through early retirement
or by changing companies. The
remaining managers not only recognized the logic of Susan
Weber’s assessment of their compet-
itive market but also the opportunities associated with the
changes that she outlined. Now in the
fifth year of her CEO role, Susan Weber can look back and see
some successful changes that
have been initiated. SAB has attracted five large, regional retail
chains in the Northeast and is
developing a distribution park for warehousing, a transportation
hub, and a call center near
Scranton, Pennsylvania. The company will have access to
several interstate highways and a
major railroad for intermodal service.
The new distribution park will allow SAB to expand their value-
added services that Susan Weber
initiated when she became CEO. SAB is now providing third-
party services to some of their cus-
tomers (warehousing and inventory management, order
fulfillment and delivery, and special

78. packaging). Their initial venture into this area has been
reasonably successful, and they expect
to attract more regional chains such as Acme Markets and
Wegman’s. A focus for the new dis-
tribution park will be fresh fruits and vegetables and other
perishable food items, commonly
referred to as the cold supply chain.
As you read this chapter, consider the issues and challenges that
SAB faces with these
new initiatives.
Source: John J. Coyle, DBA. Used with permission.
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79. Several quotes cited in a previous edition of this book are still
apropos:
“Change is inevitable, but growth and improvement are
optional.”1
“You either change and get better or you slip and get worse;
you cannot stay
the same.”2
“When the rate of change outside the organization is faster than
inside, the
end is near.”3
Susan Weber, CEO of SAB, understands the wisdom of these
comments. The ratio-
nale for change can be made by using examples of the past and
present giants of the
retailing industry shown in Table 1.1.
Montgomery Ward, the leading mass retailer in the 1930s and
1940s, lost its leader-

80. ship position to Sears in the 1950s because it did not have the
vision to understand that
the population exodus from the cities to the suburbs after World
War II would cause it
to lose sales volume at its large downtown stores. Sears
developed a strategy to open
multiple smaller stores in suburban shopping centers, providing
locational convenience
and free parking. In the 1970s, when the U.S. economy was
struggling with inflation
and unemployment, Kmart replaced Sears as the retail leader
with its emphasis upon
price discounts. In the 1990s, Walmart became the leading
retailer with a multifaceted
strategy based on discount pricing for brand-name products,
location in smaller commu-
nities, a “Made in America” slogan, and more customer service.
A key element in
Walmart’s ability to discount brand-name products was an
understanding of the
importance of efficiency in its logistics and supply chain system
from purchasing,
through delivery to its stores, to lowering cost of operations and
maintaining a continual
focus on improving its supply chain processes. Walmart

81. continually makes adjustments
to improve not only its store operations but also its logistics and
supply chain opera-
tions. The fact that two of the four retailing giants discussed
above no longer exist as
viable organizations is not lost upon Walmart. Walmart’s annual
sales now exceed $500
billion, but some experts are questioning whether it is becoming
stagnant since its “same
store sales” have been declining.
One could argue that most retailers are essentially supply chain
companies since they
buy products produced by others and sell these same products to
their customers. While
other factors such as merchandising, pricing, store location, and
layout are important,
supply chain management and logistics are key ingredients for
success in today’s highly
competitive global environment. Susan Weber of SAB appears
to comprehend the poten-
tial role that supply chains can play in making retail
organizations successful. She also
seems to understand that the dynamics of today’s global
environment require new think-

82. ing and perspectives. Table 1.1 shows the historical leading
retailers and clearly indicates
Table 1.1 Leading Retailers: 1930–2010
Montgomery Ward—1930s and 1940s
Sears and Roebuck—1950s and 1960s
Kmart—1970s and 1980s
Walmart—1990s and 2000s
????—2010s
Source: Center for Supply Chain Research, Penn State
University.
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83. Editorial review has deemed that any suppressed content does
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that change is necessary to maintain or gain market share. Table
1.2 demonstrates even
more dramatically the forces of change and the need to
transform the organization, espe-
cially the supply chain, since only three of the top 10 retailers
from 1996 are in the top
10 in 2010 (note also the number of global companies on the
2010 list).
At this juncture, an examination of the major external forces or
change drivers
shaping the economic and political environment is appropriate.
We need to understand
the impact of these forces of change on businesses and other
organizations.
What Forces Are Driving the Rate of Change
We know that supply chain management (SCM) became a part

84. of the vocabularies
of CEOs, CFOs, COOs, and CIOs during the 1990s. The
dynamics of the global environ-
ment changed dramatically during that decade, and
organizations had to adapt to these
changes or perish. Unfortunately, there were a number of
casualties like some of the
retailers previously mentioned.
Five major external forces appear to be driving the rate of
change and shaping our
economic and political landscape: globalization, technology,
organizational consolida-
tion, the empowered consumer, and government policy and
regulation. The impact of
these factors varies from sector to sector, but they are all
important. Additional exter-
nal forces may also influence some organizations, particularly
in the public and non-
profit sectors.
Globalization
Arguably, globalization is the most frequently cited change
factor by business leaders,

85. and it has replaced the post–World War II Cold War as the
dominant driving force in
world economics. The concept of the global marketplace or the
global economy has
taken on new meaning for all enterprises (profit and nonprofit;
small, medium, and
large; products or services) and for individual consumers during
the last two decades.
Table 1.2 Leading Retailers
1996 2010
1. Walmart 1. Walmart
2. Sears Roebuck 2. Carrefour
3. Metro 3. Metro
4. Tangelmann 4. Tesco
5. Kmart 5. Schwarz
6. Carrefour 6. Kroger

86. 7. Rewe Zentrale 7. Home Depot
8. Edeka Zentrale 8. Costco
9. Auchan 9. Aldi
10. Dayton Hudson 10. Target
Source: Center for Supply Chain Research, Penn State
University.
Supply Chain Management: An Overview 7
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87. Overall, globalization has led to a more competitively intense
economic and geopolit-
ical environment. This environment manifests itself in
opportunities and threats both
economic and political. Some individuals have implied that
there is no “geography” in
the current global environment (figuratively speaking) or,
perhaps more aptly, that time
and distance have been compressed. So, for example, companies
seeking to rationalize
their global networks frequently ask such questions as the
following:
• Where in the world should we source our materials or
services?
• Where in the world should we manufacture or produce our
products
or services?
• Where in the world should we market and sell our products or
services?
• Where in the world should we warehouse and distribute our

88. products?
• What global transportation alternatives should we consider?
Some important issues or challenges for supply chains in the
global economy are
(1) more economic and political risk; (2) shorter product life
cycles, and (3) the blurring
of traditional organizational boundaries. All three deserve some
discussion.
Supply and demand have become more volatile for a number of
reasons. Acts of ter-
rorism, for example, can have serious implications for the flow
of commerce. Companies
have put in place security measures to protect their global
supply chains and are pre-
pared to act quickly to offset challenges to the flow of materials
through their supply
chains, but the risk is ever present. One such challenge has been
the contamination of
food products and supplies from countries such as China. An
interruption in the flow
of products from China can cause serious shortages in the
supply of food and other pro-

89. ducts. Natural catastrophes such as hurricanes, floods, and
earthquakes have become
more problematic because of the scope and extent of global
trade; therefore, they pose a
significant potential problem for global supply chains. The
natural catastrophes that
occurred in Japan in 2011 interrupted or disrupted supply chains
worldwide in auto
and technology companies. Other examples could be offered,
but suffice it to say that
challenges to supply and demand can be exacerbated in number
and severity by the dis-
tances involved, which necessitates risk mitigation strategies.
Longer-run issues of supply and demand also arise with the
global competition for
sources of supply and markets. The growth in steel production
and automobile manufactur-
ing in China and information technology in India has caused
significant changes in U.S.
manufacturing of parts and finished goods. The global supply
chains of the best companies
must be adaptive and resilient to meet the challenges of the
global marketplace.

90. Shorter product life cycles are a manifestation of the ability of
products and services
to be duplicated quickly. Technology companies are particularly
vulnerable to the threat
of their new products being reengineered. However, almost all
products in our highly
competitive global environment are faced with this issue. From
a supply chain perspec-
tive, shorter product life cycles present a challenge for
inventory management. Products
that are duplicated will most likely face a faster reduction in
demand and new pricing
policies, both of which present challenges to effective inventory
management. The risk
of obsolescence in certain sectors of the economy as new
products are developed is
another challenge for inventory management. It also means
continually developing new
products or reconfiguring old products. Both are a challenge for
supply chains. Technol-
ogy companies are particularly vulnerable to product
obsolescence.
The blurring of traditional organizational boundaries is the
result of companies

91. having to adjust or transform their business model or the way
that they do business in
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a competitive global economy. To maintain their financial
viability (read profitability),
companies may have to outsource some parts of their operation
to another domestic
or global company that can provide what they need more
efficiently and, hopefully,
maintain the same quality. They may also add to their current
operations or services

92. to add value for customers. SAB is considering this strategy in
an effort to retain and
add customers.
Outsourcing is not new. It has been going on for many decades.
No organization is
completely independent. The competitiveness of the global
environment, however, has
increased the scope of outsourcing both domestically and
globally. As previously men-
tioned, companies need to analyze how they do business in
order to stay competitive
and financially viable. Nike, for example, outsources all of its
manufacturing and has
done so for many years. Airlines and hotels have outsourced
their call centers. Many
automobile and computer manufacturers outsource components
or parts that they need
for finished products. There are many examples of outsourcing
for materials and ser-
vices. From a supply chain and logistics perspective, the growth
in outsourcing is note-
worthy because it increases the importance of effective and
efficient global chains
because they become longer and more complex.

93. Before discussing technology, mention should be made of the
“BRIC factor” in the
analysis of globalization and supply chains. BRIC is an acronym
for the four countries
of Brazil, Russia, India, and China. These four countries have a
total population of well
over 3.0 billion, with China accounting for about 1.3 billion of
that total. These four
countries, especially China and India, have been a leading force
in the changing world
marketplace in this era of globalization. They not only produce
products and services
for export, but they have also become major consumers of
energy, basic materials, and
finished products. For example, General Motors sells more cars
in China than in the
United States; the Buick is the largest seller. The supply chains
of most, if not all, com-
panies have been affected by the emergence of the BRIC
countries. Walmart, for exam-
ple, is by far the largest buyer of products produced in China,
which is in sharp contrast
to its 1970s slogan of “Made in America.” It is estimated that if
Walmart were a country,

94. it would be China’s seventh- or eighth-largest trading partner.
Currently, there is growing discussion about a new group of
developing, low-cost
countries. The so-called VISTA Countries—Vietnam, Indonesia,
South Africa, Turkey,
and Argentina. It is expected that some or all of these countries
will replace the BRIC
countries as low-cost producers of various products and
services. However, the
BRIC countries with their developing middle class will become
a growing market area for
local and imported products.
SAB Distribution has been impacted by globalization because a
growing number of
products that it buys and distributes are being produced in
whole or in part in other
countries even though a U.S. company is their destination. SAB
also needs to evaluate
buying products directly from global producers. While this will
add to the complexity
of its supply chains, it may enable SAB to provide more
competitively priced products.
Also, SAB will be able to satisfy the needs of its more diverse

95. customers. Similar to other
U.S. companies, SAB is faced with both an opportunity and a
threat by globalization.
A strong complement to the growth in the global economy has
been the growth
and development in the technology related to supply chains.
Mention has been made
of time and distance being compressed, and technology has
certainly played a major
role in making this happen. Technology will be discussed as the
next external
change factor.
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96. Technology
Technology has had a major impact on supply chains as a
facilitator of change as
companies have transformed their processes. However, it is also
a major force in chang-
ing the dynamics of the marketplace. Individuals and
organizations are connected 24/7
and have access to information on the same basis via the
Internet. Search engines such as
Google have made it possible to gather timely information
quickly. We have become
what some individuals describe as the “click here” generation.
We no longer have to
wait for information to be “pushed” to us via the media on their
schedule; we can
“pull” information as we need it. Vast stores of data and
information are virtually at
our fingertips. Social networks such as Facebook and Twitter
are playing an ever increas-
ing role in business organizations and will influence supply
chains because of their

97. impact on customer demand and the speed of information
transfers. Many companies
see opportunities to “data mine” the tweets to uncover demand-
related information for
improved forecasting.
It has been argued that technology has allowed individuals and
smaller organizations
to connect to the world’s “knowledge pools” to create an
unbelievable set of opportu-
nities for collaboration in supply chains. A corollary of this
phenomenon is that the
world has become “flat.” In other words, traditionally
underdeveloped countries such as
China and India have become enabled and can participate in the
global economy much
more readily. The world is no longer tilted toward the
developed countries such as the
United States and European countries in terms of an economic
advantage. Outsourcing
to the less-developed countries has been enhanced by
technology. Collaboration oppor-
tunities with individuals and companies throughout the globe
have increased. The
flip side is that these economic advances have also created

98. market opportunities for
U.S. companies. Consequently, the flow of commerce has
become multidirectional. This
factor also increases the need for efficient and effective supply
chains.
Susan Weber, as SAB’s new CEO, will have to more fully
exploit the opportunities
presented by technology both on the procurement side of
business and in marketing pro-
ducts to customers. Her predecessor used technology to improve
internal processes, for
instance through warehouse operations and order fulfillment as
well as transportation
carrier collaboration. Susan will need to focus more externally
to improve overall supply
chain efficiency and effectiveness.
Organizational Consolidation and Power Shifts
After World War II, product manufacturers became the driving
force in supply
chains. They developed, designed, produced, promoted, and
distributed their products.
Frequently, they were the largest organizations in the supply

99. chain in terms of sales vol-
ume, employees, buying power, locations, and other factors.
They typically exerted their
influence throughout the supply chain to their specific economic
advantage, especially in
the distribution of their products.
During the 1980s and especially the 1990s, a significant change
occurred in the rela-
tive economic power in a growing number of supply chains as
mass retailers became
increasingly larger. Retail giants such as Walmart, Sears,
Kmart, Home Depot, Target,
Kroger, and McDonald’s became powerful market leaders and
engines for change.
Walmart, for example, was number one on the Fortune 500 list
by the middle of
the first decade of the twenty-first century. It had surpassed
Ford, General Motors, and
ExxonMobil with more than $500 billion of annual sales and
was the number one
employer in many states.
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While other retailers are not as large as Walmart, their size and
economic buying
power have also increased significantly. An important aspect of
the economic power
shift toward the retail end of the supply chain is that many
consumer product companies
find that 15 to 20 percent of their customers account for 70 to
80 percent of their total
sales. Walmart alone may account for over 10 percent of their
total sales. As noted pre-
viously, if Walmart were a country, it would be China’s eighth
largest trading partner.4

101. This phenomenon is not unique to the United States. For
example, a list of the top 10
global retailers would include Carrefour, Metro, Ahold, and
Tesco, all of which are head-
quartered in other countries. (See Table 1.2.)
As you would expect, the large retailers are accorded special
consideration from con-
sumer product companies. For example, customized distribution
services are provided
such as scheduled deliveries, “rainbow” pallets [mixed arrays of
products or stock-
keeping units (SKUs)], advance shipment notices (ASNs),
shrink-wrapped pallets, and
so forth. These services allow retailers to operate more
efficiently and often more effec-
tively. The scale of the retailers can also provide scale
economies (read cost savings) to
the producers of the products. It can be a win-win arrangement
for both sides, with sav-
ings passed on to the ultimate customer—the consumer.
In addition to customization, the retailer may be provided
value-added services such
as vendor-managed inventory (VMI). Essentially, this service

102. usually means that the
manufacturer will manage the inventory of its products (and
possibly related products)
at the retailer’s warehouse(s) and reorder as appropriate for
customer fulfillment. The
manufacturer may also have a representative at the designated
retail warehouse locations
to assure accurate and timely delivery. The retailer should
experience lower costs associ-
ated with inbound logistics, and the manufacturer should be
able to offset its additional
cost with increased sales (fewer stockouts, more complete
orders, etc.) because of the
more accurate and timely information of product orders at the
store level.
Finally, more collaboration is being practiced between
organizations in the supply
chains to gain mutual cost savings and improved customer
service. For example, sharing
point-of-sale data is a powerful collaborative tool for mitigating
the so-called bullwhip
effect in the supply chain, which has multiple benefits to supply
chain collaborators.
Collaborative planning and forecasting for replenishment among

103. members of the supply
chain can be used for reducing stockouts and mitigating
overreaction to swings in
demand levels. Companies can frequently make simple changes
at no extra cost to them-
selves by collaborating, which will allow their vendors and their
customers to reduce
expenses. The power of information sharing cannot be
overstated. This is a key area for
SAB to exploit as it tries to adapt to its competitive
environment and increase sales with
existing and new customers. Data sharing will help SAB to
lower stockouts and improve
on-shelf availability of their products.
The Empowered Consumer
Understanding consumer behavior has been a focus of marketing
analysis and strat-
egy development for many years. Typically, such analyses
examine consumers in total or
in major groupings or segments to understand their needs and to
respond to them with
appropriate products and services. Such analyses have
implications for logistics and sup-

104. ply chain management, but they have been viewed in the past by
logisticians as having
somewhat indirect impacts. Today, the impact of the consumer
is much more direct for
supply chains because the consumer has placed increased
demands at the retail level for an
expanded variety of products and services. For example, year-
round availability of fresh
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fruits and vegetables that are frequently imported, a selection of
many different variations

105. of the same basic product, stores being open 24/7, and similar
demands are all extras pro-
vided with very low margins on products. The supply chains
have to perform very effi-
ciently to enable the retailer and other organizations in the
supply chain to make a profit.
Today’s consumers are more enlightened and educated, and they
are empowered
more than ever by the information that they have at their
disposal from the Internet and
other sources. Their access to supply sources has expanded
dramatically beyond their
immediate locale by virtue of catalogs, the Internet, and other
media. They have the
opportunity to compare prices, quality, and service.
Consequently, they demand competi-
tive prices, high quality, tailored or customized products,
convenience, flexibility, and
responsiveness. They tend to have a low tolerance level for poor
quality in products and
services. Consumers also have increased buying power due to
higher income levels. They
demand the best quality at the best price and with the best
service. These demands place

106. increased challenges and pressure on the various supply chains
for consumer products.
The demographics of our society with the increase in two-career
families and single-
parent households have made time a critical factor for many
households. Consumers want
and demand quicker response times and more convenient
offerings according to their sche-
dules. The five-day services week from 9 AM to 6 PM for
customers is no longer acceptable.
The expectation for service is frequently 24/7 availability with a
minimum of wait time.
The age old axiom of “let the buyer beware” should probably be
changed to “let the seller
beware.” Today’s consumers may not have the loyalty of
previous periods or much patience
with inferior quality in any area. The Internet enables them to
expand their buying alterna-
tives and quickly make comparisons before they purchase. The
associated transportation
delivery service is usually expected to be provided quickly and
conveniently.
Why is this consumer revolution so important in a supply chain

107. and logistics context?
The reason is that the supply chain and logistics requirements
have dramatically increased.
For example, if retail establishments have to be open for 24
hours a day, seven days a
week, their resulting tendency to order more frequently in
smaller quantities places greater
demands on the supply chains that serve them. Also, the
pressure from consumers related
to price puts pressure in turn on the supply chain to operate as
efficiently as possible.
The power of the consumer has caused much change in how
supply chains function.
Supply chains have felt the pressure to keep prices stable even
during inflationary periods.
Collaboration has frequently been the basis for efficiencies to
offset increased costs.
Government Policy and Regulation
The fifth external change factor is the various levels of
government (federal, state, and
local) that establish and administer policies, regulations, and
taxes that impact individual
businesses and their supply chains. The deregulation of several

108. important sectors of our
economy that occurred in the 1980s and 1990s is a good
example. These deregulated
sectors include transportation, communications, and financial
institutions, which are
cornerstones of the infrastructure for most organizations.
Beginning in the late 1970s and into the 1980s, the U.S.
transportation industry was
deregulated at the federal level in terms of economic controls
such as rates and areas of
service. The net effect was that it became possible for
transportation services to be pur-
chased and sold in a much more competitive environment. The
results frequently were
lower prices to users and improved service. It became possible
for carriers and shippers
to negotiate and to make changes in their respective operations
to allow carriers to oper-
ate more efficiently and lower their prices. New carriers entered
the marketplace,
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particularly in the motor carrier industry, which increased
competition. Certain sectors
of transportation underwent consolidation through mergers and
acquisition; most nota-
ble were the railroads and airlines. Transportation companies
have also been allowed to
offer more than just transportation services. Many motor
carriers, for example, have
declared themselves to be logistics services companies and offer
an array of related ser-
vices that can include order fulfillment, inventory management,
and warehousing. They
have moved aggressively ahead in the new business
environment where companies view

110. outsourcing and partnerships as potential strategic advantages.
The financial sector was also deregulated at the federal level.
The distinctions between
commercial banks, savings and loan associations, and credit
unions, for example, have
blurred as these institutions have been allowed to broaden their
array of services. Finan-
cial markets have become more competitive and, like the
transportation sector, more
responsive to customer needs. Brokerage and insurance
companies have also been
affected by the deregulation of the broad financial industry, and
some offer services sim-
ilar to banks and vice versa.
The deregulation of financial institutions has fostered changes
in how businesses can
operate. For example, the opportunity to invest cash at the end
of the day in the global
overnight money market for periods of 6 to 10 hours made many
companies more cog-
nizant of the value of asset liquidity and asset reduction,
especially inventory. Payment
transactions for buyers and sellers have also changed