SI XTH E D I T I O N

» /'

Strategy, Planning, and Operation

KNV.1S002322

Sunil Chopra • Peter Meindl

S i x t h E d i t i o n

S u p p l y C h a in M a n a g e m e n tSt r a t e g y , P l a n n i n g , a n d O p e r a t i o n

Sunil ChopraKellogg School o f Management

Peter MeindlKepos Capital

PEARSONBoston Columbus Indianapolis New York San Francisco Hoboken

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Library of Congress Cataloging-in-Publi cation DataChopra. Sunil

Supply chain management: strategy. planning, and operation / Sunil Chopra. Kellogg School of Management Peter Meindl. Kepos Capital.—Sixth Edition,

pages cmISBN 978-0-13-380020-3— ISBN 0-13-380020-2

I. Marketing channels— Management. 2. Deliver) of goods— Management. 3. Physical distribution of goods—Management. 4. Customer sen ices— Management. 5. Industrial procurement. 6. Materials management.I. Meindl. Peter. 1970- Q. Title.

HF54I5.13.C533 2015 658.7—dc23

2014031745

10 9 8 7 6 5 4 3 2 1

PEARSON ISBN 10: 0-13-380020-2ISBN 13: 978-0-13-380020-5

DedicationI would like to thank my colleagues at Kellogg fo r all I have learned from

them about logistics and supply chain management. I am grateful fo r the love and encouragement that my parents, Krishan and Pushpa, and sisters, Sudha and Swati, have always provided during every endeavor in my life. I thank my

children, Ravi and Rajiv, fo r the joy they have brought me. Finally, none o f this would have been possible without the constant love, caring, and support

o f my wife, Maria Cristina.

—Sunil Chopra1 would like to thank three mentors—Sunil Chopra, Hau Lee, and Gerry

Lieberman—who have taught me a great deal. Thank you also to my parents and sister fo r their love, and to my sons, Jamie and Eric, fo r making me smile and teaching me what life is truly all about. Most important, I thank my wife,

Sarah, who makes life wonderful and whom I love with all my heart.

—Peter Meindl

ABOUT THE AUTHORS

SUNIL CHOPRA > %• f 1-

Sunil Chopra is the IBM Distinguished Professor of Operations Management and Information Systems at the Kellogg School of Management. He has served as the interim dean and senior associate dean for curriculum and teaching, and the codirector of the MMM program, a joint dual-degree program between the Kellogg School of Manage­ment and the McCormick School of Engineering at Northwestern University. He has a PhD in operations research from SUNY at Stony Brook. Prior to joining Kellogg, he taught at New York University and spent a year at IBM Research.

Professor Chopra’s research and teaching interests are in supply chain and logistics management, operations management, and the design of telecommunication networks.He has won several teaching awards at the MBA and Executive programs of Kellogg. He has authored more than 40 papers and two books.

He has been a department editor for Management Science and an associate editor for Man­ufacturing & Service Operations Management, Operations Research, and Decision Sciences Journal. His recent research has focused on understanding supply chain risk and devising effective risk mitigation strategies. He has also consulted for several firms in the area of supply chain and operations management.

PETER MEINDLPeter Meindl is a portfolio manager with Kepos Capital in New York. Previously, he was a research officer with Barclays Global Investors, a consultant with the Boston Consult­ing Group and Mercer Management Consulting, and the director of strategy with i2 Technologies. He holds PhD, MS, BS, and BA degrees from Stanford, and an MBA from the Kellogg School of Management at Northwestern.

The first edition of this book won the prestigious Book of the Year award in 2002 from the Institute of Industrial Engineers.

CONTENTS

Preface x

Part I Building a Strategic Framework to Analyze Supply Chains

Chapter 1 UNDERSTANDING THE SUPPLY CHAIN 11.1 What Is a Supply Chain ? 11.2 The Objective o f a Supply Chain 31.3 The Importance o f Supply Chain Decisions 51.4 Decision Phases in a Supply Chain 61.5 Process Views o f a Supply Chain 81.6 Examples o f Supply Chains 131.7 Summary o f Learning Objectives 17

Discussion Questions 17 • Bibliography 18

Chapter 2 SUPPLY CHAIN PERFORMANCE: ACHIEVING STRATEGIC FIT AND SCOPE 192.1 Competitive and Supply Chain Strategies 192.2 Achieving Strategic Fit 212.3 Expanding Strategic Scope 312.4 Challenges to Achieving and Maintaining

Strategic Fit 342.5 Summary o f Learning Objectives 35

Discussion Questions 36 • Bibliography 36► CASE STUDY: The Demise of Blockbuster 37

Chapter 3 SUPPLY CHAIN DRIVERS AND METRICS 403.1 Financial Measures o f Performance 403.2 Drivers o f Supply Chain Performance 443.3 Framework for Structuring Drivers 463.4 Facilities 473.5 Inventory 493.6 Transportation 523.7 Information 533.8 Sourcing 563.9 Pricing 573.10 Summary o f Learning Objectives 59

Discussion Questions 60 • Bibliography 61► CASE STUDY: Seven-Eleven Japan Co. 61► CASE STUDY: Financial Statements for Walmart Stores Inc. and

Macy's Inc. 67

Part II Designing the Supply Chain NetworkChapter 4 DESIGNING DISTRIBUTION NETWORKS AND

APPLICATIONS TO ONLINE SALES 694.1 The Role o f Distribution in the Supply Chain 694.2 Factors Influencing Distribution Network Design 714.3 Design Options for a Distribution Network 744.4 Online Sales and the Distribution Network 874.5 Distribution Networks in Practice 1004.6 Summary o f Learning Objectives 101

Discussion Questions 102 • Bibliography 102► CASE STUDY: Blue Nile and Diamond Retailing 103

Chapter 5 NETWORK DESIGN IN THE SUPPLY CHAIN 1085.1 The Role o f Network Design in the Supply Chain 1085.2 Factors Influencing Network Design Decisions 1095.3 Framework for Network Design Decisions 1145.4 Models for Facility Location and Capacity Allocation 1165.5 Making Network Design Decisions in Practice 1325.6 Summary o f Learning Objectives 133

Discussion Questions 133 • Exercises 134 • Bibliography 138► CASE STUDY: Managing Growth at SportStuff.com 139► CASE STUDY: Designing the Production Network at CoolWipes 140

Chapter 6 DESIGNING GLOBAL SUPPLY CHAIN NETWORKS 1426.1 The Impact o f Globalization on Supply Chain Networks 1426.2 The Offshoring Decision: Total Cost 1446.3 Risk Management in Global Supply Chains 1476.4 Discounted Cash Flows 1516.5 Evaluating Network Design Decisions Using Decision Trees 1536.6 To Onshore or Offshore: Evaluation o f Global Supply Chain

Design Decisions Under Uncertainty 1606.7 Making Global Supply Chain Design Decisions Under

Uncertainty in Practice 1686.8 Summary o f Learning Objectives 169

Discussion Questions 169 • Exercises 170 • Bibliography 171► CASE STUDY: BioPharma, Inc. 172► CASE STUDY: The Sourcing Decision at Forever Young 175

Part III Planning and Coordinating Demand and Supply in a Supply Chain

Chapter 7 DEMAND FORECASTING IN A SUPPLY CHAIN 1777.1 The Role o f Forecasting in a Supply Chain 1777.2 Characteristics o f Forecasts 178

vi Contents

7.3 Components o f a Forecast and Forecasting Methods 1797.4 Basic Approach to Demand Forecasting 1807.5 Time-Series Forecasting Methods 1827.6 Measures o f Forecast Error 1927.7 Selecting the Best Smoothing Constant 1957.8 Forecasting Demand at Tahoe Salt 1977.9 The Role o f IT in Forecasting 2027.10 Forecasting in Practice 2037.11 Summary o f Learning Objectives 204

Discussion Questions 204 • Exercises 205 • Bibliography 206► CASE STUDY: Specialty Packaging Corporation 207

Chapter 8 AGGREGATE PLANNING IN A SUPPLY CHAIN 2098.1 The Role o f Aggregate Planning in a Supply Chain 2098.2 The Aggregate Planning Problem 2118.3 Aggregate Planning Strategies 2138.4 Aggregate Planning at Red Tomato Tools 2148.5 Aggregate Planning Using Linear Programming 2158.6 Aggregate Planning in Excel 2208.7 Building a Rough Master Production Schedule 2248.8 The Role o f IT in Aggregate Planning 2258.9 Implementing Aggregate Planning in Practice 2258.10 Summary o f Learning Objectives 226

Discussion Questions 227 • Exercises 227 • Bibliography 229► CASE STUDY: Kloss Planters and Harvesters 229

Chapter 9 SALES AND OPERATIONS PLANNING: PLANNING SUPPLY AND DEMAND IN A SUPPLY CHAIN 2319.1 Responding to Predictable Variability in the Supply Chain 2319.2 Managing Supply 2329.3 Managing Demand 2349.4 Sales and Operations Planning at Red Tomato 2359.5 Implementing Sales and Operations Planning in Practice 2419.6 Summary o f Learning Objectives 242

Discussion Questions 242 • Exercises 242 • Bibliography 244► CASE STUDY: Mintendo Game Girl 245► CASE STUDY: Promotion Challenges at Gulmarg Skis 246

Chapter 10 COORDINATION IN A SUPPLY CHAIN 24810.1 Lack o f Supply Chain Coordination and the Bullwhip Effect 24810.2 The Effect on Performance o f Lack o f Coordination 25010.3 Obstacles to Coordination in a Supply Chain 25210.4 Managerial Levers to Achieve Coordination 25610.5 Continuous Replenishment and Vendor-Managed

Inventories 261

i

10.6 Collaborative Planning, Forecasting, and Replenishment 26110.7 Achieving Coordination in Practice 26510.8 Summary o f Learning Objectives 266

Discussion Questions 267 • Bibliography 267

Part IV Planning and Managing Inventories in a Supply ChainChapter 11 MANAGING ECONOMIES OF SCALE IN A SUPPLY CHAIN:

CYCLE INVENTORY 26811.1 The Role o f Cycle Inventory in a Supply Chain 26811.2 Estimating Cycle Inventory-Related Costs in Practice 27111.3 Economies o f Scale to Exploit Fixed Costs 27311.4 Aggregating Multiple Products in a Single Order 27811.5 Economies o f Scale to Exploit Quantity Discounts 28611.6 Short-Term Discounting: Trade Promotions 29711.7 Managing Multiechelon Cycle Inventory 30211.8 Summary o f Learning Objectives 305

Discussion Questions 306 • Exercises 306 • Bibliography 309► CASE STUDY: Delivery Strategy at MoonChem 310► CASE STUDY: Pricing and Delivery at KAR Foods 312

Appendix 11 A : Economic Order Quantity 313

Chapter 12 MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY 31412.1 The Role o f Safety Inventory in a Supply Chain 31412.2 Factors Affecting the Level o f Safety Inventory 31612.3 Determining the Appropriate Level o f Safety Inventory 31812.4 Impact o f Supply Uncertainty on Safety Inventory 32712.5 Impact o f Aggregation on Safety Inventory 33012.6 Impact o f Replenishment Policies on Safety Inventory 34212.7 Managing Sa fety Inventory in a Multiechelon Supply Chain 34612.8 The Role o f IT in Inventory Management 34612.9 Estimating and Managing Safety Inventory in Practice 34712.10 Summary o f Learning Objectives 348

Discussion Questions 349 • Exercises 349 • Bibliography 353► CASE STUDY: Managing Inventories at ALKO Inc. 353► CASE STUDY: Should Packing Be Postponed to the DC? 356

Appendix 12A: The Normal Distribution 357Appendix 12B: The Normal Distribution in Excel 358Appendix 12C: Expected Shortage per Replenishment Cycle 358Appendix 12D: Evaluating Safety Inventory fo r Slow-Moving

Items 359

Chapter 13 DETERMINING THE OPTIMAL LEVEL OF PRODUCT AVAILABILITY 36113.1 The Importance o f the Level o f Product Availability 36113.2 Factors Affecting Optimal Level o f Product Availability 362

13.3 Managerial Levers to Improve Supply Chain Profitability 37213.4 Setting Product Availability for Multiple Products Under

Capacity Constraints 38613.5 Setting Optimal Levels o f Product Availability in Practice 38913.6 Summary o f Learning Objectives 389

Discussion Questions 390 • Exercises 390 • Bibliography 392► CASE STUDY: The Need for Speed at Winner Apparel 393

Appendix 13A: Optimal Level o f Product Availability 394 Appendix 13B: An Intermediate Evaluation 395 Appendix 13C: Expected Profit from an Order 396 Appendix 13D: Expected Overstock from an Order 396 Appendix 13E: Expected Understock from an Order 397Appendix 13F: Simulation Using Spreadsheets 397

Part V Designing and Planning Transportation NetworksChapter 14 TRANSPORTATION IN A SUPPLY CHAIN 400

14.1 The Role o f Transportation in a Supply Chain 40014.2 Modes o f Transportation and Their Performance

Characteristics 40214.3 Transportation Infrastructure and Policies 40614.4 Design Options for a Transportation Network 40914.5 Mumbai Dabbawalas; A Highly Responsive Distribution

Network 41514.6 Trade-Offs in Transportation Design 41614.7 Tailored Transportation 42514.8 The Role o f IT in Transportation 42714.9 Making Transportation Decisions in Practice 42714.10 Summary o f Learning Objectives 428

Discussion Questions 429 • Bibliography 429► CASE STUDY: Designing the Distribution Network for Michael's

Hardware 430► CASE STUDY: The Future of Same-Day Delivery: Same as the Past? 431► CASE STUDY: Selecting Transportation Modes for China Imports 432

Part VI Managing Cross-Functional Drivers in a Supply ChainChapter 15 SOURCING DECISIONS IN A SUPPLY CHAIN 433

15.1 The Role o f Sourcing in a Supply Chain 43315.2 In-House or Outsource? 43515.3 Examples o f Successful Third-Party Suppliers 44115.4 Total Cost o f Ownership 44315.5 Supplier Selection—Auctions and Negotiations 44615.6 Sharing Risk and Reward in the Supply Chain 44815.7 The Impact o f Incentives When Outsourcing 459

Contents ix

15.8 Designing a Sourcing Portfolio: Tailored Sourcing 46115.9 Making Sourcing Decisions in Practice 46315.10 Summary o f Learning Objectives 464

Discussion Questions 465 • Exercises 465 • Bibliography 466

Chapter 16 PRICING AND REVENUE MANAGEMENT IN A SUPPLY CHAIN 46816.1 The Role o f Pricing and Revenue Management in a Supply

Chain 46816.2 Pricing and Revenue Management for Multiple Customer

Segments 47016.3 Pricing and Revenue Management for Perishable Assets 47716.4 Pricing and Revenue Management for Seasonal Demand 48416.5 Pricing and Revenue Management for Bulk and Spot

Contracts 48416.6 Using Pricing and Revenue Management in Practice 48616.7 Summary o f Learning Objectives 487

Discussion Questions 438 • Exercises 488 • Bibliography 489► CASE STUDY: To Savor or to Groupon? 490

Chapter 17 SUSTAINABILITY AND THE SUPPLY CHAIN 49217.1 The Role o f Sustainability in a Supply Chain 49217.2 The Tragedy o f the Commons 49417.3 Key Pillars o f Sustainability 49717.4 Sustainability and Supply Chain Drivers 50017.5 Closed-Loop Supply Chains 50417.6 The Pricing o f Sustainability 50517.7 Summary o f Learning Objectives 507

Discussion Questions 508 • Bibliography 508

Part VII Online ChapterChapter A INFORMATION TECHNOLOGY IN A SUPPLY CHAIN

The Role o f IT in a Supply ChainThe Supply Chain IT FrameworkCustomer Relationship ManagementInternal Supply Chain ManagementSupplier Relationship ManagementThe Transaction Management FoundationThe Future o f IT in the Supply ChainRisk Management in ITSupply Chain IT in PracticeSummary o f Learning Objectives

Discussion Questions • Bibliography

Index 509