Week 2: Pre-Class Content
What is a Supply Chain
● All parties involved, directly or indirectly, in fulfilling a customer request
● Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers
● Within each organization, the supply chain includes all functions involved in receiving
and fulfilling a customer request (new product development, marketing, operations,
distribution, finance, customer service)
● Customer is an integral part of the supply chain
● Includes movement of information, funds and products in between suppliers and
customers
● May be more accurate to use the term supply network or supply web
● Typically supply chain stages: customers, retailers, wholesalers, distributors,
manufacturers, suppliers
,The Objective of a Supply Chain
● Maximize net value generated
● Supply Chain Surplus = Customer Value - Supply Chain Cost
The Objective of a Supply Chain
● Customer purchases a wireless router from Best Buy for $60 (revenue)
● Supply chain incurs costs (convey information, produce components, storage,
transportation, transfer funds, etc)
● Difference between $60 and the sum of all of these costs is the supply chain profitability
● Supply chain profitability is total profit to be shared across all stages of the supply chain
● Success should be measured by total supply chain surplus, not profits at an individual
stage
● End customer the only source of revenue
● Sources of cost include flows of information, products, or funds between stages of the
supply chain
● Effective supply chain management involves the management of supply chain assets
and product, information, and fund flows to grow the total supply chain surplus
Importance of Supply Chain Decisions
● Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016
● Seven-Eleven Japan, 1 billion sales in 1974 to 2.7 trillion in 2016
● Webvan folded in two years
● Borders $4 billion in 2004, declared bankruptcy in 2010
● Dell, $56 billion in 2006, adopted new supply chain strategies
Summary of Learning Objective 1
The goal of a supply chain should be to grow overall supply chain surplus. Supply chain surplus
is the difference between the value generated for the customer and the total cost incurred
across all stages of the supply chain. A focus on the supply chain surplus increases the size of
the overall pie for all members of the supply chain. Supply chain decisions have a large impact
on the success or failure of each firm because they significantly influence both the revenue
generated and the cost incurred. Successful supply chains manage flows of product,
information, and funds to provide a high level of product availability to the customer while
keeping costs low.
Competitive and Supply Chain Strategies
● Competitive strategy defines the set of customer needs a company seeks to satisfy
through its products and services
● Product development strategy specifies the portfolio of new products that the company
will try to develop
● Marketing and sales strategy specifies how the market will be segmented and product
positioned, priced, and promoted
, ● Supply chain strategy determines the nature of material procurement, transportation of
materials, manufacture of product or creation of service, distribution of product, follow-up
service, whether processes will be in-house or outsourced
○ All functional strategies must support one another and the competitive strategy
The Value Chain
Achieving Strategic Fit
● Strategic fit - competitive and supply chain strategies have aligned goals
● The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy. Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy goal
To elaborate on strategic fit, let us consider the evolution of Dell and its supply chain between
1993 and the present. Between 1993 and 2006, Dell’s competitive strategy was to provide a
large variety of customizable products at a reasonable price. Given the focus on customization,
Dell’s supply chain was designed to be very responsive. Assembly facilities owned by Dell were
designed to be flexible and to easily handle the wide variety of configurations requested by
customers. A facility that focused on low cost and efficiency by producing large volumes of the
same configuration would not have been appropriate in this setting.
The notion of strategic fit also extended to other functions within Dell. Dell PCs were designed
to use common components and to allow rapid assembly. This design strategy clearly aligned
well with the supply chain’s goal of assembling customized PCs in response to customer orders.
Dell worked hard to carry this alignment to its suppliers. Given that Dell produced customized
products wIth low levels of inventory, it was crucial that suppliers and carriers be highly
responsive. For example, the ability of carriers to merge a PC from Dell with a monitor from
Sony allowed Dell not to carry any Sony monitors in inventory.
Starting in 2007, however, Dell altered its competitive strategy and had to change its supply
chain accordingly. With a reduced customer focus on hardware customization, Dell branched
out into selling PCs through retail stores such as Walmart. Through Walmart, Dell offers a
limited variety of desktops and laptops. It is also essential that monitors and other peripherals
be available in inventory because a customer buying a PC at Walmart is not willing to wait for
the monitor to show up later. Clearly, the flexible and responsive supply chain that aligns well
with a customer need for customization does not necessarily align well when customers no
longer want customization but prefer low prices. Given the change in customer priorities, Dell
, has shifted a greater fraction of its production to a build-to-stock model to maintain strategic fit.
Contract manufacturers like Foxconn that are focused on low cost now produce many of Dell’s
products well in advance of sale. To maintain strategic fit, Dell’s supply chain has moved from a
relentless focus on responsiveness to a greater focus on low cost.
Summary of Learning Objective 2
Strategic fit requires that all functions within a firm and stages in the supply chain target the
same goal—one that is consistent with customer needs. A lack of strategic fit between the
competitive and supply chain strategies can result in the supply chain taking actions that are not
consistent with customer needs, leading to a reduction in supply chain surplus and a decrease
in supply chain profitability
Supply Chain Management: Strategy, Planning, and Operation
Chapter 3: Supply Chain Drivers and Metrics
Financial Measures of Performance
● From a shareholder perspective, return on equity (ROE) is the main summary measure
of a firm’s performance
○ ROE = Net Income / Average Shareholder Equity
● Return on assets (ROA) measures the return earned on each dollar invested by the firm
in assets
○ ROA = Earnings before Interest / Average Total Assets
○ ROA = Net + [ Interest Expense x 1 - Tax Rate] / Average Total Assets
● Earnings before interest: How much would your income be if you hadn’t paid any interest
○ Whereas ROE measures the return on investment made by a firm’s
shareholders, return on assets (ROA) measures the return earned on each dollar
invested by the firm in assets
○ ROA captures the return generated by a firm’s operating and investing activities,
without regard for how these activities are financed
Financial Measures of Performance
What is a Supply Chain
● All parties involved, directly or indirectly, in fulfilling a customer request
● Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers
● Within each organization, the supply chain includes all functions involved in receiving
and fulfilling a customer request (new product development, marketing, operations,
distribution, finance, customer service)
● Customer is an integral part of the supply chain
● Includes movement of information, funds and products in between suppliers and
customers
● May be more accurate to use the term supply network or supply web
● Typically supply chain stages: customers, retailers, wholesalers, distributors,
manufacturers, suppliers
,The Objective of a Supply Chain
● Maximize net value generated
● Supply Chain Surplus = Customer Value - Supply Chain Cost
The Objective of a Supply Chain
● Customer purchases a wireless router from Best Buy for $60 (revenue)
● Supply chain incurs costs (convey information, produce components, storage,
transportation, transfer funds, etc)
● Difference between $60 and the sum of all of these costs is the supply chain profitability
● Supply chain profitability is total profit to be shared across all stages of the supply chain
● Success should be measured by total supply chain surplus, not profits at an individual
stage
● End customer the only source of revenue
● Sources of cost include flows of information, products, or funds between stages of the
supply chain
● Effective supply chain management involves the management of supply chain assets
and product, information, and fund flows to grow the total supply chain surplus
Importance of Supply Chain Decisions
● Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016
● Seven-Eleven Japan, 1 billion sales in 1974 to 2.7 trillion in 2016
● Webvan folded in two years
● Borders $4 billion in 2004, declared bankruptcy in 2010
● Dell, $56 billion in 2006, adopted new supply chain strategies
Summary of Learning Objective 1
The goal of a supply chain should be to grow overall supply chain surplus. Supply chain surplus
is the difference between the value generated for the customer and the total cost incurred
across all stages of the supply chain. A focus on the supply chain surplus increases the size of
the overall pie for all members of the supply chain. Supply chain decisions have a large impact
on the success or failure of each firm because they significantly influence both the revenue
generated and the cost incurred. Successful supply chains manage flows of product,
information, and funds to provide a high level of product availability to the customer while
keeping costs low.
Competitive and Supply Chain Strategies
● Competitive strategy defines the set of customer needs a company seeks to satisfy
through its products and services
● Product development strategy specifies the portfolio of new products that the company
will try to develop
● Marketing and sales strategy specifies how the market will be segmented and product
positioned, priced, and promoted
, ● Supply chain strategy determines the nature of material procurement, transportation of
materials, manufacture of product or creation of service, distribution of product, follow-up
service, whether processes will be in-house or outsourced
○ All functional strategies must support one another and the competitive strategy
The Value Chain
Achieving Strategic Fit
● Strategic fit - competitive and supply chain strategies have aligned goals
● The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy. Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy goal
To elaborate on strategic fit, let us consider the evolution of Dell and its supply chain between
1993 and the present. Between 1993 and 2006, Dell’s competitive strategy was to provide a
large variety of customizable products at a reasonable price. Given the focus on customization,
Dell’s supply chain was designed to be very responsive. Assembly facilities owned by Dell were
designed to be flexible and to easily handle the wide variety of configurations requested by
customers. A facility that focused on low cost and efficiency by producing large volumes of the
same configuration would not have been appropriate in this setting.
The notion of strategic fit also extended to other functions within Dell. Dell PCs were designed
to use common components and to allow rapid assembly. This design strategy clearly aligned
well with the supply chain’s goal of assembling customized PCs in response to customer orders.
Dell worked hard to carry this alignment to its suppliers. Given that Dell produced customized
products wIth low levels of inventory, it was crucial that suppliers and carriers be highly
responsive. For example, the ability of carriers to merge a PC from Dell with a monitor from
Sony allowed Dell not to carry any Sony monitors in inventory.
Starting in 2007, however, Dell altered its competitive strategy and had to change its supply
chain accordingly. With a reduced customer focus on hardware customization, Dell branched
out into selling PCs through retail stores such as Walmart. Through Walmart, Dell offers a
limited variety of desktops and laptops. It is also essential that monitors and other peripherals
be available in inventory because a customer buying a PC at Walmart is not willing to wait for
the monitor to show up later. Clearly, the flexible and responsive supply chain that aligns well
with a customer need for customization does not necessarily align well when customers no
longer want customization but prefer low prices. Given the change in customer priorities, Dell
, has shifted a greater fraction of its production to a build-to-stock model to maintain strategic fit.
Contract manufacturers like Foxconn that are focused on low cost now produce many of Dell’s
products well in advance of sale. To maintain strategic fit, Dell’s supply chain has moved from a
relentless focus on responsiveness to a greater focus on low cost.
Summary of Learning Objective 2
Strategic fit requires that all functions within a firm and stages in the supply chain target the
same goal—one that is consistent with customer needs. A lack of strategic fit between the
competitive and supply chain strategies can result in the supply chain taking actions that are not
consistent with customer needs, leading to a reduction in supply chain surplus and a decrease
in supply chain profitability
Supply Chain Management: Strategy, Planning, and Operation
Chapter 3: Supply Chain Drivers and Metrics
Financial Measures of Performance
● From a shareholder perspective, return on equity (ROE) is the main summary measure
of a firm’s performance
○ ROE = Net Income / Average Shareholder Equity
● Return on assets (ROA) measures the return earned on each dollar invested by the firm
in assets
○ ROA = Earnings before Interest / Average Total Assets
○ ROA = Net + [ Interest Expense x 1 - Tax Rate] / Average Total Assets
● Earnings before interest: How much would your income be if you hadn’t paid any interest
○ Whereas ROE measures the return on investment made by a firm’s
shareholders, return on assets (ROA) measures the return earned on each dollar
invested by the firm in assets
○ ROA captures the return generated by a firm’s operating and investing activities,
without regard for how these activities are financed
Financial Measures of Performance
