Examples of Supply Chains

In this section, we consider several supply chains and raise questions that must be answered dur­ing their design, planning, and operation phases. In later chapters, we discuss concepts and pres­ent methodologies that can be used to answer these questions.

1. Gateway and Apple: Two Different Journeys into Retailing

Gateway was founded in 1985 as a direct sales manufacturer of PCs with no retail footprint. In 1996, Gateway was one of the first PC manufacturers to start selling PCs online. After many years of selling its PCs without a retail infrastructure, however, Gateway introduced an aggres­sive strategy of opening Gateway retail stores throughout the United States in the late 1990s. Its stores carried no finished-goods inventory and were primarily focused on helping customers select the right configuration to purchase. All PCs were manufactured to order and shipped to the customer from one of the assembly plants.

Initially, investors rewarded Gateway for this strategy and raised the stock price to more than $80 per share in late 1999. However, this success did not last. By November 2002, Gateway shares had dropped to less than $4, and Gateway was losing a significant amount of money. By April 2004, Gateway had closed all its retail outlets and reduced the number of configurations offered to customers. In August 2007, Gateway was purchased by Taiwan’s Acer for $710 million. By 2010, Gateway computers were sold through more than 20 different retail outlets, including Best Buy and Costco. As one can imagine, this was quite a transition for the company to experience.

In contrast, Apple has enjoyed tremendous success since it opened its first retail store in 2001. By 2013, Apple had more than 415 stores worldwide, with sales of over $20 billion. Unlike Gateway, Apple has always carried product inventory at its stores. Given its product designs, Apple carries relatively little variety in its stores. In 2012, average revenue per Apple retail store was $51.5 million, a 19 percent increase over 2011.

The following questions highlight supply chain decisions that have a bearing on the differ­ence between Apple’s and Gateway’s performance:

1. Why did Gateway choose not to carry any finished-product inventory at its retail stores? Why did Apple choose to carry inventory at its stores?
2. Should a firm with an investment in retail stores carry any finished-goods inventory? What are the characteristics of products that are most suitable to be carried in finished-goods inventory? What characterizes products that are best manufactured to order?
3. How does product variety affect the level of inventory a retail store must carry?
4. Is a direct selling supply chain without retail stores always less expensive than a supply chain with retail stores?
5. What factors explain the success of Apple retail and the failure of Gateway country stores?

2. Zara: Apparel Manufacturing and Retail

Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer. In 2012, Inditex reported sales of about 16 billion euros from more than 6,000 retail outlets in about 86 countries. In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks. This speed allows Zara to introduce new designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display match customer preferences much more closely than do those of the competition. The result is that Zara sells most of its products at full price and has about half the markdowns in its stores compared with the competition.

Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel man­ufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the manu­facturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand are sourced out of Europe, whereas products that are more predictable are sourced from its Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house production occur after the sales season starts. This compares with less than 20 percent produc­tion after the start of a sales season for a typical retailer. This responsiveness, along with the postponement of decisions until after trends are known, allow Zara to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions.

In 2012, Inditex distributed to stores all over the world from eight distribution centers located in Spain. The group claimed an average delivery time of 24 to 36 hours for European stores and up to a maximum of 48 hours for stores in America or Asia from the time the order was received in the distribution center (DC) to the time it was delivered to the stores. Shipments from the DCs to stores were made several times a week. This allowed store inventory to closely match customer demand.

The following questions raise supply chain issues that are central to Zara’s strategy and success:

1. What advantage does Zara gain against the competition by having a very responsive supply chain?
2. Why has Inditex chosen to have both in-house manufacturing and outsourced manufactur­ing? Why has Inditex maintained manufacturing capacity in Europe even though manufac­turing in Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers?
4. What advantage does Zara gain from replenishing its stores multiple times a week com­pared with a less frequent schedule?
5. Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail sales?

3. W.W. Grainger and McMaster-Carr: MRO Suppliers

W.W. Grainger and McMaster-Carr sell maintenance, repair, and operations (MRO) products. Both companies have catalogs and web pages through which orders can be placed. W.W. Grainger also has several hundred stores throughout the United States. Customers can walk into a store, call in an order, or place it via the website. W.W. Grainger orders are either shipped to the cus­tomer or picked up by the customer at one of its stores. McMaster-Carr, on the other hand, ships almost all its orders (although a few customers near its DCs do pick up their own orders). W.W. Grainger has nine DCs that both replenish stores and fill customer orders. McMaster has five DCs from which all orders are filled. Neither McMaster nor W.W. Grainger manufactures any product. They both primarily serve the role of a distributor or retailer. Their success is largely linked to their supply chain management ability.

Both firms offer several hundred thousand products to their customers. Grainger stocks about 300,000 stock-keeping units (SKUs), whereas McMaster carries about 500,000. Grainger also provides many other products that it does not stock directly from its suppliers. Both firms face the following strategic and operational issues:

1. How many DCs should be built, and where should they be located?
2. How should product stocking be managed at the DCs? Should all DCs carry all products?
3. What products should be carried in inventory and what products should be left with the supplier to be shipped directly in response to a customer order?
4. What products should W.W. Grainger carry at a store?
5. How should markets be allocated to DCs in terms of order fulfillment? What should be done if an order cannot be completely filled from a DC? Should there be specified backup locations? How should they be selected?

4. Toyota: a Global Auto Manufacturer

Toyota Motor Corporation is Japan’s top auto manufacturer and has experienced significant growth in global sales over the past two decades. A key issue facing Toyota is the design of its global production and distribution network. Part of Toyota’s global strategy is to open factories in every market it serves. Toyota must decide what the production capability of each of the facto­ries will be, as this has a significant impact on the desired distribution system. At one extreme, each plant can be equipped only for local production. At the other extreme, each plant is capable of supplying every market. Before 1996, Toyota used specialized local factories for each market. After the Asian financial crisis in 1996-97, Toyota redesigned its plants so it could also export to markets that remain strong when the local market weakens. Toyota calls this strategy “global complementation.”

Whether to be global or local is also an issue for Toyota’s parts plants and product design. Should parts plants be built for local production or should there be a few parts plants globally that supply multiple assembly plants? Toyota has worked hard to increase commonality in parts used around the globe. Although this has helped the company lower costs and improve parts availability, common parts caused significant difficulty when one of the parts had to be recalled. In 2009, Toyota had to recall about 12 million cars using common parts across North America, Europe, and Asia, causing significant damage to the brand as well as to the finances.

Any global manufacturer like Toyota must address the following questions regarding the configuration and capability of the supply chain:

1. Where should the plants be located, and what degree of flexibility should be built into each? What capacity should each plant have?
2. Should plants be able to produce for all markets or only for specific contingency markets?
3. How should markets be allocated to plants and how frequently should this allocation be revised?
4. How should the investment in flexibility be valued?

5. Amazon: Online Sales

Amazon sells books, music, and many other items over the Internet and is one of the pioneers of online consumer sales. Amazon, based in Seattle, started by filling all orders using books pur­chased from a distributor in response to customer orders. As it grew, the company added ware­houses, allowing it to react more quickly to customer orders. In 2013, Amazon had about 40 warehouses in the United States and another 40 in the rest of the world. It uses the U.S. Postal Service and other package carriers, such as UPS and FedEx, to send products to customers. Out­bound shipping-related costs at Amazon in 2012 were over $5 billion.

Following the introduction of the Kindle, Amazon has worked hard to increase sales of digital books. The company has also added a significant amount of audio and video content for sale in digital form.

Amazon has continued to expand the set of products that it sells online. Besides books and music, Amazon has added many product categories such as toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest acquisitions was Zappos, a leader in online shoe sales. This acquisition added a great deal of product variety: According to the Amazon annual report, this required creating 121,000 product descriptions and uploading more than 2.2 million images to the website. In 2010, another interesting acquisition by Amazon was diapers.com. Unlike Zap­pos, this acquisition added little variety but considerable shipping volumes.

Several questions arise concerning how Amazon is structured and the product categories it continues to add:

1. Why is Amazon building more warehouses as it grows? How many warehouses should it have, and where should they be located?
2. Should Amazon stock every product it sells?
3. What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage?
4. What advantages and disadvantages does the online channel enjoy in the sale of shoes and diapers relative to a retail store?
5. For what products does the online channel offer the greater advantage relative to retail stores? What characterizes these products?

6. Macy’s: Omni-Channel Retailing

After selling for decades from its department stores, Macy’s has made a big push into omni­channel retailing, allowing customers to have a seamless experience between shopping online or at a store. Customers can browse online and then experience the product at a store or order online after seeing a product at the store. Omni-channel is not just about ordering, however; it is also about fulfillment. Orders placed on any channel have access to Macy’s entire assortment. By 2012, Macy’s had equipped 292 Macy’s stores to fulfill online orders or orders from other stores that were sold out of a particular item. If customers desire, orders placed online can be picked up at select stores and items purchased online can be returned to stores.

Any omni-channel retailer must address the following questions:

1. Should online orders be filled from stores or fulfillment centers?
2. How should store inventories be managed in an omni-channel setting?
3. Should returns be kept at a store or sent to a fulfillment center?

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.