CHAPTER 11 SUPPLY CHAIN STRATEGY SUPPLY CHAIN STRATEGY

CHAPTER 11 SUPPLY CHAIN STRATEGY

SUPPLY CHAIN STRATEGY • Supply Chain Process • Distribution Functions • Distribution Strategy • Channels of Distribution • Vertical Marketing Systems • Wholesaling Strategy

SUPPLY CHAIN PROCESS RAW MATERIALS & COMPONENT PARTS MANUFACTURING/ASSEMBLY CHANNELS OF DISTRIBUTION CONSUMERS/USERS

GLOBAL SUPPLY CHAIN EXAMPLES • Penny’s shirts • Vegpro Kenya • Whirlpool

REPLACEMENT SHIRT PROCESS Saturday Customer buys a new shirt in a Penny’s store in Atlanta Monday Hong Kong computer operator processes order Wednesday Worker in Taiwan ships shirt to the Penny’s store

KENYAN PRODUCE BUSINESS MODEL Kenyan produce shipped daily to Europe 300 tons Days from harvest until arrival to Europe 2 days Average days in U. S. for U. S produce to arrive in stores 7 days

WHIRLPOOL SUPPLY CHAIN STRATEGY • Replaced 41 outdated sites with 10 regional distribution centers • Segregated slow-moving goods from fastmoving goods • Combined ordering and delivering function

DISTRIBUTION FUNCTIONS • Transportation – moving products • Assorting/sorting – buying/breaking bulk • Storage – storing products • Inventory – physical count of products

TRANSPORTATION SELECTION + (STRONG) Mode Speed – (WEAK) Cost Access Rail Trucking + Air + - Water - + -

INTERMODAL TRANSPORTTION CHOICES • Rail • Trucking • Water

SHIPPING CONTAINER OF WINE Bottled Wine 9, 900 Liters Plastic Bags 24, 000 Liters

ASSORTING AND SORTING Manufacturer Assorting Stage Buys in Bulk Wholesaler Sorting Stage Breaks Bulk Retailer

STORAGE MANAGEMENT • Warehouses • Shipping containers • Port of Houston

GEICO U. S. AUTO INSURANCE MARKET 1995 2. 5% 2013 9. 7%

INVENTORY MANAGEMENT • Just-in-time • Safety stock • Inventory theft

NEED FOR INVENTORY • Time lag from supplier to final buyer • Uncertainty in supply and demand • Economy of scale in cheaper unit cost of inventory

INVENTORY IS WORKING CAPITAL THAT IS NOT EARNING ANY MONEY

COMPANY INVENTORY STRATEGY Company Products % of Total Sales % of Out-of Stock Goal A 20% 80% 1% B 60% 15% 5% C 20% 100% 5% 100% 20%

DISTRIBUTION STRATEGY • Intensive Distribution • Selective Distribution • Exclusive Distribution

DISTRIBUTION CHOICES FOR MANUFACTURERS • Control Power struggle between the manufacturer and intermediaries • Coverage strategy for the manufacturer • Cost of distribution

MANUFACTURER DISTRIBUTION Strategy Cost Control Coverage Intensive Distribution Weak Strong Weak Selective Distribution Exclusive Distribution

INTENSIVE DISTRIBUTION • Pepsi Cola • Cigarettes • M&Ms

SELECTIVE DISTRIBUTION • Furniture • Shoes • Clothes

EXCLUSIVE DISTRIBUTION • Tiffany • Rolex • Cheesecake Factory

HUB AND SPOKE DISTRIBUTION STRATEGY HUB • United Airlines • Walmart Stores

CHANNELS OF DISTRIBUTION • Consumer Channels • Business Channels

CONSUMER CHANNELS No Intermediary Man/Retailer One Intermediary Man Two Intermediaries Man Wholesaler Consumer Retailer Consumer

BUSINESS CHANNELS No Intermediary Man One Intermediary Man Two Intermediaries Man Selling Agent User Industrial Distributor User

AUTOMOBILE INSURANCE CHANNELS AETNA STATE FARM Independent Agents State Farm Agents Consumer GEICO Consumer

GEICO SHARE OF U. S. AUTOMOBILE INSURANCE 1995 2. 5% 2012 9. 7%

BERKSHIRE HATHAWAY FLOAT Year Billion 1990 2 2000 28 2012 73

VERTICAL MARKETING SYSTEMS • Corporate VMS - Ownership • Administered VMS - Size and Power • Contractual VMS - Franchise/ Contract

VERTICAL MARKETING SYSTEM CONFLICTS Types of VMS Conflicts Corporate VMS Ownership – no conflict Administrative VMS Coke vs. Costco Contractual VMS Dr. Pepper vs. Dublin Dr. Pepper

CORPORATE VMS EXAMPLES • Kroger • James Avery

ADMINISTERED VMS EXAMPLES • General Electric • Costco • Sony

CONTRACTUAL VMS EXAMPLES • Toyota • Burger King • Dr Pepper

WHOLESALING STRATEGY • Merchant Wholesalers - Take title - Independently owned • Agents Wholesalers - Do not take title - Independently owned

MERCHANT WHOLESALERS • Full-service - offers complete wholesaling service • Limited-service - offers specialized wholesaling service

FULL-SERVICE WHOLESALER EXAMPLES • Sysco • Cardinal Health Grocers Supply • Li and Fung

THREE MAJOR DRUG WHOLESALERS (with 95% market share) • Cardinal Health • Amerisource. Bergen • Mc. Kesson

LIMITED-SERVICE WHOLESALER EXAMPLES Types Description Drop Shipper No physical possession Rack Jobber Provides and stocks racks

DROP SHIPPING EXAMPLES • Coal broker • e. Bay • Infomercial products

ADVANTAGES OF DROP SHIPPING • No upfront inventory purchase • Positive cash flow cycle • Business can operate out of home

RACK JOBBER EXAMPLES • Toys • Paper backs • Music CDs

AGENT WHOLESALERS • Manufacturing Agents • Selling Agents • International Agents

MANUFACTURING AGENT EXAMPLES • Electrical products • Furniture • Apparel

SELLING AGENT EXAMPLES • Textiles • Chemicals • Industrial Equipment

TRENDS IN WHOLESALING • Expanding in global distribution • Reduction of small wholesalers • Major cost efficiencies