Build 2 Order System

7/31/2019 Build 2 Order System

1/13

Supply Chain

Management and

Build-to-Order Systems1Tutorial

Content

T1.1 Basics of Supply Chains

T1.2 Types of Supply Chains

T1.3 Examples of Supply Chains

T1.4 Supply Chain Challenges

T1.5 Build-to-Order Production

W-147

turban_tutor01_W147-W159-hr 29-01-2009 11:21 Page W-147


2/13

W-148 Tutorial 1 Supply Chain Management and Build-to-Order Systems

T1.1 Basics of Supply ChainsA supply chain is a concept describing the flow ofmaterials, information,money,and

services from raw material suppliers through factories and warehouses to the end cus-tomers.A supply chain also includes the organizations andprocesses that create and

deliver these products, information,and services to the end customers.The termsup-ply chain comes from a picture of how the partnering organizations are linkedtogether.As shown in Figure T1.1,a simple linear supply chain links a company thatprocesses milk (middle of the chain) with its suppliers (on the bottom) and its dis-tributors and customers (on the top). The supply chain shown in Figure T1.1 is fairlysimple. However, supply chains can be much more complex. Note that the supplychain shows both physical flows and the flow of information. Not shown is the flowof money, which usually goes in the direction opposite to the flow of the physicalmaterials.

Customers

Packaged milk

products

Retail grocers

Packagingoperation

Milk product

processing

Milk

producer

Raw

milk

Cardb

oard

containe

rs

Labels

Plastic

containers

Dairy

farm

Feed

for cows

Cardboard container

manufacturer

Label

company

Plastic container

manufacturer

Tier

one

Cardboard Chemicals

Paper

mill

Wood

Lumber

company

Material flow

Information flow

Chemical

plant

Chemical

extraction plant

Tier

two

Tier

three

Raw materials

External

suppliers

UPSTREAM

INTERNAL

DOWNSTREA

M

Internal

functions

External

distributors

Figure T1.1 A simple chain fora manufacturer. Note: Only rep-resentative processes areshown. (Source: Modified fromReid and Sanders, 2002.)



3/13

T1.1 Basics of Supply Chains W-149

A supply chain can be broken into three major parts (components):upstream, inter-nal, and downstream, as shown in Figure T1.1.

The upstream supply chain. The upstream part of the supply chain includes theactivities of a company (a milk producer, in our case), with its first-tier suppliers andtheir connection to their suppliers (referred to as second-tier and third-tier suppli-ers). The supplier relationship can be extended several tiers, all the way to the ori-gin of the material (e.g., mining ores, growing crops). In the upstream supply chain,the major activity isprocurement.

An examination of Figure T1.1 shows that several potential tiers of suppliers exist.Some processes, such as those required to provide raw milk, may have only one tierof suppliers. However, in many cases several tiers of suppliers exist, meaning that asupplier has one or more subsuppliers, and the subsupplier might have its own sub-suppliers, and so on. For example,making cardboard containers involves three tiers:the cardboard container manufacturer (tier one), which gets its material from thepaper mill (tier two), which gets its material from the lumber company (tier three).Some supply chains have up to a dozen tiers.

The internal supply chain. The internalpart of the supply chain includes all of thein-house processes used in transforming the inputs received from the suppliers intothe organizations outputs. It extends from the time the inputs enter an organization

to the time that the products go to distribution outside of the organization.The inter-nal supply chain is mainly concerned with production management, manufacturing,and inventory control (e.g., processing and packaging in Figure T1.1).

The downstream supply chain. The downstream part of the supply chain includesall of the activities involved in delivering the products to the final customers. Thedownstream supply chain is directed at distribution,warehousing,transportation,andafter-sale services (e.g., retail grocers in Figure T1.1).

A companys supply chain involves an array of business processes that not onlyeffectively transform raw items to finished goods or services, but also make thosegoods or services attractive to customers. The activities that add value to the com-panys goods or services are part of what is called the value chain, which we discussin Tutorial 2.

Initially, the concept of a supply chain refers to the flow of materials from theirsources (suppliers) to the company, and then inside the company to places wherethey are needed.A demand chain, which describes the process of taking orders anddelivering finished goods to meet the demand of customers, also is recognized.Thesetwo concepts are interrelated. The relationship is often described as push-pull.Goods and services are pushed along the supply chain ultimately to meet therequirements of an end consumer.In the demand chain, the demand from customerspulls goods and services from suppliers to the end consumer. Therefore, they arefrequently combined under the single concept named the supply chain. (Seeen.wikipedia.org/wiki/supply_chain.)

More Definitions. The following definitions are helpful for the study of this tutorial.Supply Chain Management. The function ofsupply chain management (SCM)

is to plan, organize, and coordinate the activities along the supply chain. Today, theconcept of SCM refers to a total systems approach to managing the entire supplychain. For an overview, see Stadtler (2005). SCM is usually supported by IT (seeHugos, 2006).

E-Supply Chain. When a supply chain is managed electronically, usually withWeb-based software, it is referred to as an e-supply chain. It should be noted that asthe Internet becomes more pervasive and ubiquitous, the distinction between IT-enabled supply chains and e-supply chains is rapidly diminishing.Most supply chainsnow involve a mix of Web-based and other information systems to ensure efficiencyand uninterrupted flows of goods and services in a timely manner. As this tutorial

MAJOR CONCEPTS AND

DEFINITIONS

SUPPLY CHAIN PARTS



4/13


will show, improvements in supply chains frequently involve an attempt to convertthem to e-supply chains, namely, to automate the information and financial flows inthe chain.

Virtual Supply Chains. In recent times, many companies have redesigned theirsupply chains to outsource some part of their supply chain activities, often with the

help of sophisticated, Web-based EC and IT support packages. Nike, for example,has outsourced much of the manufacture and distribution of its sporting apparel andsports shoes worldwide. It uses EC and IT systems to manage the order fulfillmentprocess without owning the manufacturing facilities, thereby allowing the companyto focus on marketing, customer relationships, and new product development, forexample. This is referred to as a virtual supply chain.

SCM Software. SCM softwarerefers to software that supportsspecific segmentsof the supply chain, especially in manufacturing, inventory control, scheduling,warehousing, and transportation. This software is designed to improve decisionmaking regarding supply chain issues, optimization, and analysis. Importantly, SCMsoftware offers better control of the storage and flow of goods and services alonga supply chain.

The Supply Chain Flows. There are typically three types of flows in the supplychain: materials, information, and financial (money). In managing the supply chain,

it is necessary to coordinate all of the flows among all of the parties involved inthe chain.

1. Material flows. These are all physical products, raw materials, supplies, and soforth, that flow along the chain. The concept of material flows also includes reverseflowsreturned products, recycled products, and disposal of materials or products.A supply chain thus involves aproduct life cycle approach, from dirt to dust.

2. Information flows. This includes all data related to demand, shipments, orders,returns, schedules, and changes in the data. It also includes customer feedback, ideasfrom suppliers to manufacturers, order flows, credit flows, information to customers,and so forth.

3. Financial flows. The financial flows are all transfers of money, payments, creditcard information and authorization, payment schedules, e-payments, and credit-related data.

Flow in Service Industries. Note that in some service industries, there are lim-

ited or no physical flows of materials, but frequently there is flow of documents (hardand soft copies).The digitization of software, music, and so on results in a supply chainwithout physical flow. Notice, however, that in such a case, there are two types ofinformation flow: one that replaces material flow (e.g., digitized software) and onethat supports information (orders, billing,etc.). In managing supply chains, it is nec-essary to coordinate all of the aforementioned types of flows among all of the par-ties involved in the supply chain (see Sengupta et al., 2006).

T1.2 Types of Supply ChainsSupply chains come in all shapes and sizes and can be fairly complex. As shown inFigure T1.2, the supply chain for a car manufacturer includes hundreds of suppliers,dozens of manufacturing plants (for parts) and assembly plants (for cars), dealers,direct business customers (fleets),wholesalers (some of which are virtual),customers,and support functions such as product engineering and purchasing.

Notice that in this case,the chain is not strictly linear as it is in Figure T1.1. Someloops can be found in the process. In addition, sometimes the flow of informationand even goods can be bidirectional. For example, not shown in this figure is thereturn of products (known as reverse logistics, or returns). For the automaker, forexample, that would be cars returned to the dealers in the event of defects or recallsby the manufacturer.



5/13

T1.2 Types of Supply Chains W-151

Car Dealers

SalesOperations

Allocatedbuildable

ordersNewproducts andengineeringchanges

ProductEngineering

Manufacturing(57 plants)

Shiprelease

Engines

Electrical/FuelHandling Devices

ComponentsGroup Electronics

Glass Plastics/Trim Products

ClimateControls

MATERIALS

Sourcing

Request to

buy

Request tobuy

PURCHASING

PARTS

CARS

Assembly MaterialPlanning (19 plants)

Shipping

Assembly Line

Warehousing

Receiving

Suppliers

(hundreds)

PARTS

Vehicle scheduling Preproduction planning Components scheduling Planning/sequencing

Transmissions Castings

StampingShipre

leases

andeng

ineering

chan

ges

Engineeringchangesandshipreleases

Ad

vanceshipnoticeFigure T1.2 A complex supplychain for a car manufacturer.

Many supply chains can be classified into four major categories: integrated make-to-stock, build-to-order, continuous replenishment, and channel assembly. If a com-pany uses a build-to-order business model, for example, it will not be necessary tostore finished products, but it will be necessary to warehouse raw materials and com-ponents.Therefore, it is clear that supply chains depend on the nature of the com-pany, its business processes, and the product types and/or services that it offers. Abrief description of these four types follows.

Integrated Make-to-Stock. The integrated make-to-stock supply chain modelfocuses on tracking customer demand in real time, so that the production processcan restock the finished-goods inventory efficiently.This integration often is achievedthrough use of an information system that is fully integrated. Through applicationof such a system, an organization can receive real-time demand information that itcan use to develop and modify production plans and schedules.

Example 1. An example is major oil companies, such as Mobil, that place sen-sors in each tank at each gas station or retail outlet it serves.The sensors measure inreal time the level of gas. Mobil can then use this information for shipment inven-tory and production scheduling decisions. Such information is integrated furtherdown the supply chain to the procurement function, so that input materials can sup-port the modified production plans and schedules.

Example 2. Starbucks Coffeestarbucks.com) uses several distribution channels.Starbucks not only sells coffee drinks and some food to consumers, but also sells beansand ground coffee to businesses such as airlines, supermarkets,department stores,andice-cream makers. In addition, it sells through direct mail, including the Internet.Starbucks is successfully integrating all sources of demand and matching it with thesupply by using Oracles automated information system for manufacturing (calledGEMMS). The system handles distribution planning, manufacturing scheduling, andinventory control. The coordination of supply with multiple distribution channels



6/13


requires timely and accurate information flows about demand, inventories, storagecapacity,transportation scheduling, and more.The information systems are critical fordoing all of these functions with maximum effectiveness and reasonable cost.

Build-to-Order. Dell Computer is best known for its application of the build-to-

order model. In this model, one begins the assembly of the customers order (fromcomponents) almost immediately upon receipt of the order. This requires carefulmanagement of the component inventories and delivery of needed supplies alongthe supply chain. One way to accomplish this is to use many common componentsacross several production lines and in several locations. One of the primary benefitsof this type of supply chain model is the perception that each customer is receivinga personalized product. In addition, the customer receives it rapidly.This type of sup-ply chain model supports the concept of mass customization. We describe this in moredetail later in this tutorial.

Continuous Replenishment. The idea of the continuous-replenishment supplychain model is to replenish the inventory constantly by working closely with suppli-ers and intermediaries. However, if the replenishment process involves many ship-ments, the cost could be too high, causing the supply chain to collapse. Therefore,tight integration is needed between the order-fulfillment process and the production

and acquisition processes. Real-time information about demand changes is requiredin order for the production process to maintain the desired replenishment schedulesand levels. This model is most applicable to environments with stable demand pat-terns, as is usually the case with distribution of prescription medicines. The modelrequires intermediaries when large systems are involved.

Channel Assembly. A slight modification to the build-to-order model is the chan-nel-assembly supply chain model. In this model, the parts of the product are gath-ered and assembled as the product moves through the distribution channel. This isaccomplished through strategic alliances with third-party logistics (3PL) firms.Theseservices sometimes involve either the physical assembly of components and the mak-ing of finished products at a 3PL facility, or the collection of finished components fordelivery to the customer. For example, a computer company could have items suchas the monitor and the CPU shipped directly from its vendors to a 3PL facility, suchas at FedEx or UPS. Therefore, the customers computer order would not come

together until all items were placed on a vehicle for delivery by the 3PL. A channelassembly might have low or zero inventories when properly planned and coordi-nated,and can achieve a faster market response time;this is popular in the computertechnology industry.

The flow of goods, services, information, and financial resources usually isdesigned not only to transform raw items to finished products and services effectively,but also to do so in an efficient manner. Several types of software are available toachieve this goal, as we will see later in the tutorial.

T1.3 Examples of Supply Chains

With more than 27,900 stores worldwide, 7-Eleven is one of the largest conveniencestore chains in the world (7-eleven.com, 2008). It has about 10,000 stores in Japanand almost 6,000 in the United States. 7-Eleven Japan is one of the most profitablecompanies listed on the Tokyo stock exchange. It attributes its success primarily toits supply chain design and management ability.One of the key objectives of 7-ElevenJapan is to micro-match supply and demand by location, season, and time of day. Tofulfill this objective, 7-Eleven Japan opens new stores in target areas. This helps 7-Eleven establish a strong presence, and it consolidates its warehousing and trans-

7-ELEVEN: A

CONVENIENCE STORE



7/13

T1.3 Examples of Supply Chains W-153

portation functions. In addition, all stores are connected electronically to the headoffice, distribution centers (DCs), and suppliers. Orders are passed to the suppliersthat package store-specific orders and deliver them to the DC.At the DC, all ordersof like products from different suppliers are combined and delivered to the stores.7-Eleven Japan has made an effort to have no direct store delivery from vendors to

the stores.In the United States, 7-Eleven is taking a similar approach to the one usedin Japan, except that a distributor delivers a large fraction of products to the stores,not the 7-Eleven DC.

In Japan and the United States, 7-Eleven has invested a significant amount ofmoney and effort in a retail information system. Data are collected by scannersand analyzed. The resulting information is then made available to headquartersand the stores for use in ordering, product assortment, and merchandising.Information systems play a key role in 7-Elevens ability to micro-match supplyand demand.

7-Eleven has made clear choices in the design of its supply chain. Other conve-nience store chains have not always made the same choices.The following questionsfocus mainly on 7-Elevens supply chain choices and its key success factors.

Questions for the 7-Eleven Case1. What factors influence the decisions regarding the opening and closing of stores?

Why does 7-Eleven choose to have a preponderance of its stores in a particularlocation?2. Why does 7-Eleven Japan discourage direct store delivery from vendors and make

an effort to move all products through combined DCs? How does the presenceof the distributor delivering to the stores affect the performance of the deliverysystem in the United States?

3. Where are DCs located, and how many stores does each center serve? How arestores assigned to DCs?

4. What point-of-sales data do 7-Eleven gather, and what information is made avail-able to store managers to assist them in their ordering and merchandising deci-sions? How should the information system be structured?

W.W. Grainger and McMaster Carr sell maintenance, repair, and operation (MRO)products mostly to businesses (B2B). Both companies have online catalogs as wellas Web pages through which customers can place orders, and customers can also placetheir orders in the retail stores or over the telephone. Either W.W. Grainger ships

orders to customers from their distribution centers (DCs), or customers can pick uptheir orders at one of the retail stores. McMaster Carr, on the other hand, ships allorders.W.W. Grainger has several DCs that replenish stores and fill customer orders;McMaster Carr has DCs from which it fills all orders. Both firms offer several hun-dred thousand products to their customers. Each firm stocks about 100,000 products;they obtain the rest from the supplier as needed.Both firms face the following strate-gic and operational issues.

Questions for the Grainger Case1. How many DCs should a company have, and where should they be located?2. How should product stocking be managed at the DCs? Should all DCs carry all

products? If not, how are stocking decisions made?3. Which products should be carried in inventory, and which products should be left

with the suppliers? (They both buy from thousands of suppliers.)4. 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 specifiedbackup locations be available? How should these be selected?

5. How should replenishment of inventory be managed at the various stockinglocations?

6. How should Web orders be handled relative to the existing business? Is it betterto integrate the Web business with the existing business or to set up separatedistribution?

W.W. GRAINGER AND

MCMASTER CARR: MRO

SUPPLIERS WITH A

DIFFERENT SUPPLY CHAIN

STRATEGY



8/13


9/13

T1.4 Supply Chain Challenges W-155

Trust is vitally important in a collaboration relationship between suppliers and buy-ers in the supply chain. Trust involves a calculated process wherein an organizationestimates the costs and/or the rewards of another party cheating or staying in the rela-tionship. Because of the increase in the Internet-enabled supply chain, organizationsare collaborating to a greater extent. For example, in the operation of e-marketplaces,trust between organizations could be an obstacle for the effective management of thesupply chain. Trust has been linked not only to successful implementation of supplychain systems, but also to the ongoing operation of these systems.

What are the factors leading to a trusting behavior in a supplierbuyer relation-ship? One of the factors is information sharing because it lets all of the firms in thesupply chain know enough to be assured about other firms capabilities and intentions.

Another factor that leads to trust in the supply chain is the prediction process, whichis one partys ability to forecast the other partys behavior. Repeated interactionenables one party to interpret projected outcomes better for another party. A thirdfactor that leads to trust is the perception of mutually sharing both the risks and thebenefits of the collaboration. The fourth factor involves determining the partys abil-ity to meet its obligations.This factor is important as the two organizations will assesseach others propensity to perform on the mutually agreed contract. Trust, risk per-ception, and relationship commitment all ultimately affect whether an organizationcontinues in a cooperative electronic relationship.

Managing a supply chain with international concerns adds many layers of complex-ity. The development of a supply chain strategy must include political concerns, cur-rency risk, governmental concerns, production quality, and infrastructure issues.Anexcellent source of information on economic and political stability is the CIAs WorldFactbook at cia.gov/cia/publications/factbook/index.html. This topic is explored in

Chapter 11.

Make-or-buy decisions can be extremely complex. Make decisions involve manufac-turing or developing a product internally, whereas buy decisions involve externallybuilt products and services.Choosing between producing a product or service in-houseor purchasing it from an outside source involves looking at the core competencies of

OUTSOURCING: MAKE-

OR-BUY DECISIONS

GLOBAL SUPPLY CHAIN

MANAGEMENT ISSUES

TRUST AND

COLLABORATION

A Closer Look T1.1The Bullwhip Effect

Thebullwhip effect (as described in Chapter 8) refers to erratic shiftsin orders up and down the supply chain. This effect was initially

observed by Procter & Gamble (P&G) with its disposable diapers

product (Pampers). While actual sales in retail stores were fairly sta-

ble and predictable, orders from distributors to the manufacturer,

P&G, had wild swings, creating production and inventory problems.

An investigation revealed that distributors orders were fluctuating

because of poor demand forecast, price fluctuation, order batching,

and rationing within the supply chain. These dysfunctions resulted in

unnecessary and costly inventories in various locations along the sup-

ply chain, fluctuations in P&G production levels as well as in ordersto P&Gs suppliers, and flow of inaccurate information. Distorted

information can lead to tremendous inefficiencies, excessive inven-

tories, poor customer service, lost revenues, ineffective shipments,

and missed production schedules (Donovan, 2002/2003).

The bullwhip effect is not unique to P&G, however. Firms

ranging from Hewlett-Packard in the computer industry to Bristol-

Myers Squibb in pharmaceuticals have experienced a similar phe-nomenon. Basically, demand variables can become magnified

when viewed through the eyes of managers at each link in the sup-

ply chain. If each distinct entity makes ordering and inventory deci-

sions with an eye to its own interest above those of the chain,

stockpiling may be simultaneously occurring at as many as seven

or eight locations along the supply chain. Study has shown that

such hoarding has led in some cases to as many as 100 days worth

of inventory that is waiting, just in case (versus 1020 days in the

normal case).A 1998 industry study projected that $30 billion in savings

could materialize in grocery industry supply chains alone by shar-

ing information and collaborating. Thus, companies are trying to

avoid the sting of the bullwhip as well as to solve other SCM

problems.

Sources:Donovan (2002/2003) and Logic Tools (2006).



10/13


the organization,analyzing the costs of producing or acquiring,assessing the suitabilityof suppliers,examining the expertise within the organization, and examining the abil-ity to inventory products. Activities that are outsourced are usually not part of thecore competencies of the organization. Resources that are transferred to the out-sourced company often include facilities, people, equipment, and finances. Because

outsourcing transfers some of the organizations internal processes and resources tooutside vendors, outsourcing decisions involve complex legal contracts, paymentschedules, and service-level agreements.

General Motors (GM) has spent two years planning for changes in its supplychain network. CIO and Vice President Ralph Szygenda stated that major supplychain redesign was needed because the whole process had to better accommodateglobalization (Bacheldor, 2004). GM is truly a global company and therefore puts alot of effort into outsourcing contracts on a global level. Outsourcing managementinvolves the forecasting and prediction of cost trends,labor availability, expertise, andthe ability to meet schedules (Gibson, 2005).

In an environment where there are many suppliers, organizations need a strategy toevaluate supplier products, services, and the approach they will use to decide whichsupplier is most appropriate.When supplies or products are commodities, organiza-tions can play one supplier against another based on price.Long-term partnering rela-

tionships are usually not entered into for commodity products using a many-supplierstrategy. However, when the product is not a commodity and there is clear differ-entiation, this strategy will depend on the uniqueness of the product and the pro-prietariness of the product or process used to manufacture the product. Having manysuppliers tends to decrease risk and increase costs.

Another challenge in managing the supply chain is the selection of vendors.A deci-sion needs to be made regarding from whom to buy goods and services. There arethree stages to the vendor selection process: (1) vender evaluation, (2) vendordevelopment, and (3) vendor negotiation. Vendor evaluation involves findingpotential vendors and determining the likelihood of their being good suppliers inthe future.Vendor development assumes you will be working with a particular ven-dor and includes training, engineering and production help, infrastructure devel-opment, and procedures for information transfer. Negotiations focus on vendorquality, delivery, payment, and cost. Vendor selection must consider factors such

as strategic fit, vendor competence, delivery capability, production process capa-bility, financial strength, facilities and location, product selection, vendor quality,and product pricing.

Because it is often difficult to forecast demand for products and services, it thenbecomes equally difficult to predict supply. Demand and supply mismatches arereceiving increased visibility and coverage as businesses look for solutions. Demandand supply mismatches can lead to both short- and long-term loss in sales and mar-ket share,or to lower sales price due to markdowns of excess inventories, or can pre-vent the firm from capitalizing on strong market demand due to the unavailabilityof products. Mismatches can negatively impact the productivity and utilization oforganizational assets, such as equipment over- or underutilization. Companies canend up with costly inventory balances and carrying costs.

Reverse logistics is the process of continuously taking back products and/or pack-

aging materials to avoid waste. Reverse logistics affects many components of thelogistics process as well as the supply chain because companies are responsiblefor products after theyve been sold and after customers have disposed of them.Another aspect of reverse logistics is handling and disposition of damaged goodsreturned by the consumer. Reverse logistics programs can be costly for manyorganizations and can create difficulties in the management of the supply chainlife cycle.

COST OF REVERSE

LOGISTICS

DIFFICULTY IN

FORECASTING DEMAND

VENDOR SELECTION

MULTIPLE SUPPLIERS

STRATEGY



11/13

T1.5 Build-to-Order Production W-157

T1.5 Build-to-Order ProductionThe concept of build-to-order means that you start to make a product (service) onlyafteran order for it is placed.This concept is as old as commerce itself, and was theonly method of production until the Industrial Revolution began.According to this

concept, if you need a pair of shoes, you go to a shoemaker who takes the measure-ment. You negotiate quality, design, and price, and you make a down payment. Theshoemaker buys the materials and makes a customized product for you. Customizedproducts were expensive, and it took a long time to finish them.This changed withthe coming of the Industrial Revolution.

The Industrial Revolution started with the concept of dividing work into smallparts. Such division of labor makes the work simpler, requiring less training foremployees. It also allows forspecialization. Different employees become experts inexecuting certain tasks. Because the work segments are simpler, it is easier to auto-mate them.All of this reduces the prices to consumers, and demand increases. So theconcept ofbuild-to-marketdeveloped.To build-to-market, it was necessary to designstandard products, produce them,store them, and then sell them.The creation of stan-dard products by automation drove prices down still further, and demand accelerated.To meet the ever-increasing demand, the solution of mass production was created.

According to the concept of mass production, a manufacturer produces large

amounts of standard products at a very low cost, and then pushes (markets) themto consumers.With increased competition and the desire to sell in remote markets,it was necessary to create special marketing organizations to do the sales.This newmodel also required the creation of large factories, and finance, accounting, person-nel, and other departments to keep track of the many new and specialized businessactivities. In mass production, the workers do not know who the customers are, andfrequently do not care about customers needs or product quality. But the productsare inexpensive, and their prices fuel demand, so the concept became a dominantone. Mass production also required inventory systems at various places in the sup-ply chain, which were based on forecasted demand. If the forecasted demand waswrong, the inventories were incorrect:Either the inventories were insufficient to meetdemand, or there was too much inventory at hand.

As society became more affluent, the demand for customized products,especiallycars, increased. To make sales, manufacturers had to meet this kind of demand. Aslong as the demand for customized product was small, there was no problem of meet-

ing it. In purchasing a new car, for example, customers were asked to pay a premiumand wait for a long time, and they were willing to do so. Slowly, the demand for cus-tomized products and services increased. In the 1970s, Burger King introduced theconcept of having it your way, and manufacturers began looking for solutions forproviding customized products in large quantities. This idea is the essence ofmasscustomization. Such solutions were usually enhanced by some kind of informationtechnologies (Pine and Gilmore, 1999).Later,Dell Computer introduced the idea ofcustomized PCs.This customization strategy was so successful that many other indus-tries also wanted to try mass customization. However, they found that it is not so easyto do so (Zipkin, 2001 and Agrawal et al., 2001).

Using e-commerce can facilitate the use of customization and even the use ofmass customization (Holweg and Pil,2001).To understand this strategy, lets look firstat a comparison of mass production, also known as apush system, with mass cus-tomization, also known as apull system, as shown in Figure T1.3.

One important area in the supply chain is ordering. Using EC a customer can

self-configure the desired product online. The order is received in seconds, and onceit is verified and payment arranged, the order is sent electronically to the produc-tion floor. This saves processing time and money. For complex products, customersmay collaborate in real time with the manufacturers designers, as is done at CiscoSystems.Again,time and money are saved,and errors are reduced due to better com-munication and collaboration. For example, for an implementation in the automotiveindustry, seeA Closer Look T1.2.



12/13


13/13

References W-159

GlossaryBullwhip effect Erratic shifts in orders up and down the

supply chain.

Demand chain The process of taking orders and deliveringfinished goods from suppliers to meet the demand ofcustomers.

E-supply chain A supply chain that is managedelectronically, usually with Web technologies.

Outsourcing Acquiring IS services from an external (outside)organization rather than through internal IS units.

Reverse logistics (returns) A flow of material or finishedgoods back to the source;for example, the return ofdefective products by customers.

SCM software Applications programs specifically designed toimprove decision making in segments of the supply chain.

Supply chain Flow of materials, information,money,andservices from raw material suppliers, through factories andwarehouses, to the end customers; includes theorganizations and processes involved.

Supply chain management (SCM) The management of allof the activities along the supply chain, from suppliers, tointernal logistics within a company, to distribution, tocustomers.This includes ordering, monitoring, andbilling.

Trust The psychological status of involved parties who arewilling to pursue further interaction to achieve a plannedgoal.

Virtual supply chain A supply chain executed by thepartners in the virtual enterprise.

Ford, GM, and Toyota, along with other automakers around

the world, have announced plans to implement a build-to-order

program, much like the Dell approach to building computers.

These auto giants intend to transform themselves from build-to-

stock companies to build-to-order companies, thereby cuttinginventory requirements in half, while at the same time giving cus-

tomers the vehicle they want in a short period (e.g., 1 to 2 weeks).However, according to Weiner (2006) this transformation has so far

been doomed to failure by rigid production processes, inflexi-

ble product structures, the lack of integrated logistics processes,

and inadequate networking of manufacturers, suppliers and cus-

tomers. Only when a network of suppliers produce standard

modules for cars using standardized processes and IT systems will

the dream of a truly agile and responsive supply chain delivering

build-to-customer-order capability be realized.As an example of this trend toward build-to-order mass cus-

tomization in the new car market, Jaguar car buyers can build a

dream car online. On Jaguars Web site (jaguar.com), consumers are

able to custom configure their cars features and components, see

it online, price it, and have it delivered to a nearby dealer. Using a

virtual car on the Web site, customers can view in real time more than

1,250 possible exterior combinations out of several million, rotate

the image 360 degrees, and see the price updated automatically

with each selection of trim or accessories. After storing the car in avirtual garage, the customer can decide on the purchase and select

a dealer at which to pick up the completed car. (Thus, conflicts withthe established dealer network channel are avoided.) The Web site

helps primarily with the research processit is not a fully transac-

tional site. The configuration, however, can be transmitted to the

production floor, thereby reducing delivery time and contributing to

increased customer satisfaction. Similar configuration systems are

available from all of the major car manufacturers. Customers can

electronically track the progress of the car, including visualization of

the production process in the factory. Another similarly impressiveWeb site with similar functionality is hummer.com.

Sources: Compiled from jaguar.com (accessed June 2008), hummer.com

(accessed June 2008), Weiner (2006), and Knowledge@Wharton (2005).

References7-Eleven.com, 7-eleven.com/AboutUs/tabid/73/Default.aspx (accessed June

2008).

Agrawal, M. T. V., et al., The False Promise of Mass Customization,

McKinsey Quarterly, No. 3,2001.

Bacheldor, B., General Motors Takes Design Up a Notch, Information

Week, February 23, 2004.

Donovan, R. M., Supply Chain Management: Cracking the Bullwhip

Effect, Material Handling Management, Director Issue, 2002/2003.

Gibson, S.,GM Pushes Outsourcing Envelope, Eweek, December 2005.

Holweg, M., and F. Pil, Successful Build-to-Order Strategies Start with theCustomer, MIT Sloan Management Journal, 43(1), Fall 2001, pp. 7483.

Hugos, M., The Essentials of Supply Chain Management, 2nd ed., Hoboken,

NJ: John Wiley and Sons, 2006.

Knowledge@Wharton, Car Trouble: Should We Recall the U.S. Auto

Industry? May 4, 2005, knowledge.wharton.upenn.edu/article.cfm?arti-

cleid=1183&CFID=69508139&CFTOKEN=20334258&jsessionid=9a3066

929f4951487158 (accessed June 2008).

Logic tools,Is Better Forecasting a Solution to the Bullwhip Effect?2006.

logic-tools.com/resources/articles/bullwhip.html (accessed June 2008).

Pine,B. J.,and J. Gilmore,The Four Faces of Mass Customization,Harvard

Business Review, JanuaryFebruary 1999.

Reid,D.,and N.Sanders, Operations Management. New York: John Wiley &

Sons, 2002.

Sengupta, K., D. R. Heiser, and L. S. Cook, Manufacturing and Service

Supply Chain Performance: A Comparative Analysis, The Journal of

Supply Chain Management, October 2006.

Stadtler, H., Supply Chain Management and Advanced Planning: Basics,Overview, and Challenges, European Journal of Operational Research,

163(3), 2005.

Weiner, M., The 5-Day Car: Ordered on MondayDelivered on Friday.

Ilipt.org , February 28 , 20 06 , fraunhofer.de/Images/magazine_2-

2006_28_tcm6-64704.pdf(accessed June 2008).

Zipkin, P., The Limits of Mass Customization, MIT Sloan Management

Review, Spring 2001.


Build 2 Order System

Documents