CHAPTER 11.

The supply chain for goods and services consists of a network of firms and locations that begins with raw materials and ends with final users. A supply chain can be relatively short, with only a few stages, as in strawberries grown 30 kilometers from where they are eaten. Or a supply chain can span the globe, as in bauxite mined in Australia, smelted into aluminum in New Zealand, stamped into sheet metal in Japan, and installed in an airplane in Spain.

Roughly speaking, a supply chain can be divided into five different levels, as displayed inFigure 11.1and described inTable 11.1: tier 2 suppliers, tier 1 suppliers, manufacturers, distributors, and retailers.

Figure 11.1

The flow of product through different levels of supply chains

TABLE 11.1Different Levels of a Supply Chain and Their Function

Supply Chain Level

Role in the Supply Chain

Example

Tier II supplier

Design and manufacturing of specialized components

B&H Tool Worksmetal stamping

Tier I supplier

Design and assembly of component systems

Mitsubishi Heavy

Industriesaircraft wings

Robert Boschautomobile brake systems

Foxconncomputers

Intelmicroprocessors

Shimanobike components

Original equipment manufacturer (OEM)

Design and assembly of final products

Boeingaircraft

Toyotaautomobiles

Applecomputers

Dellcomputers

Trekbicycles

Distributor

Inventory storage, break-bulk, transportation

Syscofood

McKessonmedical supplies

Retailer

Product assortment, consumer support and services

Walmartgeneral merchandize

Home Depothardware

Krogergroceries

11.1.1Tier 2 Suppliers, Tier 1 Suppliers, and Manufacturers

Products start with tier 2 suppliers as individual components. Tier 2 suppliers provide their components to tier 1 suppliers, who make more complex components. For example, a tier 2 supplier might provide the electric harnesses for an aircraft wing to a tier 1 supplier that assembles the complete wing. (In some settings, another layer is identified, called tier 3, which is the set of suppliers to tier 2.)

Tier 1 suppliers are the primary suppliers to manufacturers, where products are designed and assembled into their final form for consumption. Manufacturers can be large and well-known. For example, Apple Inc. is a well-known manufacturer of computer devices and phones (e.g., iPhone, iPad, iMac, etc.). In fact, at the start of 2015, Apple Inc. was one of the world's most recognized brands and the world's most valuable company, as measured by market capitalization (i.e., the total value of its stock).

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In contrast to manufacturers, most people are not as familiar with tier 1 and tier 2 suppliers. This is especially true of tier 2 suppliers because they tend to be smaller than their tier 1 customers, even if "smaller" might mean a very large company to most of us (e.g., annual sales of hundreds of millions of dollars or more). However, there are exceptions. For example, Intel Inc. is a tier 1 supplier of microprocessors to computer manufacturers. Due to its "Intel inside" marketing effort, consumers are aware of which company makes their microprocessor. Similarly, if you are an avid cyclist, you know that Shimano is a tier 1 supplier of bike components to bike manufacturers like Trek. And Alcoa, a very large producer of aluminum, could be considered a tier 2 supplier to beverage manufacturers like Coca Cola and Budweiser because it supplies the metal to the tier 1 suppliers who make the cans for the drinks.

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11.1.2Distributors and Retailers

After producing a product, a manufacturer must distribute its products to final consumers. This involves two layers of the supply chain: distributors and retailers. Retailers are probably the most familiar level of the supply chain to you. Retailers generally don't make things. Instead, they provide an assortment of products and, in some cases, they assist consumers with their purchasing decisions. Traditional retailers operate physical stores close to where consumers live. They are calledbrick-and-mortar retailers, in reference to their tangible buildings. However, not all retailers need a store made of bricks (or cinder blocks, or metal framing):mail-order retailers(orcatalog retailers) started in the early 1900s in the United States andonline retailers(ore-commerceore-tailers) like Amazon.com transferred the idea of a paper catalog onto web pages.

Brick-and-mortar retailerA retailer with physical stores in which consumers are able to immediately purchase goods.

Mail-order retailersRetailers that merchandize their goods via a print catalog and sell to consumers by shipping them goods via a third-party carrier like the U.S. Postal Service, UPS, FedEx, or DHL. Also called catalog retailers.

Catalog retailersRetailers that merchandize their goods via a print catalog and sell to consumers by shipping them goods via a third-party carrier like the U.S. Postal Service, UPS, FedEx, or DHL. Also called mail-order retailers.

Online retailersRetailers that merchandize their goods via an online website (or app) and sell to consumers by shipping them goods via a third-party carrier like the U.S. Postal Service, UPS, FedEx, or DHL. Also called e-commerce or e-tailers.

e-commerceRetailers that merchandize their goods via an online website (or app) and sell to consumers by shipping them goods via a third-party carrier like the U.S. Postal Service, UPS, FedEx, or DHL. Also called online retailers or e-tailers.

e-tailersRetailers that merchandize their goods via an online website (or app) and sell to consumers by shipping them goods via a third-party carrier like the U.S. Postal Service, UPS, FedEx, or DHL. Also called online retailers or e-commerce.

Distributors are the one step between manufacturers and retailers. This level is a bit "invisible" to most people, unless you happen to work in the industry that they serve. For example, McKesson is one of the largest distributors of medical supplies to hospitalssomebody needs to supply hospitals with bandages, syringes, saline solution, and myriad other things they need to treat patients.

The role of distributors is probably least understood among the various levels of the supply chain. Have you heard the cry "cut out the middleman"? That admonition suggests you can get a better deal if you deal directly with the manufacturer, bypassing the distributor. But, in fact, distributors play an important role within the supply chain. Indeed, if they didn't provide value, market forces would ensure that they would disappear!

Three of the important sources of value that distributors provide are cost-effective storage of inventory, faster delivery lead times, and smaller order quantities.

Cost-Effective Storage of Inventory

While it might cost a retailer $200 to $300 each year to rent each square meter in its stores, a distributor might pay only one-fourth of that for its facilities, which are calleddistribution centers (DCs)orfulfillment centers. (In the old days, they were called "warehouses," but that term is no longer in vogue.) Furthermore, because a DC doesn't have to look nice for customers, a distributor can store more items per square meter in a DC than a retailer can in one of its stores. For example, a DC can stack items higher and can use deeper shelving. The combination of (i) a lower price per square meter for storage space and (ii) less space needed for the same amount of product yields a substantially lower cost to store inventory at a distributor than at a retail store.

Distribution center (DC)A building used to receive products from suppliers and then redistribute them to retail stores or send packages to consumers. Also called a fulfillment center.

Fulfillment centerA building used to receive products from suppliers and then redistribute them to retail stores or send packages to consumers. Also called a distribution center.

Faster Delivery Lead Times

A product is generally manufactured in a limited number of places. That means that customers are usually located far away from the manufacturer, which means it takes a considerable amount of time to receive an order from a manufacturer. The time to receive an order is called thelead time. And, as shown later in this chapter and in the other chapters on inventory management, the longer the lead time, the more inventory is needed to ensure that enough inventory is available for customers. Hence, because distributors are located closer to consumers than is the manufacturer, they can help their customers (usually retailers) keep less inventory, which saves them from having to purchase more costly space to house the inventory.

Lead timeThe time to receive an order.

Smaller Order Quantities

Distributors can purchase in large quantities from manufacturers but then allow their customers to purchase in smaller quantities. This service is calledbreaking bulk. For example, a distributor might purchase 200 cases on apalletfrom a manufacturer and then allow its retail customers to purchase in case multiples smaller than a pallet, such as 50 cases. (A pallet is the wooden platform used as the base for a stack of inventory that can be moved around with a forklift.) This service allows the retailer to substantially lower its inventory.

Breaking bulkA service in which a distributor purchases in large quantities from manufacturers but then allows customers to purchase in smaller quantities.

PalletEither (1) a platform, often wooden, used as a base to store inventory and to facilitate moving that inventory via a forklift or (2) the quantity of inventory that is stacked on the platform.

To illustrate the value of small order quantities, consider the following example depicted inFigure 11.2. There are four suppliers, called A, B, C, and D, that need to deliver their product to four retail stores, called 1, 2, 3, and 4. There are two ways to do this. The first has a

Supply Chain Management

In Chapter 11, we explored operations across locations and firm boundaries, that is, operations along the supply chain from raw materials, to manufacturing, to distribution, to retail, and finally to the consumer.

Project Description:

Your assignment for Project 5 consists of explaining the roles and values of each layer within a supply chain.Your explanation should include the following:

1)Provide a summary of the different levels of the supply chain to include the function of each level.

2)Explain in detail the differences between Tier 1 suppliers, Tier 2 suppliers and manufacturers.

3)Describe the role and function of distributors and retailers in the supply chain.Your explanation needs to include the various formats in which retailers exist such as traditional and ecommerce.Ensure that you provide examples of each retailer strategy.