CHƯƠNG 3 QUẢN lý CUNG – cầu và DỊCH vụ KHÁCH HÀNG quản lý chuỗi cung cấp DHBK (1)

The following list suggests a number of ways in which effective demand management will help to unify channel members with the common goal of satisfying customers and solving customer pro

䡲 Know the types of forecasts that may be needed, andunderstand how collaboration among trading

partners will help the overall forecasting and demandmanagement process

䡲 Identify the key steps in the order-fulfillment process,and understand how effective order management cancreate value for a firm and its customers

䡲 Realize the meaning of customer service, and

understand its importance to logistics and supplychain management

䡲 Understand the difference between logistics andmarketing channels, and understand that goods mayreach their intended customer via a number of

alternative channels of distribution

Logistics Profile

How Scan-Based Trading

Changed Distribution

at Dreyer’s

Not only has scan-based trading changed the

pay-ment process at Dreyer’s Grand Ice Cream, but

it has altered distribution operations as well Six

years ago, the ice-cream maker began instituting

scan-based trading, a practice whereby the merchant

pays the manufacturer for products based on what is

actually scanned at the checkout counter According

to the director of distribution for Dreyer’s, an

Oak-land, California-based company, the retailers send

them daily scanned data, and they pay Dreyer’s

directly from the scanned data

For starters, the implementation of scan-based

trad-ing has changed the way inventory is managed

because there is no longer a transfer of product

ownership at the store “In essence, the inventory

remains Dreyer’s inventory until it’s scanned,” says

the director of distribution.“The handoff at the back

door doesn’t happen.”

Because consumer takeaway drives what Dreyer’s

stocks, the ice-cream manufacturer has shifted to a

closed-loop distribution system As a result, they

reported having more detailed knowledge of what is

selling at each location, and the traditional invoice

discrepancies are being eliminated

In-store vendor control of inventory also has

elimi-nated the time-consuming validation of product

delivery at each store Previously, it took drivers up

to one half hour to count inventory and validateitems against the store’s pricing files This has hadother benefits as well Notably, deliveries are nolonger restricted to the normal receiving hours ofthe retail stores Also, from the perspective of fleetoperations, Dreyer’s is able to promote 24/7 avail-ability of product to its customers The removal ofdelivery-window constraints has allowed Dreyer’s tooptimize its 800-vehicle fleet for direct store deliv-ery Although the company has experienced salesincreases of 10 percent to 15 percent per year, it hasnot had to add vehicles to its fleet since it adoptedscan-based trading

Improved fleet utilization has freed up resources thatDreyer’s can reassign to in-store stocking tasks.(Unlike other companies, the drivers strictly operatethe trucks; a separate workforce does the stocking.)

In short, the money saved on distribution has beenreinvested in stocking and merchandising.The feeling

is that Dreyer’s can take the money saved on bution and reinvest it in stocking and merchandising

distri-If available funds can be spent on people in stores,instead of trucks, then more value is offered to thecustomer With the increases in efficiency of truckdelivery, the focus at Dreyer’s has shifted from deliv-ery of the product to a partnership of selling prod-ucts at the store level If the product does not sell,the manufacturer does not get paid

Source: Adapted from James Aaron Cooke,“Scan and Supply,” tics Management and Distribution Report (June 2000): 67 Copyright

Logis-Cahners Business Information Reprinted by permission.

Outbound-to-Customer Logistics Systems

In an effort to better serve their customers, many firms have placed significant

emphasis on what may be termed their outbound-to-customer logistics systems Also referred to as physical distribution, this essentially refers to the set of

processes, systems, and capabilities that enhance a firm’s ability to serve its tomers For example, the ways in which retailers such as L L Bean, Lands’ End,and Eddie Bauer fulfill their customers’ orders are examples of outbound logistics.This topic has been of significant historical interest in the study of logistics andsupply chain management, and this chapter highlights key areas of concern relat-ing to this general topic

cus-Correspondingly, the topic of inbound-to-operations logistics systems refers to the

activities and processes that precede and facilitate value-adding activities such asmanufacturing, assembly, and so on Other terms that focus on these elements of

the supply chain include materials management and physical supply A typical

example would be the movements of automotive parts and accessories that need

to move from vendor locations to automotive assembly plants Although many ofthe principles of inbound logistics are conceptually similar to those of outboundlogistics, there are important differences that must be recognized Thus, the topic

of inbound logistics systems is the focus of the next chapter, which is titled curement and Supply Management.”

“Pro-Examples of Successes

As a practical matter, in many firms the outbound-to-customer logistics systemreceives far more attention than the inbound-to-operations system While this ischanging quickly, it is largely due to the historical priority firms have had onimproving service to their customers This has led to an emphasis on attributessuch as product availability, on-time and order delivery, timely and accurate logis-tics information, overall responsiveness, and post-sale customer support Verysimply, providing the customer with an acceptable level of service has been ofgreater concern, historically, than assuring the efficient and effective flow of mate-rials to value-adding operations In today’s business environment, successful firmsfind it necessary to place an equal emphasis on being proficient in both of theseareas

The automotive industry provides an interesting example of the kinds of progressbeing made In order to make sure buyers get the vehicle they want, top executives

of one U.S.-based auto manufacturer recently held a “customer insight day,” inwhich they sat at a table and talked with real customers about their cars and howtheir cars fit into their lives In addition, these same executives visit at least two ofthe company’s dealerships each year In essence, they are working to change thebasic dealer strategy, which currently is to sell from stock Since studies haveshown that only 60 percent of auto customers typically get what they want, theirgoal is to make it 100 percent To achieve this, emphasis has been placed on devel-oping a process whereby a dealer can change an order shortly before the car is

built, and on identifying better means to transport finished vehicles to consumer

buyers in a more timely and consistent manner

Another goal is to make order entry and vehicle configuration more accurate and

efficient They want to be able to tell a buyer when his/her vehicle will be ready,

and stand by it Not long ago, this particular manufacturer was making only 60

per-cent of the vehicles in the week that were planned; this perper-centage has increased to

90 percent in recent years Last, the company has created a special team to work

with its suppliers to align its production strategy with its forecast The desired end

result is to shorten the time needed to get a car to the customer.1

Another example is that of a major computer disk drive manufacturer that

experi-enced rapid consolidation in its supply chain In response to a series of acquisitions

that brought together eight different companies operating in eight different ways,

the company initiated a supply chain project that focused everyone’s attention on

the needs of the customer This action enabled them to begin breaking down all of

the silos that existed between the companies and, in the process, drove out

ineffi-ciencies In addition to being able to lower prices for its customers, this firm was

able to reduce production time for its disk drives by 50 percent Shortening the

forecast was another benefit of this effort Previously, monthly sales forecasting

cycles—a long time in the high-tech/electronics industry—were used on a regular

basis More recently, the focus has shifted to weekly forecasts and, ultimately, to

having forecasts on a daily basis As a result, costs are expected to continue to

decline, with service to the customer expected to improve.2

Organization of This Chapter

Considering the complexity of the topic at hand, this chapter has a relatively

aggressive agenda of topics to be discussed First, a discussion of demand

manage-ment provides an overview of the importance of effectively managing

outbound-to-customer activities and processes Second, the topic of forecasting is addressed in

a general sense Third, the more recent emphasis on collaborative forecasting

approaches is covered Fourth, attention is directed to the customer order cycle and

how orders are placed, received, processed and shipped to the customer Fifth, the

role and importance of customer service are examined A sixth topic is how to

understand and quantify the costs that may be incurred when needed merchandise

is not available for the customer Last, a few comments regarding channels of

dis-tribution are necessary to put the overall topic of outbound logistics in its broader,

more meaningful context

Demand Management

According to Blackwell and Blackwell,3demand management may be thought of as

“focused efforts to estimate and manage customers’ demand, with the intention of

using this information to shape operating decisions.” Traditional supply chains

typ-ically begin at the point of manufacture or assembly and end with the sale of

prod-uct to consumers or business buyers Much of the focus and attention has been

supply chain consolidation

related to the topic of product flow, with significant concern for matters such astechnology, information exchange, inventory turnover, delivery speed and consis-tency, and transportation This notwithstanding, it is the manufacturers—who aremany times far removed from the end user or consumer market—who determinewhat will be available for sale, where, when, and how many If this seems to reflect

a disconnect between manufacturing and demand at the point of consumption,

Demand chain creation usually begins with the

vision of a company leader who is determined

to make operations fully complement a

consumer-centered strategy In many cases, the company will

take the lead role, inculcating its supply chain

part-ners with that same vision In other cases, it may turn

to outside resources, such as a consulting firm or

service provider, for help in this effort

Ingram Micro took the leadership approach in

creat-ing a demand chain among its supply chain partners

The Seattle-based company is the world’s leading

wholesale distributor of technology products and

services.This $22 billion giant distributes more than

200,000 products from 1,500 manufacturers to over

140,000 resellers in 130 countries

The company’s COO explains that Ingram Micro is

committed to reinventing technology distribution by

putting the customer first but the company’s

ini-tiative does not stop there The focus goes beyond

Ingram’s customers to address the needs of its

cus-tomers’ customers—or end-use customers The role

of distribution in any industry is to extract products

from a multitude of manufacturers and distribute them

to a broad set of businesses, markets, and consumers

This is true in the technology market in which Ingram

competes as well Consumers look for solutions to

their computing needs, which can involve putting

together a complex system of products and features—

not just a single product from a single vendor

The accompanying diagram depicts Ingram Micro’s

model for technology distribution The intent is that

the model begins and ends with the end user—theconsumer After listening to the needs of the endconsumer, Ingram communicates this information toits customers (resellers), who design, sell, and sup-port the products and services consumers want Inconjunction with manufacturers, the company thenputs the products together and delivers themdirectly to the end user on the reseller’s behalf The

company has chosen the terminology demand chain, rather than supply chain, because its central focus is

to meet consumer demand

Consumers/

end users

Multivendor solutions

Ingram Micro Manufacturers Resellers

Source: Figure and text adapted from Roger D

Black-well and Kristina BlackBlack-well, “The Century of theConsumer: Converting Supply Chains into Demand

Chains,” Supply Chain Management Review 3, no 3 (Fall 1999): 24–25 Reprinted with permission of Sup- ply Chain Management Review, a Cahners publication

I NGRAM M ICRO —A D EMAND C HAIN L EADER

that is exactly what it is Thus, any attention paid to demand management will

produce benefits throughout the supply chain

The essence of demand management is to further the ability of firms throughout

the supply chain—particularly manufacturing through the customer—to

collabo-rate on activities related to the flows of product, services, information, and capital

The desired end result should be to create greater value for the end user or

con-sumer, for whom all supply chain activity should be undertaken The following list

suggests a number of ways in which effective demand management will help to

unify channel members with the common goal of satisfying customers and solving

customer problems:4

• Gathering and analyzing knowledge about consumers, their problems, and

their unmet needs

• Identifying partners to perform the functions needed in the demand chain

• Moving the functions that need to be done to the channel member that can

perform them most effectively and efficiently

• Sharing with other supply chain members knowledge about consumers and

customers, available technology, and logistics challenges and opportunities

• Developing products and services that solve customers’ problems

• Developing and executing the best logistics, transportation, and distribution

methods to deliver products and services to consumers in the desired format

As firms identify the need for improved demand management, a number of

prob-lems occur First is that lack of coordination between departments (i.e., the

exis-tence of “functional silos”) results in little or no coordinated response to demand

information Second is that too much emphasis is placed on forecasts of demand,

with less attention on the collaborative efforts and the strategic and operational

plans that need to be developed from the forecasts Third is that demand

informa-tion is used moreso for tactical and operainforma-tional than for strategic purposes In

essence, and since in many cases historical performance is not a very good

pre-dictor of the future, demand information should be used to create collective and

realistic scenarios of the future Primary emphasis should be on understanding

likely demand scenarios and mapping their relationships to product supply

alter-natives The end result will be to better match demand as it occurs with

appropri-ate availability of needed product in the marketplace

Figure 3–1 provides a view of how supply-demand misalignment may impact

over-all supply chain effectiveness Using the PC industry as an example, this figure

charts production, channel orders, and true end-user demand over the life cycle of

a product Ignoring the early adopters, end-user demand for PCs typically is at its

highest level at the time new products are launched—which is also the time that

availability is most precarious As new, competing products become available,

end-user demand begins to taper off, eventually reaching a modest level, at which time

the product, now much more available, is generally phased out

Looking more closely at Figure 3–1, in the first phase of a new product launch,

when end-user demand is at its peak and opportunities for profit margins are

greatest, PC assemblers are not able to supply product in quantities sufficient to

meet demand—thus creating true product shortages Also during this time frame,

demand management objectives

forecasts

supply-demand misalignment

distributors and resellers tend to “over-order,” often creating substantial tom” demand In the next phase, as production begins to ramp up, assemblersship product against this inflated order situation and book sales at the premium,high-level launch price As channel inventories begin to fill, price competitionbegins to set in, as do product overages and returns This further depressesdemand for the PC product, and the PC assemblers are the hardest hit.

“phan-In the final phase noted in Figure 3–1, as end-user demand begins to decline, thesituation clearly has shifted to one of over-supply This is largely due to the indus-try’s planning processes and systems, which are primarily designed to use previ-ous period demand as a gauge Since much of the previous period’s demand wasrepresented by the previously mentioned “phantom” demand, forecasts are dis-torted The net result of these behaviors in aligning supply and demand is that alarge majority of product is sold during the declining period of profit opportunity,thereby diminishing substantial value creation opportunities for industry partici-pants Adding insult to injury, substantial amounts of inventory are held through-out the supply chain as a hedge against supply uncertainty Overall, this situation

is one that needs considerable attention

According to Langabeer,5 there is growing and persuasive evidence that standing and managing market demand are central determinants of business suc-cess Aside from this observation, relatively few companies have successfullylinked demand management with corporate strategy Table 3–1 provides a view ofhow demand data may be used strategically to enhance a company’s growth, port-folio, positioning, and investment strategies As suggested, effective use of demanddata can help companies to guide strategic resources in a number of importantways

under-Channel orders

End of life

Launch date

1 True end-customer demand

1 True end-customer demand.

3Channel partners over-order

in an attempt to meet demand and stock their shelves.

4 As supply catches up with demand, orders are canceled

or returned.

5 Financial and production planning are not aligned with real demand; therefore, production continues.

6 As demand declines, all parties attempt to drain inventory to prevent write-down.

2 Real shortage

5 Over-supply

4

6 Production

3Channel fill and phantom demand

FIGURE 3–1 Supply-Demand Misalignment

Source: Accenture, Stanford University, and Northwestern University, Customer-Driven Demand Networks: Unlocking Hidden Value in the Personal Computer Supply Chain (Accen-

ture, 1997), 15.

Traditional Forecasting

A major component of demand management is forecasting the amount of product that

will be purchased by consumers or end users Although forecasts are made

through-out the supply chain, the single, most important forecast is that of primary demand In

a truly integrated supply chain scenario, all other demand will emanate directly from—

or at least be influenced by—primary demand One of the key objectives of integrated

supply chain management is to further the extent to which all supply chain decisions

anticipate, as well as respond to, primary demand as it occurs in the marketplace

Figure 3–2 outlines one firm’s approach to sales forecasting and its integration with

production scheduling activities The first step is to develop a twelve-month

fore-cast of demand by month by applying traditional demand forefore-casting approaches

(e.g., moving average, exponential smoothing, Box-Jenkins, regression analysis,

etc.) to a three-year history file of data on factors such as demand, price,

season-ality, availability, deals, and promotions In the second step, brand and product

managers review this forecast and recommend relevant changes The result is an

agreed-upon statement of gross market requirements for the succeeding one- to

three-year periods The third step involves developing aggregate production schedules for

the next twelve-month period and allocating specific production requirements to

demand forecasting

Strategy Examples of How to Use Demand Management

Growth strategy • Perform “what if” analyses on total industry volume to gauge how specific

mergers and acquisitions might leverage market share.

• Analyze industry supply/demand to predict changes in product pricing structure and market economics based on mergers and acquisitions.

• Build staffing models for merged company using demand data.

Portfolio strategy • Manage maturity of products in current portfolio to optimally time overlapping

life cycles.

• Create new-product development/introduction plans based on life cycle.

• Balance combination of demand and risk for consistent “cash cows” with demand for new products.

• Ensure diversification of product portfolio through demand forecasts.

Positioning strategy • Manage product sales through each channel based on demand and product

economics.

• Manage positioning of finished goods at appropriate distribution centers, to reduce working capital, based on demand.

• Define capability to supply for each channel.

Investment strategy • Manage capital investments, marketing expenditures, and research and

development budgets based on demand forecasts of potential products and maturity of current products.

• Determine whether to add manufacturing capacity.

Source: Jim R Langabeer II, “Aligning Demand Management with Human Strategy,” Supply Chain Management Review (May/June 2000): 68 Reprinted with permission of Supply Chain Management Review, a Cahners publication.

TABLE 3–1 How Demand Management Supports Business Strategy

integrating forecasting and production

various manufacturing facilities Finally, the logistics function commonly assumesresponsibility for scheduling production on a short-term basis, in order to coordi-nate demand for finished product with the timing and availability of needed pro-duction inputs.

Actually, different approaches to forecasting serve different purposes:

• Long-term forecasts usually cover more than three years and are used for

long-range planning and strategic issues These naturally will be done inbroad terms—sales by product line or division, throughput capacity by tonper period or dollars per period, and so on These forecasts might easily gobeyond customer demand to other key corporate resources such as produc-tion capacity and desired inventory asset levels

• Midrange forecasts—in the one- to three-year range—address budgeting

issues and sales plans Again, these might predict more than demand Thedemand forecasts will very likely still be in dollars and now, perhaps, at thelevel of product family or product line The first year in a multiyear forecastmight be by month, while the following years may be by quarter

• Short-term forecasts are most important for the operational logistics planning

process They project demand into the several months ahead and are ing increasingly on shorter time intervals These forecasts are needed inunits, by actual items to be shipped, and for finite periods of time

focus-An important distinction involves the tactical use of demand information by thesupply chain, in contrast to the strategic use by an executive-controlled supplychain.6On the one hand, “tactical” use of demand data will probably help a com-pany to develop a forecast of projected sales Alternatively, “strategic” use of thesame data can help a company to analyze its product portfolio and its new prod-uct development strategies This strategic use of demand data can help to improvethe overall profitability and market positioning of a company

purposes of

forecasting

FIGURE 3–2 Integration of Sales Forecasting and Production

Histor y file (3 years—demand, price, seasonality, deals, promotions, etc.)

Forecasting model (moving average, Box-Jenkins, regression analysis, etc.)

12-month forecast (by month)

Brand and product managers review and recommend changes

Revised forecast

Gross market requirements (1- to 3-year periods)

Aggregate production schedules (12 months)

Allocation of aggregate requirements to plants

Short-term production scheduling

Collaborative Planning, Forecasting,

and Replenishment

Over time, there have been numerous industry initiatives that have attempted to

create efficiency and effectiveness through integration of supply chain activities

and processes They have been identified by names such as quick response,

elec-tronic data interchange (EDI), short cycle manufacturing, vendor-managed

inven-tory (VMI), continuous-replenishment planning (CRP), and efficient consumer

response (ECR) One by one, each fell short of expectations, particularly in its

abil-ity to integrate supply chain activities among the many participants

One of the most recent initiatives, aimed at achieving true supply chain

integra-tion, is collaborative planning, forecasting, and replenishment (CPFR®).7CPFR has

become recognized as a breakthrough business model for planning, forecasting,

and replenishment Using this approach, retailers, transport providers, distributors,

and manufacturers can utilize available Internet-based technologies to collaborate

from operational planning through execution Whereas historically, for a single

product, retailers and manufacturers may have had twenty or more types of

fore-casts between them—each developed for a special purpose, each more or less

accu-rate, and all trying to predict behavior of buyers in the marketplace—CPFR

simpli-fies and streamlines overall demand planning

The impetus for the development of CPFR came from an effort in 1995 by Wal-Mart

and one of its suppliers, Warner-Lambert Company, particularly with regard to its

Listerine™-brand product In addition to rationalizing inventories of specific line

items and addressing out-of-stock occurrences, these two companies collaborated

to increase their forecasting accuracy, so as to have just the right amount of

inven-tory where it was needed, when it was needed The three-month pilot produced

significant results and improvements for both parties, sufficient to be responsible

for further utilization by Wal-Mart of this approach that used the Internet to

facil-itate the collaboration

As suggested in Figure 3–3, CPFR emphasizes a sharing of consumer purchasing

data among and between trading partners for the purpose of helping to govern

sup-ply chain activities In this manner, CPFR creates a significant, direct link between

the consumer and the supply chain The effective implementation of CPFR is based

on systematic collaboration between trading partners, whereas predecessor

approaches are not In addition, the CPFR movement is responsible for the creation

of new technology tools to facilitate the sharing, analysis, and ultimate application

of the information by trading partners Use of the Internet as a low-cost, neutral

systems platform and the development of “between-ware” applications are

show-ing great promise

The CPFR initiative begins with the sharing of marketing plans between trading

partners Once an agreement is reached on the timing and planned sales of specific

products, and a commitment is made to follow that plan closely, the plan is then

used to create a forecast, by stock-keeping unit (SKU), by week, and by quantity

The planning can be for thirteen, twenty-six, or fifty-two weeks A typical forecast

is for seasonal or promotional items that represent approximately 15 percent of

sales in each category The regular turn items, or the remainder of products in the

category, are forecast statistically Then, the forecast is entered into a system that

CPFR

FIGURE 3–3 CPFR Business Model

Develop Front-End Agreement

Distributor Business

Development Activities

Manufacturer Business Development Activities

Create Joint Business Plan

Create Sales Forecast

Create Order Forecast

Order Generation Produce

Product

Order Filling/

Shipment Execution Delivery Execution

Production Planning

Constraints

Unresolved Supply Constraints

Identify Exceptions for Order Forecast

Resolve/Collaborate On Exception Items

Resolve/Collaborate On Exception Items

Manufacturer Decision Support Data

Manufacturer Decision Support Data

Updated Data for Exception Items

Manufacturer Exception Triggers

Order Forecast Frozen Forecast

Feedback Product

Order/PO

Order filling feedback

Distributor Decision Support Data

Distributor Decision Support Data

POS

Data

Long Term Short Term

Exception Items

Exception Items

Manufacturer Activities

Source: Used with permission of the Voluntary Interindustry Commerce Standards (VICS) Association CPFR®

is a registered trademark of the Voluntary Interindustry Commerce Standards (VICS) Association.

is accessible through the Internet by both supplier and buyer Either party is

empowered to change the forecast, within established parameters

Only a few CPFR initiatives have published the results of their collaborative efforts,

but those that are available are impressive.8Nabisco and Wegmans, for example,

noted an increase in category sales of more than 50 percent Wal-Mart and Sara Lee

reported a reduction of 14 percent in store-level inventory, with a 32 percent

increase in sales Kimberly-Clark and Kmart have achieved steady increases in

cat-egory sales growth that exceeded margin growth

Order Fulfillment and Order Management

As suggested by Figure 3–4, three critical elements of collaborative planning are

collaborative demand planning, joint capacity planning, and synchronized order

fulfillment This type of planning improves quality of the demand signal for the

entire supply chain through a constant exchange of information from one end to

the other that goes well beyond traditional practices As a result, the

down-stream supply chain firms share relevant and useful order information and

demand forecasts with those farther upstream At the same time, upstream firms

share updated information relating to product availability and expected

inven-tory levels

S UPPLY C HAIN T ECHNOLOGY

M IDWEST P HARMACEUTICALS

Alarge Midwest pharmaceutical company

manu-factures approximately 15,000 different

prod-ucts in its four locations in the domestic United

States.These products are grouped into five families,

each with approximately 3,000 products History is

collected at the product level Using the company’s

statistically advanced demand-management system, a

state-of-the-art technology, the company can analyze

changes in rates of demand and determine whether

the product is in an introduction, growth, maturity,

or decline phase of its life cycle With relatively few

inputs, such as expected product life and the data the

product was introduced, the system can isolate the

seasonal and trend components and determine each

product’s position in the life cycle

As the company rolled this information up to the higher

or “family” level, demand-chain managers could see that

in one family, 72 percent of the products were in the

mature stage, while 14 percent were in decline Thisfinding troubled management because success forcompanies in the pharmaceutical business depended

on continually adding new and innovative products totheir portfolios to replace old and declining ones.Accordingly, the company decided to alter its portfoliostrategy by immediately investing more heavily intoproducts that could offset those in decline

Tactical use of demand data would have given this pany only a forecast of projected sales Strategic use ofthe same data, on the other hand, led management tomodify and improve the portfolio and its product invest-ment strategy In essence, demand management helpedmake this company more profitable and effective

com-Source: Edited from Jim R Langabeer II, “Aligning Demand Management With Business Strategy,” Sup- ply Chain Management Review (May/June 2000): 69 Reprinted with permission of Supply Chain Manage- ment Review, a Cahners publication.

CPFR results

Figure 3–5 identifies four key stages of order fulfillment (i.e., information ing, decision-making, performance measures, and technology) and suggests howthese stages differ as supply chain activity matures from transactional to inter-active to interdependent This figure clarifies the significant enhancements to theorder-fulfillment process that may be expected as supply chain activities becomeincreasingly collaborative.

shar-Collaborative demand planning

Collaborative planning and execution

Synchronized order fulfillment

Joint capacity planning

FIGURE 3–4 Collaborative Planning

Source: Accenture, Stanford University, and Northwestern University, Customer-Driven Demand Networks: Unlocking Hidden Value in the Personal Computer Supply Chain

(Accenture, 1997), 29.

FIGURE 3–5 Stages of Order Fulfillment

Transactional Interactive Interdependent

Information Limited to basic order Some sharing of inventory Extensive sharing of inventory,

sharing information availability and shipment shipment, and sell-through

information information

Decision Independent order Some negotiation of Synchronized ordering

making decisions—”phantom order decisions among decisions driven by shared

demand” partners replenishment policies,

channel inventory data, and POS information (VMI)

Performance Limited performance Some shared performance Extensive use of performance

measures measures measures like lead times, measures tied to shared risks

on-time delivery, and inventory and rewards availability

Technology Limited use of Some use of technology to Extensive use of technology to

technology track orders and material flow allow real-time tracking of

orders and material and an automatic replenishment

Source: Accenture, Stanford University, and Northwestern University, Customer-Driven Demand Networks: Unlocking Hidden Value in the Personal Computer Supply Chain (Accenture, 1997), 32.

The Order-Management System

The order-management system represents the principal means by which buyers

and sellers communicate information relating to individual orders of product The

order-processing system, extremely important to the firm’s logistics area, is also

one of the most important components of the firm’s overall management

informa-tion system

Effective order management is a key to operational efficiency and customer

satis-faction Figure 3–6 provides a list of typical order-management functions To the

extent that a firm conducts all activities relating to order management in a timely,

accurate, and thorough manner, it follows that other areas of company activity can

be similarly well coordinated In addition, both present and potential customers

will take a positive view of consistent and predictable order cycle length and

acceptable response times By starting the process with an understanding of

cus-tomer needs, firms can design order-management systems that will be viewed as

superior to those of competitor firms A company’s order-management capabilities

will contribute toward producing a competitive advantage

The logistics area needs timely and accurate information relating to individual

cus-tomer orders; thus, more and more firms are placing the corporate order-management

function within the logistics area The move is good not only from the perspective

of the logistics process but also from that of the overall organization The area of

order management has been a primary beneficiary of the enhanced and more

responsive computer and information systems available today In many firms, the

area of order management has become an innovator in exploiting new

technologi-cal advances

Order and Replenishment Cycles

When referring to outbound-to-customer shipments, we typically use the term

order cycle The term replenishment cycle is used more frequently when referring

to the acquisition of additional inventory, as in materials management Basically,

one firm’s order cycle is another’s replenishment cycle For simplicity, we shall use

the term order cycle throughout the remainder of this discussion.

order management functions

FIGURE 3–6 Order-Management Functions

• Receive order

• Enter order - manual/electronic

• Verify and check order for accuracy

• Check credit

• Check inventory availability

• Process back order

• Acknowledge order

• Modify order

• Suspend order

• Check pricing and promotion

• Identify shipping point

• Generate picking documents

• Originate shipment

• Inquire order status

• Deliver order

• Measure service level

• Measure quality of service

• Assure continuous improvement

• Handle product returns

order cycle

Four principal activities, or elements, constitute lead time, or the order cycle: orderplacement, order processing, order preparation, and order shipment These activi-ties are shown in Figure 3–7, along with arrows indicating the principal directions

in which product and information flow Traditionally, the order cycle includes onlythose activities that occur from the time an order is placed to the time that it isreceived by the customer Special activities such as backordering and expeditingwill affect the overall length of the order cycle Subsequent customer activities,such as product returns, claims processing, and freight bill handling, are not tech-nically part of the order cycle

Order Placement Order-placement time can vary significantly, from taking days or

weeks to being instantaneous Company experiences indicate that improvements inorder-placement systems and processes offer some of the greatest opportunities forsignificantly reducing the length and variability of the overall order cycle Figure 3–8shows results of a study by Forrester Research, Inc., showing the means by whichcompanies purchased direct materials in 2000, and their advance plans for 2002

lead time

FIGURE 3–7 Major Components of the Order Cycle

Order placement

Order processing

Order preparation

Order shipment

= Principal product flows

= Principal infor mation flows

FIGURE 3–8 Order-Placement Trends

“Through what mechanisms do you purchase your direct materials today?

In 2002?”

Source: Forrester Research, Inc., The Forrester Report: On-Line Supply Chain Realities

(Cambridge, Mass.: Forrester Research, Inc., 2000), 3.

Clearly, significant increases were projected for Internet-facilitated resources such as

E-marketplaces, Extranets, and E-mail Those that were expected to show declines

in relative use were electronic data interchange (EDI) and phone/fax

Order Processing The order-processing function usually involves checking

cus-tomer credit, transferring information to sales records, sending the order to the

inventory and shipping areas, and preparing shipping documents Many of these

functions can occur simultaneously through the effective use of available

informa-tion technologies Recent improvements in computer and informainforma-tion systems have

led to considerable reductions in the times needed to accomplish these activities

Order Preparation Depending on the commodity being handled and other

fac-tors, the order-preparation process sometimes may be very simple and performed

manually or, perhaps, may be relatively complex and highly automated Since the

time needed to prepare orders for shipment frequently represents a significant

bot-tleneck in the overall order cycle, advance information concerning the composition

of individual shipments has become highly desirable The availability of real-time

information systems has helped significantly to see that this information is

avail-able in a timely and functional manner

Order Shipment Shipment time extends from the moment an order is placed upon

the transport vehicle for movement, until the moment it is received and unloaded at

the buyer’s location Measuring and controlling order-shipment time sometimes can

be difficult when using for-hire transportation services; however, most carriers today

have developed the ability to provide their customers with this type of information

One way for receivers of product to increase the likelihood of timely delivery is to

ask for advance shipment notification (ASN) from supplier firms Alternatively,

shippers may prefer to receive proof-of-delivery (POD) documentation, preferably

electronically, from carriers This helps to pinpoint the exact time and location of

delivery To improve service to customers, transport firms have moved to the use

of Internet-enabled capabilities to provide services such as these to their

cus-tomers In addition, carriers have made it easier for customers to track and trace

shipments when needed and have provided these same customers with summary

reports of shipment times, service levels, and so on

One of the major U.S automobile companies has established an integrated private/

contract carriage system and a computerized parts locating and ordering system to

produce prompt and dependable delivery service for small, less-than-truckload

shipments The system provides next-day delivery to most of its dealers from the

company’s eighteen distribution centers located throughout the United States

Approximately 80 percent of the parts deliveries are made at night through a

passkey operation Company drivers are given keys to the dealers’ facilities and

make deliveries to secured areas The night deliveries reduce delays normally

caused by daytime highway traffic and congestion at dealer facilities This

exam-ple shows how a precisely planned and well-executed transportation capability can

help to reduce needed time to fulfill customer orders

Because of the positive changes that have occurred in the transportation

environ-ment over a number of years, capable, time-sensitive logistics services are

increas-ingly becoming available While each of the modes of transport has evidenced

con-siderable improvement in this area, there are significant opportunities to further

enhance value-added services for customers Also, the availability of accurate

information on a real-time basis has been identified as a key priority for a growing

number of transportation and logistics service providers

advance shipment notification

proof of delivery

Length and Variability of the Order Cycle While interest has traditionally

cen-tered more on the overall length of the order/replenishment cycle, recent attentionhas been focused on the variability or consistency of this process Consistent withthe contemporary interest in meeting customer requirements, there also is a con-cern for making sure that the first priority is to deliver shipments at the time andlocation specified by the customer

One landmark customer service study incorporated a series of questions pertaining

to the time needed to complete the total order cycle as well as the relative timeneeded to complete the individual elements of the order cycle.9A significant find-ing was that the greatest portion of the total order cycle time occurred either beforethe manufacturer received the order from the customer or after the order wasshipped In other words, activities that were at least somewhat external to the man-ufacturer and over which the manufacturer traditionally had little control con-sumed more than one-half of the total order cycle time

This phenomenon is supported by more recent data developed by Accenture merly Andersen Consulting), which is shown in Figure 3–9 In this example, theaverage total time for order transmission and transit to customer (7.0 days)exceeded the average time spent on more internally focused activities such as orderedit/entry, pick-ticket generation, and order picking (5.1 days) Also, there weresignificant differences between the average times for completing the various stepsand the 95th percentile times Results such as this have caused manufacturers to

(for-be more aggressive in facilitating the order-placement activity experienced by theircustomers, particularly through the use of information-based and Internet-enabledcapabilities Similarly, manufacturers have become more interested in seeing thatshipments arrive at their customers’ locations in a timely manner This has resulted

in the development of strategies to assure greater control over the speed, tency, and overall quality of transportation services

consis-FIGURE 3–9 Example of Order Cycle Time Analysis

2.0 1.5 2.5 1.1

5.0 12.1

(10.0) (4.0) (6.0) (5.0)

(32.0) (12.0)

Average 95th percentile

Receipt

of order

Receipt of material (average)

Receipt of material (95th percentile)

Source: William C Copacino, “Time to Review Order Management,” Traffic Management (June 1993): 32 Used

with permission.

order cycle length

Any reduction in the length of one or more order cycle components will provide

either additional planning time for the manufacturer or a shortened order cycle for

the buyer If a manufacturing firm identifies an opportunity to reduce the length of

one or more components of the order cycle, it then can choose to either absorb the

extra time into its own system (perhaps as additional planning time) or share it

with the customer by shortening the order cycle in a material fashion In

compet-itive markets, passing such time savings along to the customer whenever possible

may be of great value in the marketplace for the manufacturer

Variability in the order cycle length also can affect the levels of safety stock carried

by purchasers of the firm’s products Specifically, as order cycle variability

increases, needed safety stock levels also increase Conversely, as firms reduce

order cycle variability, customers may choose to carry less safety stock In either

instance, order cycle variability links directly to the levels of safety stock a

cus-tomer must carry

Ideally, improvement will take the form of shorter order cycle lengths, coupled

with improved consistency and reliability Figure 3–10 illustrates a before-and-after

situation in which a firm successfully reduced the length and variability of most of

the activities comprising the order cycle Aside from the improvement in each

indi-vidual activity, the total order cycle time and variability have decreased noticeably

E-Commerce Order-Fulfillment Strategies

As firms become more and more involved in E-commerce, it has become

appar-ent that order fulfillmappar-ent and product distribution are among the most

over-looked and, perhaps, the most underestimated in terms of importance Success

in the E-commerce arena is just as much about designing and implementing the

basic principles of logistics and supply chain management as it is about

market-ing the latest technologies

According to Ricker and Kalakota,10three forces are converging to create an

explo-sion in consumer direct business models: technology forces are making it possible,

market forces are making it viable, and social forces are making it inevitable

According to these authors, some of the critical decisions to be made by

compa-nies are related to the evaluation of multiple fulfillment planning strategies Among

those that are cited are:

• Profitable to promise: Should I take the customer order at this time?

• Available to promise: Is inventory available to fulfill the order?

• Capable to promise: Does manufacturing capacity allow order commitment?

Thus, five alternative fulfillment strategies are suggested for consideration by firms

in the E-commerce business: (1) distributed delivery centers; (2) partner fulfillment

operations; (3) dedicated fulfillment centers; (4) third-party fulfillment centers; and

(5) build to order (which involves no stock inventory).11Regardless of the strategy

that is selected, a fundamental requirement of fulfillment logistics is the dedicated

collaboration of all supply chain trading partners to eliminate the costs associated

with inefficient movement of goods, redundant practices and processes, and excess

inventory Effective collaboration tends to foster not only supply chain efficiency

and effectiveness but also the ability to change when needed and to see that

strate-gic processes are continuously improved

order cycle variability

consumer-direct business needs

Customer Service

No discussion of outbound logistics systems would be considered complete out the inclusion of customer service, since customer service is really the fuel thatdrives the logistics supply chain engine Having the right product, at the righttime, in the right quantity, without damage or loss, to the right customer is an

with-FIGURE 3–10 Order Cycle Length and Variability

ORDER CYCLE

COMPONENTS

Average: 13 days Range: 4 to 22 days

AFTER SYSTEM CHANGE

Average: 11 days Range: 6 to 16 days Total order cycle

22 4

Source: Adapted from Douglas M Lambert and James R Stock, “Using Advanced Order-Processing Systems to

Improve Profitability,” Business (April–June 1982): 26.

underlying principle of logistics systems that recognizes the importance of

cus-tomer service

Another aspect of customer service that deserves mention is the growing consumer

awareness of the price/quality ratio and the special needs of today’s consumers,

who are time conscious and who demand flexibility The 1980s and the 1990s

evi-denced a growing awareness of the special needs of consumers and the

distribu-tion network that serves them Today’s consumers are a different breed They have

high standards for quality, and brand loyalty is not necessarily something that they

always support Essentially, they want products at the best price, with the best

level of service, and at times convenient to their schedules Successful companies

have adopted customer service approaches that recognize the importance of speed,

flexibility, customization, and reliability

The Logistics/Marketing Interface

Customer service is often the key link between logistics and marketing If the

logis-tics system, particularly outbound logislogis-tics, is not functioning properly and a

cus-tomer does not receive a delivery as promised, the company could lose future sales

Remember that manufacturing can produce a good product at the right cost, and

marketing can sell it; but if logistics does not deliver it when and where promised,

the customer will be dissatisfied

We could consider this description of the relationship between logistics and

mar-keting a traditional view Figure 3–11 depicts this traditional role of customer

ser-vice at the interface between marketing and logistics The relationship manifests

itself in this perspective through the “place” dimension of the marketing mix,

which is often used synonymously with channel-of-distribution decisions and the

associated customer service levels provided In this context, logistics plays a static

role that is based upon minimizing the total cost of the various logistics activities

within a given set of service levels, most likely as dictated by marketing

It is safe to say that this particular vision of logistics and its relationship to

mar-keting is one that dominated the logistics literature in the years preceding what

might be termed the “supply chain revolution.” From this traditional point of view,

the usual trade-off was seen as, “if we increase the level of customer service, then

logistics costs will automatically increase.”

An interesting example, however, is that of National Semiconductor, a company

that reengineered its supply chain to reduce the overall cost of logistics In so

doing, this company also improved in-stock inventory levels, experienced

short-ened and more consistent order cycles, and significantly improved overall service

to its global customers This situation required a more dynamic, proactive

approach that recognized the value-added role of logistics supply chains in

creat-ing and sustaincreat-ing competitive advantage and providcreat-ing win-win outcomes

In an effort to promote the true competitive advantages that can arise from a

well-run logistics operation, the chief financial officer of Compaq Computer suggested:

We’ve done most of what we have to do to be more competitive We’ve

changed the way we develop products, manufacture, market, and

adver-tise The one piece of the puzzle that we haven’t addressed is logistics It’s

the next source of competitive advantage, and the possibilities are

astounding.12

consumer awareness

traditional view

new vision