DESIGNING AND MANAGING THE SUPPLY CHAIN
David Simchi-Levi Philip Kaminsky Edith Simchi-Levi
Solutions for Discussion Questions1
Kaushik Sengupta, Hoftstra University
Kerem Bülbül
1
We would like to thank Shiming Deng for his valuable contribution to the preparation of this manual.
1
, CHAPTER 1
INTRODUCTION TO SUPPLY CHAIN MANAGEMENT
Chapter Overview
This chapter introduces supply chain management (SCM) and describes how supply
chain management is critical in today’s global business. Supply chain management
is described as a set of approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order
to minimize system wide costs while satisfying service level requirements.
It is important to understand the basic issues underlying SCM and the challenges facing
companies to achieve effective management of their supply chains. Various issues and
factors are described in this chapter. Specifically, the concept of managing risk and
uncertainty, global optimization, relationship of the supply chain to the development
chain are discussed. The chapter also discussed how the area evolved through the years.
The primary purpose of this chapter is to establish a context for SCM in the realm of
globalization and to instill this sense of importance in the students. If you’ve
accomplished that by the end of the chapter, you’ve established a solid foundation for the
remainder of the course.
Discussion Questions
Question 1
Pick any car model manufactured by a domestic auto maker. For example, consider the 2002 Ford
Thunderbird.
a. The supply chain for a car typically includes the following components::
1. Suppliers for raw materials
2. Suppliers for parts and subsystems
3. Automobile manufacturer (Ford, in the example). Within a company, there are also different
departments, which constitute the internal supply chain:
i. Purchasing and material handling
ii. Manufacturing
iii. Marketing, etc.
4. Transportation providers
5. Automobile dealers
b. Many firms are involved in the supply chain.
1. Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.
2. Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and electronic
components, etc.
3. Automobile manufacturer. For instance, Ford.
4. Transportation providers. For instance, shippers, trucking companies, railroads, etc.
2
, 5. Automobile dealers. For instance, Hayward Ford.
c. All companies involved in the supply chain want to maximize their respective profits by increasing
revenue and decreasing cost. However, companies may employ different strategies in order to
achieve this goal. Some of them focus on customer satisfaction and quick delivery, while others
may be more concerned about minimizing inventory holding costs.
d. In general, different parts of the supply chain have objectives that are not aligned with each
other.
1. Purchasing: Stable order quantities, flexible delivery lead times and little variation in mix.
2. Manufacturing: Long production runs, high quality, high productivity and low production
costs.
3. Warehousing: Low inventory, reduced transportation costs and quick replenishment
capability.
4. Customers: Short order lead times, a large variety of products and low prices.
Typically, the automobile dealer would like to offer a variety of car colors and configurations to
accommodate different customer preferences, and meanwhile have a short delivery lead time from
the manufacturer. However, in order to maximize the length of production runs, and utilize
resources more efficiently, the manufacturer would like to aggregate orders from different dealers
and offer less variety in car configurations. This is a clear example of conflicting marketing and
manufacturing goals.
Question 2
a. The supply chain for a consumer mortgage offered by a bank may involve various components.
1. Marketing companies that handle solicitation to potential customers.
2. Credit reporting agencies that evaluate potential customers.
3. The bank that extends the mortgage loans.
4. Mortgage brokers through which the loans are distributed.
b. The marketing companies strive to increase the response rate from homebuyers in order to
maximize their returns. Banks aim at a customer portfolio with a relatively low risk, healthy flow
of payments and low average loan maturity date. The brokers would like to maximize their sales
commissions.
c. Similar to product supply chains, the objective of a service supply chain is to provide what is
needed (in this case, a particular type of service, rather than a physical product) at the right location,
at the right time, and in a form that conforms to customer requirements while minimizing
systemwide costs. However, there are a number of differences between the two types of supply
chains. For instance:
1. In a product supply chain, there is both a flow of information and physical products. In a
service supply chain, it is primarily information.
2. Contrary to a service supply chain, transportation and inventory are major cost components in a
product supply chain.
3. Services typically cannot be held in inventory, so matching capacity with demand is frequently
more important in a service supply chain.
3
, 4. In a service supply chain, the (explicit) cost of information is higher than in a product supply
chain. Note that in the mortgage example above, the bank has to compensate the credit
reporting agency for each credit report it obtains.
Question 3
Many supply chains evolve over time. For example, consider a memory chip supply chain. Production
strategies may change during different stages of the product life cycle. When a new memory chip is
introduced, price is high, yield is low, and production capacity is tight, and the availability of the
product is important. Consequently, production is usually done at plants close to markets, and the
management focuses on increasing yield, reducing the number of production disruptions, and fully
utilizing capacity. When the product matures, however, its price drops and demand is stabilized for a
period of time, so minimizing production cost moves to center stage. To reduce costs, production may
be outsourced to overseas foundries, where labor and materials are much cheaper.
Question 4
A vertically integrated company aims at tighter interaction among various business components, and
frequently manages them centrally. Such a structure helps to achieve systemwide goals more easily by
removing conflicts among different parts of the supply chain through central decision making. In a
horizontally integrated company, there is frequently no benefit in coordinating the supply chains of each
business within the company. Indeed, if every business specializes in its core function, and operates
optimally, an overall global optimum may be approached.
Question 5
Effective supply chain management is also important for vertically integrated companies. In such an
organizational structure, various business functions are handled by different departments of the
company that usually have different internal objectives, and these objectives are not necessarily aligned
with each other. This may be due to lack of communication among departments or the incentives
provided by the upper management. For instance, if the sales department is evaluated based on revenue
only, and the manufacturing department is evaluated based on revenue only, and the manufacturing
department is evaluated based on cost only, the company’s profit may not be maximized globally.
Effective supply chain management is still necessary to achieve globally optimal operations.
Question 6
The sources of uncertainty in this example include:
1. Factors such as weather conditions, diseases, natural disasters cause uncertainty in availability of
raw materials, i.e., peach crop.
2. Uncertain lead times during transportation of crop from the field to the processing facility may
affect the quality of peaches, e.g., they may get spoiled.
3. Processing times in the plant, as well as the subsequent warehousing and transportation times are
subject to uncertainty.
4. Demand is not known in advance.
4
David Simchi-Levi Philip Kaminsky Edith Simchi-Levi
Solutions for Discussion Questions1
Kaushik Sengupta, Hoftstra University
Kerem Bülbül
1
We would like to thank Shiming Deng for his valuable contribution to the preparation of this manual.
1
, CHAPTER 1
INTRODUCTION TO SUPPLY CHAIN MANAGEMENT
Chapter Overview
This chapter introduces supply chain management (SCM) and describes how supply
chain management is critical in today’s global business. Supply chain management
is described as a set of approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order
to minimize system wide costs while satisfying service level requirements.
It is important to understand the basic issues underlying SCM and the challenges facing
companies to achieve effective management of their supply chains. Various issues and
factors are described in this chapter. Specifically, the concept of managing risk and
uncertainty, global optimization, relationship of the supply chain to the development
chain are discussed. The chapter also discussed how the area evolved through the years.
The primary purpose of this chapter is to establish a context for SCM in the realm of
globalization and to instill this sense of importance in the students. If you’ve
accomplished that by the end of the chapter, you’ve established a solid foundation for the
remainder of the course.
Discussion Questions
Question 1
Pick any car model manufactured by a domestic auto maker. For example, consider the 2002 Ford
Thunderbird.
a. The supply chain for a car typically includes the following components::
1. Suppliers for raw materials
2. Suppliers for parts and subsystems
3. Automobile manufacturer (Ford, in the example). Within a company, there are also different
departments, which constitute the internal supply chain:
i. Purchasing and material handling
ii. Manufacturing
iii. Marketing, etc.
4. Transportation providers
5. Automobile dealers
b. Many firms are involved in the supply chain.
1. Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.
2. Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and electronic
components, etc.
3. Automobile manufacturer. For instance, Ford.
4. Transportation providers. For instance, shippers, trucking companies, railroads, etc.
2
, 5. Automobile dealers. For instance, Hayward Ford.
c. All companies involved in the supply chain want to maximize their respective profits by increasing
revenue and decreasing cost. However, companies may employ different strategies in order to
achieve this goal. Some of them focus on customer satisfaction and quick delivery, while others
may be more concerned about minimizing inventory holding costs.
d. In general, different parts of the supply chain have objectives that are not aligned with each
other.
1. Purchasing: Stable order quantities, flexible delivery lead times and little variation in mix.
2. Manufacturing: Long production runs, high quality, high productivity and low production
costs.
3. Warehousing: Low inventory, reduced transportation costs and quick replenishment
capability.
4. Customers: Short order lead times, a large variety of products and low prices.
Typically, the automobile dealer would like to offer a variety of car colors and configurations to
accommodate different customer preferences, and meanwhile have a short delivery lead time from
the manufacturer. However, in order to maximize the length of production runs, and utilize
resources more efficiently, the manufacturer would like to aggregate orders from different dealers
and offer less variety in car configurations. This is a clear example of conflicting marketing and
manufacturing goals.
Question 2
a. The supply chain for a consumer mortgage offered by a bank may involve various components.
1. Marketing companies that handle solicitation to potential customers.
2. Credit reporting agencies that evaluate potential customers.
3. The bank that extends the mortgage loans.
4. Mortgage brokers through which the loans are distributed.
b. The marketing companies strive to increase the response rate from homebuyers in order to
maximize their returns. Banks aim at a customer portfolio with a relatively low risk, healthy flow
of payments and low average loan maturity date. The brokers would like to maximize their sales
commissions.
c. Similar to product supply chains, the objective of a service supply chain is to provide what is
needed (in this case, a particular type of service, rather than a physical product) at the right location,
at the right time, and in a form that conforms to customer requirements while minimizing
systemwide costs. However, there are a number of differences between the two types of supply
chains. For instance:
1. In a product supply chain, there is both a flow of information and physical products. In a
service supply chain, it is primarily information.
2. Contrary to a service supply chain, transportation and inventory are major cost components in a
product supply chain.
3. Services typically cannot be held in inventory, so matching capacity with demand is frequently
more important in a service supply chain.
3
, 4. In a service supply chain, the (explicit) cost of information is higher than in a product supply
chain. Note that in the mortgage example above, the bank has to compensate the credit
reporting agency for each credit report it obtains.
Question 3
Many supply chains evolve over time. For example, consider a memory chip supply chain. Production
strategies may change during different stages of the product life cycle. When a new memory chip is
introduced, price is high, yield is low, and production capacity is tight, and the availability of the
product is important. Consequently, production is usually done at plants close to markets, and the
management focuses on increasing yield, reducing the number of production disruptions, and fully
utilizing capacity. When the product matures, however, its price drops and demand is stabilized for a
period of time, so minimizing production cost moves to center stage. To reduce costs, production may
be outsourced to overseas foundries, where labor and materials are much cheaper.
Question 4
A vertically integrated company aims at tighter interaction among various business components, and
frequently manages them centrally. Such a structure helps to achieve systemwide goals more easily by
removing conflicts among different parts of the supply chain through central decision making. In a
horizontally integrated company, there is frequently no benefit in coordinating the supply chains of each
business within the company. Indeed, if every business specializes in its core function, and operates
optimally, an overall global optimum may be approached.
Question 5
Effective supply chain management is also important for vertically integrated companies. In such an
organizational structure, various business functions are handled by different departments of the
company that usually have different internal objectives, and these objectives are not necessarily aligned
with each other. This may be due to lack of communication among departments or the incentives
provided by the upper management. For instance, if the sales department is evaluated based on revenue
only, and the manufacturing department is evaluated based on revenue only, and the manufacturing
department is evaluated based on cost only, the company’s profit may not be maximized globally.
Effective supply chain management is still necessary to achieve globally optimal operations.
Question 6
The sources of uncertainty in this example include:
1. Factors such as weather conditions, diseases, natural disasters cause uncertainty in availability of
raw materials, i.e., peach crop.
2. Uncertain lead times during transportation of crop from the field to the processing facility may
affect the quality of peaches, e.g., they may get spoiled.
3. Processing times in the plant, as well as the subsequent warehousing and transportation times are
subject to uncertainty.
4. Demand is not known in advance.
4
