Before getting into a quantitative supply chain analysis, we should first learn the general principles of supply chain planning by understanding the drivers and trade-offs intuitively. A supply chain is a system, typically composed of multiple layers of facilities, from factories to DCs and warehouses, and to stores. Factories work on sourcing, production, and new product development, then ship inbound the finished goods to DCs and warehouses. DCs and warehouses hold inventory, and fulfill orders by shipping outbound to stores. Stores sell the product to customers and provide customer services such as managing returns. Sometimes, DCs may bypass the stores and ship the products directly to customers. The objective is to meet customer demand with supply at the minimum cost, where the cost includes shipping costs (inbound, outbound and direct), inventory costs and warehouse cost, and store cost. In supply chain planning, an important decision to be made is on how to meet customer demand. Should we use stores to meet customer demand, or ship directly from DCs to customers? To answer this question, let's take a closer look at the trade-offs. In the classical or store model, we stock up the stores to meet customer demand in the store. This model is widely used in practice, like Home Depot, Whole Foods, Walmart and so on. Now, in order to reduce shipping costs, people often use truckload to ship goods in order to achieve the economies of scale in shipping. This often leads to a large amount of inventories in stores. This model may work well for lower value, long shelf-life products, with a high demand volume. For products with a short life cycle or shelf life, such as fresh items in grocery stores, a different model is often used, which is called continuous replenishment. In this model, we still meet all the demand in stores, but use more frequent shipping. For instance, rather than truckload shipments, we may use less than truckload shipments, or express shipments. By increasing the shipping frequency and cost, the continuous replenishment model can effectively reduce inventories. In more recent years, with the development of e-commerce and small package shipping industry, a new model called Direct Shipping emerged, with the stores being converted to showrooms holding only samples. Customers can experience the products in stores, but their orders will be met by DCs via express shipping. This model reduced the inventories to the minimum at the expense of a much higher shipping cost. It was first attempted by catalog sellers and e-commerce stores on high value and slow-moving items, but later on, the model was spread out to many other products. In practice, a company can combine these three models for different products in different markets. These models show that shipping and inventories are important drivers or considerations for supply chain planning. So let's understand their economics a bit better. We should also discuss the economics and important issues of other aspects of the supply chain, such as: warehouse order fulfillment, new product introduction, store operations, and the customer experience. Shipping has significant economies of scale. Comparing express shipping or less than truckload shipping with truckload shipping, the example here shows the unit shipping cost over distance for express and truckload shipping. As you can see, express shipping can be much more expensive than truckload shipping, and their differences grow bigger for a longer distance. Inventory, however, has the risk pooling effect. That is, if we pull inventory from multiple stores to a warehouse, then, we can provide the same stock availability with less inventory investment. Plus, it is often cheaper to hold inventories at warehouses than stores, because warehouses are often located in less populous areas than stores, and thus, have less rental, utility and labor costs than stores. In addition to shipping and inventory, let us also understand the economics of warehouse order fulfillment, which consists of picking, packing, and loading. Specifically, picking and packing have a significant economy of scale. Picking, packing batch orders to stores, can be much cheaper than picking, packing individual orders to customers. Supply chain planning may also affect the speed of new product introduction. As Michael Dell once commented, "If I've got 11 days inventory, and my competitor has 80, and Intel comes out with a new 415 megahertz chip, that means I'm going to get to the market 69 days sooner. You as the competitor are vulnerable to product transitions, when you can get stuck with obsolete inventory." Now, this is true because, if you do not get rid of the old inventory, you won't be able to launch a new product. So either you have to wait until you sell all the old inventory, or you write them off, and take a hit. Finally, customer experience is completely different from a store to a showroom. Both models have benefits and concerns, and we will discuss more at the end of this course. In summary, supply chain planning is driven by considerations in shipping, inventory, warehousing, speed to market, and store operations and customer experience. These driving forces have delicate trade-offs. We must quantify the net impact of a strategy on all these drivers to come up with a globally optimal strategy.
