Using Supply Chains to Create Value for Customers
| Site: | Saylor University |
| Course: | MEI602: Marketing Management in Entrepreneurship |
| Book: | Using Supply Chains to Create Value for Customers |
| Printed by: | Guest user |
| Date: | Saturday, 12 September 2026, 9:41 AM |
Description
buttons.Sourcing and Procurement
Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager's job in recent years, in part because businesses keep becoming more specialized. Just like Ford's workers became more efficient by performing specialized tasks, so, too have companies.
Ford Motor Company no longer produces its own tires for its cars. It buys them from tire producers like Michelin and Goodyear. It's still possible to "own" your supply chain, though. The diamond company DeBeers owns its own mines, distributorships, and retail diamond stores. The problem is that it's very costly to own multiple types of companies and difficult to run them all well, too.
Firms look up and down their supply chains and outside them to see which companies can add the most value to their products at the least cost. If a firm can find a company that can add more value than it can to a function, it will often outsource the task to that company. After all, why do something yourself if someone else can do it better or more cost-effectively?
Rather than their own fleets of trucks, ships, and airplanes, most companies outsource at least some of their transportation tasks to shippers such as Roadway and FedEx. Other companies hire freight forwarders to help them. You can think of freight forwarders as travel agents for freight. Their duties include negotiating rates for shipments and booking space for them on transportation vehicles and in warehouses. A freight forwarder also combines small loads from various shippers into larger loads that can be shipped by more economical means. However, it doesn't own its own transportation equipment or warehouses.
Other companies go a step further and outsource their entire order processing and shipping departments to third-party logistics (3PLs) firms. FedEx Supply Chain Services and UPS Supply Chain Solutions (which are divisions of FedEx and UPS, respectively) are examples of 3PLs. A 3PL is a one-stop shipping solution for a company that wants to focus on other aspects of its business. Firms that receive and ship products internationally often hire 3PLs so they don't have to deal with the headaches of transporting products abroad and completing import and export paperwork for them.
The Growth of Outsourcing and Offshoring
Beginning in the 1990s, companies began to outsource a lot of other activities besides transportation. Their goal was twofold: (1) to lower their costs and (2) to focus on the activities they do best. You might be surprised by the functions firms outsource. In fact, many "producers" of products no longer produce them at all but outsource their production instead.
Most clothing companies, including Nike, design products, but they don't make them. Instead, they send their designs to companies in nations with low labor costs. Likewise, many drug companies no longer develop their own drugs. They outsource the task to smaller drug developers, which in recent years have had a better track record of developing best-selling pharmaceuticals. The Crest SpinBrush (toothbrush) wasn't developed by Procter & Gamble, the maker of Crest. A small company called Church & Dwight Co. developed the technology for the SpinBrush, and P&G purchased the right to market and sell the product.
Outsourcing work to companies abroad is called offshoring. Figure 9.2 "Percentage of Supply Chain Functions Offshored in 2008" shows the percentage of supply chain functions three hundred global manufacturers and service organizations say they now offshore and the percentages these organizations expect to offshore by 2010.
Figure 9.2 Percentage of Supply Chain Functions Offshored in 2008
Some of the Ins and Outs of Outsourcing
A company faces a number of tradeoffs when it outsources an activity. The loss of control - particularly when it comes to product quality and safety - is one of them. Just ask Mattel. Beginning in 2007, Mattel was forced to recall tens of millions of toys it had outsourced for production because they were tainted with lead. But Mattel isn't the only company to experience problems. In a recent global survey, more than one-fifth of the companies that outsource their production said they have experienced "frequent" and "serious" quality problems.
The U.S. Consumer Products Safety Commission randomly inspects products, but there is no way the commission's personnel can begin to test them all. To protect their customers, many companies either test their suppliers' products themselves or contract with independent labs to do so. For example, if you sell a product to Walmart, you need to be prepared to send it to such a lab, should Walmart ask you to. Companies also do on-site audits, or checks, of their suppliers. Other companies station employees with their suppliers on a permanent basis to be sure that the quality of the products they're producing is acceptable.
The loss of control of their technology is another outsourcing risk that companies face. Some countries are better about protecting patented technologies and designs than others, and some supply chain partners are more trustworthy than others. How can you be sure your supply chain partner won't steal your technology? A few years ago, General Motors began working with a Chinese firm to produce a car called the Spark for the Chinese market. But before GM could even get the automobile plant up and running, the U.S. automaker alleged that the design of the car had been stolen, sold to another company, and knockoffs of it were being driven around China's streets.
Another aspect of outsourcing relates to the social responsibility and environmental sustainability companies exhibit in terms of how they manage their supply chains. Social responsibility is the idea that companies should manage their businesses not just to earn profits but to advance the well-being of society. Both issues are becoming increasingly important to consumers. Environmental sustainability is the idea that firms should engage in business practices that have the least impact on the environment so that it's sustained for future generations.
To demonstrate to consumers they are socially responsible, Starbucks and other companies have joined the Fair Trade movement. Members of the Fair Trade movement pay farmers and other third-world producers higher prices for their products so they don't have to live in poverty. The prices consumers pay for products with fair-trade labels are often higher, but one Harvard study has shown that consumers expect them to be and that sales actually increased when the prices of them went up.
The push for environmental sustainability is also having an impact on supply chains, partly because the stricter environmental laws in many counties are demanding it. But companies are seeing the upside of producing "greener" products and disposing of them in ethical ways. First, it improves a company's image and makes it stand out among its competitors. Second, many consumers are willing to pay more for green products, even during a recession (Birchall, 2009). Walmart recently announced that it's planning to require its suppliers to measure the environmental costs of producing their products. The "green" ratings will then be put on the products labels (Rosen, 2009). Figure 9.3 "Why Firms Say They Are "Going Green" with Their Supply Chains" shows the reasons why firms "go green" with their supply chains.
Figure 9.3 Why Firms Say They Are "Going Green" with Their Supply Chains
The outdoor clothing company Patagonia takes both social responsibility and environmental sustainability seriously. Patagonia tries to design, source, produce, and recycle its products so they cause the least environmental damage possible. The company also audits its supply chain partners to ensure they treat workers fairly.
Video Clip
Hewlett-Packard = Hazardous Products
}" id="id_videojs_6aa564acb413c_1" class="video-js" playsinline="true" preload="auto" controls="true" title="MBA602Unit6-2-1.mp4">
Not going green can be hazardous to a company's reputation. After Hewlett-Packard (HP) broke a promise to eliminate toxic materials in its computers by 2009, Greenpeace activists painted the words "Hazardous Products" on the roof of the company's headquarters in Palo Alto, California. Meanwhile, a voicemail message from Star Trek actor William Shatner was delivered to all the phones in the building. "Please ask your leader [HP CEO Mark Hurd]" to make computers that are toxin free like Apple has done, Shatner said in the message. You can hear the message by going to the following link: http://www.greenpeace.org/international/news/hp-reminder-28-07-09. An HP spokesman said that eliminating the toxic materials would have disrupted the company's supply chain.
One of the drawbacks of outsourcing is the time it takes for products to make their way to the United States and into the hands of consumers. The time it takes is a big issue because it affects how responsive a company is to its customers. Retailers don't like to wait for products. Waiting might mean their customers will shop elsewhere if they can't find what they want. As we explained in Chapter 8 "Using Marketing Channels to Create Value for Customers", for this reason and others, some companies are outsourcing their activities closer to home.
Figure 9.4
Click on the link below to track the environmental and social impact of Patagonia's various products throughout the supply chain - from their design to their delivery: http://www.patagonia.com/web/us/footprint/index.jsp.
When firms can't resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcing. Insourcing can actually help set your company apart these days. The credit card company Discover doesn't outsource its customer service to companies abroad. Perhaps that helps explain why one survey ranked Discover number one in customer loyalty.
Matching a Company's Sourcing Strategies with the Needs of Its Customers
Your customer should ultimately be the focus of any insourcing and outsourcing decision you make. After all, unless the product gets recycled, the customer is the last link in the supply chain. Not all customers have the same product and service requirements, though. It might be acceptable for a company that sells PCs to individual consumers to outsource its tech support, perhaps to a firm in India that can perform the function at lower cost. However, a company that buys an expensive, customized computer network is probably going to want to deal directly with the maker of the product if the network goes down - not another company in another country.
Similarly, if you're producing an expensive car for Ferrari-type buyers, purchasing bargain-basement-priced parts could leave your customers dissatisfied - especially if the parts fail and their cars break down. Conversely, if you're designing a low-end automobile, top-of-the-line parts could make it too expensive for low-end buyers. High-end car buyers are likely to demand better after-sales service than low-end car buyers, too.
Figure 9.5
Many of Patagonia's customers are outdoor enthusiasts willing to pay $100 or more for a fleece jacket made from recycled plastic bottles. A customer at Walmart might not be. The trick for Walmart and its green index will be to satisfy customers who want low prices as well as to save the planet.
Key Takeaway
Sourcing is the process of evaluating and hiring individual businesses to supply goods and services to your business. Procurement is the process of actually purchasing those goods and services. Sourcing and procurement have become a bigger part of a supply manager's job in recent years, in part because businesses keep becoming more specialized. Companies outsource activities to lower their costs to focus on the activities they do best. Companies face numerous tradeoffs when they outsource activities, which can include a loss of control and product-quality and safety problems. When firms that can't resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcing. The customer should be the focus of any insourcing and outsourcing decisions companies make.
Review Questions
- What are some of the supply chain functions firms outsource and offshore?
- How does outsourcing differ from offshoring?
- Why might a company be better off insourcing an activity?
Source: LibreTexts, https://biz.libretexts.org/Bookshelves/Marketing/Principles_of_Marketing_(LibreTexts)/09%3A_Using_Supply_Chains_to_Create_Value_for_Customers/09.1%3A_Sourcing_and_Procurement
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 License.
Demand Planning and Inventory Control
Learning Objectives
- Explain why demand planning adds value to products.
- Describe the role inventory control plays when it comes to marketing products.
- List the reasons why firms collaborate with another for the purposes of inventory control and demand planning.
Demand Planning
Imagine you are a marketing manager who has done everything in your power to help develop and promote a product - and it's selling well. But now your company is running short of the product because the demand forecasts for it were too low. Recall that this is the scenario Nintendo faced when the Wii first came out. The same thing happened to IBM when it launched the popular ThinkPad laptop in 1992.
Not only is the product shortage going to adversely affect the profitability of your company, but it's going to adversely affect you, too. Why? Because you, as a marketing manager, probably earn either a bonus or commission from the products you work to promote, depending on how well they sell. And, of course, you can't sell what you don't have.
Figure 9.6
IBM ThinkPads were hard to find in 1992. But NASA didn't have any trouble getting one. In 1993, astronauts used it to repair the Hubble Space Telescope, which orbits Earth.
As you can probably tell, the best marketing decisions and supplier selections aren't enough if your company's demand forecasts are wrong. Demand planning is the process of estimating how much of a good or service customers will buy from you. If you're a producer of a product, this will affect not only the amount of goods and services you have to produce but also the materials you must purchase to make them. It will also affect your production scheduling, or the management of the resources, events, and processes need to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. Closely related to demand forecasting are lead times. A product's lead time is the amount of time it takes for a customer to receive a good or service once it's been ordered. Lead times also have to be taken into account when a company is forecasting demand.
Sourcing decisions - deciding which suppliers to use - are generally made periodically. Forecasting decisions must be made more frequently - sometimes daily. One way for you to predict the demand for your product is to look at your company's past sales. This is what most companies do. But they don't stop there. Why? Because changes in many factors - the availability of materials to produce a product and their prices, global competition, oil prices (which affect shipping costs), the economy, and even the weather - can change the picture.
For example, when the economy hit the skids in 2008, the demand for many products fell. So if you had based your production, sales, and marketing forecasts on 2007 data alone, chances are your forecasts would have been wildly wrong. Do you remember when peanut butter was recalled in 2009 because of contamination? If your firm were part of the supply chain for peanut butter products, you would have needed to quickly change your forecasts.
The promotions you run will also affect demand for your products. Consider what happened to KFC when it first came out with its new grilled chicken product. As part of the promotion, KFC gave away coupons for free grilled chicken via Oprah.com. Just twenty-four hours after the coupons were uploaded to the Web site, KFC risked running out of chicken. Many customers were turned away. Others were given "rain checks" (certificates) they could use to get free grilled chicken later.
Figure 9.7
KFC's new Kentucky Grilled Chicken was finger-lickin' good - if you could get it. Reportedly, the chain nearly ran out of the birds following a promotion on Oprah.com.
In addition to looking at the sales histories of their firms, supply chain managers also consult with marketing managers and sales executives when they are generating demand forecasts. Sales and marketing personnel know what promotions are being planned because they work more closely with customers and know what customers' needs are and if those needs are changing.
Firms also look to their supply chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a practice whereby supply chain partners share information and coordinate their operations. Walmart has developed a Web-based CPFR system called Retail Link. Retailers can log into Retail Link to see how well their products are selling at various Walmart stores, how soon more products need to be shipped to the company and where, how any promotions being run are affecting the profitability of their products, and so forth. Because different companies often use different information technology systems and software, Web-based tools like Retail Link are becoming a popular way for supply chain partners to interface with one another.
Not all firms are wild about sharing every piece of information they can with their supply chain partners. Some retailers view their sales information as an asset - something they can sell to information companies like Information Resources, Inc., which provides competitive data to firms that are willing to pay for it. By contrast, other firms go so far as to involve their suppliers before even producing a product so they can suggest design changes, material choices, and production recommendations.
Video Clip
Take a Test Drive of the Tata Nano
}" id="id_videojs_6aa564acb6ada_2" class="video-js" playsinline="true" preload="auto" controls="true" title="MBA602Unit6-2-2.mp4">
Priced at about $2,500 the Tata Nano is the least expensive car ever produced in the world. To make a safe, reliable car at such a low cost, Tata Motors, an Indian company, sought new, innovative design approaches from its suppliers. The elimination of one of the car's two windshield wipers was one result of the collaboration that occurred between Tata and its supply chain partners.
The trend is clearly toward more shared information, or what businesspeople refer to as supply chain visibility. After all, it makes sense that a supplier will be not only more reliable but also in a better position to add value to your products if it knows what your sales, operations, and marketing plans are - and what your customers want. By sharing more than just basic transaction information, companies can see how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating with one another, and the extent to which value is being built into the product.
Demand-planning software can also be used to create more accurate demand forecasts. Demand-planning software can synthesize a variety of factors to better predict a firm's demand - for example, the firm's sales history, point-of-sale data, warehouse, suppliers, and promotion information, and economic and competitive trends. So a company's demand forecasts are as up-to-date as possible, some of the systems allow sales and marketing personnel to input purchasing information into their mobile devices after consulting with customers.
Litehouse Foods, a salad dressing manufacturer, was able to improve its forecasts dramatically by using demand-planning software. Originally the company was using a traditional sales database and spreadsheets to do the work. "It was all pretty much manual calculations. We had no engine to do the heavy lifting for us," says John Shaw, the company's Information Technology director. In a short time, the company was able to reduce its inventory by about one-third while still meeting its customers' needs.
Inventory Control
Demand forecasting is part of a company's overall inventory control activities. Inventory control is the process of ensuring your firm has an adequate supply of products and a wide enough assortment of them meet your customers' needs. One of the goals of inventory management is to avoid stockouts. A stockout occurs when you run out of a product a customer wants to buy. Customers will simply look elsewhere to buy the product - a process the Internet has made easier than ever.
When the attack on the World Trade Center occurred, many Americans rushed to the store to buy batteries, flashlights, American flags, canned goods, and other products in the event that the emergency signaled a much bigger attack. Target sold out of many items and could not replenish them for several days, partly because its inventory tracking system only counted up what was needed at the end of the day. Walmart, on the other hand, took count of what was needed every five minutes. Before the end of the day, Walmart had purchased enough American flags, for example, to meet demand and in so doing, completely locked up all their vendors' flags. Meanwhile, Target was out of flags and out of luck - there were no more to be had.
To help avoid stockouts, most companies keep a certain amount of safety stock on hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product surges or the supply of it drops off for some reason. Maintaining too much inventory, though, ties up money that could be spent other ways - perhaps on marketing promotions. Inventory also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can also become obsolete, deteriorate, spoil, or "shrink". Shrinkage is a term used to describe a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier fraud.
When the economy went into its most recent slide, many firms found themselves between a rock and a hard place in terms of their inventory levels. On the one hand, because sales were low, firms were reluctant to hold much safety stock. Many companies, including Walmart, cut the number of brands they sold in addition to holding a smaller amount of inventory. On the other hand, because they didn't know when business would pick up, they ran the risk of running out of products. Many firms dealt with the problem by maintaining larger amounts of key products. Companies also watched their supply chain partners struggle to survive. Forty-five percent of firms responding to one survey about the downturn reported providing financial help to their critical supply chain partners - often in the form of credit and revised payment schedules.
Just-in-Time Inventory Systems
To lower the amount of inventory and still maintain the stock they need to satisfy their customers, some organizations use just-in-time inventory systems in both good times and bad. Firms with just-in-time inventory systems keep very little inventory on hand. Instead, they contract with their suppliers to ship them inventory as they need it - and even sometimes manage their inventory for them - a practice called vendor-managed inventory (VMI). Dell is an example of a company that utilizes a just-in-time inventory system that's vendor managed. Dell carries very few component parts. Instead, its suppliers carry them. They are located in small warehouses near Dell's assembly plants worldwide and provide Dell with parts "just-in-time" for them to be assembled.
Dell's inventory and production system allows customers to get their computers built exactly to their specifications, a production process that's called mass customization. This helps keep Dell's inventory levels low. Instead of a huge inventory of expensive, already-assembled computers consumers may or may not buy, Dell simply has the parts on hand, which can be configured or reconfigured should consumers' preferences change. Dell can more easily return the parts to its suppliers if at some point it redesigns its computers to better match what its customers want. And by keeping track of its customers and what they are ordering, Dell has a better idea of what they might order in the future and the types of inventory it should hold. Because mass customization lets buyers "have it their way," it also adds value to products, for which many customers are willing to pay.
Product Tracking
Some companies, including Walmart, are beginning to experiment with new technologies such as electronic product codes in an effort to better manage their inventories. An electronic product code (EPC) is similar to a barcode, only better, because the number on it is truly unique. You have probably watched a checkout person scan a barcode off of a product identical to the one you wanted to buy - perhaps a pack of gum - because the barcode on your product was missing or wouldn't scan. Electronic product codes make it possible to distinguish between two identical packs of gum. The codes contain information about when the packs of gum were manufactured, where they were shipped from, and where they were going to. Being able to tell the difference between "seemingly" identical products can help companies monitor their expiration dates if they are recalled for quality of safety reasons. EPC technology can also be used to combat "fake" products, or knockoffs, in the marketplace.
Video Clip
The Basics of RFID and EPC Technology
}" id="id_videojs_6aa564acb6b77_3" class="video-js" playsinline="true" preload="auto" controls="true" title="MBA602Unit6-2-3.mp4">
