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The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www. engage. com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Principles of Supply Chain Management A BALANCED APPROACH 3e JOEL D. WISNER University of Nevada, Las Vegas • KEAH-CHOON TAN University of Nevada, Las Vegas • G. KEONG LEONG University of Nevada, Las Vegas Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Principles of Supply Chain Management, Third edition Joel D.

Wisner, Keah-Choon Tan, G. Keong Leong Editorial Director: Jack W. Calhoun Sr. Acquisitions Editor: Charles McCormick, Jr. Developmental Editor: Daniel Noguera Editorial Assistant: Nora Heink Marketing Manager: Adam Marsh Media Editor: Chris Valentine Manufacturing Buyer: Miranda Klapper Production Service: PreMediaGlobal Sr. Art Director: Stacy Jenkins Shirley Cover Designer: Lou Ann Thesing Cover Image: iStock Photo © 2012, 2009 South-Western, a part of Cengage Learning ALL RIGHTS RESERVED.

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For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at cengage. com/permissions Further permissions questions can be emailed to [email protected] com Library of Congress Control Number: 2010943343 ISBN 13: 978-0-538-47546-4 ISBN 10: 0-538-47546-3 South-Western 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd.

For your course and learning solutions, visit www. cengage. com Purchase any of our products at your local college store or at our preferred online store www. cengagebrain. com Printed in the United States of America 1 2 3 4 5 6 7 15 14 13 12 11 To CJ, Hayley and Blake. JOEL D. WISNER To Shaw Yun, Wen Hui and Wen Jay. KEAH-CHOON TAN To Lin and Michelle. G. KEONG LEONG Brief Contents Preface xv Acknowledgements xvii About the Authors xviii Part 1 Part 2 Part 3 Supply Chain Management: An Overview 1 Chapter 1 Introduction to Supply Chain Management 3

Supply Issues in Supply Chain Management 35 Chapter Chapter Chapter 2 3 4 Purchasing Management 37 Creating and Managing Supplier Relationships 73 Ethical and Sustainable Sourcing 99 Operations Issues in Supply Chain Management 131 Chapter Chapter Chapter Chapter 5 6 7 8 Demand Forecasting 133 Resource Planning Systems 165 Inventory Management 207 Process Management—Lean and Six Sigma in the Supply Chain 249 Part 4 Distribution Issues in Supply Chain Management 297 Chapter 9 Chapter 10 Chapter 11 Chapter 12

Domestic U. S. and Global Logistics 299 Customer Relationship Management 343 Global Location Decisions 375 Service Response Logistics 401 Part 5 Integration Issues in Supply Chain Management 445 Chapter 13 Chapter 14 Supply Chain Process Integration 447 Performance Measurement Along the Supply Chain 481 On the Companion Website Cases in Supply Chain Management Student and Instructor Materials iv Contents Preface xv Acknowledgements xvii About the Authors xviii Part 1 Supply Chain Management: An Overview 1 Chapter 1

Introduction to Supply Chain Management 3 Introduction 5 Supply Chain Management Defined 6 The Importance of Supply Chain Management 9 The Origins of Supply Chain Management in the U. S. 12 The Foundations of Supply Chain Management 15 Supply Elements 15 Operations Elements 17 Logistics Elements 19 Integration Elements 21 Current Trends in Supply Chain Management 22 Expanding (and Contracting) the Supply Chain 23 Increasing Supply Chain Responsiveness 24 The Greening of Supply Chains 25 Reducing Supply Chain Costs 26 Summary 28 Key Terms 28 Discussion Questions 28 Internet Questions 29 Appendix 1. : The Beer Game 30 Beer Game Questions and Exercises 34 Part 2 Supply Issues in Supply Chain Management 35 Chapter 2 Purchasing Management 37 Introduction 39 A Brief History of Purchasing Terms 39 The Role of Supply Management in an Organization 40 The Financial Significance of Supply Management 42 The Purchasing Process 43 The Manual Purchasing System 43 Electronic Procurement Systems (e-Procurement) 47 Small Value Purchase Orders 49 Sourcing Decisions: The Make-or-Buy Decision 53 Reasons for Buying or Outsourcing 54 v i Contents Chapter 3 Reasons for Making 54 Make-or-Buy Break-Even Analysis 55 Roles of Supply Base 57 Supplier Selection 57 How Many Suppliers to Use 60 Reasons Favoring a Single Supplier 60 Reasons Favoring Multiple Suppliers 61 Purchasing Organization 61 Advantages of Centralization 62 Advantages of

Decentralization 62 International Purchasing/Global Sourcing 63 Reasons for Global Sourcing 64 Potential Challenges for Global Sourcing 64 Countertrade 65 Procurement for Government/Nonprofit Agencies 65 Characteristics of Public Procurement 66 Summary 68 Key Terms 68 Discussion Questions 69 Internet Questions 70 Spreadsheet Problems 70 Creating and Managing Supplier Relationships 73 Introduction 75 Developing Supplier Relationships 75 Building Trust 76 Shared Vision and Objectives 76 Personal Relationships 76 Mutual Benefits and Needs 76 Commitment and Top Management Support 77 Change Management 77 Information Sharing and Lines of Communication 77 Capabilities 78 Performance Metrics 78 Continuous Improvement 81 Key Points 81 Supplier Evaluation and Certification 82 The Weighted Criteria Evaluation System 84 ISO 9000 87 ISO 14000 88 Supplier Development 89 Supplier Recognition Programs 91 Supplier Relationship Management 92 Summary 97 Key Terms 97 Discussion Questions 97 Contents vii Chapter 4

Ethical and Sustainable Sourcing 99 Introduction 100 Ethical and Sustainable Sourcing Defined 102 Ethical Sourcing 102 Sustainable Sourcing 105 Developing Ethical and Sustainable Sourcing Strategies 109 Supply Base Rationalization Programs 111 Ethical and Sustainable Supplier Certification Programs 112 Outsourcing Products and Services 113 Insourcing 114 Co-sourcing 114 Early Supplier Involvement 115 Vendor Managed Inventories 116 Supplier Co-location 117 Strategic Alliance Development 117 Negotiating Win-Win Strategic Alliance Agreements 119 Use of E-Procurement Systems 121 Rewarding Supplier Performance 123 Benchmarking Successful Sourcing Practices 124 Using Third-Party Supply Chain Management Services 125 Assessing and Improving the Firm’s Own Sourcing Function 126 Summary 128 Key Terms 128 Discussion Questions 128 Internet Questions 130 Part 3 Operations Issues in Supply Chain Management 131 Chapter 5 Demand Forecasting 133 Introduction 135 Demand Forecasting 136 Forecasting Techniques 137 Qualitative Methods 137 Quantitative Methods 138 Forecast Accuracy 147 Useful Forecasting Websites 150 Collaborative Planning, Forecasting and Replenishment 150 Software Solutions 156 Forecasting Software 156 CPFR Software 161 Summary 162 Key Terms 162 Discussion Questions 162 Spreadsheet Problems 163 viii Contents Chapter 6 Chapter 7

Resource Planning Systems 165 Introduction 166 Operations Planning 167 The Aggregate Production Plan 168 The Chase Production Strategy 169 The Level Production Strategy 171 Master Production Scheduling 173 Master Production Schedule Time Fence 174 Available-to-Promise Quantities 175 The Bill of Materials 178 Material Requirements Planning 181 Terms used in Material Requirements Planning 182 Capacity Planning 185 Capacity Strategy 186 Distribution Requirements Planning 187 The Legacy Material Requirements Planning Systems 187 Manufacturing Resource Planning 189 The Development of Enterprise Resource Planning Systems 190 The Rapid Growth of Enterprise Resource Planning Systems 192 Implementing Enterprise Resource Planning Systems 193 Advantages and Disadvantages of Enterprise Resource Planning

Systems 195 Enterprise Resource Planning System Advantages 195 Enterprise Resource Planning System Disadvantages 197 Enterprise Resource Planning Software Applications 197 Enterprise Resource Planning Software Providers 199 Summary 201 Key Terms 201 Discussion Questions 202 Internet Questions 203 Spreadsheet Problems 203 Inventory Management 207 Introduction 208 Dependent Demand and Independent Demand 210 Concepts and Tools of Inventory Management 210 The Functions and Basic Types of Inventory 211 Inventory Costs 211 Inventory Investment 212 The ABC Inventory Control System 213 Radio Frequency Identification 217 Inventory Models 222 The Economic Order Quantity Model 222 The Quantity Discount Model 227 Contents ix Chapter 8

The Economic Manufacturing Quantity Model 228 The Statistical Reorder Point 234 The Continuous Review and the Periodic Review Inventory Systems 239 Summary 242 Key Terms 242 Discussion Questions 242 Internet Questions 243 Problems 243 Spreadsheet Problems 245 Process Management—Lean and Six Sigma in the Supply Chain 249 Introduction 250 Lean Production and the Toyota Production System 251 Lean Thinking and Supply Chain Management 255 The Elements of Lean 257 Waste Reduction 257 Lean Supply Chain Relationships 260 Lean Layouts 261 Inventory and Setup Time Reduction 262 Small Batch Scheduling 263 Continuous Improvement 266 Workforce Commitment 266 Lean Systems and the Environment 267 The Origins of Six Sigma Quality 268 Comparing Six Sigma and Lean 270 Lean Six 271 Six Sigma and Supply Chain Management 271 The Elements of Six Sigma 273 Deming’s Contributions 274 Crosby’s Contributions 274 Juran’s Contributions 274 The Malcolm Baldrige National Quality Award 276 The ISO 9000 and 14000 Families of Management Standards 279 The DMAIC Improvement Cycle 280 Six Sigma Training Levels 281 The Statistical Tools of Six Sigma 281 Flow Diagrams 281 Check Sheets 282 Pareto Charts 282 Cause-and-Effect Diagrams 284 Statistical Process Control 285 Summary 293 Key Terms 293 x Contents Discussion Questions 293 Internet Questions 295 Problems 295 Part 4 Distribution Issues in Supply Chain Management 297 Chapter 9 Domestic U. S. and Global Logistics 299 Introduction 301 The Fundamentals of Transportation 302 The Objective of Transportation 302 Legal Forms of Transportation 303 The Modes of Transportation 304 Intermodal Transportation 309 Transportation Pricing 310 Transportation Security 312 Transportation Regulation and Deregulation in the U. S. 14 Warehousing and Distribution 318 The Importance and Types of Warehouses 319 Risk Pooling and Warehouse Location 321 Lean Warehousing 324 The Impacts of Logistics on Supply Chain Management 325 Third-Party Logistics (3PL) Services 325 Other Transportation Intermediaries 328 Environmental Sustainability in Logistics 329 Logistics Management Software Applications 331 Transportation Management Systems 331 Warehouse Management Systems 332 Global Trade Management Systems 332 Global Logistics 333 Global Freight Security 333 Global Logistics Intermediaries 334 Foreign-Trade Zones 335 The North American Free Trade Agreement 335 Reverse Logistics 336 The Impact of Reverse Logistics on the Supply Chain 337 Reverse Logistics and the Environment 338 Summary 339 Key Terms 339 Discussion Questions 340 Internet Questions 341 Customer Relationship Management 343 Introduction 345 Customer Relationship Management Defined 346 CRM’s Role in Supply Chain Management 348 Key Tools and Components of CRM 349 Chapter 10 Contents xi Chapter 11

Segmenting Customers 349 Predicting Customer Behaviors 351 Customer Value Determination 352 Personalizing Customer Communications 352 Automated Sales Force Tools 354 Managing Customer Service Capabilities 355 Designing and Implementing a Successful CRM Program 361 Creating the CRM Plan 362 Involving CRM Users from the Outset 362 Selecting the Right Application and Provider 363 Integrating Existing CRM Applications 364 Establishing Performance Measures 364 Training for CRM Users 365 Recent Trends in CRM 366 Customer Data Privacy 366 Social Media 367 Cloud Computing 369 Summary 371 Key Terms 371 Discussion Questions 371 Internet Questions 373 Global Location Decisions 375 Introduction 376 Global Location Strategies 377 Critical Location Factors 380 Regional Trade Agreements and the World Trade Organization 380 Competitiveness of Nations 382 The World Economic Forum’s 12 Pillars of Competitiveness 384 Government Taxes and Incentives 384 Currency Stability 386 Environmental Issues 386 Access and Proximity to Markets 387 Labor Issues 388 Access to Suppliers 388 Utility Availability and Cost 388 Quality-of-Life Issues 389 Right-to-Work Laws 390 Land Availability and Cost 390 Facility Location Techniques 391 The Weighted-Factor Rating Model 391 The Break-Even Model 391 Helpful On-Line Information for Location Analysis 392 Business Clusters 394 xii Contents Chapter 12

Sustainable Development 396 Summary 398 Key Terms 398 Discussion Questions 398 Internet Questions 399 Spreadsheet Problems 399 Service Response Logistics 401 Introduction 403 An Overview of Service Operations 404 Service Productivity 405 Global Service Issues 406 Service Strategy Development 406 The Service Delivery System 408 Service Location and Layout Strategies 409 Supply Chain Management in Services 411 Service Quality and Customers 415 The Primary Concerns of Service Response Logistics 416 Managing Service Capacity 417 Managing Queue Times 423 Managing Distribution Channels 432 Managing Service Quality 436 Summary 439 Key Terms 439 Discussion Questions and Exercises 440 Problems 441 Internet Questions 443 Part 5 Integration Issues in Supply Chain Management 445 Chapter 13

Supply Chain Process Integration 447 Introduction 449 The Supply Chain Management Integration Model 450 Identify Critical Supply Chain Trading Partners 450 Review and Establish Supply Chain Strategies 451 Align Supply Chain Strategies with Key Supply Chain Process Objectives 452 Develop Internal Performance Measures for Key Process Effectiveness 456 Assess and Improve Internal Integration of Key Supply Chain Processes 456 Develop Supply Chain Performance Measures for the Key Processes 459 Assess and Improve External Process Integration and Supply Chain Performance 459 Extend Process Integration to Second-Tier Supply Chain Partners 460 Contents xiii Chapter 14 Re-evaluate the Integration Model Annually 461 Obstacles To Process Integration Along The Supply Chain 461 The Silo Mentality 462 Lack of Supply Chain Visibility 463 Lack of Trust 465 Lack of Knowledge 467 Activities Causing the Bullwhip Effect 467 Managing Supply Chain Risk And Security 470 Managing Supply Chain Risk 470 Managing Supply Chain Security 474 Summary 478 Key Terms 478 Discussion Questions 478 Internet Questions 479 Performance Measurement Along the Supply Chain 481 Introduction 483 Viewing the Supply Chain as a Competitive Force 484 Understanding End Customers 484

Understanding Supply Chain Partner Requirements 485 Adjusting Supply Chain Member Capabilities 485 Traditional Performance Measures 486 Use of Organization Costs, Revenue and Profitability Measures 486 Use of Performance Standards and Variances 487 Use of Firm-Wide Productivity and Utilization Measures 488 World-Class Performance Measurement Systems 490 Developing World-Class Performance Measures 490 Supply Chain Performance Measurement Systems 491 Supply Chain Environmental Performance 494 Specific Supply Chain Performance Measures 495 The Balanced Scorecard 496 Web-Based Scorecards 498 The SCOR Model 499 Summary 504 Key Terms 504 Discussion Questions 504 Internet Questions 506 Appendix 1 Areas under the Normal Curve 507 Appendix 2 Answers to Selected End-of-Chapter Problems 508 xiv Contents Glossary 511 References 524 Endnotes 528 Author Index 556 Subject Index 557 On the Companion Website Cases in Supply Chain Management

Part Part Part Part 2 3 4 5 Cases Cases Cases Cases Student and Instructor Materials Preface Welcome to the third edition of Principles of Supply Chain Management: A Balanced Approach. The practice of supply chain management is becoming widespread in all industries around the globe today, and both small and large firms are realizing the benefits provided by effective supply chain management. We think this text is unique in that it uses a novel and logical approach to present discussions of this topic from four perspectives: purchasing, operations, logistics and the integration of processes within these three vitally important areas of the firm and between supply chain trading partners.

We think this book is somewhat different than the other supply chain management texts available, since we present a more balanced view of the topic—many of the texts available today concentrate primarily on just one of the three areas of purchasing, operations or logistics. The objective of the book is to make readers think about how supply chain management impacts all of the areas and processes of the firm and its supply chain partners, and to show how managers can improve their firm’s competitive position by employing the practices we describe throughout the text. Junior- or senior-level business students, beginning MBA students, as well as practicing managers can benefit from reading and using this text. There are a number of additions to this third edition that we hope you will find interesting and useful. There is a greater emphasis on environmental sustainability throughout the text.

In addition, each chapter contains new Supply Chain Management in Action, e-Business Connection, and Global Perspective features, along with new references throughout and new or additional end-of-chapter discussion questions and exercises. Other specific additions and changes to the text are described below. The textbook also comes with a dedicated website containing dozens of teaching cases split among each section of the book. Most of the case companies and situations are real, while others are fictional, and the cases vary from easy to difficult and short to long. Also on the website is a guide to supply chain management videos along with the YouTube Website addresses for each video. Finally, Power Point lecture slides are available for downloading.

Part of the website is protected and for instructors only, and this site contains sample syllabi, case teaching notes, answers to all of the end-of-chapter questions and problems, and a test bank. In the Chapter 1 Appendix, there is a discussion of the Beer Game, with inventory tracking sheets to allow instructors to actually play the game with their students. Finally, there are quantitative as well as qualitative problems and questions, Internet exercises and Excel problems spread throughout most of the chapters. Part 1 is the overview and introduction of the topic of supply chain management. This chapter introduces the basic understanding and concepts of supply chain management, and should help students realize the importance of this topic.

Core concepts such as the bullwhip effect, supplier relationship management, forecasting and demand management, enterprise resource planning, transportation management and customer relationship management are discussed. There is also a new section on current trends in supply chain management. Part 2 presents supply issues in supply chain management. This very important topic is covered in three chapters, building from an introduction to purchasing management, xv xvi Preface to managing supplier relationships and then to ethical and sustainable sourcing. Within these chapters can be found sections on government purchasing, global sourcing, e-procurement, software applications, supplier development and green purchasing. Part 3 includes four chapters regarding operations issues in supply chain management.

This section progresses from topics on forecasting, resource planning and inventory management to lean production and Six Sigma. New sections in Part 3 include a greater emphasis on collaborative planning, forecasting, and replenishment (CPFR); discussions of distribution requirements planning (DRP) and radio frequency identification (RFID); and finally discussions of the latest lean production and Six Sigma programs. Part 4 presents distribution issues in supply chain management and consists of four chapters. Chapter 9 is a review of domestic U. S. and international logistics and contains new sections on green transportation, international logistics security and reverse logistics.

This is followed by chapters on customer relationship management, global location decisions and service response logistics. New content in these chapters includes new software application discussions, trends in customer relationship management, new location trends in the global economy and cloud computing services. The final section is Part 5, which presents discussions of the integration issues in supply chain management and performance measurements along the supply chain. While cooperation and integration are frequently referred to in the text, this section brings the entire text into focus, tying all of the parts together, first by discussing integration in detail, followed by a discussion of traditional and world-class performance measurement systems.

New material here includes the topics of supply chain risk management and expanded coverage of performance measurement models. We think we have compiled a very interesting set of supply chain management topics that will keep readers engaged and we hope you enjoy it. We welcome your comments and suggestions for improvement. Please direct all comments and questions to: Joel D. Wisner: joel. [email protected] edu (primary contact), Keah-Choon Tan: [email protected] nevada. edu, or G. Keong Leong: keong. [email protected] edu Acknowledgements We greatly appreciate the efforts of a number of fine and hard-working people at Cengage Learning/South-Western College Publishing. Without their feedback and guidance, this text would not have been completed.

The team members are Charles E. McCormick, Jr. , Senior Acquisitions Editor; Adam Marsh, Marketing Manager; and Daniel Noguera, our Associate Developmental Editor and day-to-day contact person. A number of other people at Cengage Learning and South-Western also need to be thanked including Stacy Shirley, Chris Valentine and Libby Shipp. We also would like to thank Katy Gabel and her people at PreMediaGlobal who put the manuscript into final copy form. Additionally, we would like to thank all of the case writers who contributed their cases to this textbook. Their names, along with their contact information, are printed with each of the cases on the website.

As with any project of this size and time span, there are certain to be a number of people who gave their time and effort to this textbook, and yet their names were inadvertently left out of these acknowledgments. We apologize for this and wish to thank you here. xvii About the Authors Joel D. Wisner is Professor of Supply Chain Management at the University of Nevada, Las Vegas. He earned his BS in Mechanical Engineering from New Mexico State University in 1976 and his MBA from West Texas State University in 1986. During that time, Dr. Wisner worked as an engineer for Union Carbide at their Oak Ridge, Tennessee facility and then worked in the oil industry in the wet and green Louisiana Gulf Coast area and also in the dry and sandy West Texas area.

In 1991, he earned his PhD in Operations and Logistics Management from Arizona State University. He holds certifications in transportation and logistics (CTL) and in purchasing management (C. P. M. ). He is currently keeping busy teaching undergraduate and graduate courses in supply chain management at UNLV. His research and case writing interests are in process assessment and improvement strategies along the supply chain. His articles have appeared in numerous journals including Journal of Business Logistics, Journal of Operations Management, Journal of Supply Chain Management, Journal of Transportation, Production and Operations Management Journal, and Business Case Journal.

More information about Dr. Wisner can be found at his website: http://faculty. unlv. edu/wisnerj. Keah-Choon Tan is Professor of Operations Management and Chair of the Marketing Department at the University of Nevada, Las Vegas. He received a BSc degree and an MBA from the University of South Alabama, and a PhD in Operations Management from Michigan State University. He is a certified purchasing manager of the Institute for Supply Management, and is certified in production and inventory management by the APICS. He has published articles in the area of supply chain management, quality, and operations scheduling in academic journals and magazines. Prior to academia, Dr.

Tan was a hospital administrator and an account comptroller of a manufacturing firm. He has served as co-track chair and on various committees for the Decision Sciences Institute. He has also served as editor, co-guest editor and on the editorial boards of academic journals. Dr. Tan has received several research grants and teaching awards, including the UNLV Foundation Distinguished Teaching Award. G. Keong Leong is Professor and Chair of the Management Department in the College of Business at the University of Nevada, Las Vegas. He received an undergraduate degree in Mechanical Engineering from the University of Malaya and an MBA and PhD from the University of South Carolina.

He was previously a member of the faculty at Ohio State University and a visiting faculty at the Thunderbird School of Global Management. His publications appear in academic journals such as Journal of Operations Management, Decision Sciences, Interfaces, Journal of Management, European Journal of Operational Research and International Journal of Production Research, among others. He has co-authored three books including Operations Strategy: Focusing Competitive Excellence and Cases in International Management: A Focus on Emerging Markets and received research and teaching awards including an Educator of the Year award from the Asian Chamber of Commerce in Las Vegas.

He has been active in the Decision Sciences Institute, serving as President, Editor of Decision Line, At-Large VicePresident, Chair of the Innovative Education Committee, Chair of the Doctoral Student xviii About the Authors xix Affairs Committee and Manufacturing Management Track Chair. In addition, he served as Chair of the Professional Development Workshop and Chair of the Operations Management Division, Academy of Management. Professor Leong is listed in Who’s Who Among American Teachers, Marquis Who’s Who in the World, Who’s Who in America, and Who’s Who in American Education. This page intentionally left blank Part 1 Supply Chain Management: An Overview Chapter 1 Introduction to Supply Chain Management 1 This page intentionally left blank Chapter 1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

Given how quickly and continuously everything is changing these days, it is essential to understand analytically the functioning of supply chains and to be able to know what strategies will produce the best results. This requires greater attention to creating supply chain solutions that are effective and efficient. 1 Growth is our mantra as an organization. We know that if you’re not growing, you’re dying. So we have to make sure that in the supply chain organization, we’re positioning ourself for that growth. 2 Learning Objectives After completing this chapter, you should be able to • Describe a supply chain and define supply chain management. • Describe the objectives and elements of supply chain management. Describe local, regional and global supply chain management activities. • Describe a brief history and current trends in supply chain management. • Understand the bullwhip effect and how it impacts the supply chain. Chapter Outline Introduction Supply Chain Management Defined The Importance of Supply Chain Management The Origins of Supply Chain Management in the U. S. The Foundations of Supply Chain Management Current Trends in Supply Chain Management Summary 3 4 Part 1 Supply Chain Management: An Overview Supply Chain Management Where Does the Coal Go? in Action At the same time most every year my dad would be asking, “But where does the coal go? We’d be on our family vacations on Lake Erie, and as a lover of ships, he’d closely observe the comings and goings of the big freighters that moved iron ore, coal, coke and other materials east and west across the Great Lakes. He’d explain to me why certain ships rode heavy (low in the water and very slow) or light (high in the water and very fast), and what materials were in the ones coming from the west, where they came from and what part they played in making steel— and in turn, what was carried in the bowels of these giant ships, some of them 1,000 feet long. One of those cargoes was coal, and the coal-bearing freighters would always pull in and unload at the harbor three miles east of us.

But the one piece of this shipping and transfer and delivery and supply puzzle that my dad couldn’t quite figure out was what happened to the coal after it was unloaded at the harbor in Conneaut, Ohio. Oh, he knew what its ultimate fate would be and the role it would play in making steel or other products, but he couldn’t figure out the physical steps involved with the movement of that coal inside the harbor, and that really bugged him. He and I would try to find secluded roads leading into the back of this enormous industrial harbor so we could see where the coal went, but we’d always be caught short by fences bearing grim warnings. We tried hiking in from the far shore, hacking our way through thick woods, but always the fence would stop us.

So I took my fellow seeker on a surprise outing. We parked at the little airport in Erie, Pennsylvania, where I’d chartered a private plane. For the next couple of hours, the pilot flew us all over Lake Erie, swooping down over the decks of some of the freighters as they made their way across the lake and circling a few times over the Conneaut harbor. I’ll never forget the sight or sound of my dad triumphantly laughing and slapping his knee as he looked out the window at the massive expanse of the harbor that we’d never been able to see from the ground as he said, “Now I see where the coal goes! ” We had to go a half mile up in the air to get the perspective we needed, but we got it.

He saw the railroad shunt that moved the coal from the ships to huge machines that transferred it to a massive web of railroad cars that linked up with rail lines heading south and thence all over the country. I suspect at some level he always knew this is what went on, but he had to see it; he had to really know; he had to be able to tangibly put into place that last piece of the puzzle that ran across thousands of miles of water and rail lines and touched hundreds of industries. I’ve been thinking about this a lot recently because companies of all sorts seem to be striving for the same kind of end-to-end view of their businesses, from their farthest-flung suppliers through their partners to their customers and even out to their customers’ customers.

The need to know, to really know and to have end-to-end vision, is becoming increasingly vital in this business world that moves and changes so rapidly. Thanks for indulging me in this mostly personal tale of end-to-end vision. I’d like to close by adding that several weeks after our plane ride, my dad died quite unexpectedly. But before he left us, he got to see where the coal went. Source: Evans, B. , “Remembering My Dad,” InformationWeek, July 26, 2010: 6–7. Used with permission. Bob Evans is senior VP and director of InformationWeek’s Global CIO unit. Chapter 1 Introduction to Supply Chain Management 5 Introduction Operating successfully today requires organizations to become much more involved with their suppliers and customers.

As global markets expand and competition increases, making products and services that customers want means that businesses must pay closer attention to where materials come from, how their suppliers’ products and services are designed, produced and transported, how their own products and services are produced and distributed to customers, and what their direct customers and the end-product consumers really want. Over the past twenty-plus years, many large firms or conglomerates have found that effectively managing all of the business units of a vertically integrated firm—a firm whose business boundaries include former suppliers and/or customers—is quite difficult. Consequently, firms are selling off many business units and otherwise paring down their organization to focus more on core capabilities, while trying to create alliances or strategic partnerships with suppliers, transportation and warehousing companies, distributors and other customers who are good at what they do.

This collaborative approach to making and distributing products and services to customers is becoming the most effective and efficient way for firms to stay successful—and is central to the practice of supply chain management (SCM). Several factors require today’s firms to work together more effectively than ever before. Communication and information exchange through computer networks using enterprise resource planning (ERP) systems (discussed further in Chapter 6) and the Internet have made global teamwork not only possible but necessary for firms to compete in most markets. Communication technology continues to change rapidly, making global partnerships and teamwork much easier than ever before.

Competition is expanding rapidly in all industries and in all markets around the world, bringing new materials, products, people and resources together, making it more difficult for the local, individually owned, “mom-and-pop” shops to keep customers. The recent global economic recession has made customers more cost-conscious while simultaneously seeking higher levels of quality and service, which is requiring organizations to find even better ways to compete. New markets are opening up as governments change and as consumers around the world learn of new products from television, the Internet, radio and contact with tourists. Customers are demanding more socially responsible and environmentally-friendly activities from organizations.

Considering all of these changes to the environment, it is indeed an exciting time for companies seeking to develop new products, find new customers and compete more successfully. New jobs and opportunities are opening up in the areas of purchasing, operations, logistics and supply chain management as firms build better competitive infrastructures. As you read this textbook, you will be introduced to the concepts of supply chain management and how to use these concepts to become better managers in today’s global economy. We use examples throughout the text to illustrate the topics discussed; and we provide online cases for each section of the textbook to enable you to test your problem-solving, decision-making and writing skills in supply chain management.

We hope that by the end of the text you will have gained an appreciation of the value of supply chain management and will be able to apply what you have learned, both in your profession and in future courses in supply chain management. In this chapter, the term supply chain management is defined, including a discussion of its importance, history and developments to date. The chapter ends with a look at some of the current trends in supply chain management. 6 Part 1 Supply Chain Management: An Overview Supply Chain Management Defined To understand supply chain management, one must begin with a discussion of a supply chain; a generic one is shown in Figure 1. 1.

The supply chain shown in the figure starts with firms extracting raw materials from the ground—such as iron ore, oil, wood and food items—and then selling these to raw material suppliers such as lumber companies, steel mills and raw food distributors. These firms, acting on purchase orders and specifications they have received from component manufacturers, turn the raw materials into materials that are usable by these customers (materials like sheet steel, aluminum, copper, lumber and inspected foodstuffs). The component manufacturers, responding to orders and specifications from their customers (the final product manufacturers) make and sell intermediate components (electrical wire, fabrics, plumbing items, nuts and bolts, molded plastic components, processed foods).

The final product manufacturers (companies like Boeing, General Motors, Coca-Cola) assemble finished products and sell them to wholesalers or distributors, who then resell these products to retailers as their product orders are received. Retailers in turn sell these products to us, the end-product consumers. Consumers buy products based on a combination of cost, quality, availability, maintainability and reputation factors, and then hope the purchased products satisfy their requirements and expectations. The companies, along with their supply chains, that can provide all of these desired things will ultimately be successful. Along the supply chain, intermediate and end customers may need to return products, obtain warranty repairs or may just throw products away or recycle them.

These reverse logistics activities are also included in the supply chain, and are discussed further in Chapter 9. Figure 1. 1 A Generic Supply Chain Product & service flow Recycling & returns Raw material Suppliers/mfgs. Second-tier suppliers Intermediate component mfgs. First-tier suppliers Wholesalers, distributors Transportation & storage activities End-product manufacturer (focal firm) First-tier customers Retailers Second-tier customers End-product consumers Information/planning/activity integration Chapter 1 Introduction to Supply Chain Management 7 Referring again to Figure 1. 1, the firm in the middle of the figure is referred to as the focal firm, and the direct suppliers and customers of the focal firm are first-tier suppliers and customers.

The first-tier suppliers’ suppliers are thus the focal firm’s second-tier suppliers, and the first-tier customers’ customers are the focal firm’s second-tier customers. Some supply chains, such as an automobile supply chain, might have many tiers, while others such as a law office, might have very few tiers. While the focal firm is presented here and in other chapter discussions as an end-product assembly firm, it can be any of the firms involved in the supply chain, depending on the frame of reference of the manager viewing the diagram. Thus, the series of companies eventually making products and services available to consumers—including all of the functions enabling the production, delivery and recycling of materials, components, end products and services—is called a supply chain.

Companies with multiple products likely have multiple supply chains. All products and services reach their customers via some type of supply chain—some much larger, longer and more complex than others. Some may involve foreign suppliers or markets. With this idea of a supply chain in mind, then, it is easy to come to the realization that there really is only one true source of income for all supply chain organizations—the supply chain’s end customers. Steve Darendinger, vice president of advanced sourcing and supply chain strategy for Cisco Systems of California, says the key to developing effective supply chain management programs is keeping the customer in mind. The things that we do within our supply chain are driven around customer success,” he says. “We provide opportunities and solutions for customers. ”3 When individual firms in a supply chain make business decisions while ignoring the interests of the end customer and other chain members, these suboptimal decisions transfer risks, costs and additional waiting time along the supply chain, ultimately leading to higher end-product prices, lower supply chain service levels and eventually lower end-customer demand. A number of other companies are also indirectly involved in most supply chains, and they play a very important role in the eventual delivery of end products to customers.

These are the many service providers, such as trucking and airfreight shipping companies, information system providers, public warehousing firms, freight forwarders, agents and consultants. These service providers are extremely useful to the primary firms in most supply chains, since they can help to get products where they need to be in a timely fashion, allow buyers and sellers to communicate effectively, allow firms to serve outlying markets, enable firms to save money on domestic and global shipments, and in general allow firms to adequately serve their customers at the lowest possible cost. So now that a general description of a supply chain has been provided, what is supply chain management (SCM)? A number of definitions are available in the literature and among various professional associations.

A few of these are provided here from three organizations connected to the practice of supply chain management: • The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as: “The planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers and customers. ”4 • The Institute for Supply Management (ISM) describes supply chain management as: “The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer. ”5 8 Part 1 Supply Chain Management: An Overview The Singapore-based Logistics & Supply Chain Management Society defines supply chain management as: “The coordinated set of techniques to plan and execute all steps in the global network used to acquire raw materials from vendors, transform them into finished goods, and deliver both goods and services to customers. ”6 Consistent across these definitions is the idea of coordinating or integrating a number of goods- and services-related activities among supply chain participants to improve operating efficiencies, quality and customer service among the collaborating organizations. Thus, for supply chain management to be successful, firms must work together by sharing information on things like demand forecasts, production plans, capacity changes, new marketing strategies, new product and service developments, new technologies employed, purchasing plans, delivery dates and anything else impacting the firm’s purchasing, production and distribution plans.

In theory, supply chains work as a cohesive, singularly competitive unit, accomplishing what many large, vertically integrated firms have tried and failed to accomplish. The difference is that independent firms in a supply chain are relatively free to enter and leave supply chain relationships if these relationships are no longer proving beneficial; it is this free market alliance-building that allows supply chains to operate more effectively than vertically integrated conglomerates. For example, when a particular material or product is in short supply accompanied by rising prices, a firm may find it beneficial to align itself with one of these suppliers to ensure continued supply of the scarce item.

This alignment may become beneficial to both parties—new markets for the supplier leading to new, future product opportunities; and long-term continuity of supply and stable prices for the buyer. Later, when new competitors start producing the scarce product or when demand declines, the supplier may no longer be valued by the buying firm; instead, the firm may see more value in negotiating with other potential suppliers for its purchase requirements and may then decide to dissolve the original buyer–supplier alignment. As can be seen from this example, supply chains are often very dynamic or fluid, which can also cause problems in effectively managing them.

While supply chain management may allow organizations to realize the advantages of vertical integration, certain conditions must be present for successful supply chain management to occur. Perhaps the single most important prerequisite is a change in the corporate cultures of all participating firms in the supply chain to make them conducive to supply chain management. More traditional organizational cultures that emphasize short-term, company-focused performance in many ways conflict with the objectives of supply chain management. Supply chain management focuses on positioning organizations in such a way that all participants in the supply chain benefit. Thus, effective supply chain management relies on high levels of trust, cooperation, collaboration and honest, accurate communications.

Purchasing, operations, logistics and transportation managers not only must be equipped with the necessary expertise in these critical supply chain functions but also must appreciate and understand how these functions interact and affect the entire supply chain. Rebecca Morgan, president of Fulcrum Consulting Works, an Ohio-based supply chain management consulting firm, says too many companies go into agreements they call partnerships and then try to control the relationship from end to end. “A lot of the automotive companies did this in the beginning,” she says. “They issued a unilateral ultimatum: you will do this for me if you want to do business with me, no matter Chapter 1 Introduction to Supply Chain Management 9 what it means for you. 7 This type of supply chain management approach can lead to distrust, poor performance, finding ways to “beat the system” and ultimately loss of customers. Boundaries of supply chains are also dynamic. It has often been said that supply chain boundaries for the focal firm extend from “the suppliers’ suppliers to the customers’ customers. ” Today, most firms’ supply chain management efforts do not extend beyond those boundaries. In fact, in many cases, firms find it very difficult to extend coordination efforts beyond a few of their most important direct suppliers and customers (in one survey, a number of firm representatives stated that most of their supply chain efforts were with the firm’s internal suppliers and customers only! ). However, with time and successful initial results, many firms are extending the boundaries of their supply chains to include their second-tier suppliers and customers, logistics service companies, as well as non-domestic suppliers and customers. Some of the firms considered to be the best at managing their supply chains have very recognizable names: Procter & Gamble, Cisco Systems, Wal-Mart, Apple Computers, PepsiCo and Toyota Motor. The Importance of Supply Chain Management While all firms are part of a chain of organizations bringing products and services to customers (and most firms operate within a number of supply chains), certainly not all supply chains are managed in any truly coordinated fashion.

Firms continue to operate independently in many industries (particularly small firms). It is often easy for managers to be focused solely on their immediate customers, their daily operations, their sales and their profits. After all, with customers complaining, employees to train, late supplier deliveries, creditors to pay and equipment to repair, who has time for relationship building and other supply chain management efforts? Particularly within this most recent economic downturn, firms may be struggling to just keep their doors open. Many firms, though, have worked through their economic problems and are encountering some value-enhancing benefits from their supply chain management efforts.

Firms with large system inventories, many suppliers, complex product assemblies and highly valued customers with large purchasing budgets have the most to gain from the practice of supply chain management. For these firms, even moderate supply chain management success can mean lower purchasing and inventory carrying costs, better product quality and higher levels of customer service—all leading to more sales. According to the U. S. Census Bureau’s Annual Survey of Manufactures, the total cost of all materials purchased in 2008 exceeded $3. 2 trillion among U. S. manufacturers, up from $2. 2 trillion in 2000. Additionally, fuel purchases among manufacturers in the U. S. otaled $63 billion, up 10 percent from just the previous year due to rising fuel prices. 9 Thus it can easily be seen that purchasing, inventory and transportation cost savings can be quite sizable for firms utilizing effective supply chain management strategies. In fact, in a 2009 Global Survey of Supply Chain Progress conducted by Michigan State University, almost two-thirds of the respondents reported the existence of an “official” supply chain management group within the firm with jurisdiction over activities like logistics, sourcing and performance measurement. Additionally, about 70 percent of the respondents reported that their supply chain initiatives had either reduced costs or improved revenues. 0 In some cases firms hire a company knowledgeable in supply chain management activities to help the firm develop its own capabilities, and to get the benefits much faster. The Global Perspective feature describes global security system 10 Part 1 Supply Chain Management: An Overview Global Perspective How Diebold Learned to Manage Its Supply Chains In 2006, the senior management at Diebold established an aggressive set of cost savings goals as part of its Smart Business 200 program. And the Canton, Ohio, company’s supply chain organization was expected to contribute a significant portion to the $200 million savings goal through consolidation, optimization and process improvements. We knew the opportunity was there but we didn’t have the scale of resources or the access to industry best practices” to meet those goals, says Paul Dougherty, strategic procurement manager in Diebold’s global procurement organization. In short, he knew Diebold needed outside help and brought in a fourth-party logistics provider (4PL), Menlo Logistics, to do a full supply chain assessment. “We actually used to have a map on the wall in one of our procurement conference rooms that depicted each known storage location marked with a pin. There were literally hundreds of excessive, disparate stocking locations with limited or no real-time visibility of inventory positioning, turnover cycles or valuation,” says Dougherty.

Based on evaluation of this core mission alignment and a mandate to achieve aggressive savings goals, Diebold chose to have the infrastructure services provided by a 3PL and the more strategic initiatives developed and implemented by a 4PL. To guide its 4PL implementation, Diebold established a Logistics Directorate team with extensive experience across the supply chain. “Today, the map we used to have on the wall is gone and we have consolidated most of that inventory into two distribution centers using a warehouse management system with detailed visibility at the transaction level,” says Dougherty. The primary objective of Menlo’s 4PL work is to drive bottom line, year-over-year net cost reductions to Diebold while improving its service levels, which is no small task. There was a lot of low hanging fruit at the outset and the initial emphasis was consolidating inventory and establishing a flexible, cost-effective, distribution network,” says Dougherty. Gradually, Diebold placed increased reliance on its internal expertise to manage its regional warehousing while looking to Menlo 4PL for continuous engineering improvements to the supply chain network design. The allocation of specific duties is a collaborative effort based on constantly evolving requirements. To date, Menlo has successfully achieved its annual savings goals. Source: Hannon, D. , “Signs that Your Company May Need a 4PL Intervention,” Purchasing, V. 139, No. 2 (2010): 16. Used with permission. anufacturer Diebold’s choice of a company to do just that, with great and quick success. Today, they still use their fourth-party logistics provider (4PL) company (a company hired to manage all of a firm’s logistics and supply chain management capabilities) but have also developed internal skills in managing their supply chains. Managers must realize that their supply chain management efforts can start small— for instance, with just one key supplier—and build through time to include more supply chain participants such as other important suppliers, key customers and logistics services. Finally, supply chain management efforts can include second-tier suppliers and customers. So why are these integration activities so important?

As alluded to earlier, when a firm, its customers and its suppliers all know each others’ future plans and are willing to work together, the planning process is easier and much more productive, in Chapter 1 Introduction to Supply Chain Management 11 Example 1. 1 Grebson Manufacturing’s Supply Chain The Pearson Bearings Co. makes roller bearings for Grebson Manufacturing on an as-needed basis. For the upcoming quarter, they have forecasted Grebson’s roller bearing demand to be 25,000 units. Since Grebson’s demand for bearings from Pearson has been somewhat erratic in the past due to the number of bearing companies competing with Pearson and also the fluctuation of demand from Grebson’s customers, Pearson’s roller bearing forecast includes 5,000 units of safety stock.

The steel used in Pearson Bearings’ manufacturing process is usually purchased from Rogers Steels, Inc. Rogers Steels has, in turn, forecasted Pearson’s quarterly demand for the high-carbon steel it typically purchases for roller bearings. The forecast also includes safety stock of about 20 percent over what Rogers Steels expects to sell to Pearson over the next three months. This short description has exposed several problems occurring in most supply chains. Because Pearson does not know with full confidence what Grebson’s roller bearing demand will be for the upcoming quarter (it could be zero, or it could exceed 25,000 units), Pearson will incur the extra costs of producing and holding 5,000 units of safety stock.

Additionally, Pearson risks having to either scrap, sell or hold onto any units not sold to Grebson, as well as losing current and future sales to Grebson if their demand exceeds 25,000 units over the next quarter. Rogers Steels faces the same dilemma—extra materials, labor costs and warehouse space for safety stock along with the potential stockout costs of lost present and future sales. Additionally, Grebson’s historic demand pattern for roller bearings from its suppliers already includes some safety stock, since it uses roller bearings in one of the products it makes for a primary customer. terms of cost savings, quality improvements and service enhancements. A fictitious example is provided in Example 1. 1. Example 1. illustrates some of the costs associated with independent planning and lack of supply chain information sharing and coordination. Grebson’s safety stock, which they have built into their roller bearing purchase orders, has resulted in still additional safety stock production levels at the Pearson plant. In fact, some of the erratic purchasing patterns of Grebson are probably due to their leftover safety stocks causing lower purchase quantities during those periods. This, in turn, creates greater demand variability, leading to a decision at Pearson to produce an even higher level of safety stock. This same scenario plays out between Pearson and Rogers Steels, with erratic buying patterns by Pearson and further safety stock production by Rogers.

If the supply chain were larger, this magnification of safety stock, based on erratic demand patterns and forecasts derived from demand already containing safety stock, would continue as orders pass to more distant suppliers up the chain. This supply chain forecasting, safety stock and production problem is known as the bullwhip effect. If Grebson Manufacturing knew its customers’ purchase plans for the coming quarter along with how their purchase plans were derived, it would be much more confident about what the upcoming demand was going to be, resulting in little, if any, safety stock required. And consequently it would be able to communicate its own purchase plans for roller bearings to Pearson.

If Grebson purchased its roller bearings from only Pearson and, further, told Pearson what their quarterly purchase plans were, and if Pearson did likewise with Rogers, safety stocks throughout the supply chain would be reduced drastically, driving down the costs of purchasing, producing and carrying roller bearings at each stage. This discussion also sets the stage for a supply chain management concept called collaborative planning, forecasting and replenishment, discussed further in Chapter 5. 12 Part 1 Supply Chain Management: An Overview The result includes lower supply chain costs and better customer service (remember, there would be few, if any, stockouts if purchase quantities were decided ahead of time and shipping companies delivered on time; additionally, production quantities would be less, reducing purchase costs and production time).

Trade estimates suggest that the bullwhip effect results in excess costs on the order of 12 to 25 percent at each firm in the supply chain, which can be a tremendous competitive disadvantage. Lower costs resulting from reducing the bullwhip effect can also result in better quality, since potentially higher profit margins mean more investment into materials research, better production methods and use of more reliable transportation and storage facilities. Additionally, as working relationships throughout the supply chain mature, suppliers will feel more comfortable investing capital in better facilities, better products and better services for their customers.

With time, customers will share more information with suppliers and suppliers will be more likely to participate in their key customers’ new product design efforts, for instance. These, then, become some of the more important benefits of a wellintegrated supply chain. In the following chapters, other associated benefits will also become apparent. The Origins of Supply Chain Management in the U. S. During the 1950s and 1960s, U. S. manufacturers were employing mass production techniques to reduce costs and improve productivity, while relatively little attention was typically paid to creating supplier partnerships, improving process design and flexibility, Table 1. 1

Historic Supply Chain Management Events in the United States Increased supply chain capabilities Supply chain relationship formation, sustainability, social responsibility JIT, TQM, BPR, supplier and customer alliances Inventory management, MRP, MRPII and cost containment Traditional mass manufacturing 1950s 1960s 1970s 1980s 1990s 2000s Future Note: MRP = material requirements planning, JIT = just-in-time, TQM = total quality management, BPR = business process reengineering. Chapter 1 Introduction to Supply Chain Management 13 or improving product quality (see Table 1. 1). New product design and development was slow and relied exclusively on in-house resources, technologies and capacity.

Sharing technology and expertise through strategic buyer–supplier partnerships was essentially unheard of back then. Processes on the factory floor were cushioned with inventory to keep machinery running and maintain balanced material flows, resulting in large investments in work-in-process inventories. In the 1960s and 1970s, computer technologies began to flourish and material requirements planning (MRP) software applications and manufacturing resource planning (MRPII) software applications were developed. These systems allowed companies to see the importance of effective materials management—they could now recognize and quantify the impact of high levels of inventories on manufacturing, storage and transportation costs.

As computer capabilities grew, the sophistication of inventory tracking software also grew, making it possible to further reduce inventory costs while improving internal communication of the need for purchased parts and supplies. The 1980s were the breakout years for supply chain management. One of the first widely recorded uses of the term supply chain management came about in a paper published in 1982. 11 Intense global competition beginning in the 1980s (and continuing today) provided an incentive for U. S. manufacturers to offer lower-cost, higher-quality products along with higher levels of customer service. Manufacturers utilized just-in-time (JIT) and total quality management (TQM) strategies to improve quality, manufacturing efficiency and delivery times.

In a JIT manufacturing environment with little inventory to cushion scheduling and/or production problems, firms began to realize the potential benefits and importance of strategic and cooperative supplier-buyer-customer relationships, which are the foundation of SCM. The concept of these partnerships or alliances emerged as manufacturers experimented with JIT and TQM. As competition in the U. S. intensified further in the 1990s, accompanied by increasing logistics and inventory costs and the trend toward market globalization, the challenges associated with improving quality, manufacturing efficiency, customer service and new product design and development also increased.

To deal with these challenges, manufacturers began purchasing from a select number of certified, high-quality suppliers with excellent service reputations and involved these suppliers in their new product d