Supply Chain Management in Hospitality Industry

Chapter 1
Understanding the Supply Chain
supply chain
➢ is a system of organizations, people, activities, information, and resources involved in supplying a
product or service to a consumer.
➢ consists of all parties involved, directly or indirectly, in fulfilling a customer request.
➢ includes the manufacturers, suppliers, transporters, warehouses, retailers, distributors, and even
customers themselves
⤷Within each organization, such as a manufacturer, the supply chain includes all functions involved in
receiving and filling customer requests.
⤷These functions include: new product development distribution
marketing finance
operations customer service

➢ is dynamic and involves the constant flow of information, product, and funds between different stages.
⤷ The primary purpose of any supply chain is to satisfy customer needs, and in the process, generate
profit for itself.
➢ conjures up images of product or supply moving from suppliers to manufacturers to distributors to
retailers to customers along a chain.
➢ may also imply that only one player is involved at each stage.

In reality, a manufacturer may receive material from several suppliers and then supply several distributors.
⤷Thus, most supply chains are actually networks.
The term supply network or supply web - describes the structure of most supply chains.

Stages of a Typical Supply Chain:

• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material suppliers

➛Each stage in a supply chain is connected through the flow of products, information, and funds.
➛These flows often occur in both directions and may be managed by one of the stages or an intermediary.
Objective of the supply chain ￫ ￫ ￫ to maximize the overall value generated.

The value (also known as supply chain surplus) a supply chain generates is the difference between
what the value of the final product is to the customer and the costs the supply chain incurs in
filling the customer’s request.

Supply Chain Surplus = Customer Value – Supply Chain Cost

The value of the final product may vary for each customer and can be estimated by the maximum amount the
customer is willing to pay for it.

The difference between the value of the product and its price remains with the customer as consumer surplus.
The rest of the supply chain surplus becomes supply chain profitability, the difference between the revenue
generated from the customer and the overall cost across the supply chain.

For example:
▸A customer purchasing a wireless router from Best Buy pays $60, which represents the revenue the supply
chain receives.
▸Customers who purchase the router clearly value it at or above $60.
▸Thus, part of the supply chain surplus is left with the customer as consumer surplus.
▸The rest stays with the supply chain as profit.
Best Buy and other stages of the supply chain incur costs to convey information, produce components, store
them, transport them, transfer funds, and so on.
▸The difference between the $60 that the customer paid and the sum of all costs incurred by the supply chain
to produce and distribute the router represents the supply chain profitability.
Supply chain profitability - is the total profit to be shared across all supply chain stages and
intermediaries.
The higher the supply chain profitability, the more successful the supply chain.
● For most profit-making supply chains, the supply chain surplus will be strongly correlated with profits.
● Supply chain success should be measured in terms of supply chain profitability and not in terms of the
profits at an individual stage.
● A focus on growing the supply chain surplus pushes all members of the supply chain toward
growing the size of the overall pie.

● Having defined the success of a supply chain in terms of supply chain profitability, the next
the logical step is to look for sources of value, revenue, and cost.
● For any supply chain, there is only one source of revenue: the customer.
____________________________________

The value obtained by a customer purchasing ingredients at Wal-Mart depends upon several factors:
1. the functionality of the ingredients,
2. how far the customer has to travel to Wal-Mart, and
3. the likelihood of finding the ingredient in stock.
⬇
The customer is the only one providing positive cash flow for the Wal-Mart supply chain.
⬇
All other cash flows are simply fund exchanges that occur within the supply chain, given that
different stages have different owners.
⬇
When Wal-Mart pays its supplier, it is taking a portion of the funds the customer provides and
passes that money on to the supplier.
_________________________________

● All flows of information, product, or funds generate costs within the supply chain.
Thus, the appropriate management of these flows is a key to supply chain success.
● Effective supply chain management involves the management of supply chain assets and product,
information, and fund flows to maximize total supply chain surplus.
● A growth in supply chain surplus increases the size of the total pie, allowing contributing
members of the supply chain to benefit.
Supply chain activities - involve the transformation of natural resources, raw materials, and components
into a finished product and delivered to the end customer.
★ In sophisticated supply chain systems, used products may re-enter the supply chain at any point where
residual value is recyclable.
★ Supply chains link value chains
★ Suppliers in a supply chain are often ranked by ‘tier”:
first-tier suppliers → those who supply direct to the client business
second-tier suppliers → are suppliers to the first-tier
__________________________________

A typical supply chain begins with the ecological, biological, and political regulation of natural resources
followed by ⬇
the human extraction of raw material
before moving on to ⬇
layers of storage facilities of ever-decreasing size
&
increasingly remote geographical locations
finally reaching ⬇
the customer
_____________________________________

❖ At the end of the supply chain, materials and finished products only flow there because of customer
behavior at the end of the chain.
▸Supply chain processes - should be coordinated in order to focus on end customer buying
behavior.
▸“Customer responsiveness” - is as an indicator confirming that materials are able to flow through
sequence of supply chain processes in order to meet end customer
buying behavior.

❖ Many of the exchanges encountered in the supply chain take place between different companies that
seek to maximize their revenue within their sphere of interest but may have little or no knowledge or
interest in the remaining players in the supply chain.
▸A chain - is a complex and dynamic supply and demand network.

❖ As part of their efforts to demonstrate ethical practices, many large companies and global brands are
integrating codes of conduct and guidelines into their corporate cultures and management systems.
❖ Through these, corporations are making demands on their suppliers (facilities, farms, subcontracted
services such as cleaning, canteen, security,etc.) and verifying through social audits that they are
complying with the required standard.
❖ A lack of transparency in the supply chain can bar consumers from knowledge of where their purchases
originated and facilitate socially responsible practices.
❖ Supply-chain managers are under constant scrutiny to secure the best pricing for their resources which
becomes a difficult task when faced with the inherent lack of transparency.
 Cost benchmarking - is one effective method for identifying the competitive pricing
within the industry.
- gives negotiators a solid base to form their strategy on drive
overall spend down.

A diagram of a supply chain

The black arrow represents the flow of materials and information.

The gray arrow represents the flow of information.
The elements are (a) the initial supplier
(b) a supplier
(c) a manufacturer (production)
(d) a customer
(e) the final customer

The Importance of Supply Chain Decisions

✓ There is a close connection between the design and management of supply chain flows (product,
information, and funds) and the success of a supply chain.
✓ Wal-Mart, Amazon, and Seven-ElevenJapan are examples of companies that have built their success on
superior design, planning, and operation of their supply chain.
⤷ Wal-Mart has been a leader at using supply chain design, planning, and operation to achieve
success.
⤷ From its beginning, the company invested heavily in transportation and information infrastructure to
facilitate the effective flow of goods and information.
⤷ Wal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate
frequent replenishment at its retail stores in a cost-effective manner.
▪Frequent replenishment allows stores to match supply and demand more effectively than the
competition.
⤷ Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down
costs and improve product availability

↳ Seven-Eleven Japan is another example of a company that has used excellent supply chain
design, planning, and operation to drive growth and profitability.
↳ It has used a very responsive replenishment system along with an outstanding information system to
ensure that products are available at each of its convenience stores to match customer needs.
↳ Its responsiveness allows it to change the merchandising mix at each store by time of day to
precisely match customer demand.
 Decision Phases in a Supply Chain
● Successful supply chain management requires many decisions relating to the flow of information,
product, and funds.
● Each decision should be made to raise the supply chain surplus.
● These decisions fall into three categories or phases, depending on:
the frequency of each decision and
the time frame during which a decision phase has an impact.

1. Supply Chain Strategy or Design:

⬪ During this phase, a company decides how to structure the supply chain over the next several years.
⬪ It decides ➾ what the chain’s configuration will be,
➾ how resources will be allocated, and
➾ what processes each stage will perform.

⬪ Strategic decisions made by companies include:

a) whether to outsource or perform a supply chain function in-house,
b) the location and capacities of production and warehousing facilities,
c) the products to be manufactured or stored at various locations,
d) the modes of transportation to be made available along different shipping legs,
e) the type of information system to be utilized.
 ⬪ A firm must ensure that the supply chain configuration supports its strategic objectives and increases the
supply chain surplus during this phase.
⬪ Supply chain design decisions are typically made for the long term (a matter of years).
⬪ Expensive to alter on short notice.
⬪ Consequently, when companies make these decisions, they must take into account uncertainty in
anticipated market conditions over the next few years.

2. Supply Chain Planning:

⬫ For decisions made during this phase, the time frame considered is a quarter to a year.
⬫ The supply chain’s configuration determined in the strategic phase is fixed.
⤷This configuration establishes constraints within which planning must be done.
⬫ The goal of planning is: to maximize the supply chain surplus that can be generated over the planning
horizon given the constraints established during the strategic or design phase.
⬫ Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of
demand and other factors such as costs and prices in different markets.
⬫ Planning includes making decisions regarding which:
↻ markets will be supplied from which locations,
↻ the subcontracting of manufacturing,
↻ the inventory policies to be followed,
↻ the timing and size of marketing and price promotions.
⬫ Planning establishes parameters within which a supply chain will function over a specified period of time.
⬫ In the planning phase, companies must include:
↳ uncertainty in demand,
↳ exchange rates,and
↳ competition over this time horizon in their decisions.
⬫ Given a shorter time frame and better forecasts than in the design phase, companies in the planning phase
try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize
performance.
⬫ As a result of the planning phase, companies define a set of operating policies that govern short-term
operations.

3. Supply Chain Operation:

￮ The time horizon here is weekly or daily.
￮ During this phase, companies make decisions regarding individual customer orders.
￮ At the operational level,supply chain configuration is considered fixed, and planning policies are already
defined.
￮ The goal of supply chain operations is: to handle incoming customer orders in the best possible manner.
￮ During this phase,
⤷ firms allocate inventory or production to individual orders,
⤷ set a date that an order is to be filled,
⤷ generate pick lists at a warehouse,
⤷ allocate an order to a particular shipping mode and shipment,
⤷ set delivery schedules of trucks, and
⤷ place replenishment orders.
￮ Because operational decisions are being made in the short term (minutes, hours, or days), there is
less uncertainty about demand information.
￮ Given the constraints established by the configuration and planning policies, the goal during the operation
phase is to exploit the reduction of uncertainty and optimize performance.
 ￮ The design, planning, and operation of a supply chain have a strong impact on overall profitability and
success.

Key Point
>> Supply chain decision phases may be categorized as design, planning, or operational, depending on the
time frame during which the decisions made apply.
>> Design decisions constrain or enable good planning, which in turn constrains or enables effective operation.

The Key Traits of Every Successful Supply Chain

1. Successful Supply Chains Embrace Innovation
✯ Adopting new technologies before anybody else
✯ Experimenting with new processes

2. Successful Supply Chains are Data-driven

✯ Using data optimization software
✯ Tracking the movement of the supply chain will help increase efficiencies throughout the operation

3. Successful Supply Chains Empower Employees

✯Through effective labor management, supply chain leaders are able to empower their top workers,
making them more invested in the success of the company as a whole.
✯ By incentivizing performance and carefully tracking every position on your floor to determine
bottlenecks, you can control the largest variable cost in your supply chain.
✯ The most successful organizations put their employees within the supply chain in the best place to
succeed by supplying them with the best tools to get the job done.
✯ Either through embracing intuitive and easy to use devices like smartphones or by utilizing
multilingual systems, the best organizations make sure all of their employees have everything they
need to truly shine.

4. Successful Supply Chains Promote Transparency

✯ Freely share data throughout the entire organization.
✯ Complete tracking within your supply chain
✯ Keeping tabs on expiration dates
 5. Successful Supply Chains Are Prepared for the Unexpected
✯ The more things change, the more the organization needs to be able to adapt to solve new
problems.
Preparation + Perspiration = Supply Chain Profitability and Growth.

Process Views of a Supply Chain

❖ A supply chain is a sequence of processes and flows that take place within and between different
stages and combine to fill a customer need for a product.
❖ There are two ways to view the processes performed in a supply chain.

1. Cycle View:
￭The processes in a supply chain are divided into a series of cycles, each performed at the interface between
two successive stages of a supply chain.

2. Push/Pull View:
￭ The processes in a supply chain are divided into two categories depending on whether they are executed in
response to a customer order or in anticipation of customer orders.
￭ Pull processes are initiated by a customer order, whereas
push processes are initiated and performed in anticipation of customer orders.

Cycle View of Supply Chain Processes

￭ All supply chain processes can be broken down into the following four process cycles:
• Customer order cycle
• Replenishment cycle
• Manufacturing cycle
• Procurement cycle
￭ Each cycle occurs at the interface between two successive stages of the supply chain.
￭ Not every supply chain will have all four cycles clearly separated.

For example:
▸A grocery supply chain in which a retailer stocks finished-goods inventories and places replenishment orders with a
distributor is likely to have all four cycles separated.
▸Dell, in contrast, bypasses the retailer and distributor when it sells directly to customers.
Supply Chain Process Cycles
 Subprocesses in Each Supply Chain Process Cycle
● Each cycle consists of six sub processes as shown above.
● Each cycle starts with the supplier marketing the product to customers.
● A buyer then places an order that is received by the supplier.
● The supplier supplies the order, which is received by the buyer.
● The buyer may return some of the product or other recycled material to the supplier or a third party.
● The cycle of activities then begins all over again.

* Depending on the transaction in question, the sub processes can be applied to the appropriate cycle.
Within each cycle:
⤹ the goal of the buyer is to ensure product availability and to achieve economies of scale in
ordering.
⤹ The supplier attempts to forecast customer orders and reduce the cost of receiving the order.
⤹ The supplier then works to fill the order on time and improve efficiency and accuracy of the
order fulfillment process.
⤹ The buyer then works to reduce the cost of the receiving process.
⤹ Reverse flows are managed to reduce cost and meet environmental objectives.

Important Differences Among the Cycles:

1. In the customer order cycle, demand is external to the supply chain and thus uncertain.
In all other cycles, order placement is uncertain but can be projected based on policies followed by the
particular supply chain stage.
For example:
In the procurement cycle, a tire supplier to an automotive manufacturer can predict tire demand precisely once the
production schedule at the manufacturer is known.

2. The second difference across cycles relates to the scale of an order.

Whereas a customer buys a single car, the dealer orders multiple cars at a time from the manufacturer, and
the manufacturer, in turn, orders an even larger quantity of tires from the supplier.

As we move from the customer to the supplier, the number of individual orders declines and the size of each
order increases.
Thus, sharing of information and operating policies across supply chain stages becomes more important as
we move further from the end customer.

Key Point
>> A cycle view of the supply chain clearly defines the processes involved and the owners of each process.
>> This view is useful when considering operational decisions because it specifies the roles and
responsibilities of each member of the supply chain and the desired outcome for each process.

Push/Pull View of Supply Chain Processes

All processes in a supply chain fall into one of two categories depending on the timing of their execution
relative to end customer demand.
￭ With pull processes, execution is initiated in response to a customer order.
With push processes, execution is initiated in anticipation of customer orders based on a forecast.

￭ Pull processes may also be referred to as reactive processes because they react to customer demand.
 Push processes may also be referred to as speculative processes because they respond to speculated (or
forecasted) rather than actual demand.

￭ Push processes operate in an uncertain environment because customer demand is not yet known.
Pull processes operate in an environment in which customer demand is known.
They are, however, often constrained by inventory and capacity decisions that were made in the push phase.

Push/Pull View of the Supply Chain

🔹All processes that are part of the customer order cycle are pull processes.
🔸Order fulfillment takes place from product in inventory that is built up in anticipation of customer
🔹The goal of the replenishment cycle is to ensure product availability when a customer order arrives.
🔸All processes in the replenishment cycle are performed in anticipation of demand and are thus push
🔹The same holds true for processes in the manufacturing and procurement cycles.
processes.

➛Raw material such as fabric is often purchased six to nine months before customer demand is
 expected.
➛ Manufacturing itself begins three to six months before the point of sale.
🔹All processes in the customer order and manufacturing cycle are thus classified as pull processes because
🔸Inventory is replenished in anticipation of customer demand.
they are initiated by customer order arrival.

🔹All processes in the procurement cycle are thus classified as push processes, because they are in response
🔸A push/pull view of the supply chain is very useful when considering strategic decisions relating to supply
to a forecast.

🔹The goal: is to identify an appropriate push/pull boundary such that the supply chain can match supply
chain design.

and demand effectively.

Supply Chain Macro Processes in a Firm

All supply chain processes discussed in the two process views can be classified into the following three macro
processes:
1. Customer Relationship Management (CRM) ➛ all processes that focus on the interface between the firm
and its customers
2. Internal Supply Chain Management (ISCM) ➛ all processes that are internal to the firm
3. Supplier Relationship Management (SRM) ➛ all processes that focus on the interface between the firm
and its suppliers

Key Point
>> Within a firm, all supply chain activities belong to one of three macro processes: CRM, ISCM, and SRM.
>> Integration among the three macro processes is crucial for successful supply chain management.
These three macro processes manage:
a) the flow of information
b) product
c) funds required to ↝ generate,
↝ receive,
↝ fulfill a customer request.
CRM macro process aims: to generate customer demand and facilitate the placement and tracking of
orders
It includes processes such as:
▪ marketing ▪ order management
▪ pricing ▪ call center management
▪ sales

ISCM macro process aims: to fulfill demand generated by the CRM process in a timely manner and at
the lowest possible cost.
ISCM processes include the:
▪ planning of internal production and storage capacity
▪ preparation of demand and supply plans
▪ fulfillment of actual orders.

SRM macro process aims: to arrange for and manage supply sources for various goods and
services.

SRM processes include the:

▪ evaluation and selection of suppliers
▪ negotiation of supply terms,
▪ communication regarding new products and orders with suppliers.

✫ For a supply chain to be successful, it is crucial that the three macro processes are well integrated.
✫ The organizational structure of the firm has a strong influence on the success or failure of the integration
effort.
✫ In many firms, marketing is in charge of the CRM macro process,
manufacturing handles the ISCM macro process,
purchasing oversees the SRM macro process—with little communication among them

☹ It is not unusual for marketing and manufacturing to have different forecasts when making their plans.
☹ This lack of integration hurts the supply chain’s ability to match supply and demand effectively, leading to
dissatisfied customers and high costs.
✓Thus, firms should structure a supply chain organization that mirrors the macro processes and ensures
good
communication and coordination among the owners of processes that interact with one another.

Chapter 2
Supply Chain Performance
Achieving Strategic Fit and Scope

❖ A company’s competitive strategy - defines, relative to its competitors, the set of customer needs
that it seeks to satisfy through its products and services.
Aim: to provide high availability of a variety of products of reasonable quality at low prices.
[low price and product availability]
 ❖ The competitive strategy is defined based on how the customer prioritizes product cost, delivery
time, variety, and quality. [will be defined based on its customers’ priorities]
1. One customer places greater emphasis on product variety and response time than on cost.
2. Another customer may place emphasis on cost.
3. One may place greater emphasis on product variety and cost.
❖ Competitive strategy targets one or more customer segments.
Aim: to provide products and services that satisfy these customers’ needs

Achieving Strategic Fit

Strategic fit - expresses the degree to which an organization is matching its resources and
capabilities with the opportunities in the external environment.
The matching takes place through strategy and it is therefore vital that the company has the actual resources
and capabilities to execute and support the strategy.
 ↪ requires that both the competitive and supply chain strategies of a company have aligned goals.

↪ refers to consistency between the customer priorities that the competitive strategy hopes to satisfy
and the supply chain capabilities that the supply chain strategy aims to build.

Why is Strategic fit important?

● Strategic fit evaluates the current performance of an organization/industry.
● This is necessary to evaluate how the organization is capable of achieving its external demands.

For a company to achieve strategic fit, it must accomplish the following:

1. The competitive strategy and all functional strategies must fit together to form a coordinated overall
strategy.
▹Each functional strategy must support other functional strategies and help a firm reach its competitive
strategy goal.

2. The different functions in a company must appropriately structure their processes and resources to be
able to execute these strategies successfully.

3. The design of the overall supply chain and the role of each stage must be aligned to support the supply
chain strategy.
▹A company may fail either because of a lack of strategic fit or because its overall supply chain design,
processes, and resources do not provide the capabilities to support the desired strategic fit.

How Is Strategic Fit Achieved?

What does a company need to do to achieve that all-important strategic fit between the supply
chain and competitive strategies?
● A competitive strategy will specify, either explicitly or implicitly, one or more customer segments that a
company hopes to satisfy.
● To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to
satisfy the needs of the targeted customer segments.

Three Basic Steps to Achieve strategic fit

1. UNDERSTANDING THE CUSTOMER AND SUPPLY CHAIN UNCERTAINTY
𝆗 First, a company must understand the customer needs for each targeted segment and the uncertainty
these needs are imposed on the supply chain.
𝆗 These needs help the company define the desired cost and service requirements.
 𝆗 The supply chain uncertainty helps the company identify the extent of the unpredictability of demand,
disruption, and delay that the supply chain must be prepared for.

2. UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES

𝆗 Each of the many types of supply chains is designed to perform different tasks well.
𝆗 A company must understand what its supply chain is designed to do well.

3. ACHIEVING STRATEGIC FIT

𝆗 If a mismatch exists between what the supply chain does particularly well and the desired customer needs,
the company will either need to restructure the supply chain to support the competitive strategy or alter its
competitive strategy.

STEP 1: UNDERSTANDING THE CUSTOMER AND SUPPLY CHAIN UNCERTAINTY

▷To understand the customer, a company must identify the needs of the customer segment being served.

▷In general, customer demand from different segments varies along several attributes as follows:
• The Quantity of the Product Needed
• The Variety of Products Needed
• The Service Level Required:
• The Price of the Product
• The Desired Rate of Innovation in the Product

▷Each customer in a particular segment will tend to have similar needs, whereas customers in a different
segments can have very different needs.

▷This single measure helps define what the supply chain should do particularly well.

Demand uncertainty
☛ reflects the uncertainty of customer demand for a product.

Implied Demand Uncertainty

☛ is demand uncertainty imposed on the supply chain because of the customer needs it seeks to
satisfy.
☛ is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy
based on the attributes the customer desires.

For example:
A firm supplying only emergency orders for a product will face a higher implied demand uncertainty than a firm
that supplies the same product with a long lead time, as the second firm has an opportunity to fulfill the
orders evenly over the long lead time.
Another illustration of the need for this distinction is the impact of service level.:
As a supply chain raises its level of service, it must be able to meet a higher and higher percentage of actual
demand, forcing it to prepare for rare surges in demand.
Thus, raising the service level increases the implied demand uncertainty even though the product’s underlying
demand uncertainty does not change.

▷Both the product demand uncertainty and various customer needs that the supply chain tries to fill affect
 implied demand uncertainty.

▷As each individual customer need contributes to the implied demand uncertainty, we can use
implied demand uncertainty as a common metric with which to distinguish different types of demand.
▷Implied demand uncertainty is often correlated with other characteristics of demand

Key Point
>> The first step in achieving strategic fit between competitive and supply chain strategies is to understand
customers and supply chain uncertainty.
>> Uncertainty from the customer and the supply chain can be combined and mapped on the implied
uncertainty spectrum.

STEP 2: UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES

▷After understanding the uncertainty that the company faces, the next question is:
How does the firm best meet demand in that uncertain environment?
▷Creating strategic fit is all about creating a supply chain strategy that best meets the demand a company has
targeted given the uncertainty it faces.

SUPPLY CHAIN RESPONSIVENESS INCLUDES A SUPPLY CHAIN’S ABILITY TO DO THE FOLLOWING:

• Respond to wide ranges of quantities demanded
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a high service level
• Handle supply uncertainty
▷These abilities are similar to many of the characteristics of demand and supply that led to high implied
uncertainty.
▷The more of these abilities a supply chain has, the more responsive it is.
▷Responsiveness, however, comes at a cost.
For instance, to respond to a wider range of quantities demanded, capacity must be increased, which increases
costs.
 ↪ This increase in cost leads to the second definition: Supply chain efficiency is the inverse of the cost of
making and delivering a product to the customer.
↪ Increases in cost lower efficiency. For every strategic choice to increase responsiveness, there are
additional costs that lower efficiency.

STEP 3: ACHIEVING STRATEGIC FIT

✦After mapping the level of implied uncertainty and understanding the supply chain position on the
responsiveness spectrum, the third and final step is to ensure that the degree of supply chain responsiveness
is consistent with the implied uncertainty.
GOAL: to target high responsiveness for a supply chain facing high implied uncertainty, and efficiency for a
supply chain facing low implied uncertainty.

✦An efficient supply chain may carry less inventory and maintain a level load on the warehouse to lower
picking and packing costs.
For example:
Pasta is a product with relatively stable customer demand, giving it a low implied demand uncertainty.
Supply is also quite predictable.

✦It follows that increasing implied uncertainty from customers and supply sources is best served by increasing
responsiveness from the supply chain.

✦Toward the beginning stages of a product’s life cycle:

1. Demand is very uncertain, and supply may be unpredictable.
2. Margins are often high, and time is crucial to gaining sales.
3. Product availability is crucial to capturing the market.
4. Cost is often a secondary consideration

New product development ⇒ Marketing and Sales ⇒ Operations ⇒ Distribution ⇒ Service

 The Value Chain in a Company

*New product development - creates specifications for the product.

*Marketing and sales - generate demand by publicizing the customer priorities that the products
and services will satisfy.
Marketing - also brings customer input back to new product development.
*Operations - transforms inputs to outputs to create the product.
*Distribution - either takes the product to the customer or brings the customer to the
product.
*Service - responds to customer requests during or after the sale.

*These are core processes or functions that must be performed for a successful sale.

Finance, accounting, information technology, and human resources support and facilitate the functioning of the
value chain.
❖ To execute a company’s competitive strategy, all these functions play a role, and each must develop its
own strategy.
⤿ Here, strategy refers to what each process or function will try to do particularly well:
a) product development strategy
➺ specifies the portfolio of new products that a company will try to develop.
➺ dictates whether the development effort will be made internally or outsourced.

b) marketing and sales strategy

➺ specifies how the market will be segmented and how the product will be positioned, priced,
and promoted.

c) supply chain strategy

➺ determines the ⬪nature of procurement of raw materials,
⬪transportation of materials to and from the company,
⬪manufacture of the product or operation to provide the service,
⬪distribution of the product to the customer,
⬪follow-up service,
⬪a specification of whether these processes will be performed in-house or
outsourced.
➺ specifies what the operations, distribution, and service functions, whether performed
in-house or outsourced, should do particularly well
➺ includes a specification of the broad structure of the supply chain and what many traditionally
call: ⬪“supplier strategy,”
⬪“operations strategy,
⬪“logistics strategy.”
For example:
Decision to sell direct ] ⬝define the broad structure of the supply chains
Decision to start selling through resellers ]
Decision to use contract manufacturers ] ⬝are all part of the supply chain strategies
 ➺ also includes design decisions regarding inventory, transportation, operating facilities, and
information flows.

⤿ For a firm to succeed, all functional strategies must support one another and the competitive strategy.
For example:
Seven-Eleven Japan’s success can be related to the excellent fit among its functional
Strategies:
a) Marketing at Seven-Eleven has emphasized convenience in the form of easy access to
stores and availability of a wide range of products and services.
b) New product development at Seven-Eleven is constantly adding products and services.
c) Operations and distribution at Seven-Eleven have focused on having a high density of
stores, being very responsive, and providing an excellent information infrastructure.

Value chain analysis for hospitality services

Since its inception, the hospitality sector has been constantly changing and growing more competitive with the
changing demands of tourists.

Thus, tourism stakeholders should constantly monitor the value chain to understand how value can be added
differently to their organizations, to attract more customers and generate more revenue.

The concept of value chain involves all aspects of a business’s operational activities and can be studied in
combination with the supply chain.

Supply chain ⇔ focuses on the procurement process of goods and services from suppliers

Value chain ⇔ studies the value added at various intervals through a series of activities or
processes that aim to create profitable value for a product offering.

Value chain analysis ⇔ can be complementary to other types of business management efficiency analysis.

System of Values in the Hospitality Industry

Hotel value Chain guide

➢ Hospitality is a modern industry that began its development relatively 100 years ago.
➢ It is actively developing and needs a constant search for better solutions.
➢ The company is directly involved in the formation of values.
➢ Value reflects the importance of the good (set of useful properties) for consumers.
➢ The development of the category "customer value" was based on the labor theory of value.
➢ The essence of this theory is to determine the value of a commodity in order to establish its
equivalence with other commodities during the exchange.

A functional feature of the hotel service is its differentiation into:

● basic (accommodation and food);
 ● additional types of services (the range of which depends on the category and type of
enterprise).
Based on the above, the formation of the marketing concept of consumer value in the hotel industry
should be considered in the format of the value chain of M. Porter.
basic value chain model
➢ was first presented in Michael Porter's book "Competitive Advantage: Creating and Sustaining Superior
performance. (1985, New York).
↝According to Porter, M., the whole production process is divided into two types of activity:
primary and secondary
↝The value of the final product depends on them.
↝It was possible to identify ways to reduce costs and increase differentiation at each production stage.
↝At what stage of the process hoteliers earn, and at what - they lose profits, the chain of values
reveals.

Value Chain Components

➢ A tourist product is a complex set of activities necessary for the consumer, which are provided by
different structures (organizations).

Porter’s Value Chain

⤷ is a strategic tool that helps map out the internal activities to perform that add value to the customers.

⤷a process view of how an organization transforms inputs into outputs step by step, which customers
then purchase to generate margin.

⤷With this approach, Porter was able to design a generic chain of activities (or generic Value Chain)
common to all businesses.
 The value chain is formed by:
● Main Activities (Primary Activities)
● Support Activities (Secondary Activities)
The gap between the value created and the cost of creating that value is known as the margin.

Primary Hotel Value Chain Activities

● Inbound logistics: is the way materials and other goods are brought into the hotel
☛ This process includes the steps to order, receive, store, transport and manage incoming
supplies.
☛ focuses on the supply part of the supply-demand equation.
☛☛ all agreements with food and beverage suppliers;
☛☛ laundry services,
☛☛ home storage and circulation in hotel departments;
☛☛ inventory control and inventory recovery.
 ● Operations: procedures that allow you to produce goods and services offered on the market with the
support of all advanced tools.
● Outbound logistics: the way of offering services and products and their distribution between several
outlets and guests.

● Marketing and sales: all events that try to interest customers and people in the hotel for rooms,
conferences, restaurants, as well as the promotion of the hotel with advertising and costs, taking into
account competitors.
● Service: Good service will increase the value of the product and will be vital for the visitor, who will have
to choose which of the many hotels to stay at.

Inbound vs. Outbound Logistics

ATTRIBUTE INBOUND LOGISTICS OUTBOUND LOGISTICS

Direction Inward Outward

Focus Supply Demand

Role Receiving Delivery

 Key Relationships Suppliers, vendors, and their Distributors, wholesalers, retailers,
distributors end customers

Processes Sourcing, procurement, materials Inventory management, order

handling, putaway fulfillment, shipping

Activity Raw materials or goods coming Finished products going out to

from suppliers customers.

Strategic Imperative Obtaining goods or materials the Meeting customer demand,

company needs to make its supporting the sales process to
products generate revenue

Inbound logistics is the process of orchestrating the receipt of inputs and then storing and distributing them
internally.

Secondary Activities of Hotel Value Chain

● The infrastructure of the firm: the management team with permanent planning, product quality
management, open public affairs, finance, and accounting.
● Human resource management: staff recruiting, selecting, training, development, and compensation.
● Technology development: the hospitality industry is constantly growing, so new solutions are needed
to save time and work smarter. Here you should develop a program to monitor all transactions and
exchange everything with all hotel departments in real time.
● Procurement: is the act of obtaining goods or services, typically for business purposes.

☛ facilities wanted for guests,

☛ the building,
☛ the gear that will support all the operations to make the service smooth and easy.
 McDonald's Value Chain Analysis

Margin is the gap between the value created and the cost of creating that value.

External efficiency is measured by client satisfaction and market share.

To achieve customer satisfaction, the business requires, which depends on the timely received goods and its
services to standards by exterior suppliers.

It is vital to truly have good communication and teamwork between suppliers at one end and the customer at
the other end of the value string.

Cost Advantages, Differentiation, Technologies and Value Chain

Cost advantages. Cost advantage is when a business provides the same products and
services as its competitors, albeit at a lesser cost.
Cost competitive advantage is when a company is able to utilize its skilled workforce, inexpensive raw materials,
controlled costs, and efficient operations to create maximum value to consumers.

➢ The organization can obtain cost-effective costs by lowering the price tag for certain value-based
activities or reconfiguring the value chain.
➢ Once the value chain has been identified, a cost analysis can be made by estimating the cost of
operating the value chain.
➢ The cost obtained from the accounting record might need to be modified to allocate them properly to
the value-creating activity.
➢ Costs can be kept at a minimum in many different ways.

Differentiation. Differentiation advantage is when a business provides better products

and services as its competitors.
Product/service differentiation is having a valuable, unique offering for its consumers resulting in consumer
loyalty.
Cost competitive advantages can easily disappear with the introduction of a new competitor or new technology.
If a company offers a unique product or service, it is harder to maintain an edge in the market based on price
alone. The company must offer something to the consumer besides just a low price.

A niche competitive advantage seeks to target and reach a single segment of the market.
This type of strategy works very effectively for smaller and new companies that do not have the resources to go
after larger sections of the marketplace.
A niche market is a segment of a larger market that can be defined by its own unique needs,
preferences, or identity that makes it different from the market at large.

Sustainable competitive advantage is the key to business success.

It is the force that enables a business to have greater focus, more sales, better profit margins, and higher
customer and staff retention than competitors.

➢ A differentiation edge can happen from any part of the value chain.
For instance, procurement of unique and widely available inputs for opponents can create differentiation, as can
distributor channels that offer high service levels.

➢ A product differentiation advantage may be performed by changing specific value chain activities to
increase the final product's uniqueness or reconfiguring the value chain.

The technologies used at each stage of the value chain are one of the strategic directions of
choice, which are related to the economical basis of costs.
➢ New technologies are used in both priority and support activities.
For example, encouraging suppliers to produce equipment that is most appropriate to the technology used can
increase an organization's competitiveness.

How to Improve the Hotel Value Chain

It is vital for hotel owners to understand at what stage and how exactly to increase the value of their business.
To do this, you need to analyze business processes in several steps.

Step 1. Activity Analysis.

At this stage, an analysis of all actions of staff and managers on customer service and service delivery.
Task: to collect the maximum amount of information and feedback from people involved in the company
(customers, hotel employees, managers, tour operators, travel agents, business partners, suppliers).
➛This will form the most motivated and professional team and monitor the effectiveness of services.

Step2. Value analysis.

Task: evaluation by the customer of a specific service in the activity.
For example, the object of evaluation may be the quality of service after a telephone order to the room service.
How quickly did you answer the call, fulfill the request, was the interlocutor polite?

The client must be satisfied with the speed and quality of service.
This analysis will identify the weaknesses of any activity and eliminate shortcomings.
Step 3. Assessment of changes and action plan.
Through previous actions, it will be possible to generate ideas for improving the business and meeting
customer needs.

Conclusions
➤In the service industry and especially in the hotel industry, value is added and created from the individual's
inputs of your time, knowledge, accessories, and systems to provide the hotel guests and customers.

➤Customers in these businesses can also be employees of the same organization.

➤The more value is established, the more folks decide to pay the purchase price for the service or product,
the greater they will continue buying from the same company.

➤The decisions to distinguish the merchandise offered from both companies are necessary to add value and
persuade the possible client to make the right choice.

Chapter 3
Introduction to Supply Chain Management
Supply Chain Management
❖ Is the heart of every organization
❖ can be defined as a system that handles the entire production flow of goods and services in the
organization.
❖ monitors the life cycle of material as they enter the organization and move out of the organization.
❖ can be defined as the management of the flow of products and services which begins from the origin of
products and ends at product’s consumption.
❖ comprises movement and storage of raw materials that are involved in work in progress, inventory, and
fully furnished goods.
❖ includes material and information flows both up and down the supply chain.
☛ The effectiveness of supply chain management plays an essential role in the success of every business.

☛ Companies are required to create a network of different suppliers to obtain different types of raw material
that they need for the production process.

☛ Companies must have suppliers that can meet the demand of the material and can provide material in any
quantity whenever it is required in the organization.

☛ The role of supply chain management (SCM) has even increased more because of cut-throat competition in
every market segment.

☛ Several companies are providing similar products which gives more options to the consumers to choose
from.

☛ As a result of that,it becomes difficult for companies to survive in the market and is required to continually
think about innovative ideas to stay ahead in the competition.

☛ An adequate supply chain management is useful for the:

manufacturer ⇔ can increase the profit margin by rightly knowing the demand for the product in
the market.
supplier ⇔ can manage his supply effectively to different manufacturers as he communicated the
need for material on time.

Supply Chain Management Processes:

systems management inventory management
operations and assembly transport
procurement production plan warehousing
order processing customer support

❖ In today’s changing business environment, there is an increased focus on delivering value to customers
at the cheapest possible costs.
❖ There has been increased interest in logistics and supply chain management practices since
performance is not only determined by actions and decisions, but also on the improvement of return on
investment and greater profitability.

Main objective of SCM ￫ ￫ ￫ to monitor and relate production, distribution, and shipment of products and
services.
↳ can be done by companies with a very good and tight hold over internal inventories, production,
distribution, internal production, and sales.

The Importance of Supply Chain Management

❖ Supply chain management is essential for an organization.
✧ An organization can reduce cost, wastage of material, and time required for the production
process with the help of effective supply chain management.
❖ In competitive times, the importance of supply chain management has become even more crucial.
✧ The industry standards require supply chains to become just-in-time supply chains.

1. Identifying the potential problems in the process

● If business can’t deliver to meet the demand of customers = poor service
= disappointed customers

2. Dynamic price optimization

● Many products have a limited shelf life. = if not sold on time, become
useless
● Businesses whose businesses are affected by season use dynamic pricing to meet the demand
of customers.
For example, companies like airlines and hotels that sell perishable products adjust the pricing
of their products dynamically.

● Effective supply chain management helps in increasing the margin on the selling price of the
goods.

3. Enhancing the allocation of “available to promise” inventory

● Sufficient supply chain management helps in the dynamic allocation of resources and material.
● An organization can schedule their work based on the information obtained from supply chain
management.
For example, production work can be planned according to the information available about the delivery of
raw material, forecast of sales, and an actual number of orders.
 Key features of effective supply chain management
❖ Supply chain management is one of the essential parts of a business.
❖ A proper and effective supply chain management helps organizations to enhance their business and to
build the reputation of the company.
❖ A company with a good reputation can sustain their business for an extended period and can establish
long-term relationships with the customers.

1. Comprehensive
● The data collected using supply chain management is compared with the data collected in real-time.
● The outcome obtained through this process is fast and thorough in nature.
● Supply chain management helps in avoiding latency in the future.

2. Connected
● Supply chain management helps in connecting not only suppliers and manufacturers but also supports
a manufacturer to communicate with their customers.
● A manufacturer can place orders as per the requirement of raw material available for the production
process.
For example, businesses can collect data about the changing trends and can use this information to plan for
future manufacturing work. This helps the organization to serve its customers better.

3. Cognitively enabled
● The action in supply chain management is performed by collecting and coordinating information.
● This helps the organization to perform effectively and make decisions in the supply chain.
● Many organizations have advanced supply chains that enable organizations in automated learning.

4. Collaborative
● Supply chain management helps in collaboration between suppliers and manufacturers.
● Active partnership with suppliers helps an organization to serve its customers better.

5. Cyber aware
 ● An adequate supply chain management should not only help the organization in enhancing their
business but should also help them in making the system of the organization safe and intrusion-proof.

Advantages of Supply Chain Management

1. Assists companies in adapting to the challenges of globalization, economic upheaval, expanding
consumer expectations, and related differences.
2. Assists companies in minimizing waste, driving out costs, and achieving efficiencies throughout the
supply chain process.
3. Assists in achieving shipping of the right products to the right place at the right time.
4. Creates better delivery mechanisms for products and services in demand with minimum delay.
5. Develops better customer relationships and service.
6. Enhances inventory management, supporting the successful execution of just-in-time stock models.
7. Improvises productivity and business functions.
8. Minimizes direct and indirect costs.
9. Minimizes warehouse and transportation costs.

The overall goal of SCM software: ￫ ￫ ￫ to improve supply chain performance.

↳ Timely and accurate supply chain information allows manufacturers to make and ship only as much
product as much can be sold.

Supply Chain Management of McDonalds

 seven core Principles of Supply Chain Management

The following are the seven core principles of supply chain management that can be used in the supply chain
of any organization irrespective of what type of product it produces:

1. Segment
★ Segmentation of customers based on their demand and the service required by them.
↪ Then, use this information to make alterations to the supply chain so that one can serve each
segment of customers efficiently and profitably.
★ Having a precise knowledge of your customer’s expectations and their purchasing habits enables you
to serve the needs of your customers adequately.

2. Customization of logistics based on the segments

★ Once you have customized parts of your customers and their demands,
↪ then you are required to customize your logistics network to meet the service requirement
and to serve each segment efficiently.
★ Curate your services in such a way so that you can meet the individual demand of your customers.
↪ In this way, you can not only serve your customers but can also stay profitable.

3. Forecast demands
★ Marketers are required to listen to the market demands and can plan their supply chain accordingly.
★ Keep forecasts consistent.
★ Make the Supply Chain Management (SCM) initiatives flexible so that it can be ready for all types of
unexpected events that may occur in the business.

4. Products differentiation
★ Differentiate the products further down the supply chain.
↪ This will help you in determining the accurate demand metrics.
↪ Be prepared with the customized products that the customers might demand at any point in
time in the future.
5. Minimize costs
★ Manage the resources in such a way so that it will minimize the cost of production.
★ Optimize the cost of raw material by coordinating with your suppliers.
↪ In this way, you can benefit from the relationship with the suppliers.

6. Use technology
★ Make the use of technology and supply chain management tools:
○ to help in decision-making at various levels and
○ to provide a clear view of products, services, and information related to them.

7. Analyze the performance

★ This will help in determining the areas where it is required to put more energy so that your processes
run smoothly.

◾ Effective supply chain systems help both manufacturers and retailers reduce excess inventory.
Six (6) Components of Supply Chain Management

◾This decreases the cost of producing,shipping, insuring,and storing products that cannot be sold.
1. Planning 4. Delivering
2. Sourcing 5. Returning

◾
3. Making 6. Enabling
Companies always try to match supply with aggregate demand by developing a course of action using
Analytics:
To procure what is planned is “Source.”
To plan what is ample for production is “Make.”
To attain significant service levels by delivering on time with quoted lead time is “Deliver.”

Planning ➜ Sourcing ➜ Making ➜ Delivering ➜ Returning ➜ Enabling

1. Planning
▶ is the first and most essential element of supply chain management.
►is imperative to control inventory and the manufacturing process.
Purpose: to manage and plan all required resources in the organization to produce products and
services to meet the demand of customers.

►determines which metric should be used to ensure the efficiency and effectiveness of the supply chain of the
organization.
Role: to keep up with the organizational goal and to stay ahead in the competition.

►With the help of an action plan, the organization makes sure that it delivers value to its customers.

2. Sourcing
►is the second component of supply chain management.
►The performance of an organization largely depends on its suppliers.
►It is an essential job of an organization to choose the right suppliers to deliver material and services that it
requires to produce final products.
►The organization gets into a contract with the suppliers, and suppliers provide products and services to the
organization.
►An organization uses different processes to manage its relationships with the suppliers. Various methods are
part of sourcing.
The main processes that are part of sourcing are:
ordering for the material,
receiving material,
management of inventory,
keeping communication with suppliers,
authorizing suppliers’ payment

3. Making
► is the next component of supply chain management.
► It is the responsibility of the supplier chain manager to coordinate the activities of production.
Various activities that are part of the supply chain management process are:
accepting raw material,
manufacturing products,
testing the quality of final products,
discarding and recycling the stuff that does not match the quality standards,
packing the final products,
scheduling the final delivery.

Organizations regularly check:

the quality, ] to make sure that the organization is creating
the productivity of employees, ] products that meet the
output of production ] quality standards or not.
4. Delivering
► The delivery component of supply chain management is also referred to as logistics.
► The delivery process is complex, and people choose your products influenced by the quality and speed of
your delivery.
The delivery component of the supply chain management process consists of activities like:
coordinating customers’ orders,
scheduling delivery,
method of payment,
dispatching deliveries,
invoicing customers,
receiving the payment.

► The speed of the delivery of goods depends on the fleet of the vehicles.
► Many organizations outsource their delivery work to specialized organizations to reduce their work and in
the case when the delivery process requires special handling and extra efforts.

5. Returning
► In this step, the organization returns the goods that are unwanted, defective, or in excess quantity.
► The supplier should be willing to take back the products and scrap or recycle the faulty products.
► In case the received products are surplus in volume, but in good shape, then it should be returned to the
warehouse for sale.

6. Enabling
► The supply chain requires different support processes to keep a check on the information following through
the supply chain process.
► Supply chain management should abide by the regulations.
The methods like:
human resource, ]
finance, ]
IT, ]
portfolio management, ] are the essential processes
facilities, ] of the enabling process.
product design, ]
quality assurance, ]
sales