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A01 CHOP0203 06 SE FM.indd Page 1 28/10/14 5:18 PM f-w-148/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020Sixth EditionSupply Chain ManagementS t r at e g y , P l a n n i n g , a n d O pe r at i onSunil ChopraKellogg School of ManagementPeter MeindlKepos CapitalBoston Columbus Indianapolis New York San Francisco HobokenAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal TorontoDelhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
A01 CHOP0203 06 SE FM.indd Page 2 13/11/14 7:30 AM f-w-147Vice President, Business Publishing: Donna BattistaAcquisitions Editor: Dan TylmanEditorial Assistant: Linda Seibert AlbelliVice President, Product Marketing: Maggie MoylanDirector of Marketing, Digital Services and Products:Jeanette KoskinasExecutive Product Marketing Manager: Anne FahlgrenExecutive Field Marketing Manager: Lenny Ann RaperSenior Strategic Marketing Manager: Erin GardnerTeam Lead, Program Management: Ashley SantoraProgram Manager: Claudia FernandesTeam Lead, Project Management: Jeff HolcombProject Manager: Liz NapolitanoOperations Specialist: Carol MelvilleCreative Director: Blair BrownArt Director: Jon Boylan/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020Vice President, Director of Digital Strategy and Assessment:Paul GentileManager of Learning Applications: Paul DeLucaDigital Editor: Megan ReesDirector, Digital Studio: Sacha LaustsenDigital Studio Manager: Diane LombardoDigital Studio Project Manager: James BatemanDigital Content Team Lead: Noel LotzDigital Content Project Lead: Miguel LeonarteFull-Service Project Management and Composition: iEnergizer/Aptara , Inc.Interior Designer: iEnergizer/Aptara , Inc.Cover Designer: Kristina Mose-Libon/Lumina Datamatics Cover Art: madpixblue/FotoliaPrinter/Binder: Edwards Brothers MalloyCover Printer: Lehigh-Phoenix/HagerstownMicrosoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents and relatedgraphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind.Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all warranties andconditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title and non-infringement. In no event shallMicrosoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss ofuse, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance ofinformation available from the services.The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes are periodically added tothe information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s)described herein at any time. Partial screen shots may be viewed in full within the software version specified.Microsoft and Windows are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. This book is not sponsored orendorsed by or affiliated with the Microsoft Corporation.Copyright 2016, 2013, 2010 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America.This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage ina retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For informationregarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, pleasevisit www.pearsoned.com/permissions/.Acknowledgments of third-party content appear on the appropriate page within the text.PEARSON and ALWAYS LEARNING are exclusive trademarks, in the U.S. and/or other countries, owned by Pearson Education, Inc., or its affiliates.Unless otherwise indicated herein, any third-party trademarks that may appear in this work are the property of their respective owners, and anyreferences to third-party trademarks, logos, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended toimply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between theowner and Pearson Education, Inc. or its affiliates, authors, licensees, or distributors.Library of Congress Cataloging-in-Publication DataChopra, SunilSupply chain management : strategy, planning, and operation / Sunil Chopra, Kellogg School of Management,Peter Meindl, Kepos Capital.—Sixth Edition.pages cmISBN 978-0-13-380020-3—ISBN 0-13-380020-21. Marketing channels—Management. 2. Delivery of goods—Management. 3. Physical distribution of goods—Management. 4. Customer services—Management. 5. Industrial procurement. 6. Materials management.I. Meindl, Peter, 1970– II. Title.HF5415.13.C533 2015658.7—dc23201403174510 9 8 7 6 5 4 3 2 1ISBN 10: 0-13-380020-2ISBN 13: 978-0-13-380020-3www.ebook3000.com
A01 CHOP0203 06 SE FM.indd Page 3 28/10/14 5:18 PM f-w-148/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020DedicationI would like to thank my colleagues at Kellogg for all I have learned fromthem about logistics and supply chain management. I am grateful for the loveand encouragement that my parents, Krishan and Pushpa, and sisters, Sudhaand Swati, have always provided during every endeavor in my life. I thank mychildren, Ravi and Rajiv, for the joy they have brought me. Finally, none of thiswould have been possible without the constant love, caring, and supportof my wife, Maria Cristina.—Sunil ChopraI would like to thank three mentors—Sunil Chopra, Hau Lee, and GerryLieberman—who have taught me a great deal. Thank you also to my parentsand sister for their love, and to my sons, Jamie and Eric, for making me smileand teaching me what life is truly all about. Most important, I thank my wife,Sarah, who makes life wonderful and whom I love with all my heart.—Peter MeindlAbout the AuthorsSunil ChopraSunil Chopra is the IBM Distinguished Professor of Operations Management and Information Systems at the Kellogg School of Management. He has served as the interimdean and senior associate dean for curriculum and teaching, and the codirector of theMMM program, a joint dual-degree program between the Kellogg School of Management and the McCormick School of Engineering at Northwestern University. He has aPhD in operations research from SUNY at Stony Brook. Prior to joining Kellogg, hetaught at New York University and spent a year at IBM Research.Professor Chopra’s research and teaching interests are in supply chain and logisticsmanagement, operations management, and the design of telecommunication networks.He has won several teaching awards at the MBA and Executive programs of Kellogg. Hehas authored more than 40 papers and two books.He has been a department editor for Management Science and an associate editor for Manufacturing & Service Operations Management, Operations Research, and Decision SciencesJournal. His recent research has focused on understanding supply chain risk and devising effective risk mitigation strategies. He has also consulted for several firms in the area of supplychain and operations management.Peter MeindlPeter Meindl is a portfolio manager with Kepos Capital in New York. Previously, he wasa research officer with Barclays Global Investors, a consultant with the Boston Consulting Group and Mercer Management Consulting, and the director of strategy withi2 Technologies. He holds PhD, MS, BS, and BA degrees from Stanford, and an MBAfrom the Kellogg School of Management at Northwestern.The first edition of this book won the prestigious Book of the Year award in 2002 from theInstitute of Industrial Engineers.
A01 CHOP0203 06 SE FM.indd Page 4 28/10/14 5:18 PM f-w-148/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020ContentsPrefacePart IxBuilding a Strategic Framework to Analyze SupplyChainsChapter 1 Understanding the Supply Chain1.11.21.31.41.51.61.71What Is a Supply Chain? 1The Objective of a Supply Chain 3The Importance of Supply Chain Decisions 5Decision Phases in a Supply Chain 6Process Views of a Supply Chain 8Examples of Supply Chains 13Summary of Learning Objectives 17Discussion Questions 17 Bibliography 18Chapter 2 Supply Chain Performance: Achieving StrategicFit and Scope 192.12.22.32.42.5Competitive and Supply Chain Strategies 19Achieving Strategic Fit 21Expanding Strategic Scope 31Challenges to Achieving and MaintainingStrategic Fit 34Summary of Learning Objectives 35Discussion Questions 36 Bibliography 36 CASE STUDY: The Demise of Blockbuster 37Chapter 3 Supply Chain Drivers and Metrics 403.13.23.33.43.53.63.73.83.93.10Financial Measures of Performance 40Drivers of Supply Chain Performance 44Framework for Structuring Drivers 46Facilities 47Inventory 49Transportation 52Information 53Sourcing 56Pricing 57Summary of Learning Objectives 59Discussion Questions 60 Bibliography 61 CASE STUDY: Seven-Eleven Japan Co. 61 CASE STUDY: Financial Statements for Walmart Stores Inc. andMacy’s Inc. 67ivwww.ebook3000.com
A01 CHOP0203 06 SE FM.indd Page 5 28/10/14 5:18 PM f-w-148/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020ContentsPart II Designing the Supply Chain NetworkChapter 4 Designing Distribution Networks andApplications to Online Sales 694.14.24.34.44.54.6The Role of Distribution in the Supply Chain 69Factors Influencing Distribution Network Design 71Design Options for a Distribution Network 74Online Sales and the Distribution Network 87Distribution Networks in Practice 100Summary of Learning Objectives 101Discussion Questions 102 Bibliography 102 CASE STUDY: Blue Nile and Diamond Retailing 103Chapter 5 Network Design in the Supply Chain5.15.25.35.45.55.6108The Role of Network Design in the Supply Chain 108Factors Influencing Network Design Decisions 109Framework for Network Design Decisions 114Models for Facility Location and Capacity Allocation 116Making Network Design Decisions in Practice 132Summary of Learning Objectives 133Discussion Questions 133 Exercises 134 Bibliography 138 CASE STUDY: Managing Growth at SportStuff.com 139 CASE STUDY: Designing the Production Network at CoolWipes 140Chapter 6 Designing Global Supply Chain Networks 1426.16.26.36.46.56.66.76.8The Impact of Globalization on Supply Chain Networks 142The Offshoring Decision: Total Cost 144Risk Management in Global Supply Chains 147Discounted Cash Flows 151Evaluating Network Design Decisions Using Decision Trees 153To Onshore or Offshore: Evaluation of Global Supply ChainDesign Decisions Under Uncertainty 160Making Global Supply Chain Design Decisions UnderUncertainty in Practice 168Summary of Learning Objectives 169Discussion Questions 169 Exercises 170 Bibliography 171 CASE STUDY: BioPharma, Inc. 172 CASE STUDY: The Sourcing Decision at Forever Young 175Part IIIPlanning and Coordinating Demand and Supply in aSupply ChainChapter 7 Demand Forecasting in a Supply Chain7.17.2The Role of Forecasting in a Supply Chain 177Characteristics of Forecasts 178177v
A01 CHOP0203 06 SE FM.indd Page 6 28/10/14 5:18 PM f-w-148vi/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE omponents of a Forecast and Forecasting Methods 179Basic Approach to Demand Forecasting 180Time-Series Forecasting Methods 182Measures of Forecast Error 192Selecting the Best Smoothing Constant 195Forecasting Demand at Tahoe Salt 197The Role of IT in Forecasting 202Forecasting in Practice 203Summary of Learning Objectives 204Discussion Questions 204 Exercises 205 Bibliography 206 CASE STUDY: Specialty Packaging Corporation 207Chapter 8 Aggregate Planning in a Supply Chain8.18.28.38.48.58.68.78.88.98.10209The Role of Aggregate Planning in a Supply Chain 209The Aggregate Planning Problem 211Aggregate Planning Strategies 213Aggregate Planning at Red Tomato Tools 214Aggregate Planning Using Linear Programming 215Aggregate Planning in Excel 220Building a Rough Master Production Schedule 224The Role of IT in Aggregate Planning 225Implementing Aggregate Planning in Practice 225Summary of Learning Objectives 226Discussion Questions 227 Exercises 227 Bibliography 229 CASE STUDY: Kloss Planters and Harvesters 229Chapter 9 Sales and Operations Planning: Planning Supplyand Demand in a Supply Chain 2319.19.29.39.49.59.6Responding to Predictable Variability in the Supply Chain 231Managing Supply 232Managing Demand 234Sales and Operations Planning at Red Tomato 235Implementing Sales and Operations Planning in Practice 241Summary of Learning Objectives 242Discussion Questions 242 Exercises 242 Bibliography 244 CASE STUDY: Mintendo Game Girl 245 CASE STUDY: Promotion Challenges at Gulmarg Skis 246Chapter 10 Coordination in a Supply Chain10.110.210.310.410.5248Lack of Supply Chain Coordination and the Bullwhip Effect 248The Effect on Performance of Lack of Coordination 250Obstacles to Coordination in a Supply Chain 252Managerial Levers to Achieve Coordination 256Continuous Replenishment and Vendor-ManagedInventories 261www.ebook3000.com
A01 CHOP0203 06 SE FM.indd Page 7 10/11/14 11:17 AM f-w-147/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020Contents10.6 Collaborative Planning, Forecasting, and Replenishment 26110.7 Achieving Coordination in Practice 26510.8 Summary of Learning Objectives 266Discussion Questions 267 Part IVBibliography 267Planning and Managing Inventories in a Supply ChainChapter 11 Managing Economies of Scale in a Supply Chain:Cycle Inventory 26811.111.211.311.411.511.611.711.8The Role of Cycle Inventory in a Supply Chain 268Estimating Cycle Inventory-Related Costs in Practice 271Economies of Scale to Exploit Fixed Costs 273Aggregating Multiple Products in a Single Order 278Economies of Scale to Exploit Quantity Discounts 286Short-Term Discounting: Trade Promotions 297Managing Multiechelon Cycle Inventory 302Summary of Learning Objectives 305Discussion Questions 306 Exercises 306 Bibliography 309 CASE STUDY: Delivery Strategy at MoonChem 310 CASE STUDY: Pricing and Delivery at KAR Foods 312Appendix 11A: Economic Order Quantity 313Chapter 12 Managing Uncertainty in a Supply Chain: SafetyInventory 31412.1 The Role of Safety Inventory in a Supply Chain 31412.2 Factors Affecting the Level of Safety Inventory 31612.3 Determining the Appropriate Level of Safety Inventory 31812.4 Impact of Supply Uncertainty on Safety Inventory 32712.5 Impact of Aggregation on Safety Inventory 33012.6 Impact of Replenishment Policies on Safety Inventory 34212.7 Managing Safety Inventory in a Multiechelon Supply Chain 34612.8 The Role of IT in Inventory Management 34612.9 Estimating and Managing Safety Inventory in Practice 34712.10 Summary of Learning Objectives 348Discussion Questions 349 Exercises 349 Bibliography 353 CASE STUDY: Managing Inventories at ALKO Inc. 353 CASE STUDY: Should Packing Be Postponed to the DC? 356Appendix 12A: The Normal Distribution 357Appendix 12B: The Normal Distribution in Excel 358Appendix 12C: Expected Shortage per Replenishment Cycle 358Appendix 12D: Evaluating Safety Inventory for Slow-MovingItems 359Chapter 13 Determining the Optimal Level of ProductAvailability 36113.1 The Importance of the Level of Product Availability 36113.2 Factors Affecting Optimal Level of Product Availability 362vii
A01 CHOP0203 06 SE FM.indd Page 8 28/10/14 5:18 PM f-w-148viii/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020Contents13.3 Managerial Levers to Improve Supply Chain Profitability 37213.4 Setting Product Availability for Multiple Products UnderCapacity Constraints 38613.5 Setting Optimal Levels of Product Availability in Practice 38913.6 Summary of Learning Objectives 389Discussion Questions 390 Exercises 390 Bibliography 392 CASE STUDY: The Need for Speed at Winner Apparel 393Appendix 13A: Optimal Level of Product Availability 394Appendix 13B: An Intermediate Evaluation 395Appendix 13C: Expected Profit from an Order 396Appendix 13D: Expected Overstock from an Order 396Appendix 13E: Expected Understock from an Order 397Appendix 13F: Simulation Using Spreadsheets 397Part V Designing and Planning Transportation NetworksChapter 14 Transportation in a Supply Chain40014.1 The Role of Transportation in a Supply Chain 40014.2 Modes of Transportation and Their PerformanceCharacteristics 40214.3 Transportation Infrastructure and Policies 40614.4 Design Options for a Transportation Network 40914.5 Mumbai Dabbawalas: A Highly Responsive DistributionNetwork 41514.6 Trade-Offs in Transportation Design 41614.7 Tailored Transportation 42514.8 The Role of IT in Transportation 42714.9 Making Transportation Decisions in Practice 42714.10 Summary of Learning Objectives 428Discussion Questions 429 Bibliography 429 CASE STUDY: Designing the Distribution Network for Michael’sHardware 430 CASE STUDY: The Future of Same-Day Delivery: Same as the Past? 431 CASE STUDY: Selecting Transportation Modes for China Imports 432Part VI Managing Cross-Functional Drivers in a Supply ChainChapter 15 Sourcing Decisions in a Supply Chain15.115.215.315.415.515.615.7433The Role of Sourcing in a Supply Chain 433In-House or Outsource? 435Examples of Successful Third-Party Suppliers 441Total Cost of Ownership 443Supplier Selection—Auctions and Negotiations 446Sharing Risk and Reward in the Supply Chain 448The Impact of Incentives When Outsourcing 459www.ebook3000.com
A01 CHOP0203 06 SE FM.indd Page 9 10/11/14 11:18 AM f-w-147/203/AW00176/9780133800203 CHOPRA/CHOPRA SUPPLY CHAN MANAGEMENT06 SE 978013380020Contents15.8 Designing a Sourcing Portfolio: Tailored Sourcing 46115.9 Making Sourcing Decisions in Practice 46315.10 Summary of Learning Objectives 464Discussion Questions 465 Exercises 465 Bibliography 466Chapter 16 Pricing and Revenue Management in a SupplyChain 46816.1 The Role of Pricing and Revenue Management in a SupplyChain 46816.2 Pricing and Revenue Management for Multiple CustomerSegments 47016.3 Pricing and Revenue Management for Perishable Assets 47716.4 Pricing and Revenue Management for Seasonal Demand 48416.5 Pricing and Revenue Management for Bulk and SpotContracts 48416.6 Using Pricing and Revenue Management in Practice 48616.7 Summary of Learning Objectives 487Discussion Questions 488 Exercises CASE STUDY: To Savor or to Groupon? 490488 Bibliography 489Chapter 17 Sustainability and the Supply Chain17.117.217.317.417.517.617.7492The Role of Sustainability in a Supply Chain 492The Tragedy of the Commons 494Key Pillars of Sustainability 497Sustainability and Supply Chain Drivers 500Closed-Loop Supply Chains 504The Pricing of Sustainability 505Summary of Learning Objectives 507Discussion Questions 508 Bibliography 508Part VII Online ChapterChapter A Information Technology in a Supply ChainThe Role of IT in a Supply ChainThe Supply Chain IT FrameworkCustomer Relationship ManagementInternal Supply Chain ManagementSupplier Relationship ManagementThe Transaction Management FoundationThe Future of IT in the Supply ChainRisk Management in ITSupply Chain IT in PracticeSummary of Learning ObjectivesDiscussion QuestionsIndex509 Bibliographyix
Team Lead, Program Management: Ashley Santora Program Manager: Claudia Fernandes Team Lead, Project Management: Jeff Holcomb Project Manager: Liz Napolitano Operations Specialist: Carol Melville Creative Director: Blair Brown Art Director: Jon Boylan Vice President, Director of Digital Strategy and Assessment: Paul Gentile
