Supply Chain E SUPPLY CHAIN MANAGEMENT STRATEGY, PLANNING, AND OPERATION Seventh Edition Sunil Chopra Kellogg School of Management New York, NY Vic

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Supply Chain E SUPPLY CHAIN MANAGEMENT

STRATEGY, PLANNING, AND OPERATION
Seventh Edition

Sunil Chopra
Kellogg School of Management

New York, NY

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Library of Congress Cataloging-in-Publication Data
Names: Chopra, Sunil
Title: Supply chain management / Sunil Chopra, Kellogg School of Management.
Description: Seventh edition. | Boston : Pearson Education, [2017]
Identifiers: LCCN 2017035661 | ISBN 9780134731889 | ISBN 0134731883
Subjects: LCSH: Marketing channels—Management. | Delivery of goods—Management. | Physical

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distribution of goods—Management. | Customer services—Management. | Industrial procurement. |
Materials management.
Classification: LCC HF5415.13 .C533 2017 | DDC 658.7—dc23 LC record available at https://
lccn.loc.gov/2017035661
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Dedication

I would like to thank my colleagues at Kellogg for all I have learned from them about logistics and
supply chain management. I thank Peter Meindl for his collaboration during earlier editions of this
book. I am grateful for the love and encouragement that my parents, Krishan and Pushpa, and
sisters, Sudha and Swati, have always provided during every endeavor in my life. I thank my
children, Ravi and Rajiv, for the joy they have brought me. Finally, none of this would have been
possible without the constant love, caring, and support of my wife, Maria Cristina.

—Sunil Chopra

About the Author

Sunil Chopra

Sunil Chopra is the IBM Distinguished Professor of Operations Management and Information
Systems at the Kellogg School of Management. He has served as the interim dean and senior
associate dean for curriculum and teaching, and the codirector of the MMM program, a joint dual-
degree program between the Kellogg School of Management and the McCormick School of
Engineering at Northwestern University. He has a PhD in operations research from SUNY at Stony
Brook. Prior to joining Kellogg, he taught at New York University and spent a year at IBM Research.

Professor Chopra’s research and teaching interests are in supply chain and logistics management,
operations management, combinatorial optimization, and the design of telecommunication networks.
He has won several teaching awards at the MBA and Executive programs of Kellogg. He has
authored more than 50 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 Sciences Journal. He has
also consulted for several firms in the area of supply chain and operations management.

Contents
Cover

Title Page

Copygiht

Dedication

About the Author

Preface ix

Part I Building a Strategic Framework to Analyze Supply Chains
Chapter 1 Understanding the Supply Chain 1

What Is a Supply Chain? 1

The Objective of a Supply Chain 3

Decision Phases in a Supply Chain 6

Process Views of a Supply Chain 8

Examples of Supply Chains 13

Developing Skills for Your Career 17

Discussion Questions 18

Bibliography 18

Chapter 2 Achieving Strategic Fit in a Supply Chain 19
Competitive and Supply Chain Strategies 19

How is Strategic Fit Achieved? 22

Supply Chain Levers to Deal with Uncertainty 31

Expanding Strategic Scope 33

Discussion Questions 36

Bibliography 36

Case Study: The Demise of Blockbuster 37

Chapter 3 Supply Chain Drivers and Metrics 40
Financial Measures of Performance 40

A Framework for Supply Chain Decisions 45

Facilities 47

Inventory 50

Transportation 52

Information 54

Sourcing 56

Pricing 58

Discussion Questions 61

Bibliography 61

Case Study: Seven-Eleven Japan Co. 61

Case Study: Financial Statements for Walmart Stores inc. and Macy’s inc. 68

Part II Designing the Supply Chain Network
Chapter 4 Designing Distribution Networks and Applications to Omni-Channel Retailing 69

Factors Affecting Distribution Network Design in the Supply Chain 69

Design Options for a Distribution Network 74

Online Sales and Omni-Channel Retailing 88

Discussion Questions 97

Bibliography 97

Case Study: Blue Nile and Diamond Retailing 98

Chapter 5 Network Design in the Supply Chain 103
The Role of Network Design in the Supply Chain 103

Factors Influencing Network Design Decisions 105

Framework for Network Design Decisions 110

Models for Designing a Regional Network Configuration 113

Models for Identifying Potential Sites in a Region 118

Models for Demand Allocation and Plant Location 121

Discussion Questions 129

Exercises 129

Bibliography 134

Case Study: Designing the Production Network at CoolWipes 134

Case Study: Managing a Merger at Lightning Networks 135

Chapter 6 Designing Global Supply Chain Networks 138
The Impact of Globalization on Supply Chain Networks 138

The Importance of Total Cost in Global Networks 140

Risk Management in Global Supply Chains 143

Evaluating Network Design Decisions using Decision Trees 147

To Onshore or To Offshore: The Value of Flexibility in a Supply Chain Under Uncertainty 157

Discussion Questions 165

Exercises 165

Bibliography 167

Case Study: BioPharma, Inc. 168

Case Study: The Sourcing Decision at Forever Young 171

Part III Planning and Coordinating Demand and Supply in a Supply Chain
Chapter 7 Demand Forecasting in a Supply Chain 172

The Role of Forecasting in a Supply Chain 172

Components of a Forecast and Forecasting Methods 174

Time-Series Forecasting Methods 178

Measures of Forecast Error 188

Building Forecasting Models using Excel 191

Discussion Questions 199

Exercises 200

Bibliography 202

Case Study: Specialty Packaging Corporation 202

Chapter 8 Aggregate Planning in a Supply Chain 205
Aggregate Planning and its Role in a Supply Chain 205

The Basic Tradeoffs in Aggregate Planning 208

Aggregate Planning using Linear Programming 209

Aggregate Planning in Excel 217

Discussion Questions 222

Exercises 222

Bibliography 224

Case Study: Kloss Planters and Harvesters 224

Case Study: Smartphone Production at Quicktronics 226

Chapter 9 Sales and Operations Planning in a Supply Chain 227
Responding to Predictable Variability in the Supply Chain 227

Sales and Operations Planning at Red Tomato 231

Discussion Questions 238

Exercises 238

Bibliography 240

Case Study: Mintendo Game Girl 241

Case Study: Promotion Challenges at Gulmarg Skis 242

Chapter 10 Coordination in a Supply Chain 244
Lack of Supply Chain Coordination and its Impact on Performance 244

Obstacles to Coordination in a Supply Chain 248

Managerial Levers to Improve Coordination 252

Some Practical Approaches to Improve Supply Chain Coordination 258

Discussion Questions 263

Bibliography 263

Part IV Planning and Managing Inventories in a Supply Chain
Chapter 11 Managing Economies of Scale in a Supply Chain Cycle Inventory 264

The Role of Cycle Inventory in a Supply Chain 264

Economies of Scale to Exploit Fixed Costs 267

Aggregating Multiple Products in a Single Order 274

Economies of Scale to Exploit Quantity Discounts 282

Why do Suppliers offer Quantity Discounts? 288

Short-Term Discounting: Trade Promotions 294

Managing Multiechelon Cycle Inventory 298

Managerial Levers to Reduce Cycle Inventory 301

Discussion Questions 303

Exercises 303

Bibliography 307

Case Study: Delivery Strategy at MoonChem 307

Case Study: Pricing and Delivery at Kar Foods 309

Appendix 11A: Economic Order Quantity 310

Chapter 12 Managing Uncertainty in a Supply Chain Safety Inventory 311
The Role of Safety Inventory in a Supply Chain 311

Factors Affecting the Level of Safety Inventory 313

Determining the Appropriate Level of Safety Inventory 317

Impact of Supply Uncertainty on Safety Inventory 326

Impact of Aggregation on Safety Inventory 328

Impact of Replenishment Policies on Safety Inventory 341

Managing Safety Inventory in a Multiechelon Supply Chain 344

Managerial Levers to Reduce Safety Inventory 345

Discussion Questions 346

Exercises 346

Bibliography 350

Case Study: Managing Inventories at Alko Inc. 350

Case Study: Should Packing be Postponed to the DC? 353

Appendix 12A: The Normal Distribution 354

Appendix 12B: The Normal Distribution in Excel 355

Appendix 12C: Expected Shortage per Replenishment Cycle 355

Appendix 12D: Evaluating Safety Inventory For Slow-Moving Items 356

Chapter 13 Linking Product Availability to Profits 358
Factors Affecting the Desired Level of Product Availability 358

Evaluating the Optimal Level of Product Availability 362

Basic Managerial Levers to Improve Supply Chain Profitability 370

The Value of Speed in a Seasonal Supply Chain 372

The Value of Postponement in a Seasonal Supply Chain 377

Setting Product Availability for Multiple Products under Capacity Constraints 382

Discussion Questions 385

Exercises 385

Bibliography 388

Case Study: The Need for Speed at Winner Apparel 388

Appendix 13A: Optimal Level of Product Availability 390

Appendix 13B: An Intermediate Evaluation 390

Appendix 13C: Expected Profit from an Order 391

Appendix 13D: Expected Overstock from an Order 392

Appendix 13E: Expected Understock from an Order 392

Appendix 13F: Simulation using Spreadsheets 393

Part V Designing and Planning Transportation Networks
Chapter 14 Transportation in a Supply Chain 396

Transportation Modes and their Role in a Supply Chain 396

Transportation Infrastructure and Policies 402

Design Options for a Transportation Network 405

Mumbai Dabbawalas: A Successful Same-Day Delivery Network 411

Trade-Offs in Transportation Design 412

Tailored Transportation 420

Discussion Questions 423

Bibliography 423

Case Study: Designing the Distribution Network for Michael’s Hardware 424

Case Study: The Future of Same-Day Delivery: Same as the Past? 425

Case Study: Selecting Transportation Modes for China Imports 426

Part VI Managing Cross-Functional Drivers in a Supply Chain
Chapter 15 Sourcing Decisions in a Supply Chain 427

The Sourcing Decision in a Supply Chain 427

Total Cost of Ownership 437

Designing a Sourcing Portfolio: Tailored Sourcing 439

The Impact of Incentives on Third-Party Behavior 443

Sharing Risk and Reward in the Supply Chain 445

Discussion Questions 456

Exercises 457

Bibliography 458

Case Study: Polaris Industries inc. 459

Chapter 16 Pricing and Revenue Management in a Supply Chain 464
The Role of Pricing and Revenue Management in a Supply Chain 464

Differential Pricing for Multiple Customer Segments 467

Dynamic Pricing and Overbooking for Perishable Assets 474

Discounting and Peak Pricing for Seasonal Demand 481

Constructing a Portfolio of Bulk Contracts and Spot Buying 482

Some Practical Challenges When using Revenue Management 484

Discussion Questions 485

Exercises 485

Bibliography 486

Case Study: To Savor or to Groupon? 486

Chapter 17 Sustainability and the Supply Chain 489

The Role of Sustainability in a Supply Chain 489

The Tragedy of the Commons 491

Key Pillars of Corporate Social Responsibility 495

Sustainability and Supply Chain Drivers 499

The Role of Incentives and Regulation for Sustainability 502

Discussion Questions 507

Bibliography 507

Part VII Online Chapter
Chapter A Information Technology in a Supply Chain

The Role of IT in a Supply Chain

The Supply Chain IT Framework

The Future of IT in the Supply Chain

Risk Management in IT

Discussion Questions

Bibliography

Index 508

Preface
This book is targeted toward an academic as well as a practitioner audience. On the academic side,
it is appropriate for MBA students, engineering master’s students, and senior undergraduate students
interested in supply chain management and logistics. It can also serve as a suitable reference for
both concepts as well as providing a methodology for practitioners in consulting and industry.

New to this Edition

The seventh edition has focused on changes that enhance students’ ability to sharpen their critical
thinking and data analytics skills as they study with the book. All concepts discussed in the book are
linked to strategic decision making in a supply chain, and all quantitative ideas are illustrated using
spreadsheets that can be implemented in practice. Some specific changes in the seventh edition
include:

The link between supply chain decisions and the financial performance of a firm is developed in
detail in Chapter 3.
The concepts underlying the design of distribution networks are illustrated in the context of omni-
channel retailing in Chapter 4. The evolution of retailing is used throughout the book to illustrate
the link between supply chain concepts and strategic decision making in a supply chain.
Each section of each chapter in the book is associated with a clearly identified learning objective
that is summarized at the end of the section.
We have added new mini-cases in Chapters 5, 8, and 15. Information in other cases has been
updated to be current.
New exercises have been added in several chapters.
For all numerical examples discussed in the book, we have developed spreadsheets that
students can use to understand the concept at a deeper level. These spreadsheets are referred
to in the book and allow the student to try different “what-if” analyses. These spreadsheets are
available at www.pearsonhighered.com/chopra along with basic guidance on how they may be
created and used.
We have continued to add current examples throughout the book, with a particular focus on
bringing in more global examples.

Solving Teaching and Learning Challenges

To be successful, supply chain practitioners must be able to formulate effective supply chain strategy
and be able to solve any resulting supply chain problems using the available analytical tools. In a
supply chain class this creates the challenge of teaching students to think strategically while
supporting their decisions with robust quantitative analysis. This book is designed to help faculty and
students overcome this challenge through its conceptual and pedagogical structure. Conceptually,
the book aims to develop an understanding of the following key areas and their interrelationships:

The strategic role of a supply chain
The key strategic drivers of supply chain performance
Analytic methodologies for supply chain analysis

To illustrate the strategic importance of good supply chain management, we provide many current
examples to show how companies have succeeded through effective supply chain management or

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failed because of weak supply chain management. Our strategic framework, the use of Excel-based
models to explain analytic methodologies, and several mini-cases to help students internalize the
link between the analytic methodologies and strategic decision making provide pedagogical support
for faculty using the book.

A Consistent Strategic Framework

Within the strategic framework, we identify facilities, inventory, transportation, information, sourcing,
and pricing as the key drivers of supply chain performance. The book is structured to dig deeper into
each driver to understand its role in the success of a supply chain, its interaction with other drivers,
analytic methodologies to support decisions related to the driver, and managerial levers related to
the driver that help improve supply chain performance.

Every analytic methodology is illustrated with its application in Excel. Students have access to the
associated Excel file along with instructions to construct and use the file. The Excel files help
students deepen their understanding of the link between the analytic models and the strategic
decisions they support.

Mini Cases
Most chapters have mini cases that can be used by faculty to ensure that students can apply the
concepts and methodologies in the context of strategic decision making for a business.

Developing Career Skills

Skills learned in this book will be of great use no matter what path students choose to follow. The
book is developed with the premise that good strategic decisions cannot be made without access to
relevant analytics, and all analytics should be designed to support decision making. As a result,
students will develop critical thinking, the ability to formulate and analyze problems, and support their
recommendations with analytics that uses data literacy and computing skills.

Every chapter in the book pushes students to think critically in order to define and solve supply
chain problems. For example, Chapter 4 develops a framework for distribution networks and then

pushes students to think about how retailing may evolve in the future as consumer preferences
and technology change. The first part of the chapter teaches frameworks and concepts related to
the design of distribution networks. The last part of the chapter then pushes the students to
analyze retailing by applying the knowledge they have gained in order to decide how retailers
need to change in order to succeed in the 21 century.
All the analytics in the book are developed through the use of Microsoft Excel. This helps
students develop data literacy, computing skills, and the knowledge of how to apply information
technology to support decision making. The analytics that are developed in these chapters in turn
support the framework laid out in Chapter 4. Whereas Chapter 4 helps students to think
conceptually about why certain retailing models have succeeded for selling jewelry while others
have failed, the succeeding chapters help students quantify financial metrics for different retail
networks. As a result, students learn how to use data and models to improve strategic decision
making.

st

Excel Based Models

Table of Contents Overview

Part
1

Building a Strategic Framework to Analyze Supply Chains

Ch. 1: Understanding the Supply
Chain

Introduces the supply chain, the managerial objective, and key
decisions

Ch. 2: Achieving Strategic Fit in a
Supply Chain

Discusses the need to align strategy with supply chain
capabilities

Ch. 3: Supply Chain Drivers and
Metrics

Defines key drivers of supply chain performance and associated
performance metrics

Part
2

Designing the Supply Chain Network

Ch. 4: Designing Distribution
Networks and Applications to
Omni-Channel Retailing

Introduces framework for designing distribution networks with an
application to omni-channel retailing

Ch. 5: Network Design in the
Supply Chain

Presents analytic models that support network design

Ch. 6: Designing Global Supply
Chain Networks

Discusses risks in global supply chains and analytic
methodologies that incorporate uncertainty in network design

Part
3

Planning and Coordinating Demand and Supply in a Supply Chain

Ch. 7: Demand Forecasting in a
Supply Chain

Introduces techniques for demand forecasting and measuring
forecast error

Ch. 8: Aggregate Planning in a
Supply Chain

Introduces methodologies to plan supply to meet seasonal
demand

Ch. 9: Sales and Operations
Planning in a Supply Chain

Discusses how optimally managing both demand and supply can
grow supply chain profits

Ch. 10: Coordination in a Supply
Chain

Discusses obstacles to coordination and managerial levers that
help improve coordination in a supply chain

Part
4

Planning and Managing Inventories in a Supply Chain

Ch. 11: Managing Economies of
Scale in a Supply Chain – Cycle
Inventory

Introduces methodologies to obtain optimal batch sizes and
discusses managerial levers that help reduce cycle inventory
without hurting costs

Ch. 12: Managing Uncertainty in a
Supply Chain – Safety Inventory

Introduces methodologies to obtain safety inventory and
discusses managerial levers that help reduce safety inventory
without hurting product availability

Ch. 13: Linking Product
Availability to Profits

Discusses managerial levers that help increase profits in a supply
chain

Part
5

Designing and Planning Transportation Networks

Ch. 14: Transportation in a Supply
Chain

Discusses options and tradeoffs when designing a transportation
network

Part
6

Managing Cross Functional Drivers in a Supply Chain

Ch. 15: Sourcing Decisions in a
Supply Chain

Introduces the concept of total cost in the context of sourcing and
discusses the benefits of sharing risk and reward in a supply
chain

Ch. 16: Pricing and Revenue
Management in a Supply Chain

Discusses how differential pricing can help increase profits in a
supply chain

Ch. 17: Sustainability and the
Supply Chain

Discusses the challenge to sustainability posed by the tragedy of
the commons and the role of incentives and regulation for
improved sustainability

Part
7

Online Chapter

Ch. A: Information Technology in
a Supply Chain

Introduces a framework for the role of information technology in a
supply chain

Instructor Teaching Resources

At the Instructor Resource Center, http://www.pearsonhighered.com/irc, instructors can easily
register to gain access to a variety of instructor resources available with this text in downloadable
format. If assistance is needed, our dedicated technical support team is ready to help with the media
supplements that accompany this text. Visit https://support.pearson.com/getsupport for answers
to frequently asked questions and toll-free user support phone numbers.

This program comes with the following teaching resources.

Supplements available to instructors at
www.pearsonhighered.com/irc

Features of the Supplement

Instructor’s Solution Manual
developed by the author

Case Teaching Notes and Worksheets
Spreadsheets for all quantitative examples
Discussion questions
Example figures
Additional exercises
Solutions to all questions and problems in the book

Test Bank

authored by Geoff Willis of the University of
Central Oklahoma

2000 multiple-choice, true/false, short- answer, and graphing
questions with these annotations:

Correct answer
Difficulty level (1 for straight recall, 2 for some analysis, 3
for complex analysis)
Learning outcome reference
Topic covered
AACSB learning standard (Analytical Thinking; Information
Technology; Application of Knowledge)

TestGen Computerized Test Bank TestGen allows instructors to:

Customize, save, and generate classroom tests
Edit, add, or delete questions from the Test Item Files
Analyze test results

®

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Organize a database of tests and student results.

PowerPoint Presentations
authored by Jeff Heyl of the Lincoln
University

Slides include all the graphs, tables, and equations in the
textbook.

PowerPoints meet accessibility standards for students with
disabilities. Features include, but not limited to:

Keyboard and Screen Reader access
Alternative text for images
High color contrast between background and foreground
colors

For Students
The following material is available to students at http://www.pearsonhighered.com/chopra:

Spreadsheets for numerical examples discussed in the book. These provide the details of the
example discussed, but are live and allow the student to try different what-if analyses.
Spreadsheets that allow students to build every table shown in Chapters 5 through 16.
Online chapter: Chapter A: Information Technology in a Supply Chain.
Technical Note: Routing and Scheduling in Transportation. This note is also bundled with the
Instructor’s Manual available on www.pearsonhighered.com/irc.

Acknowledgments

I would like to thank the many people who helped throughout this process. I thank the reviewers
whose suggestions significantly improved the book, including: Steven Brown, Arizona State
University; Ming Chen, California State University, Long Beach; Sameer Kumar, University of Saint
Thomas; Frank Montabon, Iowa State University; Brian Sauser, University of North Texas; and Paul
Venderspek, Colorado State University, and Michael Godfrey, University of Wisconsin Oshkosh.

I would also like to thank my editor, Neeraj Bhalla, content producer, Sugandh Juneja, editorial
assistant, Linda Albelli, and the people at SPi, including Nicole Suddeth, Ronel Mirano, and Raja
Natesan, for their efforts with the book. Finally, I would like to thank you, the readers, for reading
and using this book. I hope it contributes to all your efforts to improve the performance of companies
and supply chains throughout the world. I would be pleased to hear your comments and suggestions
for future editions of this text.

Sunil Chopra
Kellogg School of Management, Northwestern University

http://www.pearsonhighered.com/chopra

http://www.pearsonhighered.com/irc

Part I Building a Strategic Framework to Analyze Supply Chains

Chapter 1 Understanding the Supply Chain

Learning Objectives

After reading this chapter, you will be able to

In this chapter, we provide a conceptual understanding of what a supply chain is
and the various issues that must be considered when designing, planning, or
operating a supply chain. We identify the goal of a supply chain and discuss the
significance of supply chain decisions for the success of a firm. We also provide
several examples from different industries to emphasize the variety of supply
chain issues and decisions that companies need to consider at the strategic,
planning, and operational levels.

1.1 Discuss …

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