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Chapter 10 - Information Systems and Supply Chain Management
10-1
CHAPTER 10
INFORMATION SYSTEMS AND SUPPLY CHAIN
MANAGEMENT
ANNOTATED OUTLINE
INSTRUCTOR NOTES
I. Creating Strategic Advantage Through
Supply Chain Management and Information
Systems
• In a simplified supply chain, manufacturers
ship merchandise either to a distribution
center operated by a retailer or they ship
directly to stores.
• Supply chain management refers to a set
of approaches and techniques firms employ
to efficiently and effectively integrate their
suppliers, manufacturers, warehouses,
stores, and transportation intermediaries.
PPT 10-3 for supply chain definition.
PPT 10-4 illustrates the components of a typical
supply chain.
A. Strategic Advantage
• Not all retailers can develop a competitive
advantage from their information and supply
chain systems. Achieving this advantage
Zara’s strategic supply chain advantage is
discussed in PPT 10-7.
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• When retailers do develop a competitive
advantage from these systems, as Wal-Mart
has, the advantage is sustainable – it is very
difficult for competitors to duplicate.
B. Improved Product Availability
• An efficient supply chain has two benefits
See PPT 10-9 for summaries of the benefits of
supply chain management.
1. Reduced Stockouts
• A stockout occurs when an SKU that a
customer wants is not available.
2. Tailored Assortments
• Another benefit provided by information
systems that support supply chains is
making sure the right merchandise is
available at the right store.
C. Higher Return on Assets
• One measure of retailing performance is the
ability to generate a target return on
investment (ROI).
See PPT 10-10
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retailer to take advantage of special buying
opportunities and obtain items at a lower
cost, thus improving the gross margin.
• Sophisticated inventory management
systems can allow the retailer to carry
relatively little backup inventory to stay in
stock.
II. Information Flows
• The flow of information is complex in a
retail environment.
• The sales transaction data are also sent to the
distribution center. When the store inventory
drops to a specified level, more merchandise
is shipped to the store and the shipment
information is sent to the retailer’s computer
system so the planner knows the inventory
level left in the distribution center.
See PPT 10-11 for an overview of Information
and Merchandise Flows.
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• The planner communicates with the
distribution center to coordinate deliveries
from the vendor and to the stores, check
inventory status, and so on.
A. Data Warehousing
• Purchase data collected at the point of sale
goes into a huge database known as a data
warehouse. The information stored in the
data warehouse is accessible on various
dimensions and levels.
See PPT 10-17
Ask students what would they like to know
about their customers? How would they use
that information?
B. Electronic Data Interchange
• Electronic Data Interchange (EDI) is the
computer-to-computer exchange of business
documents in a structured format , which
means that the data transmissions used s
standard format to communicate the data.
See PPT 10-19
Ask students if they were buyers at the retail store,
what information would they like to have from the
vendor.
1. Standards
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Interindustry Commerce Standard (VCIS)
used in the general merchandise retailing
sector.
2. Transmission Systems
• In larger retail firms, communications
among employees within a company are
done through an intranet.
• An extranet is a collaborative network that
uses Internet technology to link businesses
with their suppliers, customers, or other
businesses. Extranets are typically private
and secure in that they can be accessed only
by certain parties.
Consider a large retail chain with over 500
stores spread in 10 countries. Discuss how
intranets could provide better coordination of
activities across the entire organization.
3. Security
• Because the Internet is a publicly accessible
network, its use to communicate internally
and externally with vendors and customers
raises security issues.
See PPT 10-20
Ask students what rules they would include if they
were in charge of setting up the security policy.
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bad publicity.
• Internet security can be expensive but is
necessary for even the smallest retailer or
service provider.
• The security policy should meet the
following objectives:
1. Authentication. The system should be able to
assure or verify that the person or computer
at the other end of the session really is
who/what it claims to be.
4. Benefits of EDI
• The use of EDI provides three main
benefits to retailers and their vendors:
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better record-keeping and fewer human
errors.
• Due to these benefits, many retailers are
asking their vendors to interface with
them using EDI. However, small- to
medium-sized vendors and retailers face
significant barriers, specifically cost and
lack of information technology (IT)
expertise to become EDI enabled.
III. The Physical Flow of Merchandise --
Logistics
• Logistics is that part of the supply chain
process that plans, implements, and controls
the efficient, effective flow and storage of
goods, services, and related information
from the point of origin to the point of
consumption in order to meet customers'
requirements.
• Sometimes merchandise is temporarily
stored at the distribution center; other times
it is immediately prepared to be shipped to
individual stores. This preparation may
See PPT 10-21. Also see a diagram of
Merchandise Flow in PPT 10-22.
A. Distribution Centers versus Direct Store
Delivery
• Retailers can use a distribution center or
The advantages of using a Distribution
Center are summarized in PPT 10-24
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direct store delivery, depending on
merchandise characteristics and the nature
of demand.
• Advantages of using a distribution center
are: (1) more accurate sales forecasts, (2) the
retailer’s ability to carry less merchandise in
the individual stores, which results in less
inventory investment system-wide, (3)
easier to avoid running out of stock or
having too much stock, and (4) since
distribution centers are better equipped to
prepare merchandise for sale, it is more cost-
effective to store merchandise and get it
ready for sale than in individual stores.
• What type of retailer should use a
distribution center? Retailers with wildly
fluctuating demand at a store level, stores
that require frequent replenishment, stores
that carry a relatively large number of items
Ask students if they have ever bought a
refrigerator from a big retailer like Sears. Remind
them that they were asked if they wanted a left or
right handed refrigerator, and that the
refrigerator was delivered from a distribution
center. Why? The retailer was practicing the
"Principle of Postponement". That is, the retailer
did not put the handle on the refrigerator until it
was about to be delivered. Also, all inventories
were stored in a central location. In this way, the
total amount of inventory could be reduced
IV. The Distribution Center
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• The distribution center performs several
functions, which might include:
A. Activities Managed by Distribution Centers
See PPT 10-23 for the activities performed by
a distribution center.
1. Management of Inbound Transportation
• Buyers and their staffs get more involved in
2. Receiving and Checking
• Receiving refers to the process of recording
the receipt of merchandise as it arrives at a
distribution center.
3. Storing and Crossdocking
• After the merchandise is received and
checked, it is either stored or crossdocked.
Ask students what they think an ideal cross-
docking distribution center would look like.
Draw it on the board. Draw a long skinny
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• Merchandise size and the sales rate typically
determine whether cartons are crossdocked
or stored.
4. Getting Merchandise Floor Ready
• Floor-ready merchandise is merchandise
that's ready to be placed on the selling floor.
Getting merchandise floor ready entails
ticketing, marking, and, in the case of
apparel, placing garments on hangers.
• An even better approach from the retailer's
perspective is to get vendors to ship the
Ask students if they think retailers are asking
too much of their vendors in making them
provide floor-ready merchandise. Consider
the challenges for manufacturers of having to
adhere to multiple retailers’ floor-ready
requirements.
busy checking in and marking merchandise.
Point out inefficiencies of such a system.
5. Preparing to Ship Merchandise to a Store
• After receiving the store order, the computer
at a distribution center creates a pick ticket,
a document that tells the order filler how
much of each item to get from the storage
area.
6. Management of Outbound Transportation
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• The management of outbound transportation
from distribution center to stores has
become increasingly complex as chain
B. Outsourcing Logistics
* To streamline their operations and make
more productive use of their assets and
personnel, retailers are constantly looking to
outsource logistical functions if those
functions can be performed better or less
expensively by third-party logistics
companies.
See PPT 10-25
Ask students to weigh the pros and cons of
outsourcing logistics.
1. Transportation
* Retailers must choose their shippers
carefully and demand reliable, customized
services. A retailer’s lead time and the
variation in lead time are determined by the
chosen transportation company.
2. Warehousing
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* To meet increasingly stringent demands
retailers are placing on their vendors to meet
3. Freight Forwarder
* Freight forwarders are companies that
purchase transport services. They then
consolidate small shipments from a number
of shippers into large shipments that move at
a lower freight rate.
4. Integrated Third-Party Logistics
Services
* Traditional definitions distinguishing
between transportation, warehousing, and
freight forwarding, have become blurred in
recent years.
C. Pull and Push Supply Chains
• In a pull supply chain, orders for
merchandise are generated at the store
level on the basis of sales data captured
by POS terminals. The demand for an
item pulls it through the supply chain.
See PPT 10-26 for a summary of
characteristics of push and pull supply
chains.
Ask students: “All other things held equal, which
retailer is more sophisticated, one using a pull or
a push logistics system?”
