Supply chain surplus

The value created by a company in a supply chain equals the surplus accrued to all individual stakeholders - customers and suppliers - in the company s supply chain. Surplus for each stakeholder is defined as its revenue minus cost. As the revenue of one company in a supply chain can be the cost of another, value creation can be intertwined. Therefore, if value creation were a zero sum game, the stakeholders would operate as adversaries. However, if the total value-pie were to increase, the stakeholders would be mutually supportive. This can happen only if the supplier is interested in increasing customer s value and vice versa. Conversely, to increase the total value, the supply chain would need to increase benefits to customers, lower the costs of its suppliers, use its resources more effectively, and develop relationships with suppliers and customers in innovative ways. 

The objective of every supply chain should be 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 entire 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... 

In this book, we have a strong focus on analyzing all supply chain decisions in terms of their impact on the supply chain surplus. These decisions and their impact can vary for a wide variety of reasons. For instance, consider the difference in the supply chain structure for fast-moving consumer goods that is observed in the United States and India. U.S. distributors play a much smaller role in this supply chain compared with their Indian counterparts. We argue that the difference in supply chain structure can be explained by the impact a distributor has on the supply chain surplus in the two countries. 

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. As a result, each category of decisions must consider uncertainty over the decision horizon. 

Intercompany Scope Maximizing Supply Chain Surplus... 

The goal of only maximizing company profits can sometimes lead to conflict between stages of a supply chain. For example, both the supplier and the manufacturer in a supply chain may prefer to have the other side hold most of the inventory, with the goal of improving their own profits. If the two parties cannot look beyond their own profits, the more powerful party will simply force the other to hold inventories without any regard for where inventories are best held. The result is a decrease in the supply chain surplus—the total pie that both parties get to share. 

In Chapter 1, we discussed how growing the supply chain surplus is the ultimate goal of a supply chain. Our premise was that increasing the surplus allows for a growth of supply chain profitability, which facilitates an improvement in the financial performance of each member of the supply chain. In this section, we define important financial measures that are reported by a firm and affected by supply chain performance. In later sections, we link supply chain drivers and associated metrics to the various financial measures. The definitions of financial measures in this section are taken from Dyckman, Magee, and Pfeiffer (2011). To illustrate the various financial measures, we use the financial results reported in 2013 by Amazon.com and Nordstrom Inc. and assume a tax rate of 0.35. 

PROCUREMENT Procurement is the process of obtaining goods and services within a supply chain. Managers must structure procurement with a goal of increasing supply chain surplus. For example, a firm should set up procurement for direct materials to ensure good coordination between the supplier and buyer. In contrast, the procurement of MRO products should be structured to ensure that transaction costs are low. 

As the preceding examples illustrate, firms can make many choices when designing then-distribution networks. An inappropriate network can have a significant negative effect on the profitability of the firm, as is evident in the failure of companies such as Blockbuster and Webvan. The appropriate choice of distribution network grows the supply chain surplus by satisfying customer needs at the lowest possible cost. 

Supply chain coordination improves if all stages of the chain take actions that are aligned and increase total supply chain surplus. Supply chain coordination requires each stage of the supply chain to share information and take into account the impact its actions have on other stages. 

The lack of coordination in a supply chain increases variability and hurts the supply chain surplus. We discuss the impact of the bullwhip effect on various costs in the P G diaper supply chain. 

In the examples described earlier, firms provide different levels of product availability. Every supply chain manager must use factors that influence the optimal level of product availability to target that optimal level and identify managerial levers that increase supply chain surplus. Next, we identify factors that affect the optimal level of product availability. 

Will the third party increase the supply chain surplus relative to performing the activity... 

Recall that the supply chain surplus is the difference between the value of a product for the customer and the total cost of all supply chain activities involved in bringing the product to the customer. Our basic premise is that outsourcing makes sense if it increases the supply chain surplus (assuming we get to keep some of the increase) without significantly inCTcasing risks. A sourcing decision should aim to increase the net valne created by the supply chain. 

Effective sourcing processes within a firm can improve profits for the firm, as well as total supply chain surplus, in a variety of ways. It is important that the drivers of improved profits be clearly identified when making sourcing decisions. The following are some of the benefits from effective sourcing decisions ... 

Third parties increase the supply chain surplus if they either increase value for the customer or decrease the supply chain cost relative to a firm performing the task in-house. Third parties can increase the supply chain surplus effectively if they are able to aggregate supply chain assets or flows to a higher level than a firm itself can. Here, we discuss various mechanisms that third parties can use to grow the surplus. 

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