Supply Chain Strategies Case: 7-Eleven Japan

OPERATNS 476

Distribution and Supply Chain Management Fall Term 1, 2007

Jeannette Song

Session 2
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Plan
Review of last class Supply chain strategies What is the right supply chain for your product? What kind of supply chain partner would you like to choose, as a supplier and as a customer? Review: Newsvendor model Case: 7-Eleven Japan

Review of Session 1
What is a supply chain?
Products, value added activities/ tiers, facilities, players, flows of materials, information and cash

What is supply chain management? Purpose & ideal Elements Challenges Some principles and innovations Example: Supply chain of a bottle of Listerine Case: Barilla
VMI (Vendor Managed Inventory; also known as Continuous Replenishment)
Why and how? Collaboration and incentives: external and internal
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Review of Inventory Concepts

Demand per period: mean , standard deviation ; replenishment leadtime: L IP = inventory position; IO = inventory on-order IN = net inventory = on-hand inventory backorders IP = IN + IO (definition) If full backlogging, all demand will be satisfied eventually, E[IO] = average pipeline inventory = L = mean leadtime demand This is Littles Law: WIP = (Processing Time) * (Throughput Time) Base-stock policy with base-stock level s IP = s s = E[IN] + E[IO] = E[IN] + L. So E[IN] = s L Optimal base-stock level s= L + z L = mean leadtime demand + safety stock, where z is a function of desired service level In effect, E[IN] = safety stock If a company says they carry one month of inventory, they mean E[IN] = Average monthly demand,
4 which in effect implies their safety stock level equals average monthly demand.

Products and Supply Chain Design

(Fisher, 1997)

Two types of products:

Functional: canned soup Innovative: computers, fashion apparel Products from the same industry can fall into both categories

Two basic types of supply chains:

Physically efficient Market responsive

Match the supply chain to the product

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Supply Chain Strategy Development

Matching the Right Supply Chain to Your Products
Efficient Supply Chains Responsive Supply Chains

Functional or innovative?
Before devising a supply chain strategy, we need to consider the nature of its products

Product Characteristics
Functional:
long life cycle (2 years) 1ow contribution margin (520%) low product variety (10-20 per category) low forecast error (10%) low stockout rate (1-2%) no forced markdowns (0%) long make-to-order leadtime (6+ months)

Innovative:
short life cycle (0.3 -1 year) high contribution margin (2060%) high product variety (often millions per category) high forecast error (40-100%) high stock-out rate (10-40%) many markdowns (10-25% of full price) short make-to-order lead time (1 day to 2 weeks)
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Example: Campbell Soup

Primarily functional products Only 5% of the products are new each year Most products have been in the market for years Highly predictable demand Long life-cycle (relative to lead-times)

Example: Sport Obermeyer

Primarily innovative products (fashion skiwear) Each year, 95% of the products are completely new designs Demand forecasts err by as much as 200% Short retail season

Physically Efficient Supply Chains

Cost concerns:
Inventory holding, transportation, handling and manufacturing costs

What do we usually see?

Large manufacturing batches to achieve scale Minimum order quantities to reduce handling/order processing costs Full truck load shipments

Focus on traditional cost measures:

Inventory turns, factory and transportation utilization
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Market Responsive Supply Chains

Cost concerns:
Inventory obsolescence/markdown, lost sales/poor service

What to do:
Accept and reduce demand uncertainty: Finding sources of new data to learn more about demand Postpone variety as much as possible, component commonality Avoid uncertainty: Pay a premium for flexibility: faster transportation, lower transportation and factory utilization, smaller batches Hedge against uncertainty: Buffer inventory and excess capacity.

Focus on flexibility:
Avoid emphasis on traditional explicit costs (inventory holding, transportation efficiency, manufacturing utilization) Recognize that opportunity cost of lost sales and poor service are 11 high

Matching Supply Chains With Product Demand Characteristics

Product Demand Supply Chain Types Functional Innovative

Efficient

Mismatch

Responsive

Mismatch

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FEBRUARY 26, 2007

Paul Pressler's Fall From The Gap

. Despite Pressler's expertise and comfort with the operational side of the company, some of his initiatives in that area also backfired. In 2003, he kicked off a plan to remake the retailer's supply chain. One goal was to combine fabric purchases across all three of the company's brands, which had previously used separate suppliers. Pressler wanted to cut costs and speed the flow of merchandise from drawing board to store shelf. But the effort stumbled. Since all three brands sell jeans made of denim, in late 2003 they began purchasing it together. But the big buying deals yielded denim of a single quality, weave, and weight. That meant all three brands were limited to one kind of fabric even though, with their different audiences, they needed to be able to offer an array of jeans. And with all that denim ordered in advance, there was less incentive for designers to keep their eyes open so they could jump on the next great style. Jeans made with material from the pooled purchases ended up largely falling flat, and the joint purchasing effort was abandoned .. 13

Samsungs European Supply Chain

Share the same logistics systems? Same shipping schedule?

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So Many Choices!

Does the world need 28 kinds of toothpaste from each manufacturer?

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Supply Chain Strategy

What is the Right Supply Chain for My Company?

Products
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How Do You Choose Supply Chain Partners?

Suppliers

Customers

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Review The Newsvendor Model

One-time decision about how much (Q) to order to cover demand in a single period Demand (D) is uncertain, has a distribution F with mean E[D]= and standard deviation Inventory remaining at end of period perishes (or is salvaged) Typical uses:
Seasonal products (clothing, toys, cards, etc.) Press runs (books, magazines, CDs, etc.) Perishable products (food, flowers) Capacity in service companies (hotel rooms, airplane seats)

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Model
Variables: D = demand for newspapers --- distribution F Q = # of newspapers to purchase from distributor p = price per newspaper w = cost per newspaper v = salvage value Profits are

(Q, D ) = p min{Q, D} w Q + v (Q min{Q, D})

quantity sold = minimum between demand and quantity available costs salvage for unsold units
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Marginal Analysis
Some notation G = marginal revenue for buying and selling one unit (=pw) L = marginal loss for buying and not selling one unit (=w-v)

Expected marginal benefit of stocking one more unit:

G (1 F (Q ) ) = G P ( D Q )

Expected marginal cost of having one more unit:

L F (Q ) = L P ( D Q )
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Optimal Solution
marginal benefit = marginal cost

G 1 F ( Q * ) = LF ( Q * )
Optimal solution:

F (Q * ) =

G pw = G+ L pv

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Normal Demand
Demand (D) is has a normal distribution F with mean E[D]= and standard deviation Compute ratio = G/(G+L) Set z* = NORMSINV(ratio)

Then, the optimal order quantity is

Q* = + z*
= mean demand + safety stock
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Example: Greeting Cards

A greeting card retailer is deciding what quantity of Mothers Day cards to purchase.
Purchase price (from distributor) = $1 per card Retail price = $2.50 per card Unsold cards are sold to a liquidator for $0.25 per card Any excess demand is lost Based on historical data, the retailer estimates that demand for the cards will follow a Normal distribution with a mean = 200 and standard deviation = 50
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Solution
G =$2.50 $1 = $1.50 L = $1 $0.25 = $0.75 ratio = 1.5/(1.5+0.75) = 0.6667 safety factor z* = normsinv(0.6667) = 0.45 order quantity Q* = 200 + (0.45)(50) = 221.54 Safety stock = Q*- =221.54-200 = 21.54 (extra units ordered above the mean demand)
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Case: 7-Eleven Japan Learning Objectives

Distinguish
functional and innovative products efficient vs. responsive chains

How to build a responsive supply chain

Speed Flexibility Efficiency?

Role of information technology Role of partnership and incentives Culture; continuous improvement; innovation
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7-11

Network of 32,711 Stores across the globe

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7-11
Japan USA Taiwan Thailand South Korea China 11,747 6,157 4,588 4,055 1,513
1,277 (*Beijing 53)

Malaysia Mexico Canada Australia Singapore

854 709 463 366 368

Turkey Sweden Denmark Puerto Rico

73 77 59 14

Philippines 291 Norway 100 Total 32,711

Network of 32,711 Stores across the globe

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7-11 Japan (SEJ)

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SEJ Sales Trends

Total Store Sales

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SEJ Expansion Trend

Total No. of Stores

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SEJ Financials
Revenue from Operations

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SEJ Financials
Operating Income

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SEJ Financials
Net Income / Net Income per Share

33 Jeannette Song Fuqua School of Business

SEJ Timeline
1973 November York Seven Co., Ltd., established Licensing agreement and area service contract concluded with The Southland Corporation, USA (currently Seven-Eleven, Inc.) 1974 1975 May June First store opened (Toyosu Store, Koto-ku, Tokyo) 24-hour operations (Toramaru Store, Koriyama, Fukushima Prefecture) begun Total number of stores reached 100 Integration of suppliers and joint delivery started Corporate name changed to Seven-Eleven Japan Co., Ltd. Ordering using Terminal Seven launched

1976

May September

1978

January August

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SEJ Timeline
1980 1982 1984 1985 November October February May August 1987 March April October 1988 March November December
Jeannette Song

Total number of stores reached 1,000 POS system introduced EOB ordering system introduced Total number of stores reached 2,000 Introduction of computers capable of displaying graphs Introduction of interactive registers capable of transmitting information to and from the headquarters and stores Three-times-a-day delivery of cooked rice items started Total number of stores reached 3,000 Payment of Tokyo Electric Power Co., Inc., bills becomes possible at 7-Eleven stores Payment of Tokyo Gas Co., Ltd., bills becomes possible at 7-Eleven stores Control system to keep cooked rice items at 20 in factories, delivery trucks, and display cases started The Southland Corporation's Hawaii operations acquired
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SEJ Timeline
1990 June September 1991 March Total number of stores reached 4,000 Introduction of Fourth-Generation Total Information System Acquisition of The Southland Corporations equity and participation in management Payment of Nippon Telegraph and Telephone Corporation telephone bills becomes possible at 7-Eleven stores ISDN (Integrated Services Digital Network) launched Store image refreshment begun Introduction of new executive office information system Total number of stores reached 5,000 "Seven-Eleven Midorino Kikin" established
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April

May 1992 February October 1993 February November

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SEJ Timeline
1994 1995 April May June 1996 January March April October November Payment for installment purchases becomes possible at 7-Eleven stores Total number of stores reached 6,000 Payment for mail-order purchases becomes possible at 7-Eleven stores Introduction of new display cases Introduction of weather information system Sale of international phone cards launched Introduction of color photocopiers Sale of game software launched

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SEJ Timeline
1997 June November December 1998 March October 1999 March Total number of stores reached 7,000 Introduction of Fifth-Generation Total Information System Introduction of power saving devices in 7-Eleven stores Sale of music CDs launched Launch of magazines and periodicals subscription service Introduction of new POS registers Sales of nutritional drinks launched November Total number of stores reached 8,000 Launch of e-Shopping! Books service Payment service for Internet shopping introduced
38 Jeannette Song Fuqua School of Business

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SEJ Timeline
2000 February August 2001 April May August 2002 February May November
Jeannette Song

Establishment of e-commerce company, 7dream.com (service commenced in July 2000) Establishment of meal delivery service company, Seven-Meal Service Co., Ltd. Establishment of IYBank Co., Ltd., through joint investment with Ito-Yokado Co., Ltd. Installation of IYBank ATMs in stores begins Introduction of items free of food additives and artificial colorings Total number of stores reached 9,000 Installation of open display cases usable for refrigerated and hot beverages begun Launch of ticket issuing service using Multifunction Copiers
39 Fuqua School of Business

SEJ Timeline
2003 2004 August January April 2005 February February Total number of stores reached 10,000 Establishment of SEVEN-ELEVEN (BEIJING) CO., LTD., as a joint venture First store in the People's Republic of China opened (Dongzhimen Store, Dongcheng District, Beijing) Total number of stores with IYBank ATMs reached 9,652 7-Eleven, Inc., became a subsidiary of Seven-Eleven Japan, integrating the management of the IY Group's convenience store operations to SEJ

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SEJ: Products and Services

Products
Life cycles Demand characteristics # SKUs

Innovative or functional?

http://www.youtube.com/watch?v=vKsmf4TWToM

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SEJ: Supply chain structure

Players
Tiers

Facilities
Plants, warehouses, stores, etc.

Flows of goods, information, cash

Replenishment schedules Inventory levels Logistics
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SEJ: Supply chain structure (cont.)

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Functional vs. Innovative Products

Product Demand Supply Chain Types Functional Innovative

Efficient

Responsive

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Where do you see responsiveness?

Reduce uncertainty

Avoid uncertainty

Hedge against uncertainty

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Where do you see efficiency?

High utilization

High inventory turns

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SEJ Strategy
Increase responsiveness in its supply chain for its innovative products
Product Demand Supply Chain Types Functional Innovative

Efficient

Responsive

But scale demands efficiency!

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SEJ Strategy
Sell innovative products on a large scale through a responsive and efficient supply chain!!
Product Demand Supply Chain Types Functional Innovative

Efficient

Responsive

Supply chain strategy and execution allows this to happen!

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Product, Marketing, and Service Strategy

Freshness is Job #1 One-stop shop for busy, young customers Wide range of products (3000 SKUs in 2001 using only 1200 sq. ft. of store space) High rate of product turnover Rapid introduction of innovative services High volume products

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New Product Development

Linked with retail and sales performance Exchange information with suppliers Joint product development used as key differentiator Original products represented 40% of sales in 2001; expected to increase to 50%
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Supply Chain and Distribution Strategy

Align marketing, development, expansion, retail and execution needs Synchronize planning and operations across the supplier networks and retail channels
Real-time information drives retail, ordering, and supply processes

Leverage IT capabilities for superior decisionmaking

Key decisions involve operations managers Centralized and decentralized Exploring commonality in products, processes, and decision-frameworks

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Retail Execution
Daily ordering -Based on POS data
-Frequency based on product category -Back-up IT systems at store for ordering

Careful and planned product assortment

-Use of real-time information to determine shelf-life

Dynamic store layout and display to increase utilization -Display decisions left to store managers Frequent delivery -Joint delivery program for efficiency

-Diversified mode of transportation to increase flexibility

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7-Dream.com
Clicks and Mortar strategy Key to diversifying product line, and attracting younger customers Promote brand image as innovative Partnership

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Summary
Match supply chain design with product characteristics Newsvendor model review
Tradeoff of overage and underage costs

Combine responsiveness and efficiency:

7-11 Japan IT, communication, data Flexibility, partnership Commonality, efficiency Centralized and decentralized decision making Efficiency, responsiveness, and incentives
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