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Supply Chain StrategiesCase: 7-Eleven Japan

OPERATNS 476Distribution 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

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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 λ, standard deviation σ; 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 = λ L = mean leadtime demand•This is Little’s Law: WIP = (Processing Time) * (Throughput Time)

•Base-stock policy with base-stock level s•IP = s•s = E[IN] + E[IO] = E[IN] + λL. So E[IN] = s – λL

•Optimal base-stock level s= λL + zσ √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, which in effect implies their safety stock level equals average monthly demand.

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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…

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Product Characteristics

Functional:• long life cycle (2 years)• 1ow contribution margin (5-

20%)• 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 (20-

60%)• 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)

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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

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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

high

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Matching Supply Chains With Product Demand Characteristics

Supply Chain Types

Efficient

Responsive

Functional Innovative

Product Demand

Mismatch

Mismatch

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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 …..

FEBRUARY 26, 2007

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Samsung’s 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 toothpastefrom 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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ReviewThe 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]= λ and standard deviation σ

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 FQ = # of newspapers to purchase from distributorp = price per newspaperw = cost per newspaperv = salvage value

Profits are …

( )},min{ },min{),( DQQvQwDQpDQ −+−=π

quantity sold =minimum between demandand quantity available

costs salvage forunsold units

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Marginal Analysis

Some notation…

G = marginal revenue for buying and selling one unit ( = p – w )

L = marginal loss for buying and not selling one unit ( = w - v )

• Expected marginal benefit of stocking one more unit:

• Expected marginal cost of having one more unit:

( ) )( )(1 QDPGQFG ≥=−

)()( QDPLQFL ≤=

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Optimal Solution

( ) )()(1 ** QLFQFG =−

marginal benefit = marginal cost

Optimal solution:

vpwp

LGGQF

−−

=+

=)( *

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Normal Demand

Demand (D) is has a normal distribution F with mean E[D]= λ and standard deviation σ

Compute ratio = G/(G+L)

Set z* = NORMSINV(ratio)

Then, the optimal order quantity is

Q* = λ + z* σ= mean demand + safety stock

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Example: Greeting Cards

A greeting card retailer is deciding what quantity of Mother’s 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 λ = 200 and standard deviation σ = 50

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Solution

G =$2.50 – $1 = $1.50L = $1 – $0.25 = $0.75

ratio = 1.5/(1.5+0.75) = 0.6667

safety factor z* = normsinv(0.6667) = 0.45

order quantityQ* = 200 + (0.45)(50) = 221.54

Safety stock = Q*- λ =221.54-200 = 21.54(extra units ordered above the mean demand)

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Case: 7-Eleven JapanLearning 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

Network of 32,711 Stores across the globe

32,711Total100Norway

291PhilippinesChina368Singapore1,513South Korea

14Puerto Rico366Australia4,055Thailand59Denmark463Canada4,588Taiwan77Sweden709Mexico6,157USA73Turkey854Malaysia11,747Japan

(*Beijing 53)

1,277

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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

Jeannette Song Fuqua School of Business

Revenue from Operations

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SEJ Financials

Jeannette Song Fuqua School of Business

Operating Income

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SEJ Financials

Jeannette Song Fuqua School of Business

Net Income / Net Income per Share

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SEJ Timeline

Jeannette Song Fuqua School of Business

Ordering using Terminal Seven launchedAugust

Corporate name changed to Seven-Eleven Japan Co., Ltd.January1978

Integration of suppliers and joint delivery startedSeptember

Total number of stores reached 100May1976

24-hour operations (Toramaru Store, Koriyama, Fukushima Prefecture) begun

June1975

First store opened (Toyosu Store, Koto-ku, Tokyo)May1974

Licensing agreement and area service contract concluded with The Southland Corporation, USA (currently Seven-Eleven, Inc.)

York Seven Co., Ltd., establishedNovember1973

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SEJ Timeline

Jeannette Song Fuqua School of BusinessThe Southland Corporation's Hawaii operations acquiredDecember

Control system to keep cooked rice items at 20 in factories, delivery trucks, and display cases started

November

Payment of Tokyo Gas Co., Ltd., bills becomes possible at 7-Eleven storesMarch1988

Payment of Tokyo Electric Power Co., Inc., bills becomes possible at 7-Eleven stores

October

Total number of stores reached 3,000April

Three-times-a-day delivery of cooked rice items startedMarch1987

Introduction of interactive registers capable of transmitting information to and from the headquarters and stores

August

Introduction of computers capable of displaying graphsMay1985

Total number of stores reached 2,000February1984

EOB ordering system introduced

POS system introducedOctober1982

Total number of stores reached 1,000November1980

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SEJ Timeline

Jeannette Song Fuqua School of Business

"Seven-Eleven Midorino Kikin" establishedNovember

Total number of stores reached 5,000February1993

Introduction of new executive office information systemOctober

Store image refreshment begunFebruary1992

ISDN (Integrated Services Digital Network) launchedMay

Payment of Nippon Telegraph and Telephone Corporation telephone bills becomes possible at 7-Eleven stores

April

Acquisition of The Southland Corporation’s equity and participation in management

March1991

Introduction of Fourth-Generation Total Information SystemSeptember

Total number of stores reached 4,000June1990

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SEJ Timeline

Jeannette Song Fuqua School of Business

Sale of game software launchedNovember

Introduction of color photocopiersOctober

Sale of international phone cards launchedApril

Introduction of weather information systemMarch

Introduction of new display casesJanuary1996

Payment for mail-order purchases becomes possible at 7-Eleven stores

June

Total number of stores reached 6,000May1995

Payment for installment purchases becomes possible at 7-Eleven storesApril1994

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SEJ Timeline

Jeannette Song Fuqua School of Business

Payment service for Internet shopping introduced

Launch of e-Shopping! Books service

Total number of stores reached 8,000November

Sales of nutritional drinks launched

Introduction of new POS registersMarch1999

Launch of magazines and periodicals subscription serviceOctober

Sale of music CDs launchedMarch1998

Introduction of power saving devices in 7-Eleven storesDecember

Introduction of Fifth-Generation Total Information SystemNovember

Total number of stores reached 7,000June1997

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SEJ Timeline

Jeannette Song Fuqua School of Business

Launch of ticket issuing service using Multifunction CopiersNovember

Installation of open display cases usable for refrigerated and hot beverages begun

May

Total number of stores reached 9,000February2002

Introduction of items free of food additives and artificial coloringsAugust

Installation of IYBank ATMs in stores beginsMay

Establishment of IYBank Co., Ltd., through joint investment with Ito-Yokado Co., Ltd.

April2001

Establishment of meal delivery service company, Seven-Meal Service Co., Ltd.

August

Establishment of e-commerce company, 7dream.com(service commenced in July 2000)February2000

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SEJ Timeline

Jeannette Song Fuqua School of Business

7-Eleven, Inc., became a subsidiary of Seven-Eleven Japan, integrating the management of the IY Group's convenience store operations to SEJ

February

Total number of stores with IYBank ATMs reached 9,652February2005

First store in the People's Republic of China opened (Dongzhimen Store, Dongcheng District, Beijing)

April

Establishment of SEVEN-ELEVEN (BEIJING) CO., LTD., as a joint venture

January2004

Total number of stores reached 10,000August2003

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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

Supply Chain Types

Efficient

Responsive

Functional Innovative

Product Demand

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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

Supply Chain Types

Efficient

Responsive

Functional Innovative

Product Demand

Increase responsiveness in its supply chain for its innovative products

But scale demands efficiency!

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SEJ Strategy

Supply Chain Types

Efficient

Responsive

Functional Innovative

Product Demand

Sell innovative products on a large scale through a responsive and efficient supply chain!!

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 decision-making• 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