Supply Chain Management

SCM

Week 3
Class #5

WEEKLY OBJECTIVES
IT and processes to support the supply chain
The drivers of Supply Chain Management
Supply chain logistics and new trends

OBJETIVES
By the end of this unit you will be able to:
identify the major drivers of supply chain performance
discuss the role of each driver in creating strategic fit
between the supply chain strategy and the competitive
strategy
define the key metrics that track the performance of the
supply chain in terms of each driver

 Logistical Drivers:

Inventory

Facilities

Transportation

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 Cross-functional drivers:

Sourcing

Information
Pricing

 These 6 drivers interact with each other to determine the supply

chains performance in terms of responsiveness and efficiency.
The goal is to structure the drivers to achieve the desired level of
responsiveness at the lowest possible cost.

DRIVERS OF SUPPLY CHAIN PERFORMANCE

Facilities
places where inventory is stored, assembled, or fabricated.
production sites and storage sites.
For example, a high-efficiency distributor would have fewer warehouses to
increase efficiency, but this will reduce responsiveness
Inventory
raw materials, WIP, finished goods within a supply chain.
inventory policies.
For example, a clothing retailer can make itself more responsive by stocking
large amounts of inventory and satisfying customer demand from stock.
Transportation
moving inventory from point to point in a supply chain.
combinations of transportation modes and routes.
For example, a mail-order catalog company can use a faster mode of
transportation such as FedEx to ship products making its supply chain
more responsive.
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DRIVERS OF SUPPLY CHAIN PERFORMANCE

Information
data and analysis regarding inventory, transportation, facilities throughout the supply
chain.
potentially the biggest driver of supply chain performance.
For example, with information on customer demand patterns, a
pharmaceutical company can produce and stock drugs in anticipation of
customer demand, which makes the supply chain very responsive.
Sourcing
functions a firm performs and functions that are outsourced.
For example, Motorola outsourced much of its production to contract
manufacturers in China, it saw its efficiency improve but its responsiveness
suffer because of the long distances.
Pricing
Price associated with goods and services provided by a firm to the supply chain.
Pricing affects the behavior of the buyer of the good or service.
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EXAMPLE:
The furniture industry in the United States
Low-cost furniture is outsourced to Asia and available at many discount
retailers.
Variety is typically low and retailers such as Wal-Mart stock inventory of finished
goods.
The low variety and stable replenishment orders allow furniture manufacturers
in Asia to focus on efficiency.
Given the available inventory, low-cost modes of transportation from Asia are
used.
So, relatively low-cost inventory at the retailer allows the supply chain to
become efficient by lowering transportation and production costs.
The primary goal of this supply chain is to deliver a low price and acceptable
quality.

http://www.ikea.com/us/en/
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https://www.walmart.com/cp/103150?search_redirect=true&redirect_query=furniture

A FRAMEWORK FOR
STRUCTURING DRIVERS
Competitive Strategy
Supply Chain
Strategy
Efficiency

Responsiveness

Supply chain structure

Logistical Drivers

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Cross Functional Drivers

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EXAMPLE:
Wal-Mart
Wal-Marts competitive strategy is to be reliable, low-cost retailer for a wide
variety of mass-consumption goods.
Wal-Mart maintains an efficient supply chain by keeping low levels of inventory.
Wal-Mart pioneered cross-docking, a system in which inventory is not stocked
in a warehouse but rather is shipped to stock from the manufacturer.
These shipments make only brief stops at distribution centers (DC), where they
are transferred to trucks that make deliveries to stores.
This significantly lowers inventory because products are stocked only at stores,
not at both stores and warehouses.
So, Wal-Mart favors efficiency over responsiveness.
Wal-Mart runs its own fleet to keep responsiveness high.
This strategy dictates that the ideal Supply Chain will emphasize efficiency
but also maintain and adequate level of responsiveness in terms or
product availability.

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1. FACILITIES
Role in the supply chain
the where of the supply chain
manufacturing or storage (warehouses)
Role in the competitive strategy
economies of scale (efficiency priority)
larger number of smaller facilities (responsiveness priority)
Example 3.1: Toyota and Honda
Components of facilities decisions

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FACILITIES
Example 3-1 Toyota and Honda

Both Toyota and Honda use facilities decisions to be more responsive to

their customers. The end goal is to open manufacturing facilities in
every major market that they enter.
The increase in responsiveness plays a large role in Toyota and Hondas
decision to place facilities in their local markets. The flexibility of Honda
facilities to assemble both SUVs and cars in the same plant allowed
the company to keep costs down in the downturn of 2010. While
competitors SUV production facilities were idle, Honda facilities
maintained a high level of utilization.

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1.A. COMPONENTS OF FACILITIES DECISIONS

Location
centralization (efficiency) vs. decentralization (responsiveness)
other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Manufacturing methodology (product focused versus process focused)
Warehousing methodology (SKU storage, job lot storage, cross-docking)
Overall trade-off: Responsiveness versus efficiency

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1.B. FACILITY-RELATED METRICS

Capacity: measures the maximum amount a facility can process.

Utilization: measures the fraction of capacity that is currently being used in the facility.
Production cost per unit: measures the average cost to produce a unit of output.
Product Variety: measures the number of products/product families processed in a
facility.
Processing/setup/down/idle time: measure the fraction of time that the facility was
processing units, being set up to process unit, unavailable because it was down, or idle
because it had no units to process.
Quality Losses: measures the fraction of production lost due to defects.

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2. INVENTORY
Role in the supply chain:
Exists in the supply chain because of a mismatch between supply and
demand. Another significant role that inventory plays is to reduce cost by
exploiting economies of scale that may exist during production and
distribution.
Inventory also has a significant impact on the material flow time in a supply
chain. Material flow time is the time that elapses between the point at
which material enters the supply chain to the point at which exits.
For a supply chain, throughput is the rate at which sales occur.
I=DT , where I is inventory, T is flow time and D throughput.
If the flow time of an auto assembly process is 10 hours and the throughput
is 60 units an hour, then the inventory is 600 units.

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INVENTORY: ROLE IN COMPETITIVE

STRATEGY
If responsiveness is a strategic competitive priority, a firm can locate larger amounts
of inventory closer to customers
If cost is more important, inventory can be reduced to make the firm more efficient
Trade-off (a balance achieved between two desirable but incompatible features)

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2.A. COMPONENTS OF INVENTORY DECISIONS

Cycle inventory
Average amount of inventory used to satisfy demand between shipments
Depends on lot size
Safety inventory
inventory held in case demand exceeds expectations
costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand
cost of carrying additional inventory versus cost of flexible production
Overall trade-off: Responsiveness versus efficiency
more inventory: greater responsiveness but greater cost
less inventory: lower cost but lower responsiveness

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2.B. INVENTORY-RELATED METRICS

Cash to cash cycle time: is a high-level metric that includes inventories,
accounts payable and receivables
Average inventory: measures the average amount of inventory carried.
Measured in units, days of demand and financial value.
Inventory turns: measures the number of times inventory turns over a year.
Seasonal inventory: measures the amount of both cycle and safety inventory that
is purchased solely due to seasonal changes in demand.
Fill rate: measures the fraction of orders/demand that were met on time from
inventory.

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3. TRANSPORTATION
Role in the supply chain
Role in the competitive strategy
Components of transportation decisions

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TRANSPORTATION: ROLE IN
THE SUPPLY CHAIN
Moves the product between stages in the supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater responsiveness but lower efficiency
Also affects inventory and facilities

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TRANSPORTATION:
ROLE IN THE COMPETITIVE STRATEGY
If responsiveness is a strategic competitive priority, then faster
transportation modes can provide greater responsiveness to
customers who are willing to pay for it.
Can also use slower transportation modes for customers whose
priority is price (cost)
Can also consider both inventory and transportation to find the
right balance

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3.A. COMPONENTS OF
TRANSPORTATION DECISIONS
Mode of transportation:
air, truck, rail, ship, pipeline, electronic transportation
vary in cost, speed, size of shipment, flexibility
Route and network selection
route: path along which a product is shipped
network: collection of locations and routes
In-house or outsource
Overall trade-off: Responsiveness versus efficiency

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3.B. TRANSPORTATION-RELATED METRICS

Average inbound transportation cost: measures the cost of bringing product
into a facility as a percentage of sales or cost of goods sold (COGS)
Average outbound transportation cost: measures the cost of sending product
out of a facility to the customer.
Fraction transported by mode: measures the fraction of transportation (in units
or dollars) using each mode of transportation.

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CLASS EXERCISE
CHOOSE ONE COMPANY
CHOOSE A PRODUCT OF THE COMPANY
STATE THE SUPPLY CHAIN THROUGH THE 3
LOGISTICAL DRIVERS
STATE THE SUPPLY CHAIN THROUGH THE 3 CROSS
FUNCTIONAL DRIVERS

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4. INFORMATION
Role in the supply chain: Information deeply affects every part of the
supply chain and impacts every other driver. Good information on
supply and demand can help improve the utilization and
responsiveness of a facility. Wal-Mart uses information on shipments
from suppliers to facilitate cross-docking and lower inventory and
transportation expense. Airlines normally use information to offer the
right number of seats at a discount price, leaving sufficient seats for
business customers needing seats at the last minute and willing to
pay a high price.

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INFORMATION
Role in the competitive strategy: It is an important driver companies use in order to
be more responsive and more efficient. However, beyond a certain point the marginal
cost of handling additional information increases, while the marginal benefit from the
additional information decreases.
In the case of firms which target customers who required customized products, invest
in information because this allows them to respond more quickly.

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4.A. COMPONENTS OF INFORMATION DECISIONS

Push v Pull: Different types of systems require different type of information.
Manager must determine whether processes are part of the push or pull phase in the
chain. Push systems generally require information in the form of elaborate material
requirement planning (MRP) to take the master production schedule and roll it back,
creating schedules for suppliers with part types, quantities and delivery dates. Pull
systems require information on actual demand to be transmitted extremely quickly
throughout the entire chain.

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COMPONENTS OF INFORMATION DECISIONS

Coordination and information sharing: This occurs when all stages of a supply
chain work toward the objective of maximizing total supply chain profitability based
on shared information. For example, if the supplier is to produce the right parts in a
timely manner for a manufacturer in a pull system, the manufacturer must share
demand and production information with the supplier.
Forecasting and aggregate supply planning: This is making projection about what
the future demand and conditions will be. Managers decide how they will make
forecasts and to what extent rely on that.

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COMPONENTS OF INFORMATION DECISIONS

Enabling Technologies: Managers must decide which technologies to use
and how to integrate these technologies into their companies and their
partners companies. EDI, Internet, ERP (Enterprise resource planning). This
ERP systems keep track of the information. SCM software uses the
information in ERP systems to provide analytical decision support in addition
of the visibility of the information.
RFID (Radio frequency identification).
http://www.youtube.com/watch?v=cCsK_3MOYqA&feature=related

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4.B. INFORMATION-RELATED METRICS

Forecast horizon: identifies how far in advance of the actual event a forecast is
made.
Forecast error: measures the difference between the forecast and actual demand.
Seasonal factors: measures the extent to which the average demand in a season is
above or below the average in a year.

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HOMEWORK
Investigate about the programs used during a SCM
Identify 3 IT programs and their application in each driver and
metric. One of them should be SAP program
Mention IT trends

5. SOURCING
Role in the supply chain: Is the set of business processes required to purchase
goods and services. Managers must first decide which tasks will be outsourced and
those that will be performed within the firm (single supplier or a portfolio of suppliers).
Managers select the suppliers and negotiate contracts which define the role of each
supply source and it is structured to improve the supply chain performance and
minimize information distortion between stages.

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SOURCING
Role in the competitive strategy: Firms outsource to responsive third parties if it is
too expensive for them to develop this responsiveness on their own (next-day
package delivery). Other firms have kept the responsive process in-house to
maintain control (Zara). Firms also outsource for efficiency if the third party can
achieve significant economies of scale or has a lower cost structure.

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5.A. COMPONENTS OF SOURCING

DECISIONS
In-house or Outsource: This decision should be driven by its
impact on the total supply chain surplus. It is best to outsource if
the growth in total supply chain surplus is significant with little
additional risk.
Supplier Selection: Managers must identify the criteria along
which suppliers will be evaluated and how they will be selected
(direct negotiation or resort to an auction).
Procurement: Managers must decide on the structure of
procurement of direct and indirect material.

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5.B. SOURCING-RELATED METRICS

Days payable outstanding: measures the number of days between a supplier
performed a supply chain task and when it was paid.
Average purchased price: measures the average price at which a good or service
was purchased during a year.
Supply quality: measure the quality of product supply.
Supplier reliability: measures the variability of the suppliers lead time as well as the
delivered quantity relative to plan.

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OVERALL TRADE-OFF: INCREASE THE SUPPLY

CHAIN SURPLUS
Outsourcing to a third party is meaningful if the third party raises the supply chain
surplus more than the firm can by its own. In contrast, a firm should keep a supply
chain function in-house if the third party cannot increase the supply chain surplus or
if the risk associated with outsourcing is significant.

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6. PRICING
Role in the supply chain: One of the most significant factors that affect the level
and type of demand that the supply chain will face. Directly affects the supply chain
in terms of the level of responsiveness required as well as the demand profile that
the supply chain attempts to serve. Pricing is also a lever that can be used to match
supply and demand.
Role in the competitive strategy: Pricing is a significant attribute through which a
firm executes a competitive strategy. Through pricing firms target a broader set of
customers, some of whom need responsiveness while others need efficiency.

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6.A. COMPONENTS IN PRICING DECISIONS

Pricing and economies of scale: The most used approach is to offer quantity
discounts while keeping consistency with economies of scale.
Everyday low pricing v high-low pricing: If firms keep prices low and stable over
time it will result in relatively stable demand. The high-low pricing will result in a peak
during the discount week and follow by a steep drop in demand during the following
weeks.
Fixed price v menu pricing: A firm decide if it will charge a fixed price for its supply
chain activities or have a menu with prices considering other attributes.

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6.B. PRICING-RELATED METRICS

Profit Margin: Measures profits as a percentage of revenues. (gross, net), scope
(SKU, product line, division, firm).
Days sales outstanding: the average time between when a sale is made and when
the cash is collected.
Average order size: Measures the average quantity per order (the average sale
price, order size, incremental fixed and variable cost per order.
Range of sale price: measures the maximum and minimum of sale price per unit
over a specified time horizon.

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OVERALL TRADE OFF: INCREASE FIRM PROFIT

All pricing decisions should be made with the objective to increase firm
profits. Differential pricing may be used to attract customers with varying
needs, as long as this strategy helps either increase revenues or shrink
costs.

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ANSWER THE FOLLOWING QUESTIONS:

How could a grocery retailer use inventory to increase responsiveness of the companys
supply chain?
How could and auto manufacturer use transportation to increase the efficiency of its
supply chain?
How could an industrial supplies distributor use information to increase its
responsiveness?
What are some industries in which products have proliferated and life cycles have
shortened? How the supply chain in these industries adapted?
How can the full set of logistical and cross-functional drivers be used to create strategic
fit for a PC manufacturer targeting both time-sensitive an d price-conscious customers?

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CLASS EXERCISE

Divide the class in 6 groups

Each Group is a different driver

Each driver is gonna have papers for the orders and comunication between drivers

Company name: Coca Cola

Product: Regular coke 350 ml

IT PROGRAMS
IT and processes to support the supply chain
IT Trends, eg. EDI, ERP, RFID, SAP
The impact of IT in the Supply/Global Supply Chain
Management

SUPPLY CHAIN IT PROGRAMS

-SUPPLY CHAIN IT SYSTEMS CONTINUE THEIR RAPID MIGRATION TO GREATER INTEGRATION
AND AVAILABILITY OF CLOUD-BASED SYSTEMS.
-THE KEY REQUIREMENTS ARE THE SAMEENSURING THAT YOU HAVE THE RIGHT
PROCESSES AND APPLICATIONS TO SUPPORT YOUR BUSINESS REQUIREMENTS.
-MOST COMPANIES HAVE SPECIALIZED NEEDS FOR THEIR SUPPLY CHAIN SYSTEMS AND
TECHNOLOGIES.
-THE FOUNDATION OF ANY SUCCESSFUL IMPLEMENTATION IS UNDERSTANDING WHAT
CAPABILITIES NEED TO BE ADDRESSED, THE PROCESSES THAT WILL DELIVER THESE
CAPABILITIES, AND THEN APPLYING STRUCTURE SELECTION AND IMPLEMENTATION
METHODOLOGIES TO ACHIEVE OBJECTIVES IN THE MOST COST-EFFECTIVE AND TIMELY
MANNER.

SUPPLY CHAIN IT PROGRAMS

-EFFECTIVE IT SYSTEMS ARE ESSENTIAL ELEMENTS FOR ACHIEVING PROFITABLE GROWTH,
WHETHER ORGANIC OR THROUGH ACQUISITIONS.
-THIS SERVICE FACILITATES A GAP ANALYSIS AND DEFINES PROCESS AND/OR TECHNOLOGY
CHANGES THAT WILL IMPROVE DATA AND PRODUCT FLOWS AND REDUCE COSTS WHILE
MINIMIZING OR ELIMINATING CONSTRAINTS.

EG. SUPPLY CHAIN IT PROGRAMS

SUPPLY CHAIN IT PROGRAMS

-From cloud computing and mobile apps, to social media and 3D printing, the
once-staid realm of supply chain is full of exciting changes. In addition to the
continuous stream of functional innovation coming from software vendors, there
are some emerging overarching technological trends that are having a large
impact on the supply chain sector.
-This report covers some of the biggest technological developments that are
currently affecting this sector:
Cloud delivery
Analytics and Predictive Analytics
Mobility
-One of the key components of enterprise resource planning (ERP) packages is called
manufacturing resource planning (MRP-II) or, as it is also known today, sales and
operations planning (SOP).

SUPPLY CHAIN IT PROGRAMS

To succeed in their tasks, planners and schedulers rely on materials
resource planning (MRP) software to make recommendations and
send signals.
To make meaningful suggestions, MRP requires a steady diet of
accurate, relevant, and timely data.
This guide breaks down two critical MRP project success factors:
1)tips to select the right MRP software, and
2) best practices to extract meaningful value from MRP solutions.

SUPPLY CHAIN IT PROGRAMS

Cloud Delivery
Given all that we know about the cloud, perhaps the most amazing thing is
that we still call it the cloud. The cloud essentially is delivery of functionality
over the Internet, and refers to the service models, deployment models,
business processes, software applications, platforms, and infrastructure that
are taking advantage of the Internet to deliver new capabilities.
The advantages of the cloud over on-premises installations include scalability,
redundancy, accessibility, lower upfront costs, easier upgrades and support,
and continual updates with the latest features and functions of the software.
The concerns and/or risks include outages and downtime, potential security
and privacy issues, vendor lock-in, and application robustness.

SUPPLY CHAIN IT PROGRAMS

The cloud story has largely been a story of alliancesSAP and
Successfactors, SAP and Ariba, Infor and Salesforce.com, Oracle and
Microsoft, Salesforce.com and NetSuite, NetSuite and Autodesk,
everybody and AWS, everybody else and Azure, and the rest and
Rackspace.
No two vendors have tackled the cloud in quite the same way,
however. While SAP and Oracle battled it out for which vendor gets
the most cloud mind share, Infor pursued another strategy and Sage
yet another.
The cloud consists of five key defining characteristics, according to
the National Institute of Standards and Technology

1. On-demand self-service. A key element of the cloud, or cloudrelated technology, is the clouds rapid provisionability on an asneeded basis.

2. Broad network access.The cloud takes advantage of the Internet

and Internet networks and technologies by using an ever-broader and
larger number of devices and platforms.

3. Resource pooling. In its most common context, the cloud leverages

a resource pooling effect by using securely partitioned resources to
serve a given population of users. This is known as a multitenant
model. There are debates, technical and otherwise, about the
advantages of the multitenant model over single-tenant and other
models.

4. Elasticity. Capabilities and resources can be provisioned and deprovisioned with relative rapidity, sometimes automatically in
response to demand. To the end user, these capabilities appear to be
essentially unlimited and available on-demand at any time.

5. Measured service. There are mechanisms and systems in place to

measure, control, optimize, and/or report on resources, providing a
level of transparency and accountability to relevant parties.

SUPPLY CHAIN IT PROGRAMS

THE SUPPLY CHAIN REALM IS SEEING FERVENT INNOVATION.

NOT ONLY ARE NEWER SUPPLY CHAIN MANAGEMENT (SCM) SOFTWARE SOLUTIONS
SPRINGING UP EVERYWHERE, BUT A NUMBER OF TECHNOLOGICAL TRENDS AND CHANGES
WHICH ARE DISRUPTING MANY INDUSTRIES ARE HAVING A MAJOR IMPACT ON THE SUPPLY
CHAIN SECTOR.
SUCH NEXT-GENERATION TECHNOLOGIES, INCLUDE THE CLOUD DELIVERY OPTION,
PREDICTIVE ANALYTICS, AND MOBILITY, AMONG OTHERS.
THESE TECHNOLOGIES PRESENT MANY OPPORTUNITIES FOR ORGANIZATIONS TO CREATE
BUSINESS PROCESS EFFICIENCIES, INCREASE CONTROL OF AND VISIBILITY INTO THEIR
SUPPLY CHAIN, AS WELL AS BETTER ENGAGE WITH BOTH SUPPLIERS AND CUSTOMERS.

ANY QUESTIONS??