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374 Part Three Key System Applications for the Digital Age

its primary suppliers. The suppliers of soles, eyelets, uppers, and laces are the
secondary (Tier 2) suppliers. Suppliers to these suppliers are the tertiary (Tier
3) suppliers.
The upstream portion of the supply chain includes the company’s suppliers,
the suppliers’ suppliers, and the processes for managing relationships with
them. The downstream portion consists of the organizations and processes for
distributing and delivering products to the final customers. Companies doing
manufacturing, such as Nike’s contract suppliers of sneakers, also manage their
own internal supply chain processes for transforming materials, components,
and services furnished by their suppliers into finished products or intermediate
products (components or parts) for their customers and for managing materials
and inventory.
The supply chain illustrated in Figure 9.2 has been simplified. It only shows
two contract manufacturers for sneakers and only the upstream supply chain
for sneaker soles. Nike has hundreds of contract manufacturers turning out
finished sneakers, socks, and athletic clothing, each with its own set of sup-
pliers. The upstream portion of Nike’s supply chain would actually comprise
thousands of entities. Nike also has numerous distributors and many thousands
of retail stores where its shoes are sold, so the downstream portion of its supply
chain is also large and complex.

INFORMATION SYSTEMS AND SUPPLY CHAIN
MANAGEMENT

Inefficiencies in the supply chain, such as parts shortages, underutilized plant
capacity, excessive finished goods inventory, or high transportation costs,
are caused by inaccurate or untimely information. For example, manufactur-
ers may keep too many parts in inventory because they do not know exactly
when they will receive their next shipments from their suppliers. Suppliers
may order too few raw materials because they do not have precise information
on demand. These supply chain inefficiencies waste as much as 25 percent of a
company’s operating costs.
If a manufacturer had perfect information about exactly how many units of
product customers wanted, when they wanted them, and when they could be
produced, it would be possible to implement a highly efficient just-in-time
strategy. Components would arrive exactly at the moment they were needed
and finished goods would be shipped as they left the assembly line.
In a supply chain, however, uncertainties arise because many events
cannot be foreseen—uncertain product demand, late shipments from sup-
pliers, defective parts or raw materials, or production process breakdowns.
To satisfy customers, manufacturers often deal with such uncertainties and
unforeseen events by keeping more material or products in inventory than
what they think they may actually need. The safety stock acts as a buffer
for the lack of flexibility in the supply chain. Although excess inventory is
expensive, low fill rates are also costly because business may be lost from
canceled orders.
One recurring problem in supply chain management is the bullwhip effect,
in which information about the demand for a product gets distorted as it passes
from one entity to the next across the supply chain. A slight rise in demand
for an item might cause different members in the supply chain—distributors,
manufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and ter-
tiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each

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