 Hello everyone, this is Chris Kappels here. I'm Jim Rice and we're gonna talk about a couple things This is the third live event for SC2x supply chain design and what I wanted to do is first recap the course a little bit I'll do the first half and Jim will take the second half Then we'll start talking about the case and the case is chef yourself case that we wrote about two years ago And we'll talk more detail about that I have some Slido questions that I want you to answer and if you have any questions for us you should use Slido You can see these the code. It's SC2x Right that's Slido comm send in your questions now and Jim and I can answer those Along with Sergio who's sitting behind the camera And then after we finish the discussion of the case and answer any of your questions I'll give a quick wrap up. We have some announcements for SC2x and I'll tell you a little bit about the next course You should take SC3x but first Let's recap SC2x is kind of the the bridge course It's kind of a keystone of all the curriculum because it ties together all the modeling We've done in SC0 and 1 and it leads in to some of the more Qualitative things we do in SC3x and 4x so we started off with the Grand Vati Problem facility location went through the Weber method. We went through a bunch of different techniques And so the whole idea was where do you locate a facility on a Euclidean plane? And then when you have a real network underneath and that facility Location problem is the heart of a network design study because the next thing we did was how do you set up a supply chain network? And this is where you used all your large-scale optimization scales with mixed integer linear programs And hopefully you got very comfortable with setting up these milps where you're minimizing costs typically Subject to a bunch of constraints that you make sure you meet demand You don't exceed supply that any transportation node what comes in equals what goes out and then you can do in a lot of level of service restrictions and Areas there we also spent a lot of time talking about the process for doing a network design study because it's a it's a classic Project that you might face when you're at a company and so the idea of who do you get involved? How do you negotiate it? What data do you go with those are just as important as the math? It's hard for a lot of students to realize that to get focused in on the mathematics because it's fun And that's sometimes the least important part of the whole supply chain network design process As it's more about convincing people making sure you've understand the whole situation you have the right data things along those lines We moved from network design into production planning and then aggregate Planning and again, you're using that mixed integer linear programming format Excuse me, but now you're adding in timing element So you still have that conservation of flow what comes in must go out But you can also hold it for time periods and so you'll see that the same mathematical technique is used for this Production planning we also went from MRPs using a bill of materials Showed how those go into the production plan and how they tie into the aggregate planning and then we tied it all together With sales and operations planning so hopefully you have a sense of the whole scale of the planning process From planning with your suppliers through production through your distribution planning out and then tying marketing and operations with the SNLP planning method Then we went into different channels just understanding product flow. We talked about some traditional channels We talked about some new emerging channels such as omni channel direct store delivery and these are again ways to get product from Original source all the way down to consumer and this is an area that's very hot right now So it's important you understand how the different channel strategies tie together And the last thing we covered in the first half of the course was closed loop or reverse supply chains And that's becoming even more important Especially with e-commerce because the amount of returns are much higher on reverse logistics for e-commerce Retailers then they offer traditional retailers. So that's what we covered in the first half And then in the second half we switched gears and the second half We focused on supply chain financial analysis Now broadly speaking what the this subject area was intended to do is to help make you Conversant with those who speak only in the terms of the finance financial analyst if you will so be able to speak with us Chief financial officer You know I think about the things that you were talking about Chris what you were covering in the first half of the course Well, what the what we cover is really helping You be able to understand the sort of the quantitative work that you've done and then Explain what the financial impact of those decisions you might be making that are informed by those approaches you've taken Or designs you might have selected be able to articulate that to the senior executives And so what I'd like to do is tell you a little bit about what we covered in What that was supposed to help you learn? We start off with the income statement and a balance sheet to fundamental financial reports to help you understand how to read those and and then also how to interpret that recognizing that one gives you a snapshot in time of the Assets that the and liabilities that the firm has But also the other which is the income statement gives you a record of the performance of the firm over a stated period of time a year for for instance We then moved over into covering the role of accounting costing systems and activity-based costing these are Important for you to understand because while they are not publicly available Information it's critically important for use by the decision-makers. So really what these systems are? They're internal systems that allow the business to determine exactly how they want their cost to be represented so that it gives them better information on how to make decisions and that's actually a very evident one we use an activity-based Cost system because it's really focused on giving you an understanding of how you allocate overhead costs to various functions So that you're not distorting where the real costs are coming from So after we've gone through the understanding of financial reports and then understanding the cost systems that are underlying them We then moved over into talking about working capital and cash cash conversion cycle So now we're talking about the the actual financial resources that the firms using and putting to work in the supply chain And we have to be able to explain that and that's what that's what we we did in this particular session and Understanding the three different components of the cash-to-cash conversions cycle is really important to help you understand where those where's the cash being used and Where are potential opportunities for you to shorten that particular cycle? This then segwayed into the material that my colleague Dr. Jared Gensel Harvard When he started talking about cash flows all the different cash flows the relevant cash flows free cash flows Working capital cash flows and then ultimately that was fundamental information to help us understand what this kind of cash flow Analysis was and all of this will help you learn. Hopefully helped you learn Methods for evaluating supply chain investments. So the analysis that you might do in the using the methods that Chris talked about Hopefully that's going to lead a decision maker to decide. Well, we want to invest in this kind of capability or in this resource or in these This personnel will ultimately you have to you have to make a financial case for that and that's really what we covered in that In the last week we we segwayed into some different material. We introduced this concept of supply chain financial Supply chain finance. Excuse me. It's a term that we that's commonly used now But traditionally it's been called trade financing and it's very closely related to the cash-to-cash conversion cycle it's understanding how Firms can basically get cash instead of having to hold on to Receivables meaning that somebody owes you money can't do a whole lot with that You need cash And so there's a variety and emerging number of different ways to basically access that cash that makes your business more capable to operate When you have cash obviously and then lastly Jared finished up by talking about a broad range of different methods to Analyze supply chain not supply chains, but companies financial performance Recognizing there's a connection to what we do in the supply chain in many of those but not all of those financial methods measures rather So that's what we covered in that and hopefully it's made you I like to say it's armed and dangerous and the ability to Speak with your chief financial officer or your senior executives about what is we do in the supply chain and how it impacts? the financial performance of the business So then adding on to those two things that we covered in the second half We also covered procurement and that's a whole wide the whole sourcing side of things And so that's really if you think of the three flows that we're designing here the physical flow the information flow and the financial flow This is more the information flow. How do you get information to your suppliers and how do you get their information back? And so you'll see Sheffi talked about different methods, and it's really all about segmentation Hopefully you picked up on that. It's been one of our main topics since SC 1x All supply chains. There's not a one-size-fits-all supply chain Every company has multiple supply chains You need to find the right supply chain that fits and for procurement You need to find the right approach for the type of material you're procuring or service And so you we talked about how you segment those based on value and risk and determine which Type of acquisition process or sourcing or procurement process matches Which type of material you're trying to procure and you spend a little bit of time on Commit or elections and again This is using our old friend the mixed integer linear program in a slightly new framework It's only been around for a decade or so, but it's another way to optimize to find the best matching of products and suppliers and Then we finished up Excuse me with organizational design and against that last design element that we talked about and we really focused on the key question Do you centralize or do you decentralize and every company has this the old joke is that you'll centralize and then ten years later you'll decentralize and So what we tried to do is give some clarity into why companies go one way or the other what functions need to go But it's it's really an ongoing struggle for different companies because they have different different approaches It's sometimes a style issue and then the last thing we did with metrics and the big takeaway from that is think about a balanced scorecard You can't measure things performance on just one metric You need to look at the whole breadth of things And so the common way that we talked about is to look at it again in that like a triangle You look at your asset utilization you look at your efficiency or productivity, and then you look at your Effectiveness so if you think of in these ways, it's the usage of your inputs the translation of Outputs into inputs as efficiency your productivity, and then are you doing the right thing the efficiency? And so your metric system should cover all three of these to keep your supply chain in balance. Oh That's what we tried to cover in SC 2x It's my favorite course to be honest because I think it really ties things together, and I love the network design stuff I love that we bring the finance stuff in And so it I think it's pretty robust Excuse me, and then what we started doing at the end of SC 2x is introduce the first case study You'll see more case studies in SC 3x and 4x We wanted to introduce them because you're shifting away again from just doing models You know theoretical models to actually putting them into practice And so I'm going to talk a little bit about chef yourself But I want to remind you that we have some polls going on in Slido and so the first one I was going to create a word cloud But not many of you are playing along and so I'm asking what one word sums up Wendy's situation at Chef yourself Let me just describe what the the case is to remind you and you should all have access to this and many of you have Responded to some of the polls online As part of the class as well and we'll talk about those in a second Well, it essentially like any case there's a protagonist and this is a Wendy Swenson and she shows up at this job Chef yourself and she's been challenged by her new Boss who's a Raj Singh the COO to make recommendations on how to improve things And the way when we wrote this we want to make it. It's very realistic That Wendy is in charge of supply chain, but no one reports to her She has no authority But she has the responsibility of solving this and that's a pretty common trait in any supply chain where you're Charged with fixing something, but you don't own it directly So you have to use more soft than hard leadership skills So you have to convince people instead of ordering them So that's her her challenge and chef yourself is a startup 10 years old But it's getting getting bigger and they deliver meals to home. It's a garment gourmet Partially prepared meals that are delivered where someone else would you'd finish off cooking and it's mainly geared to To a fluent kind of yuppies young professionals who don't have the time to cook but want good meals And they're willing to spend a little bit of time of prepping at home And so we gave you a sense of what their operations were they grew from a single kitchen in Sacramento Now they still have that single kitchen it's expanded and that's where they do all the cooking the packing of those meals and their main Target audience was initially Sacramento and close to that to San Francisco and San Jose And so they have different ways of distributing that product down to them They use a local trucking company for the local Sacramento areas This is in California the Western coast of the United States. And so they use I think it's truck eco for local delivery It's kind of a per case delivery going down to San Francisco and San Jose They use pool distribution where they'll deliver a line haul down and then they'll have a local delivery and they have different cost structure But some of the changes that have happened. They've opened up four new cities So originally they were within a pretty tight area Sacramento, San Francisco and San Jose Now they're spreading out because they want to grow and they've reached into Los Angeles San Diego, Las Vegas and Phoenix, Arizona So if you know any of the geography and you can see it in the case it's further down south So it's a lot more spread out and so that they had to use a new distribution System so they work with a company called ace and they they're just getting that into place so Wendy was charged with trying to figure out what they could do to improve operations. And so what I want to Do is create oh some more people are coming in here great. I'm gonna switch a poll now and I'm gonna ask you What do you think the greatest challenge facing chef for yourself is today based on what you've read so far Lack of growth rising cost to serve a lack of inter company communication higher raw material costs dropping customer service decreasing customer retention and So I'll continue talking, but you guys can can vote on this now What do you think the greatest challenge facing chef yourself? Now the meals are designed by this nutritionist this Lisa Crofts and her focus if you read through is really all on local Farms local ingredients fresh very innovative doesn't use the same ingredient twice because her whole idea to make it an Innovative surprising meal. And so that's her whole focus and she's been with them I think she was employee number three coming to the company Their marketing is done by someone named Linda chin and the marketing for this is really focused on promotions And so what they what her growth pattern is you've got to do these promotions big discounts initially to get people in Because you've got to constantly continue to grow. That's why she's pushing on for a variety of things right now They're given I think six meal options. They have to pick three and she's saying let's expand that Let's give more options to more people expand to more cities The sourcing is done by some guy named Eddie white and his whole focus has been on procuring this product from local farms Pay payment upon receipt, which is something that ties into what Jim was talking about with supply chain financing But his challenge has been as you read through this You can see that they sometimes have conflicting goals one of the challenges that Eddie white the sourcing or procurement guy saw Was that the meals were designed without thinking about sourcing in mind? So they procured new ingredients every time they come from different areas. They'd never use the same ingredient twice Short notice things like that and then let's see who else did she talk to she talked to John Bush the CEO who's still thinking about you know, we got to grow and His whole focus is on increasing that growth path because if you look at the financials They've actually been growing their revenue quite nicely It's been increasing and so going out has definitely increased their revenue there, but there might be some challenges Any any comments Jim as you well, I think that among the things that you mentioned Chris that The policy that they have and working working with their suppliers is to pay on demand That's really generous and that's not consistent with the way the world is today in terms of working with suppliers For many of you are working in the supply chain or in companies right now You know that perhaps your Terms with your suppliers are extending beyond the used to be 30 days now It's extended to 60 and in some cases at the upwards of a hundred and 120 days I know that some of our customers are telling us they're not going to pay us for you know upwards of that length of time So having a policy that you're going to pay your supplier that quick Is that you have to decide that that's what you're going to do now? The problem they may have is if you're buying from local community small companies You could just tell them, you know, we're not going to pay you for six months and they may go out of business Right, so it's you know, it's maybe a function of the design of their system particularly if the if the I think it was Linda the marketing the Was I'm sorry was that the gal who's doing the the chef who was basically saying we want to have unique? Yeah, that's a that's Lisa cross also Lisa cross So she's going to be probably an advocate of that as well because she's going to be looking for getting unique raw materials from special suppliers absolutely that's Inherently it's going to cause a cash flow issue for the firm the challenge is you're exactly right And this is why this is so interesting because you got to look at the roots of the company every company has a Center and so if you look at the company like P&G Procter and Gamble They're a marketing company Everything they do is to marketing if you look at Walmart Walmart is a supply chain company Yeah, they do marketing these other stuff, but they're their focus is supply chain That's why the CEO is usually an ex supply chain guy If you look at chef yourself, where did it come from John Bush is a foodie And so he hired people because he loves this food And so their whole focus is fresh now small and if you've ever been in this part of the United States It's all about local farmers. So that's a definite challenge for the procurement guys because they're forced into a corner and so It might shift the strategy. And so should they shift to bigger farms? Larger agricultural concerns for a lot of their product because then they could probably negotiate better terms Yes, but that that goes to the core of who the company is right is is this company a you know a local fresh company or are they going to? pretend that that's who they are right and still you know then have to basically You know go with the larger farms like Hagen-Dazs is really you know, we yeah the guys in Brooklyn Yeah, Hagen-Dazs we always thought it was from somewhere in Europe and it's actually from Newark, right? So do they market that they're really a pseudo company? But so it's it's a it's a challenge that you'll face a supply chain to make your supply chain strategy match the company's Culture or their approach and make sure they align, but that's a challenge Okay, so let's talk about the poll Okay, so John Bush would fire all of you because no one said lack of growth is a problem and he said that's the number one problem Right, and so if you disagree with the CEO, that's a bad. It's not a good thing It's not a good place to start but the rising cost to serve. That's a challenge and the lack of intercompany communication Interestingly that's almost a cause and so it's something it can be possibly be fixed higher raw material costs Maybe but we didn't really specify that and interestingly this case was based on some other real companies like a blue apron And their real challenge is the last one there customer retention They find they can't hang on to customers and if you look at their financials when you talk more about what what's happening with this Market in the United States It's something that catches on really big, but it doesn't stay long so they have to increase their marketing budget So if they increase their marketing budget the number of customers goes up But as soon as they drop it they they drop off because it's it's a churn They're constantly bringing on new customers. And so a lot of these Similar companies are having a hard time retaining companies at customers after the first 60 days Well, I think in blue apron's case. They even went out and started looking at different channels So they're starting to go out into even Costco So they're not going direct to the consumer now that opens up. Oh, you know a much broader potential of for growth But they're Disconnected with the customer because the customer is a buffer called Costco in between them and then of course Costco has to make Some margin on that probably a fair amount of margin So they're not going to get the same amount of margin on that incremental volume volume That's going direct to that's going through Costco that being said their distribution costs will probably be lower because they're Just delivering large volumes to Costco So it's a very different distribution channel and they really have to understand the dynamics that it affects a relationship with the customer It affects their costs and probably affects the freshness because if they're going through an intermediary That's going to be product. That's going to be sitting on the shelf for some period of time yeah, that's um we talked to guys at Starbucks and they also go through these multiple channels and they had a big You know discussion whether when they should start going through the retail Retailers go through the supermarkets for some of their products because they didn't want to take away from that the third space going to a Starbucks store and they eventually found that it worked for them. They didn't have the freshness issues But it was a challenge of do you go to other channels because will it dilute the brand will it change the way that the customer perceives Because a lot of this what chef yourself does that we tried to get across it has this feel right? You're you're you're kind of, you know Close to earth close supporting local farmers and everything and so your supply chain strategy has to kind of align or at least compliment Or at least not totally violate that that culture All right, so I switched the questions now to which the following proposed initiatives Excuse me. Do you think when you should start right away? And these are the questions that you also answered in the poll and what's interesting I've got you guys need to keep answering on the poll. I know there's at least 20 of you out there I'll talk about what the the because this class had a very different set of priorities than previous classes And so I'll talk about that in just a second But I want to see you guys get voting in but the You had was established sales and operations planning process Conduct a network design for the number and location of kitchens because it one of the big Challenges that some people put out is that the Sacramento kitchen was too constrained and they need a second one Maybe down in some other location south Create a formal forecasting team renegotiate the Payment terms for suppliers from 30 to 60 days Establish a meal design process with sourcing kitchen marketing and other functions Re-design the distribution boxes to the new cities those four new ones they expanded to all right So can I just yeah, please so one of the options as Chris was mentioning is renegotiate payment terms Well for the suppliers, right? Those are the small farmers Yeah, so as much as that might be something that sounds like a good idea Based on the nature of those companies it would be very difficult without putting financial those companies in financial distress It depends of the firm, but you at the farm actually, right? But you need to check that out one option there though would be to go out to some third-party financiers and look for ways that together you could find a reasonably priced loan that the farm might be able to take out to Acquire the cash as soon as possible and So involving a third party would probably help in that case now There's going to be a cost if you exercise, you know using thanks for out there if you have somebody else Provide financing, but that's okay. I mean it can't having some cash You know it might cost you a percentage point or a couple of percentage points But that's going to be you know if that's what's necessary to keep the business operating that might end to support your suppliers That might be a good option, but renegotiating Look you're the you know the chef yourself is probably bigger than the farm So they can probably push the farms around but you don't want to push the farms around so much the farm says look We're not going to do business with you. Yeah, and it's and they did they want to they seem to have this field the softer gentler kinder Kind of company and so it might hurt their their image. All right, so let's let's talk about what you guys did and overwhelmingly You said established an SNOP process So I tried to stress the question right away, so hopefully we gave a cross when we described this in the videos Starting a process like this is non-trivial. It's not just hold a meeting where you serve food and everyone shows up It's a whole process where you get people together. So I would always argue that yes, this is the longer term But if you're looking for it, you're new to someone right you're new to a company you've got 90 days Before you're you know, you're either taken seriously or you're dismissed And so you've got to use those 90 days quickly and one thing you need to think about is how do you make an impact this low-hanging fruit? So what I tried to get you guys to think about is what makes sense to do right now Not long term because I agree the SNOP That's what they really need because kind of undermined through all these kind of discussions Is that they're not talking to each other and sales and operations planning would bring that all together? And so that could almost tie together with that meal design process And so when we talked about new product design, which we do in SC1x I think We talked about Designing for supply chain and so we're finding in that funnel design process from new ideas to final new product launched Bringing supply chain in earlier so that you're not Coming up with a product that costs a ton to actually produce and that's one of the challenges that they had So meal design is one of those things along with SNOP. I think it's a good longer term thing to introduce But for me, honestly, no one picked the one low-hanging fruit that I would grab right away And that's renegotiate or redesign how the boxes get to the new cities because if you did any financial analysis if you looked at the Excuse me the exhibits that we have and did some of the math for what the costs are for delivering the boxes to Los Angeles, San Diego, Las Vegas and Phoenix It's almost 5x more expensive And so if you look at the terms of that ace trucking and you say, you know what this doesn't make sense There's got to be a better way And this is a classic problem that companies have when you start something you find something that works And you because you want to get it out there, but then you're not looking at being efficient or costly You're just getting it done, but now as it goes you got to start looking and say, okay Doesn't make sense. It does the cost to serve make sense. And so here it's so much more expensive You could probably if you could renegotiate ace trucking down to the other company the What what I call them the truckie no no the KC fish Which is an acronym for JB hunt right the large US carrier If you look at those terms if you can negotiate those then you have a much better chance So low-hanging fruit is something you want to go through that has immediate impact and it's pretty easy to do and that gives you Credibility because suddenly if you do this and you take off 30 cents a box From this then suddenly you have more capital. You have more respect because you found a solution to Create an SNOP process. I don't know. What do you think that takes in terms of time? Can you just well? I know I mean look You know talk with a couple of companies we met with somebody a few months ago And I actually was two weeks ago. Well a local company we're doing some work with and This fellows same thing. He's a new guy. He's been on the company for less than a year but he's been there about nine months and He's still working on trying to develop the willingness of the different parties to come to the table talk And it's really critical that he does that but that they use this process But it's taken him in nine months, and they don't even have a form one He says well, I'm trying to get him to meet but we're meeting, you know every only every so often Yeah, so it takes it does take a while It usually takes someone the only person who could make it happen probably is either Raj Singh the COO or John Bush the President and usually you don't want the president involved you the COO is probably the one Along with marketing to bring it together Someone new bringing it in It's gonna be tough tough to get that done, but I agree with what you guys voted for the longer term direction interestingly, I asked the same question in the polls in the Discussion form that you guys filled out in class And you also had SNOP as the highest interestingly Last time we ran it in the 2017 second course the number one was establishing a meal plan that meal design Which I thought was really interesting But the whole it's never no one ever votes really high that we should do the the new Re-design the distribution of boxes to the new cities that always receives low votes and Because it's it's not sexy But it's an easy quick win for most the most of times It's actually one of the last Resorts in almost every one of the last four runs that we've done in this course Well, but I think it illustrates one of the issues that I think we've implicitly suggested here It's the issue of scaling you know a firm particularly this applies to Companies that are starting up or even with new product introduction You know you start up with a system that works and you because you need to get the product out there And it works for a little while but after You get to some a certain point of volume that system really is not designed for volume And so your question is can you scale with that system? And so that's really the inherent question we have here does can this get the kitchen in Sacramento Can that actually be scaled to service all these other Outlying areas and the transportation costs look like they're really significant So it does raise this issue of do they need to put another kitchen someplace else or can they as you suggested? You know restructure their distribution process so they can go with the you know the KC fish that would maybe be more efficient and Reduce some of their costs that that's a great point It's the scalability that you don't think about when you initially set something up You just want does it work and then scalability is a whole separate issue So if you look on on Slido you can also go to questions too And so I'm moving the questions over as they come in some questions that are specific to the course I'll ignore for now. I'll answer those at the end I won't only answer questions for the case study But I want you guys to do is let me know which questions you want answered so you can go there and give them the thumbs up We don't let you do a thumbs down. Sorry, but you can you can upvote them And so we'll start answering those the most upvoted ones But I want to give you another poll that leads into what Jim was talking about And that's a whole challenge of do we want another kitchen because there was debate there Is that the problem or is there other other problems? And so here's a quick question. What do you recommend? Would you recommend they open up a new kitchen? Yes or no? And so I'll they give you guys a second to go in there and vote and then we'll ask the next follow-up obvious question in a second Because this is one of the most basic questions you have is do I grow? Can I could I stay internal because expanding is a lower risk because you're already there and you're just adding to it? And if you know anything about California the cost of land is probably lower in Sacramento than it is in some of these areas you're going to And it's always a risk if I open a new kitchen. I have to it's not just opening up a new facility It's new staff. It's now it's new crews. It's new labor And so I also I'm now managing two kitchens. So do they source from the same place? Do they have different farms they pull from? Yeah, I was thinking about the supply because the supply base is it's critical to this business model and You know if there's a farm in Northern, California Which is convenient for Sacramento It's probably not convenient for if you open a kitchen down in the Phoenix area and the you know the climate's very different So the the vegetation is going to be very different the farming what you're going to be able to get locally is going to be really different so These are important issues because if the firm goes to the goes to the market saying we're going to provide these kinds of products and They're offering a certain products in one market and then very different ones than another That could be a disadvantage. Maybe it could be an advantage, too But you know that they not being consistent. That's a tough thing for marketers to manage Yeah, I think they would they would have to offer the same thing because if they offer different Offerings then that that changes everything. Well, that adds a complexity. Yeah, it's almost like two separate companies Yep, they serve differently. So when you think of the kitchen, it's not just what do I put x dollars for investment? It changes the operations. They have to be in sync now And so it makes it more complex so we have 20 votes in and We're two-thirds to one-third pretty much saying yes, you need a new kitchen Okay, so I'm gonna open up the next question, which is the obvious one Where where yeah, and so what I want you to do is enter in the city name and It'll help us if you type it correctly So I gave you some different potential ones there and you can always go on Google Maps or Apple Maps or something And see other cities in there, you know where the balance of the markets are I don't know are there people can see this if I hold it up close So you have this in your case study, but if you did a center of mass You could kind of look at it that way But you you can look at this as well in your case and try to understand where should you set this up because We could do a mixed-energy linear program right and do a network design and if and we could do this formally But we can't use Euclidean space because I would probably put it in the middle of the desert so the question is Where should we locate it that's close to these new markets or should it be somewhere else? so I'll let you guys start answering these and then we'll talk some more about it But the challenge here and the real Thing about the case is expanding to new markets How do you expand to new markets because the reason why they went to the four new cities is because they thought they were kind of Saturating that local area and there's a lot of stiff competition. So the challenge that a company will always face is do I grow? More in my internal customers Do I upsell maybe what John Bush was asking to do to expand the product line? Maybe or do I go to new markets new geographic markets? Or do I introduce whole new offerings? And so there's all this area of growth and the supply chain needs to obviously support that growth and that's a problem that Every one of you will ultimately be faced with You know there aren't companies that say you know what let's shrink our so let's shrink our business And we'll just get more efficient. They're just it you know, it doesn't happen. Well, it's not voluntary But but certainly we're gonna get small. Yeah, let's get we're gonna be great and small No, it doesn't work that way. So Invariably the firm even if you're a giant firm There's going to be this issue of how can you grow right now? Look Amazon faced this with In their grocery business, you know and so they were saying well How do we go about this and they made some attempts to to do that themselves and ultimately last year they decided You know, it's not working. So what did they do? They bought Whole Foods for $13 billion hold that thought Jim because we might have a question about Oh my gosh Okay, look at this and we look back there. You can see it looks like Bakersfield is the overwhelming preference and if you look And we could write a whole case in fact We've written a case with a Walmart that looks specifically at DC location based on a bunch of different factors It's really interesting. You have to consider a bunch of different factors but Most of you are saying if you were gonna open one you'd open in Bakersfield, which actually is closer to the Four markets, it's not real close. It takes off the line hall, but you you've got nothing close to Bakersfield To be honest, there's no mark. There's no local Bakersfield But there are farms close. Yes, there are it's at the base of the San Joaquin Valley And so there's gonna be a lot of fun So the supply is gonna be good there But you're looking at a long, you know long halls from that location less than Fresno And so I guess if most of because most of the I mean, that's the bread basket if you don't notice about the United States I don't know what percentage of fruits and vegetables come from there, but it's it's amazing Such a fertile area. So my guess is some of those farms are shipping north to our Sacramento kitchen in south to Bakersfield And I guess no one some people said LA LA is tough One is why would you want to live in LA? But the second is it's a very expensive area to be honest And so that's a little bit of a challenge. Did anyone say Las Vegas people just want to be in Vegas Um, there's some interesting regulations between the the states that I really didn't mention in here Arizona Nevada and California California and Arizona are competing on a lot of their fruits and vegetables And so California like I said is a big producer Arizona which is to the southwest or to the north rather of uh, You know to the I'm saying to the east of California Um, they don't they grow some but they're the major importer from Mexico and so a lot of Mexican vegetation and Agriculture comes in and they will chip it elsewhere in the United States. There's actually A border inspection at the at the border between California and Arizona where they make all vegetable stuff gets stopped and it's a day-long inspection And um, yeah, you could say it's for safety and all this stuff It's really to protect the California market. And so it adds an extra day. Yeah. Yeah, this is the stuff we did when we did it with Walmart It's fascinating Wow And so to source from there it adds a day and it has nothing to do with the the distance it adds It's the government policy and this is one of the things we'll talk about in fc3x Um Your models might tell you something but you've got to look beyond that You've got to look at the the politics the economic Environmental the technical the social aspects to get a more grounded solution a more holistic solution um, but generally if you look at just You know geographically it looks like bakersfield is the overwhelming Favorite someone wants to go to riverside. I have no idea where that is. Boston. Boston. Good. I'm glad to see everyone's taking it seriously All right, but let me go to what Jim was talking about um If you this is about a year ago and amazon acquired whole foods whole foods was a Um, national but small level. I forget how many Still 130 somewhat stores. Yeah, so compared to Walmart probably has 3 000 uh close to 4 000 now. Yeah, yeah with And so they bought this is more of a high end and the question was uh, you know, does this help or does this hurt? um chef yourself So what are your thoughts? um I think well, you know, anybody sees amazon going into their space worries and they start panicking Often for a good reason You know, I don't think amazon's going to go away. So I think they're going to disrupt what you know all That happens and occurs in the grocery space. So if I were a chef yourself, I'd be very worried And maybe that's one of the reasons why chef. Uh, well, you know, I think about uh Lou aprin has gone to a different distribution channel to try to expand to get that growth We were just talking about So I think that I think it's an issue now, of course, there's all the sorts of dynamics going on with with amazon's Useful Whole Foods there. I was just reading an article yesterday about um There's an article in the wall street journal about the consumers who are using who are prime consumers amazon prime consumers who are also whole foods customers And how many of them are unhappy with what's going on inside the source because What Whole Foods is doing is there are amazon Whole Foods. They're they're actually making their staging areas Inside the store. So they've taken some shelf space out. Yeah, and so it's there's this instead of if you've ever been to a Whole Foods It's a nice experience generally speaking fresh food. It's very well displayed Now its nickname is whole paycheck. Yeah, you spend your whole paycheck to buy the food. That's exactly right But now they have this area in there So I'm told that where you got all these people running around grabbing stuff and packaging things So it doesn't have the same feel Now, how does that affect you know, uh chef yourself? Well, I think that I wouldn't be surprised if the folks at Whole Foods decide. Hey, you know what? We can get into this You know this particular business and we know our customers because we see them every day Let's let's just jump right into that. So the the the merger created Well, there's a couple interesting things grocery has never been a sexy area. The margins are Razor thin and so it's always funny. There's this halo Bezo Jeff Bezo effect when he goes in it's like it's brilliant. He's going into grocery The grocery is a tough business. Yeah, however what they're combining amazon is amazing at delivery and a fish very efficient at this and they're combining the halo of Whole Foods Which is known as really high quality organic So they the idea is maybe they can combine that and that competes directly with what chef yourself is selling as well And so I agree with what you guys are saying 94 percent. It's not good. This is signs are not good for chef yourself um I'm gonna we have one last question. I want to do for polling and then we'll answer your questions Who do you think's most responsive for the problems of chef yourself? This is the time to point the finger of blame Who do you think's responsible? And it's just just an interesting question because I we tried to write this case With a lot of personalities because this is what you'll find You have different people in fiefdoms, especially if you go to a company That's kind of new and not totally mature Or where the personality a lot of the roles are defined by the personalities of the first people who went there And not as a generic role It's a challenge and and then so that's one of the things we want to try to bring about in this case study and so I'll let you Continue to vote and I tried to make it when I when I wrote this that No, there's no hero and no pure villain. Let's see how well I did I'll let you guys continue to vote on that and then we're gonna go in and answer some of these questions So the first question that you guys voted and please upvote ones You want to have answered and we'll answer those in the order of the most upvotes um Jim this is for you Can we say to calculate accurate cost to serve that the abc methodology is the best tool the cost to serve? I would say yes because the you know if you think about the your um income statement You know your top line is your revenue and then you have your cost of good sold And then that gives you your gross margin everything else below that you know sgna But you have your logistics costs those are the costs that we're think we're talking about here What's the cost to serve that customer in that particular location? So those costs somehow have to get allocated and You know the traditional methods of allocation Are generally are not very accurate And so using an activity based cost approach is has been very useful It gives management much more accurate information To to understand what's that cost to serve and you can look at that from you know What's the the cost to serve the particular customer or the the cost to provide a particular product? So I would say so for our case The real when you're segmenting we didn't give you a lot of detail, but it's the cities So you'd almost segment by that and you couldn't find the cost to serve And it's very easy to figure it out and the only thing that really differs Is the distribution cost I think we kept things. Yes, that's right. Yeah, but here's the deal Suppose we had a second case where they open up the the kitchen in baker's field and now they have two kitchens I guarantee the labor cost the fixed costs all those costs will be different So now you've got to decide what markets are each of the kitchen serving Do they both serve san francisco? Do they go separately? So now you have different costs. It gets much more complicated Yeah, but but there's also opportunities there because they may find that there's In the baker's field location at which many of you selected Maybe the the access to the supply is better and maybe the costs are lower certainly distribution costs are going to be lower and getting to those markets in the southeast and So maybe those markets are going to be more attractive than the san francisco and sacramento area Because you're talking about two markets there and the other ones I mean you're talking about san diego los angeles vegas and phoenix and they're huge Those are big markets. They're they're giant gigantic. So so In that case it would be more complicated more complex, but again, I think that those are some opportunities So before we answer the next question, let's go back to see who you blamed the most You blame the ceo. You guys are all fired I can't believe you're playing with half the people blame the ceo and I guess that's because he's You know one wants to grow wants to push um I don't know why 16 percent said raj What did he do? All he did was hire wendy. Um Not soon enough. Not soon enough. And then there's evenly split between and you're blaming wendy. She's it's her first week Oh my god, I know who would you who would you guys are tough? You guys are tough. Um to be honest I probably blame raj because he should have solved this earlier with lisa and eddie the real conflict is between Um the four big ones lisa eddie becky and linda They're not talking and the ceo should have solved that and so he is solving it now But I don't know why it festered as long. What do you think? If I agree to blame wendy, I would know I would agree that that uh, He owns that but ultimately the ceo needs to be the one who bears responsibility. So I say you hate john bush um No, he's a nice person, but he's not effective So john can find a new job someplace else. So I think you find that well, it's his company So it might be hard, but it's it's almost this founder issue. I I don't know if you've ever worked for startups Sometimes, uh, there's a point where the founder is not the best person to take it forward. Um, and this might be one of those areas That inflection point for the company. Um, but let's go on. We've got about seven more minutes Next one that's highest voted if you are a new logistic service provider Which I guess is like a broker or a 3 pl of some sort How do you choose between building large capacity ready when any volume for any volume? Or set it at a small capacity first? So Let me rephrase the question and I'd love to get your opinion, jim Is the real question do I build ahead of time pre-build and I'm very robust to handle my capacity Who do I build a little bit and become flexible? for longer run you got to build Only as much as you can to get revenue to keep the business floating and then you can acquire capacity as possible Yeah, because if you use all your capital, you're so if start up You'll have a limited amount of capital You can't buy you if you buy lots of capacity and say hey, we're going to be great in five years You're not going to make it past the six six months So the clock is ticking you got to really manage that cash very carefully Now you may be in a situation where They're made by a real good opportunity to buy lots of capacity That's very risky because there's plenty of organizations that are no longer here because they Invested heavily in infrastructure and they didn't get the good the demand to build that out. I mean web band I think is yeah, I was exactly same one, right? So, um, you know You've got to manage the cash and it's enough to You know get enough capacity to get the demand and satisfy that and then you know You got to conserve your cash But then when you hit a point It's that inflection point to what Jim was talking about earlier when you are you ready for it to scale So you can't worry about scaling initially you need to get enough to get the market going But then you hit another inflection point Because typically what that means is as a if I'm a small company I might buy warehouse space I might lease space, right, which is the most expensive way to do it But if I only need 10,000 square feet, that's fine But at some point I might be leasing three or four whole facilities and at that point Doesn't make sense. There's a better way to uh have that capacity now And so there's two different issues starting out and then scaling and I would you have to treat those very differently Yeah, I think starting out you're going to be very flexible right and um when you get to that point where You have the demand that can fill that capacity or pretty close to it then you make a commitment So I'm gonna a question just came in from william and I like it So I'm gonna answer that one even though it has no upvotes because I I can do that How can you solve such turf wars? In real life And so when you have people who don't like each other or maybe they like each other, but they don't respect each other They don't understand each other's views. Um, there's a couple ways you can do it one is To get them to sense a larger mission And so to do something to de to personalize a lot of the decision making so doing things as a group Whether it's a team building an off site something to get them Together uh to actually see each other's viewpoints and understand How they interact with each other because a lot of times if you don't communicate Then you build up more and more reasons why you're right and so getting them together and starting that s and op process Maybe informally at first I've had friends who work to other companies and even having an informal lunch Once a week every two weeks with people it breaks down barriers And people connect socially and then they get a little more civil in how they communicate and then you can start bringing informal Processes, but jim you've got a past experience of different organizations. Yeah, I think it's look it's easy to find places where are the issues where you don't agree but If you're in the same organization, you Presumably have a lot of things that you agree on in the sense that we're all here to try to do the right same thing We want to grow the business. We want to make the business successful And so look for those things where there's you have common Interest common where you would agree on those things if you start from those Then you can work on some of those other issues that maybe you're not in complete agreement But I think relationship development really is critical You just kind of get to know the other people and and look most people don't make bad decisions Or perform poorly on purpose because they have something in their mind the way they're thinking and if you could understand that And maybe enlighten them or maybe they enlighten you that's going to help bring you in alignment Okay, let me just do some lightening questions. We'll try to answer quickly With growing trend to decentralized supply chains, e.g off grid systems. I don't quite know what that means to be honest Do you cover how to optimize this choice of network design and future supply chain courses? Well, since I don't know what off grid systems are I'd have to say no But I might be that I'm misunderstanding if you mean more Last mile delivery things Then yes, we do cover that More um question on forecasting next year sales forecast is increased by 20 How can we link the increase in sales without bound transport impact on shipment structure? Oh, I think that's an easy math question And in fact, that's a some analysis you should be able to do if the you put the number of boxes in And you can see what the impact is on transportation because I give you that cost structure In fact, you can see that the cost structure for the existing transportation option going to the four new cities goes through the roof Because they they built it not for scale. They built it for just getting it out there And so they built it for flexibility. They didn't build it to scale So I think you can actually do that math Pretty quickly just multiply through what the cost structures would give you Um for the snop process who should be the best one to lead and monitor that what do you think jim? I think wendy's the one who needs to go work the crowd She own she owns the outcome and of course as you said in the very beginning. She has responsibility For nothing. So basically so she's going to have to bring people together and help them understand Why coming together is going to be important for the business again? That's that alignment. Why we share a common goal. Yeah, I think She can be the person on the ground. Yeah, but someone up top has to say yes, it has to happen Yeah, I mean look if rye says you're going to do this then it's going to make it happen much more quickly Someone has to bring the marketing and the operation together Does is there a good literature reference or a book for supply chain finance? Yeah, we recommend a book by higgins and it's the book. Let me see here. I have it in my Keep them talking there chris. Yeah, um, no, that's that's okay. Is it is it in the key concept document? Yeah, should be in the key concept documents guys. Um Where'd higgins go? Yeah analysis for financial management for levith edition. It's an awesome book It represents what we think about financial matters and Uh, but also from uh an operator's perspective now if you're looking at That's for supply chain financial analysis overall if you're looking for supply chain finance. There's a Uh, a white paper that was done by the folks at caps logistics. Okay, dale rogers and uh, If you want to contact us I can put you in contact with dale and get that caps down at arizona Yeah, the guys down there center for advanced procurement advanced procurement studies Yeah, and then there's also some some a white paper done by the folks at polytechnic early in alana who've done good work in that But there isn't a book that i'm aware of that's really addressing supply chain finance very until you write one Yeah, okay. He just gave me a job So we're running out of time. Um, and so I wanted to do some quick Uh reminders, um, and there's a handful more questions coming in. Sorry. We couldn't get to them all The final exam for sc2x is released on june 20th 1500 utc just like it always is same as it ever was It'll be open for one week closes on the 27th of june at 1500 utc It's time. Do you have four hours to complete it? So within the week you can pick any time you want You get four hours once you start Any questions? Please send us an email to sc2x help at mit.edu and Sergio sema and the team will respond to you very quickly The last thing I want to do is talk about sc3x Which is the next course you want to take? If you liked the idea that we got Other issues in here, you know personalities Complexities then you'll love sc3x because it builds off of everything we've done But it re introduces more reality. And so we talk about complexity of supply chains how to measure that We talk about global supply chains Bruce Arnstein comes in and talks more about global logistics global distribution and some of the challenges that happen when you cross a border We talk about disruptions. Uh, professor shaffi comes back and talks about how do you plan to be more robust under the face of disruptions We talk about exogenous factors These things that you have no control over that influence a lot of the things that you have to take care of in the supply chain such as carbon footprinting Or different political regulations And then we also talk about and introduce something called system dynamics And system dynamics is a way for you to understand how a system which the supply chain is Interacts and how it gives you a formal language to talk about that So with that, I hope you had a good time with this. You had great questions. I'll try to answer the remaining ones coming in But uh, thank you for taking the time jim. Thank you for coming Of course and uh, hope you enjoyed the case. Hope you enjoyed sc2x. Good luck on the final and hopefully we'll see you in sc3x All right, thanks