1. Chapter 3 Supply Chain Drivers and Metrics
Supply Chain Management (3rd Edition)
Chapter 3 Supply Chain Drivers and Metrics

2. Outline Drivers of supply chain performance
A framework for structuring drivers
Facilities
Inventory
Transportation
Information
Sourcing
Pricing

3. Drivers of Supply Chain Performance
Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Decisions regarding the role, location, capacity, and flexibility of facilities have a significant impact on the supply chain’s performance. See e.g. of Amazon and Blockbuster
Inventory
Encompasses raw materials, WIP, finished goods within a supply chain
Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness. See e.g. of W.W. Grainger and Zara
Transportation
Entails moving inventory from point to point in a supply chain
combinations of transportation modes and routes. See e.g. of FedEx and McMaster-Carr

4. Information
data and analysis regarding inventory, transportation, facilities, costs, prices, and customers throughout the supply chain
potentially the biggest driver of supply chain performance because it directly affects each of the other drivers. See e.g. of Seven-Eleven Japan
Sourcing
It is the choice of who will perform a particular supply chain activity such as production, storage, transportation, or the management of information.
Strategic level decisions determining functions a firm performs and functions that are outsourced. See e.g. of Motorola and Flextronics
Pricing
Price associated with goods and services provided by a firm to the supply chain

5. A Framework for Structuring Drivers
To make balance between responsiveness and efficiency that fits with competitive strategy, a company must structure the right combination of the three logistical (Facilities, Inventory, Transportation) and three cross-functional (Information, Sourcing, Pricing) drivers.
Most companies begin with a competitive strategy and then decide what their supply chain strategy ought to be. The supply chain strategy determines how the supply chain should perform with respect to efficiency and responsiveness. The supply chain must then use the logistical and cross-functional drivers to reach the performance level of maximizing supply chain profits. See the e.g. of Walmart

6. A Framework for Structuring Drivers

7. Facilities Role in the supply chain Role in the competitive strategy
the “where” of the supply chain. They are the locations to or from which the inventory is transported.
Within a facility, inventory is either transformed into another state (manufacturing) or it is stored (warehousing).
Role in the competitive strategy
Can gain economies of scale (efficiency priority) when a product is manufactured or stored in only one location.
Another extreme, larger number of smaller facilities (responsiveness priority) close to customers.
Example 3.1: Toyota and Honda

8. Components of Facilities Decisions
Role: Firms must decide whether production facilities will be flexible, dedicated, or a combination of the two. Flexible capacity can be used for many types of products but is often less efficient, whereas dedicated capacity can be used for only a limited number of products but is more efficient.
Location
centralization (efficiency) vs. decentralization (responsiveness)
other factors to consider (e.g., macro economic factors, quality of workers, cost of workers, cost of facility, availability of infrastructure, proximity to customers, location of that firm’s other facilities, tax effects etc.)
Capacity (flexibility-excess capacity versus efficiency- high utilization facility)

9. Manufacturing methodology (product focused versus process focused)
Warehousing methodology (SKU storage, job lot storage, cross-docking- not storing inventory in a warehouse rather is shipped to stores from the manufacturer)
Overall trade-off: Responsiveness versus efficiency: Increasing the no. of facilities increases facility and inventory costs but decrease transportation costs and reduces response time. Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and response time.

10. Inventory Role in the supply chain Role in the competitive strategy
Components of inventory decisions

11. Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between supply and demand. This mismatch is intentional where inventory is held in anticipation of future demand.
An important role that inventory plays in the supply chain is to increase the amount of demand that can be satisfied by having the product ready and available when the customer wants it.
Source of cost and influence on responsiveness
Inventory has significant impact on
material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain
Throughput: rate at which sales to end consumers occur
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
Example

12. 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
The goal of good supply chain design is to find the right form, location, and quantity of inventory that provides the right level of responsiveness at the lowest possible cost.
Example 3.2 – Amazon.com

13. Components of Inventory Decisions
Cycle inventory
Average amount of inventory used to satisfy demand between receipt of supplier shipments
The size of the cycle inventory is a result of the production, transportation, or purchase of material in large lots and hence depends on lot size.
Safety inventory
inventory held in case demand exceeds expectations, held to counter uncertainty
Choosing safety inventory involves making a trade-off between the costs of carrying too much inventory versus cost of losing sales due to not having enough inventory.

14. Overall trade-off: Responsiveness versus efficiency
Seasonal inventory
inventory built up to counter predictable seasonal variability in demand
Companies using seasonal inventory build up inventory in periods of low demand and store it for periods of high demand when they will not have the capacity to produce all that is demanded.
Basic trade-off is between 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
Level of product availability: It is the fraction of demand that is served on time from product held in inventory. High level of product availability provides high level of responsiveness.

15. Transportation Role in the supply chain
Role in the competitive strategy
Components of transportation decisions

16. 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. See e.g. of Dell

17. 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
Example 3.3: Blue Nile

18. 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

19. Information Role in the supply chain Role in the competitive strategy
Components of information decisions

20. Information: Role in the Supply Chain
The connection between the various stages in the supply chain – allows coordination between stages to increase responsiveness and reduce cost
Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels
E.g. Wal-mart, Seven-eleven Japan, Airlines

21. Information: Role in the Competitive Strategy
Allows supply chain to become more efficient and more responsive at the same time
Investment in information technology improves visibility of transactions and coordination of decisions across the supply chain.
Coordination is essential to all stages to achieve common goal.
What information is most valuable? Should be worked out carefully.
Example 3.4: Andersen Windows

22. Components of Information Decisions
Push Vs Pull: Push system start with forecasts that are used to build 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 so that production and distribution of products can reflect the real demand accurately.
Coordination and information sharing: Supply chain coordination occurs when all stages of a supply chain work toward the objective of maximizing total supply chain profitability based on shared information. Coordination among different stages in a supply chain requires each stage to share appropriate information with other stages.

23. Sales and operations planning: It is the process of creating an overall supply plan (production and inventories) to meet the anticipated level of demand. The S&OP process starts with sales and marketing communicating their needs to the supply chain, which in turn communicates to sales and marketing whether the needs can be met and at what cost. It is a critical piece of information to be shared across the supply chain because it affects both the demand on a firm’s supplies and the supply to its customers.

24. Enabling technologies
Electronic data interchange (EDI): It is to facilitate the placement of instantaneous, paperless purchase orders with the suppliers.
Internet
Enterprise Resource Planning (ERP) System: It provides the transactional tracking and global visibility of information from within a company and across its supply chain.
Supply Chain Management software: It uses the information in ERP systems to provide analytical decision support in addition to the visibility of information. ERP shows what is going on while SCM help decide what company should do.
Overall trade-off: Responsiveness versus efficiency

25. Sourcing Role in the supply chain Role in the competitive strategy
Components of sourcing decisions

26. Sourcing: Role in the Supply Chain
It is the set of business processes required to purchase goods and services in a supply chain
Managers must first decide whether each task will be performed by a responsive or efficient source and then whether the source will be internal to the company or a third party.
Sourcing from low-cost countries allows efficiency.
Supplier selection, single vs. multiple suppliers, contract negotiation
E.g. Dell

27. Sourcing: Role in the Competitive Strategy
Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain
In-house vs. outsource decisions- improving efficiency and responsiveness
Firms outsource to responsive third parties if it is too expensive for them to develop this responsiveness on their own; similarly firms also outsource for efficiency if the third party can achieve significant economies of scale.
Example 3.6: Cisco

28. Components of Sourcing Decisions
In-house versus outsource decisions
Supplier evaluation and selection
Procurement process: It is the process of obtaining goods and services within a supply chain.
Overall trade-off: Increase the supply chain profits

29. Pricing Role in the supply chain Role in the competitive strategy
Components of pricing decisions

30. Pricing: Role in the Supply Chain
Pricing determines the amount to charge customers in a supply chain. It affects the customer segments that choose to buy the product, as well as the customer’s expectations.
Pricing strategies can be used to match demand and supply
Short-term discounts can be used to decrease seasonal demand spikes by moving some of the demand forward.

31. Pricing: Role in the Competitive Strategy
Firms can utilize optimal pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times
Example 3.7: Amazon

32. Components of Pricing Decisions
Pricing and economies of scale
Everyday low pricing (keeping prices steady over time) versus high-low pricing (offering steep discounts on a subset of their product every week)
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits