Chapter 3

Supply Chain Drivers and Metrics

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 Drivers of Supply Chain Performance
 Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
– Decision regarding location, capacity and flexibility of facilities (Ex: Amazon vs. Best Buy)
 Inventory
– raw materials, work in progress, finished goods within a supply chain
– Changing inventory policies can dramatically alter the supply chain’s performance (efficiency and responsiveness)-
Ex: Clothing retailers- Zara/Fashion apparel business (loses values due to changing seasons and trends)
 Transportation
– moving inventory from point to point in a supply chain
– many combinations of transportation modes and routes –Ex: Mail Order Catalog Company (Fedex-Air/Rail)
 Information
– data and analysis regarding inventory, transportation, facilities costs, prices and customers throughout the supply
chain
– potentially the biggest driver of supply chain performance Ex: Seven Eleven Japan
 Sourcing
– determines who will preform a particular supply chain activity/function such as production, storage, transportation,
or the management of information. Ex: Motorola (contract manufacturers in China)
 Pricing
– Determines how much a firm will charge for the goods and services that it makes available in the supply chain. Ex:
Transportation company (varies charges according to lead time provided by the customers)

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 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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 Walmart

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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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 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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 2. Inventory: Role in the Supply
Chain
 Inventory exists because of a mismatch between supply and demand
 Source of cost and influence on responsiveness
 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 = DT (Little’s Law)
» I = inventory; D = throughput; T = flow time

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 Inventory: Role in the Supply
Chain
 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

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 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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 3. 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 to find the right
balance between responsiveness and efficiency.

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 Transportation:
Role in the Supply Chain
 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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 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
 Overall trade-off: Responsiveness versus efficiency

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 4. Information: Role in
the Supply Chain
 The connection between the various stages in the supply chain
– allows coordination between stages

 Crucial to daily operation of each stage in a supply chain – e.g.,

production scheduling, inventory levels

 Good information can help improve the utilization of supply

chain assets and the coordination of supply chain flows to
increase responsiveness and reduce costs.

© 2007 Pearson Education 3-13

 Information:
Role in the Supply Chain
 Allows supply chain to become more efficient and more responsive at the
same time (reduces the need for a trade-off)
 Information technology
 What information is most valuable?

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 Components of Information
Decisions
 Push (MRP) versus pull (demand information transmitted quickly throughout the
supply chain)
 Coordination and information sharing
 Sales and Operations planning (the process of creating overall production and
inventories plan to meet the anticipated level of demand/sales)
 Enabling technologies
– Electronic Data Intercahge-EDI (to facilitate the placement of instantaneous,
paperless purchase orders with suppliers)
– Internet
– Enterprise Resource Planning (ERP) systems (provide the transactional tracking
and global visibility of information from within company and across its supply
chain)
– Supply Chain Management software and Radio Frequency Identification
(RFID)
 Overall trade-off: Responsiveness versus efficiency

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 5. Sourcing:
Role in the Supply Chain
 Set of business processes required to purchase goods and services in a supply chain
 Supplier selection, single vs. multiple suppliers, contract negotiation
 Sourcing decisions are crucial because they affect the level of efficiency and responsiveness
in a supply chain.

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 Components of Sourcing
Decisions
 In-house vs. outsource decisions- improving efficiency and
responsiveness

 Supplier evaluation and selection (Criteria: Technical or non-

technical such as social/ environmental)
 Procurement process (the process of obtaining goods and
services within a supply chain)

 Overall trade-off: Increase the supply chain profits

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 Pricing:
Role in the Supply Chain
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply
Firms can utilize optimal pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times

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 6. Pricing:
Components of Pricing Decisions
 Pricing and economies of scale
 Everyday low pricing versus high-low pricing
 Fixed price versus menu pricing
 Overall trade-off: Increase the firm profits

© 2007 Pearson Education 3-19

 Summary
 What are the major drivers of supply chain
performance?
 What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy
(or between implied demand uncertainty and supply
chain responsiveness)?
 What are the major obstacles to achieving strategic fit?
 In the remainder of the course, we will learn how to
make decisions with respect to these drivers in order to
achieve strategic fit and surmount these obstacles
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