Supply Chain Management
Chapter 3
Supply Chain Drivers and Metrics
Lecturer:
Wilmer Jorge
OBJECTIVES
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.
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• 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 chain’s 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
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more responsive.
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 from 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.
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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 3-9
Example:
• Wal-Mart
• Wal-Mart’s 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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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
Honda’s 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 2008. While competitors’ SUV production facilities
were idle, Honda facilities maintained a high level of utilization.
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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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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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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
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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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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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Inventory-Example
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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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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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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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Transportation- Example
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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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Example
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or/1102951372825/
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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).
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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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Overall trade-off: Complexity
v Value
• As more information is shared across a supply chain. The complexity and
cost of both the required infrastructure and the follow up analysis grows
exponentially. The marginal value provided by the information shared
diminishes as more and more information is available.
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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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Example
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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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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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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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Example
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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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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 company’s 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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