Supply chain drivers

Drivers of Supply Chain Performance: A company's supply chain achieve the balance between
responsiveness and efficiency that best meets the needs of the company's competitive strategy. To
understand how a company can improve supply chain performance in terms of responsiveness and
efficiency, we must examine the logistical and cross functional drivers of supply chain performance. The
major drivers of Supply chain performance consists of three logistical drivers & three cross-functional drivers.
Logistical drivers:
• Facilities, Inventory, Transportation
Cross-functional drivers:
• Information, Sourcing, Pricing
Facilities  Facilities are the actual physical locations in the supply chain network where product is
stored, assembled, or fabricated.  The major types of facilities are production sites and storages sites. 
Decision regarding the role, location, capacity, and flexibility or facilities have a significant impact on the
supply chain’s performance.
Inventory  Inventory encompasses all raw materials, work in process, and finished good within a supply
chain.  Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness.  For
example, a clothing retailer can make itself more responsive by stocking large amounts of inventory and satisfying
customer demand from stock.  A large inventory increases the retailer’s cost, thereby making it less efficient.
Reducing inventory makes the retailer more efficient but hurts its responsiveness.

 Transportation  Transportation entails moving inventory from point to point in the supply chain.  Transportation
can take the form of many combinations of modes and routes, each with its own performance characteristics. 
Transportation choices have a large impact on supply chain responsiveness and efficiency.

 Information  Information consists of data and analysis concerning facilities, inventory, transportation, costs,
prices, and customers throughout the supply chain.  Information is potentially the biggest driver of performance in
the supply chain because it directly affects each of the other drivers.  Information presents management with the
opportunity to make supply chains more responsive and more efficient.

Sourcing  Sourcing is the choice of who will perform a particular supply chain activity such as a production, storage,
transportation, or the management of information.  At the strategic level, these decisions determine what
functions a firm performs and what functions the firm outsources.  Sourcing decisions affect both the
responsiveness and efficiency of a supply chain.

Pricing  Pricing determines how much a firm will charge for goods and services that it makes available in the supply
chain.  Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain performance.

 Our definition of these drivers attempts to delineate logistics and supply chain management.  Supply chain
management includes the use of logistical and cross-functional drivers to increase the supply chain surplus.  Cross-
functional drivers have become increasingly important in raising the supply chain surplus in recent years.  While
logistics remains a major part, supply chain management is increasingly becoming focused on the three cross-
functional drivers.

SUPPLY CHAIN DECISION-MAKING FRAMEWORK

The goal of a supply chain strategy is to strike the balance between responsiveness and efficiency that fits with the
competitive strategy. To reach this goal, a company must structure the right combination of the three logistical and
three cross-functional drivers discussed earlier. For each of the individual drivers, supply chain managers must make
a trade-off between efficiency and responsiveness based on interaction with the other drivers. The combined impact
of these drivers then determines the responsiveness and the profits of the entire supply chain. We provide a visual
framework for supply chain decision making in Figure 3-1. 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 three
logistical and three cross-functional drivers to reach the performance level the supply chain strategy dictates and
maximize the supply chain profits.  Although this framework is generally viewed from the top down, in many
instances, a study of the six drivers may indicate the need to change the supply chain and potentially even the
competitive strategy.

Cross-docking is the practice of unloading goods from inbound delivery

vehicles and loading them directly onto outbound vehicles.
Facilities
Role in supply chain
Facilities are 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

Facilities are a key driver of supply chain performance in terms of responsiveness and efficiency. For example,
companies can gain economies of scale when a product is manufactured or stored in only one location; this
centralization increases efficiency. The cost reduction, however, comes at the expense of responsiveness, as many of
a company's customers may be located far from the production facility. The opposite is also true. Locating facilities
close to customers increases the number of facilities needed and consequently reduces efficiency. If the customer
demands and is willing to pay for the responsiveness that having numerous facilities adds, however, then this
facilities decision helps meet the company's competitive strategy goals.

Components of facilities decisions Role: For production facility, firms must decide whether they will be flexible,
dedicated or a combination of two. Flexible capacity can be used for many types of product, whereas dedicated
capacity can be used for only a limited number of products. Location: where a company will locate; whether to
centralize or decentralize. Centralize in order to get economics of scale or decentralize to become more responsive
by being closer to the customer. Capacity: determine a facility’s capacity to perform its intended function or
functions.

Facility Related Metrics

A manger should track the following facility-related metrics that influence supply chain performance:

Capacity: measures the maximum amount a facility can process. Utilization: measures the fraction of capacity that is
currently being used in the facility. Utilization affects both the unit cost and associated delays. Production cost per
unit: measures the average cost to produce a unit of output. Theoretical flow/cycle time of production: measures
the time required to process a unit if there are absolutely no delays at any stage. Actual average flow/cycle time:
measures the average time taken for all units proceed over a specified duration such as week or month. Flow time
efficiency: is the ration of the theoretical flow time to the average flow time. Product variety: measures the number
of products processed in a facility. Volume contribution of top 20 percent SKUs and customers: measures the
fraction of total volume processed by a facility that comes from the top 20 percent SKUs or customers.
Processing/setup/down/idle time: measure the fraction of time that the facility was processing units. Average 
production  batch  size:  measures  the  average  amount  produced  in  each production batch.

Inventory

Inventory “stockage” exists in all supply chains because of a mismatch between supply and demand. Inventory plays
a significant role in a supply chain’s ability to support a firm’s competitive strategy. A supply chain manager must
make routine decisions to create a more responsive and more efficient supply chain. Increasing inventory gives
higher responsiveness but results in higher inventory carrying cost.

Role in Competitive Strategy: Source of cost and influence on responsiveness

Role in supply chain:

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) where, I = inventory; R = throughput; T
= flow time Inventory and flow time are synonymous in a supply chain because throughput is often determined by
customer demand.

Components of Inventory

Cycle Inventory: These results due to producing or buying larger lots to minimize acquisition costs related to
processing each purchase order or production order. It is the average amount of inventory used to satisfy demand
between receipts of supplier shipments. The size of cycle inventory is a result of the production, transportation, or
purchase of material in large lots.

Safety Inventory: It is held to counter against uncertainty or variability of demand. It is the inventory held in case
demand exceeds expectations; it is held to counter uncertainty.

Seasonal inventory: It is inventory maintained to satisfy higher demands in a period compared to production
capacity. Seasonal inventory is  built up  to  counter predictable variability in  demand. Companies using seasonal
inventory buildup 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.

Metrics of Inventory
A manger should track the following inventory-related metrics that influence supply chain performance:

Average inventory: measures the average amount of inventory carried. Products with more than a specified number
of days of inventory: identifies the products for which the firm is carrying high level of inventory. Average
replenishment batch size: measures the average amount in each replenishment order. Average safety inventory:
measures the average amount of inventory on hand when a replenishment order arrives. Seasonal inventory:
measures the amount of both cycle and safety inventory that is purchased solely due to seasonal changes in
demand. Fill rate: (order/case) measures the fraction of orders/ demand that were met on time from inventory.
Fraction of time out of stock: measures the fraction of time that a particular SKU had zero inventories.

Transportation

Transportation moves the product between different stages in a supply chain. Like the other supply chain drivers,
transportation has a large impact on both responsiveness and efficiency.

Roles in SC strategy

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.

Roles in 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.

Components of transportation

Choice of transportation mode

The mode of transportation is the manner in which a product is moved from one location to another in supply chain
network. Companies can choose between air, truck, rail, ship, pipeline as modes of transportation. All the modes
vary in cost, speed, size of shipment and flexibility.

Design of transportation network

The transportation network is the collection of transportation modes, locations and routes along which product can
be shipped. A company must decide whether transportation from a supply source will be direct to the demand point
or will go through intermediate consolidation point. Route: path along which a product is shipped Network:
collection of locations and routes

Metrics of transportation

A manger should track the following transportation-related metrics that influence supply chain performance:
Average inbound transportation cost: measures the cost of bringing product into a facility as a percentage of sales or
cost of goods sold. Average incoming shipment size: measures the average number of units or dollars in each
incoming shipment at a facility. Average inbound transportation cost per shipment: measures the average
transportation cost of each incoming delivery.

Information

Information is important driver that companies have used to become both more efficient and more responsive.
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.

Roles in SC strategy 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

Roles in competitive strategy

Allows supply chain to become more efficient and more responsive at the same time Information is most valuable in
reducing cost and improving responsiveness within a supply chain.

Components of information

Push (MRP) versus pull: When designing processes of the supply chain, managers must determine whether these
processes are part of push or pull phase in the chain. Push system generally require information in the form of
elaborate material requirements planning (MRP) systems to take the master production schedules for suppliers with
part types, quantities and delivery dates. Pull system require information on actual demand to be transmitted
extremely quickly throughout the entire chain so that production and distribution of products may 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.

Forecasting and aggregate supply planning: Forecasting is the art and science of making projections about what
future demand and conditions will be. Managers must decide how they will make forecasts and to what extent they
will rely on forecasts to make decisions. Aggregate supply planning transforms forecasts into plans of activity to
satisfy the projected demand.

Information Related Metrics A manger should track the following information-related metrics that influence supply
chain performance: Forecast horizon: identifies how far in advance of the actual event a forecast is made. Frequency
of update: identifies how frequently each forecast is updated. Forecast error: measures the difference between
forecast and actual demand.

Sourcing

Sourcing is the set of business process required to purchase goods and services. Managers must decide which task
will be outsourced and those that will be performed within the firm.

Roles in SC strategy Set of business processes required to purchase goods and services in a supply chain Supplier
selection, single vs. multiple suppliers, contract negotiation

Roles in 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.

Components

In-house or outsource decisions: The most significant sourcing decision for a firm is whether to perform a task in-
house or outsource it to a third party. Supplier evaluation and selection: Managers must decide on the number of
suppliers they will have for a particular activity. Procurement process: Procurement is the process in which the
supplier sends product in response to customer orders. Managers must decide on the structure of procurement of
direct as well as indirect materials, and strategic as well as general materials.

Sourcing related metrics

Days payable outstanding: measures the number of days between when a supplier performed a supply chain task
and when it was paid. Average purchase price: measures the average price at which a good or service was purchased
during a year. Range of purchase price: measures the fluctuation in purchase price during a specified period. Average
purchase quantity: measures the average amount purchased per order. Fraction of on-time deliveries: measures the
fraction of deliveries from the supplier that were on time. Supply quality: measures the quality of product supplied.
Supply lead time: measures the average time between when an order is placed and the product arrives. Supplier
reliability: measures the variability of the supplier’s lead time as well as the delivered quantity relative to plan.

Pricing

Pricing is the process by which a firm decides how much to charge customers for its goods and services. Pricing
affects the customer segments that choose to buy the product, as well as the customer’s expectations.
Roles in SC strategy Pricing determines the amount to charge customers in a supply chain Pricing strategies can be
used to match demand and supply

Roles in competitive strategy Firms can utilize optimal pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times.

Components

Everyday low pricing versus high-low pricing: Some supply chain offer everyday low pricing. In contrast, most
practice high-low pricing and offer steep discounts on a subset of their product every week. Fixed price versus menu
pricing: A firm must decide whether it will charge a fixed price for its supply chain activities or have a menu with
prices that vary with some other attributes such as response time or location of delivery.

Pricing related metrics

A manger should track the following pricing-related metrics that influence supply chain performance:

Profit margin: measures profit as a percentage of revenue. Days sales outstanding: measures the average time
between when a sale is made and when the cash is collected. Incremental fixed cost per order: measures the
incremental costs that are independent of the size of the order. Incremental variable cost per order: measures the
incremental costs that vary with the size of the order. Average sale price: measures the average price at which a
supply chain activity was performed in a given period. Average order size: measures the average quantity per order.
Range of sale price: measures the maximum and minimum of sale price per unit over a specified time horizon. Range
of periodic sales: measures the maximum and minimum of the quantity sold per period (day/week/month) during a
specified time horizon.

Obstacles to achieve strategic fit

The key to achieving strategic fit is a company's ability to find a balance between responsiveness and efficiency that
best matches the needs of its target customer. In deciding where this balance should be located on the
responsiveness spectrum, companies face many obstacles. In this section we discuss some of the obstacles and also
provide a feel for how the supply chain environment has changed over the years. Increasing product variety,
decreasing product life cycles, demanding customers, and global competition all make creating supply chain
strategies more difficult, as these factors can hamper supply chain performance. The increase in globalization of the
supply chain and fragmentation of supply chain ownership has also made it more difficult to execute supply chain
strategies.

INCREASING VARIETY OF PRODUCTS

Product proliferation is rampant today. With customers demanding ever more customized products, manufacturers
have responded with mass customization and even segment-of-one views of the market. The increase in product
variety complicates the supply chain by making forecasting much more difficult. Increased variety tends to raise
uncertainty, and increased uncertainty hurts both efficiency and responsiveness within the supply chain.

DECREASING PRODUCT LIFE CYCLES

In addition to the increasing variety of product types, the life cycle of products has been shrinking. Shorter life cycles
increase uncertainty while reducing the window of opportunity within which the supply chain can achieve fit.
Increased uncertainty combined with a smaller window of opportunity has put additional pressure on supply chains
to coordinate and create a good match between supply and demand.

INCREASINGLY DEMANDING CUSTOMERS

Customers are constantly demanding improvements in delivery lead times, cost, and product performance. If they
do not receive these improvements, they move on to new suppliers. Today's customers are demanding faster
fulfillment, better quality, and better-performing products for the same price they paid years ago. This tremendous
growth in customer demands (not necessarily demand) means that the supply chain must provide more just to
maintain its business.

FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP

The new ownership structure made managing the supply chain more difficult. With the chain broken into many
owners, each with its own policies and interests, the chain is more difficult to coordinate.

GLOBALIZATION

Establishing a global supply chain creates many benefits, such as the ability to source from a global base of suppliers
who may offer better or cheaper goods than were available in a company's home nation. Globalization, however,
also adds stress to the chain, because facilities within the chain are farther apart, making coordination much more
difficult.

DIFFICULTY EXECUTING NEW STRATEGIES

Creating a successful supply chain strategy is not easy. Once a good strategy is formulated, however, the execution
of the strategy can be even more difficult.

All of the obstacles discussed earlier are making it more difficult for companies to achieve strategic fit in the supply
chain. These obstacles also represent a tremendous opportunity in terms of untapped improvement within the
supply chain. The increasing impact of these obstacles has led to supply chain management becoming a major factor
in the success or failure of firms.