Supply Chain Drivers of Supply Chain Performance

• Consists of all parties involved directly or indirectly, in • To understand how a company can improve supply chain
fulfilling a customer request performance in terms of responsiveness and efficiency,
• It includes the following: we must examine the logistical and cross functional
Manufacturer Suppliers drivers of supply chain performance:
Transporters Warehouses Facilities Inventory
Retailers Customers Transportation Information
• Within each organization, such as a manufacturer, the Sourcing Pricing
supply chain includes all functions involved in receiving • These drivers interact with each other to determine the
and filling a customer requests. Its functions include, but supply chain’s performance in terms of responsiveness
are not limited to the following: and efficiency. As a result, the structure of these drivers
New Product Development Marketing determines if and how strategic fit is achieved across the
Operations Distribution supply chain
Finance Customer Service
• It is dynamic and involves the constant flow of Facilities • The actual physical locations in the supply
information, product, and funds between different stages chain network where products is stored,
• It may involve a variety of stages, which includes the ff: assembled, or fabricated
Customers Retailers • Production Sites & Storage Sites – two
Wholesalers/Distributors Manufacturers major types of facilities
Component/Raw Material • Decisions regarding the role, location,
Suppliers capacity, and flexibility of facilities have a
• Each stage in it is connected through the flow of significant impact on the supply chain’s
products, information, and funds. These flows often performance
occur in both directions and may be managed by one of Inventory • It encompasses all raw materials, work in
the stages or an intermediary process, and finished goods within a supply
• Its appropriate design depends on both the customer’s chain
needs and the roles played by the stages involved • Changing inventory policies can dramatically
alter the supply chain’s efficiency and
The Objective of a Supply Chain responsiveness
• Its objective should be to maximize the overall value Transportatio • It entails moving inventory from point to point
generated n in the supply chain
• The value a supply chain generates is the difference • It can take the form of many combinations of
between what the final product is worth to the customer modes and routes, each with its own
and the costs the supply chain incurs in filling the performance characteristics
customer’s request • Its choices have a large impact on supply chain
• For most commercial supply chains, value will be responsiveness and efficiency
strongly correlated with supply chain profitability Information • Consists of data and analysis concerning
o Supply Chain Profitability / Supply Chain facilities, inventory, transportation, costs,
Surplus prices, and customers throughout the supply
§ The difference between the revenue generated chain
from the customer and the overall cost across the • It is potentially the biggest driver of
supply chain performance in the supply chain as it directly
§ The higher the supply chain profitability, the affects each of the other drivers
more successful is the supply chain • It presents management with the opportunity
§ Its success should be measured in terms of supply to make supply chains more responsive and
chain profitability and not in terms of the profits more efficient
at an individual stage Sourcing • It is the choice of who will perform a
• Customers – The only one source of revenue for any particular supply chain activity such as
supply chain production, storage, transportation, or the
• All flows of information, product, or funds generate costs management of information
within the supply chain. Thus, the appropriate • At this strategic level, these decisions
management of these flows is a key to supply chain determine what functions a firm performs and
success what functions the firm outsources
• Effective supply chain management involves the • Its decisions affect both the responsiveness
management of supply chain assets and product, and efficiency of a supply chain
information, and fund flows to maximize total supply Pricing • Determines how much a firm will charge for
chain profitability goods and services that it makes available in
the supply chain
The Importance of Supply Chain Decisions • It affects the behavior of the buyer of the
• There is a close connection between the design and good/service thus affecting supply chain
management of supply chain flows (product information, performance
and funds) and the success of a supply chain
• Supply chain design, planning, and operation decisions
play a significant role in the success/failure of a firm
 The Role of Distribution in the Supply chain Order • The ability of customers to track their
Visibility orders from placement to delivery
Distribution Returnability • The ease with which a customer can return
• Refers to the steps taken to move and store a product unsatisfactory merchandise and the ability
from the supplier stage to a customer stage in the supply of the network to handle such returns
chain • Changing the distribution network design affects the
• It is a key driver of the overall profitability of a firm following supply chain costs
because it affects both the supply chain cost and the Inventories • Firms try to consolidate and limit the
customer experience directly number of facilities in their supply chain
• Appropriate distribution network can be used to achieve network
a variety of supply chain objectives ranging from low Transportation • Inbound Transportation Costs – costs
cost to high responsiveness incurred in bringing material into the
• A poor distribution network can hurt the level of service facility
that customers receive while increasing the cost. An • Outbound Transportation Costs – costs of
inappropriate network can have a significant negative sending material out of a facility
effect on the profitability of the firm Facilities & • Facility costs decrease as the number of
• There are products/services that are distributed directly Handling facilities is reduced because a
to customers and there are products that can be obtained consolidation of facilities allows a firm to
from resellers omly exploit economies of scale
Information • -
Distribution Management
• To decrease inventory costs, firms try to consolidate and
• Manages the supply chain for a firm, from vendors and
limit the number of facilities in their supply chain
suppliers to manufacturer to point of sale, including
network
packaging, inventory, warehousing, and logistics
• It helps keep things organized and keeps customer
Design Options for Distribution Network
satisfied
• Managers must make two key decisions when designing
a distribution network
Distribution Chain Supply Chain
o Will product be delivered to the customer location or
• It occurs between every • System through which an picked up from a preordained site?
pair of stages in the organization acquires raw o Will product flow through an intermediary (or
supply chain material, produces products intermediate location)?
• Raw materials and and delivers the products
• Six distinct distribution network designs may be used to
components are moved and services to its
move products from factory to the customer, which are
from suppliers to customers… On their way
classified as follows:
manufacturers, whereas from producers to end users
o Manufacturer storage with direct shipping
finished products are and consumers, products
o Manufacturer storage with direct shipping and in-
moved from the pass through a series of
transit merge
manufacturer to the end marketing entities known as
o Distributor storage with package carrier delivery
consumer a distribution channel
o Distributor storage with last-mile delivery
o Manufacturer/distributor storage with customer pick-
Factors Influencing Distribution Network Design up
• At the highest level, performance of a distribution o Retail storage with customer pick-up
network should be evaluated along two dimensions
o Customer needs that are met Strength & Weaknesses of Various Distribution Options
o Cost of meeting customer needs • Distribution networks that ship directly to the
• A firm must evaluate the impact on customer service and customer – better suited for a large variety of high-value
cost as it compares different distribution network options products that have low and uncertain demand
• The customer needs that are met influence the company’s o These networks carry low levels of inventory but
revenues, which along with cost decide the profitability incur high transportation cost and provide a slow
of the delivery network response time
• Customer service measures that are influenced by the • Distribution networks that carry local inventory –
structure of the distribution network suitable for products with high demand, especially if
Response • The amount of time it takes for a customer transportation is a large fraction of total cost
Time to receive an order
Product • The number of different How e-business has affected the design of distribution
Variety products/configurations that are offered by networks in various industries
the distribution network • Its rise has affected both customer service and costs in
Product • The probability of having a product in supply chains
Availability stock when a customer order arrives • An e-business allows a firm to offer greater product
Customer • Includes the ease with which customers can variety and improve product availability by centralizing
Experience place and receive orders as well as the inventories. This is especially beneficial for low-volume,
extent to which this experience is high-variety products
customized • It improves the customer experience by providing 24-
Time to • The time it takes to bring a new product to hour access and allowing a more customized experience.
Market the market
 Selling a product online, however, increases the response estimates of what environmental factors will
time relative to retail store be to forecast future demand
• It reduces facility costs if there is no significant loss of • Example: product pricing is strongly
customer participation correlated with demand
• Transportation costs increase; however, this is Simulation • Imitate the consumer choices that give rise to
particularly significant for low-value products with demand to arrive at a forecast. Using this, a
predictable demand firm can combine time-series and causal
• It’s been the most effective for high-value products with methods to answer questions such as
uncertain demand, when customers are willing to wait o What will be the impact of a price
some time before delivery promotion?
o What will be the impact of a competitor
Forecasting in the Supply Chain Management opening a store nearby?
• Airlines simulate customer buying behavior
Forecasting to forecast demand for higher-fare seats when
• Key driver of virtually every design and planning there are no seats available at the lower fares
decision made in both an enterprise and a supply chain • Demand consists of a systematic and a
• Enterprises have always forecasted demand and used it random component. The systematic
to make decisions. A relatively recent phenomenon, component measures the expected value of
however, is to create collaborative forecasts for an entire demand
supply chain and use this as the basis for decisions
Demand
Collaborative Forecasting Systematic • It consists of the following:
• A way in which the entire supply chain is a participant in Component Level Measures current
decisions about the demand that will drive their activity. deseasonalized demand
Collaborative forecasting reaches internally and Trend Measures current rate of growth
externally to gather information that allows for the best or decline in demand
and most timely predictions of demand Seasonality Indicates predictable seasonal
• It greatly increases the accuracy of forecasts and allows fluctuations in demand
the supply chain to maximize its performance Random • Measures fluctuation in demand from the
• Without collaboration, supply chain stages farther from Component expected value
demand will likely have poor forecasts that will lead to • Refers to changes in the time-series data that
supply chain inefficiencies and a lack of responsiveness are unpredictable and cannot be associated
with the trend, seasonal, or cyclical
Identify the components of a demand forecast components
• A company must be knowledgeable about numerous
factors that are related to the demand forecast Forecast demand in supply chain given historical data
Past demand Lead time of product using time-series methodologies
Planned advertising or State of the economy • Time-series methods for forecasting are categorized as
marketing efforts static or adaptive
Planned price discounts Actions that competitors have taken • It’s a method for translating past data or experience into
estimates of the future
Forecasting Methods • It makes forecasts based solely on historical patterns in
Qualitative • Primarily subjective and rely on human the data and use time as independent variable to produce
judgement. Most appropriate when little demand
historical data is available or when experts • In static methods, the estimates of parameters and
have market intelligence that may affect the demand patters are not updated as new demand is
forecast. Such methods may also be necessary observed. Static methods include regression
to forecast demand several years into the • In adaptive methods, the estimates are updated each
future in a new industry time a new demand is observed. It includes moving
Time • Use historical demand to make a forecast. averages, simple exponential smoothing, holt’s model,
Series Based on the assumption that past demand and winter’s model
history is a good indicator of future demand. • Moving Averages & Simple Exponential Smoothing –
These methods are most appropriate when the best used when demand displays no trend or seasonality
basic demand pattern does not vary • Holt’s Model – best when demand displays a trend but
significantly from one year to the next. no seasonality
• These are the simplest methods to implement • Winter’s Model – appropriate when demand displays
and can serve as a good starting point for a both trend and seasonality
demand forecast
Causal • Assume that the demand forecast is highly Analyze demand forecasts to estimate forecast error
correlated with certain factors in the Forecast • Measures random component of demand. It is
environment (the state of the economy, Error important because it reveals how inaccurate a
interest rates, etc.) forecast is likely to be and what contingencies a
• Its methods find this correlation between firm may have to plan for
demand and environmental factors and use MAD & • Used to estimate the size of the forecast error
MAPE
Bias & • Used to estimate if the forecast consistently
TS over- or underforecasts

Sales History
• Systematic recording of all sales achieved during a
predetermined time period
• Computing Averages for Sales Histories
o Fixed Average
§ An average for a specific (fixed) time period
o Rolling Average
§ The average amount of sales or volume over
changing time period