POST GRADUATE DIPLOMA IN SUPPLY CHAIN MANAGEMENT

Strategic Supply Chain Management

Lecture-03
Supply Chain Drivers and Obstacles
 Outline
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing
• Obstacles to achieving fit
 Supply Chain Drivers

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.
– Logistical Drivers are – – Cross functional Drivers are –
• Facilities • Information
• Inventory • Sourcing
• Transportation • Pricing
 Supply Chain Drivers

• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites

• Inventory
— raw materials, WIP, finished goods within a supply chain
— inventory policies

• Transportation
— moving inventory from point to point in a supply chain
— combinations of transportation modes and routes
 Supply Chain Drivers

• Information
– data and analysis concerning facilities, inventory, transportation, costs, prices
and customers throughout the supply chain.
– potentially the biggest driver of supply chain performance.
• Sourcing
— Choices of who will perform a particular activity such as production, storage,
transportation or the information management.
— functions a firm performs and functions that are outsourced

• Pricing
— Price associated with goods and services
— provided by a firm to the supply chain
 6 Drivers of A Framework for
Supply Chain
Performance Structuring Drivers

Competitive Strategy

Supply Chain
Strategy
Responsiveness
Efficiency
Supply Chain Structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

 Framework for Structuring Drivers
• 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.
• 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.
• 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.
 Framework for Structuring Drivers

“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 strategy
and potentially even the
competitive strategy”.
 Supply Chain Drivers – “Facilities”

• Facilities are a key driver of supply chain performance in

terms of responsiveness and efficiency.

• Facilities are the actual physical locations in the supply

chain network where product is stored, assembled, or
fabricated (example – production sites and storage sites).
To or from which inventory is transported.

• Decisions regarding the role, location, capacity, and flexibility of facilities have
a significant impact on the supply chain’s performance
 Components of Facilities Decisions

• Role
– Company must decide whether production facilities will be flexible, dedicated or
a combination.
– Product focused facility performs all functions (fabrication and assembly) for
producing a single product.
– Function focused facility performs a given set of functions (fabrication or
assembly) on many types of product
• Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider such as quality and cost of workers, cost of facility,
availability of infrastructure, tax effect etc.
 Components of Facilities Decisions

• Capacity (flexibility versus efficiency)

– Excess capacity allows the facility to respond to wide swings in the demands
placed on it. Excess capacity costs money and decreases efficiency.
– The high utilization facility will have difficulty in responding to demand fluctuation.

• Overall trade-off: Responsiveness versus efficiency

– Increasing the no of facilities increases facility and inventory costs but decreases
transportation and response time.
– Increasing the flexibility or capacity of a facility increases facility costs but
decreases inventory costs and response time
 FACILITIES
• Role in the Competitive Strategy
– Facilities are a key driver of supply chain performance in terms of responsiveness and
efficiency.

– Companies can gain economies of scale when a product is manufactured or stored in

only one locations; this centralization increases efficiency.

– The cost reduction may come at the expense of responsiveness

– Locating facilities close to customers increases the number of facilities needed and
consequently reduces efficiency.

– This facility decision helps meet the company’s competitive strategy goals.
 FACILITIES
• Role in the Competitive Strategy

– Example - Toyota and Honda

Both Toyota and Honda use facilities decisions to be more responsive to their
customers. These companies have an end goal of opening manufacturing
facilities in every major market that they enter. While there are other benefits
to opening local facilities, such as protection from currency fluctuation and
trade barriers, the increase in responsiveness plays a large role in Toyota
and Honda’s decision to place facilities in their local markets.
 Supply Chain Drivers – “Inventory”

• Inventory encompasses all raw

materials, work in process, and
finished goods within a supply chain

• Changing inventory policies can

dramatically alter the supply chain’s
efficiency and responsiveness
 Supply Chain Drivers – “Inventory”

Role in the Competitive Strategy

• The form, location and quantity allows a supply chain to range from being very
low cost to very responsive.

• 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
 Supply Chain Drivers – “Inventory”

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 seasonal predictable variability in demand
– cost of carrying additional inventory versus cost of flexible production rate.
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
 Supply Chain Drivers – “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.

• Transportation choices have a large impact on supply chain responsiveness and

efficiency.

• Faster transportation allows greater responsiveness but lower efficiency.

• It also affects inventory and facilities

 Supply Chain Drivers – “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
 Supply Chain Drivers – “Transportation”

Components of Transportation Decision

• 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
Using fast mode of transportation raises responsiveness and transportation
cost but lowers the inventory holding cost.
 Supply Chain Drivers – “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 the management with the opportunity

to make supply chains more responsive and more efficient.
 Supply Chain Drivers – “Information”
Components of Information Decisions
• Push (MRP) versus pull (demand information transmitted quickly throughout the supply
chain)
• Coordination and information sharing
• Forecasting and planning
• Enabling technologies
– EDI facilitate instantaneous, paperless purchase order
– Internet
– ERP systems provide transactional tracking and global visibility within company and
across supply chain.
– Supply Chain Management software

• Overall trade-off: Good information helps a firm improve both its efficiency and
responsiveness. It is thus important to evaluate the minimum information required to
accomplish the desired objective.
 Supply Chain Drivers – “Sourcing”

• Sourcing is the choice of who will perform a particular supply

chain activity such as 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 out sources.

• Sourcing decisions affect both the responsiveness and efficiency

of a supply chain.
 Supply Chain Drivers – “Sourcing”
Components of Sourcing Decisions
• In-house versus outsource decisions –
– the most significant decision for a firm is whether to perform a task in-
house or outsource it to a third party. Outsource only the responsive
component, or outsource only the efficient component.
It is best to outsource if the growth in total supply chain surplus is significant
with little additional risk.

• Supplier evaluation and selection

– it must be decided on the number of suppliers they will have for a particular activity
– they must then identify the criteria along which suppliers will be evaluated and how they
will be selected.
– Whether it will be direct negotiation or an auction.
 Supply Chain Drivers – “Sourcing”

• Procurement process
It is the process of obtaining goods or services within the supply chain.
Managers must structure procurement with a goal of increasing supply
chain surplus.

• Overall trade-off
Increase the supply chain profits – a firm should keep a supply chain
function in-house if the third party can’t increase the supply chain surplus
or if the risk associated with outsourcing is significant.
 Supply Chain Drivers – “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.
 Supply Chain Drivers – “Pricing”
Components of Pricing Decisions

• Pricing and economies of scale

– Small production runs more expensive per unit than large production
runs.
– Loading unloading costs make it cheaper to deliver a truckload (TL) to
one location than four.

• Everyday low pricing versus high-low pricing

– EDLP keeps pricing steady over time but super markets practice high-
low pricing and offer steep discounts.
 Supply Chain Drivers – “Pricing”
Components of Pricing Decisions
• Fixed price versus menu pricing
– A firm must decide whether it will charge fixed pricing or have menu prices
that vary with response and locations.

• Overall trade-off: All pricing decisions should be made with the objective of
increasing firm profits. EDLP may foster stable demand that allows efficiency in
supply chain. Other pricing strategies may lower supply chain cost, defend
market share, or even steal market share. Different pricing may be used to
attract customers with varying needs, as long as this strategy helps either
increase revenues or shrink costs, preferably both.
• Wal-Mart’s competitive strategy is to be a reliable, low-cost retailer for a
wide variety of mass-consumption goods.
 Wal-Mart aims to provide high availability of a variety of products of
reasonable quality at low prices

• This strategy dictates that the ideal supply chain will emphasize efficiency
but also maintain an adequate level of responsiveness. Wal-Mart uses the
three logistical and three cross-functional drivers effectively to achieve this
type of supply chain performance.
With the inventory driver, Wal-Mart maintains an efficient
supply chain by keeping low levels of inventory. For
instance, Wal-Mart pioneered cross-docking, a system in
which inventory is not stocked in a warehouse but rather is
shipped to stores from the manufacturer.
These shipments make only brief stops at distribution centers
(DCs), 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.
With respect to inventory, Wal-Mart favors efficiency over
responsiveness.
On the transportation front, Wal-Mart runs its own fleet, to
keep responsiveness high. This increases transportation cost,
but the benefits in terms of reduced inventory and improved
product availability justify this cost in Wal-Mart’s case.
In the case of facilities, Wal-Mart uses centrally located DCs
within its network of stores to decrease the number of facilities
and increase efficiency at each DC. Wal-Mart builds retail stores
only where the demand is sufficient to justify having several of
them supported by a DC, thereby increasing efficiency of its
transportation assets.
To utilize information in the supply chain, Wal-Mart has
invested significantly more than its competitors in information
technology. As a result, Wal-Mart is a leader in its use of the
information driver to improve responsiveness and decrease
inventory investment.
Wal-Mart feeds demand information across the supply chain to
suppliers who manufacture only what is being demanded. The
supply chain’s ability to share demand information has required
large investments, but the result is an improved supply chain in
terms of both responsiveness and efficiency.
With regard to the sourcing driver, Wal-Mart identifies efficient
sources for each product it sells. Wal-Mart feeds them large
orders, allowing them to be efficient by exploiting economies of
scale.
Finally, for the pricing driver, Wal-Mart practices “every day low
pricing” (EDLP) for its products. This ensures that customer
demand stays steady and does not fluctuate with price
variations. The entire supply chain then focuses on meeting this
demand in an efficient manner.
Wal-Mart uses all the supply chain drivers to achieve the right
balance between responsiveness and efficiency so that its
competitive strategy and supply chain strategy are in harmony.
 Obstacles to Achieving Strategic Fit

• Increasing variety of products

• Decreasing product life cycles
• Increasingly demanding customers
• Globalization
• Difficulty executing new strategies