Supply Chain Management

Chapter 3
Supply Chain Drivers

© 2007 Pearson Education 3-1

 Drivers of Supply Chain Performance
1. Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
2. Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
3. Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
4. Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance
5. Sourcing
– functions a firm performs and functions that are outsourced
6. Pricing
– Price associated with goods and services provided by a firm to the supply chain
© 2007 Pearson Education 3-2
 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

© 2007 Pearson Education 3-3

 Facilities
Role in the supply chain
1. – the “where” of the supply chain
2. – manufacturing or storage (warehouses)

Role in the competitive strategy

1. – economies of scale (efficiency priority)
2. – larger number of smaller facilities (responsiveness priority)

Components of facilities decisions

© 2007 Pearson Education 3-4

 Components of Facilities Decisions
1. Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
2. Capacity (flexibility versus efficiency)
3. Manufacturing methodology (product focused versus
process focused)
4.
Warehousing methodology (SKU storage, job lot
storage, cross-docking)
5. Overall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-5

 Inventory
Role in the supply chain
Role in the competitive strategy
Components of inventory decisions

© 2007 Pearson Education 3-6

 Inventory: Role in the Supply Chain
1. Inventory exists because of a mismatch between
supply and demand
2. Source of cost and influence on responsiveness
3. 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 = RT (Little’s Law)
» I = inventory; R = throughput; T = flow time
» Inventory and throughput are “synonymous” in a supply chain

© 2007 Pearson Education 3-7

 Inventory: Role in Competitive
Strategy
1. If responsiveness is a strategic competitive priority, a
firm can locate larger amounts of inventory closer to
customers
2.
If cost is more important, inventory can be reduced to
make the firm more efficient
3. Trade-off

© 2007 Pearson Education 3-8

 Components of Inventory
Decisions
1.
Cycle inventory
1. – Average amount of inventory used to satisfy demand between shipments
2. – Depends on lot size

2. Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
3. Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible production
4. Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness

© 2007 Pearson Education 3-9

 Transportation
Role in the supply chain
Role in the competitive strategy
Components of transportation decisions

© 2007 Pearson Education 3-10

 Transportation: Role in
the Supply Chain
1.
Moves the product between stages in the supply chain
2. Impact on responsiveness and efficiency
3.
Faster transportation allows greater responsiveness
but lower efficiency
4. Also affects inventory and facilities

© 2007 Pearson Education 3-11

 Transportation:
Role in the Competitive Strategy
1. If responsiveness is a strategic competitive priority,
then faster transportation modes can provide greater
responsiveness to customers who are willing to pay
for it
2. Can also use slower transportation modes for
customers whose priority is price (cost)
3. Can also consider both inventory and transportation to
find the right balance

© 2007 Pearson Education 3-12

 Components of
Transportation Decisions
1. Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in1.cost,2.speed,3.size of shipment,4.flexibility
2. Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
3. In-house or outsource
4. Overall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-13

 Information
Role in the supply chain
Role in the competitive strategy
Components of information decisions

© 2007 Pearson Education 3-14

 Information: Role in
the Supply Chain
1.
The connection between the various stages in the
supply chain – allows coordination between stages
2. Crucial to daily operation of each stage in a supply
chain – e.g., production scheduling, inventory levels
1. 2.

© 2007 Pearson Education 3-15

 Information:
Role in the Competitive Strategy
1. Allows supply chain to become more efficient and
more responsive at the same time (reduces the need
for a trade-off)
2. Information technology
3.
What information is most valuable?

© 2007 Pearson Education 3-16

 Components of Information
Decisions
1. Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
2.
Coordination and information sharing
3. Forecasting and aggregate planning
4. Enabling technologies
1.
– EDI
2. – Internet
3. – ERP systems
4.
– Supply Chain Management software
5. Overall trade-off: Responsiveness versus efficiency
© 2007 Pearson Education 3-17
 Sourcing
Role in the supply chain
Role in the competitive strategy
Components of sourcing decisions

© 2007 Pearson Education 3-18

 Sourcing: Role in
the Supply Chain
1. Set of business processes required to purchase goods
and services in a supply chain
2. Supplier selection, single vs. multiple suppliers,
contract negotiation

© 2007 Pearson Education 3-19

 Sourcing:
Role in the Competitive Strategy
1. Sourcing decisions are crucial because they affect the
level of efficiency and responsiveness in a supply
chain
2. In-house vs. outsource decisions- improving
efficiency and responsiveness

© 2007 Pearson Education 3-20

 Components of Sourcing
Decisions
1. In-house versus outsource decisions
2. Supplier evaluation and selection
3. Procurement process
4. Overall trade-off: Increase the supply chain profits

© 2007 Pearson Education 3-21

 Pricing
Role in the supply chain
Role in the competitive strategy
Components of pricing decisions

© 2007 Pearson Education 3-22

 Pricing: Role in
the Supply Chain
1. Pricing determines the amount to charge customers in
a supply chain
2.
Pricing strategies can be used to match demand and
supply

© 2007 Pearson Education 3-23

 Sourcing:
Role in the Competitive Strategy
1.
Firms can utilize optimal pricing strategies to improve
efficiency and responsiveness
Low price and low product availability; vary prices by
response times

© 2007 Pearson Education 3-24

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

© 2007 Pearson Education 3-25

 Considerations for Supply
Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation/ Speed

Accommodate
together
Facilities Consolidation / Proximity or near
Dedicated by/ Flexibility
Information What information is best suited for
each objective
© 2007 Pearson Education