Unit-3

Supply Chain Drivers

To understand how a company can improve supply chain performance in terms of responsiveness and efficiency, we must examine the logistic and cross
functional drivers of supply chain performances: facilities, transportation, sourcing, inventory, information, and pricing.
These drivers interact to determine the supply chain’s performance in terms of responsiveness and efficiency. These drivers also impact the financial
measures. The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost, thus improving the supply chain surplus and the
firm’s financial performance.
First we define each driver and discuss its impact on the performance of the supply chain.
1. 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 storage sites. Decision regarding the role, location, capacity and flexibility of facilities have a significant impact on supply
chain performance. For example, in 2009, Amazon increased the number of warehousing facilities (observe increase in property, plant and equipment)
located close to customers to improve its responsiveness. In contrast, Blockbuster tried to improve its efficiency in 2010 by shutting down many facilities
even through it reduced responsiveness. Facility costs show up under selling, general, and administrative if they are leased.

# Role in Supply Chain:

If we think of inventory as what as being passed along the supply chain and transportation as how it is passed along, then 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 economics
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 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 customers 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:

i. Role: Firms must decide whether production facilities will be flexible, dedicated, or a combination of the two. Firms must also decide whether
to design a facility with a product focus or a functional focus.
ii. Location: Deciding where a company will locate its facilities constitutes a large part of the design of a supply chain. Companies must also
consider a host of issues related to the various characteristics of the local area in which the facility is situated.
iii. Capacity: Companies must also determine a facility’s capacity to perform its intended function or functions. A large amount of excess capacity
allows the facility to respond to wide swings in the demands placed on it.
iv. Facility-Related Metrics: Facility-related decisions impact both the financial performance of the firm and the supply chain’s responsiveness to
customers.

2. Inventory: Inventory encompasses all raw materials, work in process, and finished goods within a supply chain. The inventory belonging to firm is reported
under assets. Changing inventory policies can dramatically alter responsiveness. For example, W.W. Grainger makes itself responsive by stocking large
amounts of inventory and satisfying customer demand from stock through the high inventory levels reduce efficiency. Such a practice makes sense for
Grainger because its products hold their value for a long time. A strategy using high inventory levels can be dangerous in the fashion apparel business where
inventory loses value relatively quickly with changing seasons and trends. Rather than hold high levels of inventory, Spanish apparel retailer Zara has
worked hard to shorten new product and replenishment leads times. As a result, the company is very responsive but carries low levels of inventory. Zara thus
provides responsiveness at low cost.

# Role in Supply Chain:

An important role that inventory plays in the supply chain is to increase the amount of demand that can be satisfied by having the product ready
and available when the customer wants it. Another significant role that inventory plays is to reduce cost by exploiting economics of scale that may exist
during production and distribution. Inventory impacts the assets held, the costs incurred, and responsiveness provided in the supply chain. Inventory also has
a significant impact on the material flow time in a supply chain.

# Role in the Competitive Strategy: The form, location, and quality of inventory allow a supply chain to range from being very low cost to very
responsive. Large amount of finished goods inventory close to customer allow a supply chain to responsive but at a high cost. Centralized inventory in raw
material form allows a supply chain to lower cost but at the expense of responsiveness. The goal of good supply chain design is to find the right form,
location, and quantity of inventory that provides the right level of responsiveness at the lowest possible cost.

# Components of Inventory Decisions:

i. Cycle Inventory: It is the average amount of inventory used to satisfy demand between receipts of supplier shipments. The size of the cycle
inventory is a result of the production, transportation, or purchase of material in large lots.
ii. Safety Inventory: It is the inventory held, in case demand exceeds expectation; it is held to counter uncertainty. Managers face a key decision
when determining how much safety inventory to hold.
iii. Seasonal Inventory: It is built up to counter predictable seasonal variability in demand. Companies using seasonal inventory build up inventory
in periods of low demand and store it for period of high demand when they will not have the capacity to produce all that is demanded.
iv. Level of Product Availability: It is the fraction of demand that is served on time from product held in inventory. A high level of product
availability provides a high level of responsiveness but increases cost because much inventory is held but rarely used.
v. Inventory-Related Metrics: Inventory-related decisions affect the costs of goods sold, the cash-to-cash cycle, and the assets held by the supply
chain and its responsiveness to customers.

3. Transportation: Transportation entails moving inventory form point to point in the supply chain. Transportation can take the form of many combinations of
mode and routes, each with its own performance characteristics. Transportation choices have large impact on supply chain responsiveness and efficiency.
For example, a mail-order catalog company can use a faster mode of transportation such as FedEx to ship products, thus making its supply chain more
responsiveness, but also less efficient given the high costs associated with using FedEx, McMaster-Carr and W.W. Grainger, however, have structured their
supply chain to provide next-day service to most of their customers using ground transportation. They are providing a high level of responsiveness at lower
costs. Outbound transportation costs of shipping to the customer are typically included in selling, general, and administrative expense, while inbound
transportation costs are typically included in the cost of goods sold.
# Role in Supply Chain:
Transportation moves product between different stages in a supply chain and impacts both responsiveness and efficiency. Faster transportation
allows a supply chain to be more responsive but reduces its efficiency. The type of transportation allows a supply chain to be more responsive but reduces its
efficiency. The type of transportation a company uses also affects the inventory and facility location in the supply chain. Dell, for example, flies some
components from Asia because doing so allows the company to lower the level of inventory it holds. Clearly, such a practice also increases responsiveness
but decreases transportation efficiency because it is more costly than transporting parts by ship.

# Role in the Competitive Strategy:

 Transportation allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency.
A firm selling high-value items such as pacemakers may use rapid transportation to be responsive while centralizing its facilities and inventory to lower cost.
In contrast, a firm selling low-value, high demand items like light bulbs may carry a fair amount of inventory close to the customer but then use low-cost
transportation like sea, rail, and full trucks to replenish this inventory from plants located in low-cost countries.

# Components of Transportation Decisions:

i. Design of Transportation Network: The transportation network is the collection of transportation modes, locations, and routes along which
product can be shipped. Design decisions also include whether or not multiple supply chain or demand points will be included in a single run.
ii. Choice of Transportation Mode: The mode of transportation is the manner in which a product is moved from one location in the supply chain
network to another. Companies can choose among air, truck, rail, sea, and pipeline as modes of transport for products.
iii. Transportation-Related Metrics: Inbound transportation decisions impact the cost of goods sold while outbound transportation costs are part
of the selling, general, and administrative expenses. Thus, transportation costs affect the profit margin.
iv. Overall Trade-Off: Responsiveness Versus Efficiency: The fundamental trade-off for transportation is between the cost of transporting a
given product (efficiency) and the speed with which that product is transported (responsiveness). Using fast modes of transport raises
responsiveness and transportation cost but lowers the inventory holding costs.

4. Information: Information consists of data and analysis concerning facilities, inventory, transportation, costs, process, 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. For example, Seven-Eleven Japan has used
information to better match supply and demand while achieving production and distribution economies. The result is a high level of responsiveness to
customer demand while production and replenishment costs are lowered. Information technology-related expenses are typically included under either
operating expense (typically under selling, general, and administrative expense) or assets. For example, in 2009, Amazon included $1.24 billion in
technology expense under operating expenses and another $551 million under fixed assets to be depreciated.
# Role in the Supply Chain:
Good information can help improve the utilization of supply chain assets and the coordination of supply chain flows to increase responsiveness
and reduce costs. The connections between the various stages in the supply chain allow coordination between stages. Information plays crucial to daily
operation of each stage in a supply chain- e.g. production scheduling, inventory levels. Information can be used to improve product availability while
decreasing inventories.

# Role in the Competitive Strategy:

The right information can help a supply chain better meet customer needs at lower cost. The appropriate investment in information technology
improves visibility of transactions and coordination of decisions across the supply chain. Coordination is essential if all stages of the supply chain are to
work together toward a common goal. The goal in general should be to share the minimum amount of information required to achieve coordination because,
beyond a certain point, the marginal cost of handling additional information increases, whereas the marginal benefit from the additional information
decreases.

# Components of Information Decision:

i. Push versus Pull: When designing process of the supply chain, managers must determine whether these processes are part of the push or pull
phase in the chain. Push systems start with forecast whereas pull systems require information on actual demand to be transmitted in the entire
chain.
ii. 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.
iii. Sales and Operations Planning: Sales and operation planning is the process of creating an overall supply plan (production and inventories) to
meet the anticipated level of demand (sales). The S&OP process starts with sales and marketing communicating their needs to the supply chain.
iv. Enabling Technologies: many technologies exist to share and analyze information in the supply chain. Managers must decide which
technologies to use and how to integrate them into their supply chain.

5. 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 outsources. Sourcing decisions
affect both the responsiveness and efficiency of a supply chain. After Motorola outsourced much of its production to contract manufactures in China, it saw
its efficiency improve but its responsiveness suffer because of the long distances. To make up for the drop in responsiveness. Motorola started flying some of
its cell phones from China even through the choice increased transportation costs.
# Role in the Supply Chain: Sourcing is the set of business processes required to purchase goods and services. Managers must first decide whether each
task will be preformed by a responsive or efficient source and then whether the source will be internal to the company or a third party. As supply chains have
globalized, many mores sourcing options now offer both considerable opportunity and potential risks. Thus, sourcing decisions have a significant impact on
supply chain performance.
# Role in the Competitive Strategy: Sourcing decisions are crucial because they affect the level of efficiency and responsiveness the supply chain can
achieve. In some instance, firms outsource to responsive third parties it is too expensive for them to develop this responsiveness on their own. In other
instances, firms have kept the responsive process in-house to maintain control. Firms also outsource for efficiency if the third party can achieve significant
economics of scale or has a lower underlying cost structure for other reasons.

# Components of Sourcing Decisions:

i. In-House or Outsource: The most significant sourcing decision for a firm is whether to perform a task in-house or outsource it to third party.
Within a task such as transportation, managers must decide whether to outsource all of it, outsource only the responsive component, or
outsource only the efficient component. It is best to outsource if the growth in the total supply chain surplus is significant with little additional
risk.
ii. Supplier Selection: Managers must decide on the number of suppliers they will have for a particular activity. They must then identify the
criteria along which supplier will be evaluated and how they will be selected.
iii. Procurement: Procurement is the process of obtaining goods and services within a supply chain. Managers must structure procurement with a
goal of increasing supply chain surplus. For example, a firm should set up procurement for direct material to ensure good coordination between
the supplier and buyer.
iv. Sourcing-Related Metrics: Sourcing decisions directly impact the costs of goods sold and accounts payable. The performance of the source
also impacts quality, inventories, and inbound transportation costs.
v. Overall Trade-Off: Increases the Supply Chain Surplus: Sourcing decisions should be made to increase the size of the total surplus to be
shared across the supply chain. The total surplus is affected by the impact of sourcing on sales, service, production costs, transportation costs,
and information costs. In contrast, a firm should keep a supply chain function in-house if the third part cannot increase the supply chain surplus
or if the risk associated with outsourcing is significant.

6. Pricing: Pricing determines how much a firm will charge for the goods and services that it makes available in the supply chain. Pricing affects the behavior
of the buyer of the goods or service, thus affecting supply chain performance. For example, if a transportation company varies its charges based on the lead
time provided by the customers, it is likely that customer who value efficiency will order early and customers who value responsiveness will be willing to
wait and order just before they need a product transported. Differential pricing provides responsiveness to customers that value it and low cost to customers
that do not value responsiveness as much. Any change in pricing impacts revenues directly-but could also affect costs based on the impact of this change on
the other drivers.
 # Role in the Supply Chain:
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. This 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 especially when the supply
chain is not very flexible. In short, pricing is one of the most significant factors that affect the level and type of demand the supply chain will face.
# Role in the Competitive Strategy:
Pricing is a significant attribute through which a firm executes its competitive strategy. Some manufacturing and transportation firms use
pricing that varies with the response time desired by the customer. Through their pricing, these firms are targeting a broader set of customers, some of whom
need responsiveness while others need efficiency. In this case, it becomes important for these firms to structure a supply chain that can meet the two
divergent needs. Amazon uses a menu of shipping options and prices to identify customers who value responsiveness and those who value low cost.

# Components of Pricing Decisions:

i. Pricing and Economics of Scale: Most supply chain activities display economics of scale. Changeovers make small production runs more
expensive per unit than large production runs. Loading and unloading costs make it cheaper to deliver a truckload to one location than four. In
each case, the provider of supply chain activity must decide how to price it appropriately to reflect these economies of scale.
ii. Everyday Low Pricing versus High-Low Pricing: A firm such as Costco practices everyday low pricing at its warehouse stores, keeping
prices steady over time. Costco will go to the extent of not offering any discount on damaged books to ensure its everyday low-pricing strategy.
In contrast, most supermarkets practice high-low pricing and offer steep discounts on subsets of their product every week.
iii. 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 attribute, such as the response time or location of delivery. If marginal supply chain costs or the value to the
customers vary significantly along some attribute, it is often effective to have a pricing menu. The pricing policy thus can lead to customer
behavior that has a negative impact on profits.
iv. Pricing-Related Metrics: Pricing directly affects revenues but can also affect production costs and inventories depending upon its impact on
consumer demand. A manager should track pricing related metrics like- profit margin, days sales outstanding, average sale price, average order
size, incremental fixed cost per order, incremental variable cost per unit, range of sale price, and range of periodic sales.

# Framework for Structuring Drivers:

 The combined impact of these drivers determines responsiveness and efficiency of the entire supply chain.
 Supply chain determines how the supply chain should perform with respect to efficiency and responsiveness.
 Supply chain uses the supply chain drivers to reach the performance level the supply chain strategy dictates