Supply Chain Management

Chapter 3

Supply Chain Drivers and
Metrics

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Outline
• Drivers of supply chain performance
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing

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Drivers of Supply Chain
Performance
• 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
• Information
• data and analysis regarding inventory, transportation, facilities throughout
the supply chain
• potentially the biggest driver of supply chain performance
• Sourcing
• functions a firm performs and functions that are outsourced
• Pricing
• Price associated with goods and services provided by a firm to the supply
chain
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A Framework for

Structuring Drivers

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Facilities
• Role in the supply chain
If we think of inventory aswhat is being passed along the supply chain and transportation ashow it is
passed along, then facilities are thewhere 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.

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Components of Facilities Decisions
Role:
• Firms must decide whether production facilities will be flexible, dedicated, or a
combination of the two. Flexible capacity can be used for many types of products
but is often less efficient, whereas dedicated capacity can be used for only a
limited number of products but is more efficient.
• Firms must also decide whether to design a facility with a product focus or a
functional focus. A product-focused facility performs all functions (e.g.,
fabrication and assembly) needed for producing a single type of product. A
functional-focused facility performs a given set of functions (e.g., fabrication or
assembly) on many types of products
Location
• Deciding where a company will locate its facilities constitutes a large part of the
design of a supply chain. A basic trade-off here is whether to centralize in order to
gain economies of scale or to decentralize to become more responsive by being
closer to the customer..
Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions

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Inventory
Role in the Supply Chain
• Inventory exists because of a mismatch between
supply and demand
• Source of cost and influence on responsiveness
Role in the competitive strategy
• 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

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Components of Inventory Decisions
• Cycle inventory: 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. Companies produce or purchase in large lots to exploit economies
of scale in the production, transportation, or purchasing process. With the increase in lot size,
however, comes an increase in carrying costs. (to meet normal demand, regular sales order)
• Safety inventory: is inventory held in case demand exceeds expectation; it is held to counter
uncertainty. If the world were perfectly predictable, only cycle inventory would be needed. Because
demand is uncertain and may exceed expectations, however, companies hold safety inventory to
satisfy an unexpectedly high demand. Managers face a key decision when determining how much
safety inventory to hold.

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Components of Inventory Decisions
• Seasonal inventory: 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
periods of high demand when they will not have the capacity to produce all that is demanded.
Managers face key decisions in determining whether to build seasonal inventory, and if they do build
it, in deciding how much to build. If a company can rapidly change the rate of its production system
at very low cost, then it may not need seasonal inventory, because the production system can adjust
to a period of high demand without incurring large costs
• Level of product availability 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. In contrast, a low level of product availability
lowers inventory holding cost but results in a higher fraction of customers who are not served on
time
• Overall trade-off: Responsiveness versus efficiency
• more inventory: greater responsiveness but greater cost
• less inventory: lower cost but lower responsiveness
Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions

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Information: Role in

the Supply Chain
• 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
• Good information can help improve the utilization of supply
chain assets and the coordination of supply chain flows to
increase responsiveness and reduce costs.

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Information:

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.

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Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions

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Sourcing: 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 performed by a responsive or efficient
source and then whether the source will be
internal to the company or a third party.

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Sourcing: 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 if it is too expensive for them to
develop this responsiveness on their own.
• An example is the outsourcing of next-day package
delivery by all firms to a few package carriers because it
is too expensive for a firm to develop next-day delivery
capability on its own
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Components of Sourcing Decisions
• In-house versus 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. 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.
• Supplier evaluation and selection
Managers must decide 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.
• 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 materials to ensure good coordination between the
supplier and buyer.
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Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions

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Pricing: 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.

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pricing: Role in the Competitive Strategy
• Pricing is a significant attribute through which a firm
executes its competitive strategy.
• For example, Costco, a membership-based wholesaler
in the United States, has a policy that prices are kept
steady but low. Customers expect low prices but are
comfortable with a lower level of product availability.
The steady prices also ensure that demand stays
relatively stable

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Components of Pricing Decisions
• Pricing and economies of scale:
Most supply chain activities display economies 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 the supply
chain activity must decide how to price it appropriately to reflect these economies of scale.
• Everyday low pricing versus high-low pricing:
Everyday low price (EDLP) is a pricing strategy promising consumers a low price without the
need to wait for sale price events or comparison shopping. .High–low pricing (or hi–low pricing)
is a type of pricing strategy adopted by companies, usually small and medium-sized retail firms,
where a firm initially charges a high price for a product and later, when it has become less
desirable, sells it at a discount or through clearance sales.
• 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.
• Overall trade-off: Increase the firm profits
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