Mgt5309_ch03

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3-1 © 2007 Pearson Education

Objectives of Chapters1, 2, 3Building a Strategic Framework to Analyze a SC:

(Ch1,2,3)– Ch1 Define SC, expresses correlation betweenSC decisions and a firms performance.

– Ch2 Relationship between SC strategy andCompetitive strategy, and the concept of strategicfit,

– Ch3 SC drivers and performance metrics

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© 2007 Pearson Education 3-2

Chapter 3

Supply Chain Drivers and Metrics

Supply Chain Management(3rd Edition)

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Outline

Drivers of supply chain performance

A framework for structuring driversFacilitiesInventoryTransportationInformation

SourcingPricingObstacles to achieving fit

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Drivers of Supply Chain PerformanceThree logistical drivers:– Facilities

» places where inventory is stored, assembled, or fabricated» Two major types: production sites and storage sites» Decision regarding their role, location, capacity and flexibility have

to be made– Inventory

» raw materials, WIP, finished goods within a supply chain» inventory policies have to be decided

– Transportation

» moving inventory from point to point in a supply chain» Many combinations of transportation modes and routes

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Drivers of Supply Chain PerformanceThree cross-functional drivers:– Information

» data and analysis regarding inventory, transportation, facilitiesthroughout 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 thesupply chain

» Affect the behavior of the buyer

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Drivers of Supply Chain Performance

Cross-functional drivers have become moreimportant in increasing the SC surplus.These drivers do not act independently but interactwith each other to determine the overall SCperformance.Drivers have to be structured appropriately to providethe desired level of responsiveness/efficiency.

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A Framework forStructuring Drivers

Com petitive Strategy

Supp ly ChainStrategy

Efficiency Responsiveness

Facilities Invento ry Transporta tion

Info rm ation

Sup ply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

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Facilities

Role in the supply chain

Role in the competitive strategyComponents of facilities decisions

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Facilities

Role in the supply chain– the “where” of the supply chain– Location to and from which inventory is transported– manufacturing or storage (warehouses)

Role in the competitive strategy– economies of scale (efficiency priority)– larger number of smaller facilities (responsiveness priority)

Example 3.1: Toyota and Honda

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Components of Facilities DecisionsRole

– Production facilities: Flexible vs. dedicated, Product focusedvs. functional focused.

– Warehouses and DCs: Cross-docking vs. Storage facilities

Location– centralization (efficiency) vs. decentralization (responsiveness)– other factors to consider (e.g., macroeconomic factors, quality

of workers, cost of facility, availability of infrastructure, tax

effects…)Capacity (flexibility versus efficiency)Overall trade-off: Responsiveness versus efficiency

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InventoryRole in the supply chain

Role in the competitive strategyComponents of inventory decisions

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Inventory: Role in the Supply ChainInventory exists because of a mismatch between

supply and demandSource of cost and influence on responsivenessImpact on

– material flow time: time elapsed between when materialenters the supply chain to when it exits the supply chain

– throughput» rate at which sales to end consumers occur» I = DT (Little’s Law)» I = inventory; D = throughput; T = flow time» Example

» Inventory and flow time are “synonymous” in a supply chain

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Inventory: Role in CompetitiveStrategy

If responsiveness is a strategic competitive priority, a

firm can locate larger amounts of inventory closer tocustomersIf cost is more important, inventory can be reduced to

make the firm more efficientTrade-off Example 3.2 – Nordstrom

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Components of InventoryDecisions

Cycle inventory– Average amount of inventory used to satisfy demand between shipments

– Depends on lot size– Trade-off between ordering cost and cost of holding large inventory.

Safety inventory– inventory held in case demand exceeds expectations, to counter uncertainty.– costs of carrying too much inventory versus cost of losing sales

Seasonal inventory– inventory built up to counter predictable variability in demand– cost of carrying additional inventory versus cost of flexible production

Level of Product Availability– Fraction of demand that is served on time from product held in inventory

Overall trade-off: Responsiveness versus efficiency– more inventory: greater responsiveness but greater cost– less inventory: lower cost but lower responsiveness

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Transportation: Role inthe Supply Chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiencyFaster transportation allows greater responsivenessbut lower efficiencyAlso affects inventory and facilitiesDell example

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Transportation:Role in the Competitive StrategyIf responsiveness is a strategic competitive priority,

then faster transportation modes can provide greaterresponsiveness to customers who are willing to payfor it

Can also use slower transportation modes forcustomers whose priority is price (cost)Can also consider both inventory and transportation to

find the right balanceExample 3.3: Laura Ashley

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Components ofTransportation Decisions

Mode of transportation selection

– air, truck, rail, ship, pipeline, electronic transportation– vary in cost, speed, size of shipment, flexibility

Route and network design– network: collection of transportation modes, locations and routes

– route: path along which a product is shipped– Direct supply vs. intermediate consolidation points– Supply and Design points to be included in a single run– Set of transportation modes to be used

In-house or outsourceOverall trade-off: Responsiveness versus efficiency

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InformationRole in the supply chain

Role in the competitive strategyComponents of information decisions

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Information: Role inthe Supply Chain

The connection between the various stages in the

supply chain – allows coordination between stagesCrucial to daily operation of each stage in a supplychain – e.g., production scheduling system, warehouse

mgt system

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Information:Role in the Competitive StrategyAllows supply chain to become more efficient and

more responsive at the same time (reduces the needfor a trade-off)Information technology

What information is most valuable?Example 3.5: Dell

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Components of InformationDecisions

Push (MRP) versus pull (demand information transmittedquickly throughout the supply chain)Coordination and information sharingForecasting and aggregate planningEnabling technologies– EDI– Standards to electronically exchange info between and within

businesses– Internet communication between and within stages of the SC– ERP systems—real time transactional tracking within and across SC

stages– Supply Chain Management software—Analytical decision support of

information from ERP– RFID–a RF tag applied to items for tracking

Overall trade-off: Responsiveness versus efficiency

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SourcingRole in the supply chain

Role in the competitive strategyComponents of sourcing decisions

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Sourcing: Role inthe Supply Chain

Set of business processes required to purchase goods

and services in a supply chainSupplier selection, single vs. multiple suppliers,selection criteria, contract negotiation

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Sourcing:Role in the Competitive StrategySourcing decisions are crucial because they affect the

level of efficiency and responsiveness in a supplychainIn-house vs. outsource decisions- improving

efficiency and responsivenessExample 3.6: Cisco

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Components of SourcingDecisions

In-house versus outsource decisions

Supplier evaluation, selection and negotiationProcurement processOverall trade-off: Increase the supply chain profitswith little risk

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PricingRole in the supply chain

Role in the competitive strategyComponents of pricing decisions

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Pricing: Role inthe Supply Chain

Pricing determines the amount to charge customers

for goods and servicesPricing strategies can be used to match demand andsupply

Pricing affects significantly the level and type ofdemand that the SC will face.

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Sourcing:Role in the Competitive StrategyFirms can utilize optimal pricing strategies to improve

efficiency and responsivenessLow and steady price and low product availability;varying prices by response times

Example 3.7: Amazon

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Components of Pricing DecisionsPricing and economies of scale

Everyday low pricing versus high-low pricingFixed price versus menu pricingOverall trade-off: Increase the firm profits

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Wal-Mart ExampleCompetitive strategy: Wal-Mart aims to be a reliable, low-costretailer for a wide variety of mass-consumption goods.SC strategy: Efficiency with an adequate level of responsiveness.Inventory: low level of inventory through cross-docking

efficiency

Transportation: Wal-Mart runs its own fleet responsiveness.Facilities: Centrally located DCs within its network of storesEfficiency.Information: Large investment to share information across the SC

all the way to the suppliers Responsiveness and Efficiency.Sourcing: Different sources for different product Efficiencythrough economies of scale.Pricing: EDLP Low variability in demand, enable efficiency.

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Obstacles to AchievingStrategic Fit

Increasing variety of products

Decreasing product life cyclesIncreasingly demanding customersFragmentation of supply chain ownershipGlobalizationDifficulty executing new strategies

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SummaryWhat are the major drivers of supply chain

performance?What is the role of each driver in creating strategic fitbetween supply chain strategy and competitive strategy

(or between implied demand uncertainty and supplychain responsiveness)?What are the major obstacles to achieving strategic fit?

In the remainder of the course, we will learn how tomake decisions with respect to these drivers in order toachieve strategic fit and surmount these obstacles

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Case Study: Seven-Eleven Japan Co.1. A CONVENIENCE STORE CHAIN ATTEMPTS TO BE RESPONSIVE AND

PROVIDE CUSTOMERS WHAT THEY NEED, WHEN THEY NEED IT,

WHERE THEY NEED IT. WHAT ARE SOME DIFFERENT WAYS THAT ACONVENIENCE STORE SUPPLY CHAIN CAN BE RESPONSIVE? WHATARE SOME RISKS IN EACH CASE?

2. SEVEN-ELEVEN'S SUPPLY CHAIN STRATEGY IN JAPAN CAN BEDESCRIBED AS ATTEMPTING TO MICRO-MATCH SUPPLY ANDDEMAND USING RAPID REPLENISHMENT. WHAT ARE SOME RISKSASSOCIATED WITH THIS CHOICE?

3. WHAT HAS SEVEN-ELEVEN DONE IN ITS CHOICE OF FACILITYLOCATION, INVENTORY MANAGEMENT, TRANSPORTATION, ANDINFORMATION INFRASTRUCTURE TO DEVELOP CAPABILITIES THATSUPPORT ITS SUPPLY CHAIN STRATEGY IN JAPAN?

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Case Study: Seven-Eleven Japan Co.4. SEVEN-ELEVEN DOES NOT ALLOW DIRECT STORE DELIVERY IN JAPAN, WITH

ALL PRODUCTS FLOWING THROUGH ITS DISTRIBUTION CENTER. WHATBENEFIT DOES SEVEN-ELEVEN DERIVE FROM THIS POLICY? WHEN IS DIRECT

STORE DELIVERY MORE APPROPRIATE?

5. WHAT DO YOU THINK ABOUT THE 7DREAM CONCEPT FOR SEVEN-ELEVENJAPAN? FROM A SUPPLY CHAIN PERSPECTIVE IS IT LIKELY TO BE MORESUCCESSFUL IN JAPAN OR THE UNITED STATES? WHY?

6. SEVEN-ELEVEN IS ATTEMPTING TO DUPLICATE THEIR SUCCESSFUL JAPANESESUPPLY CHAIN STRUCTURE IN THE UNITED STATES WITH THEINTRODUCTION OF CDCS. WHAT ARE THE PROS AND CONS OF THISAPPROACH? KEEP IN MIND THAT STORES ARE ALSO REPLENISHED BYWHOLESALERS AND DSD BY MANUFACTURERS.

7. THE UNITED STATES HAS FOOD SERVICE DISTRIBUTORS LIKE MCLANE THATALSO REPLENISH CONVENIENCE STORES. WHAT ARE THE PROS AND CONS TOHAVING A DISTRIBUTOR REPLENISH CONVENIENCE STORES VERSUS ACOMPANY LIKE SEVEN-ELEVEN MANAGING ITS OWN DISTRIBUTIONFUNCTION?

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