Ssscmmodule 1-4th sem

Supply Chain Drivers and Obstacles

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Supply Chain Management

Outline• Drivers of supply chain performance• A framework for structuring drivers• Facilities• Inventory• Transportation• Information• Sourcing• Pricing• Obstacles to achieving fit

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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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Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

Facilities

It is the place where utility is added to convert the inputs ( to outputs) for instance inventory is either processed to another form or stored before being transported or delivered to the next partner of the chain . A facility of a SC may be factory warehouse or a retail store. Decisions regarding the location of the facilities (plant), their capacity and the flexibility of the facilities have a major impact on the performance of the SC for Ex. An automobile firm can locate its spare parts distributors and service centers close to customers to increase responsiveness at the cost of efficiency .On, the contrary, fewer spare parts distributors and service centers may increase the efficiency of the SC network at the cost of its responsiveness

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

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

priority)• Example : Toyota and Honda• Components of facilities decisions

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Components of Facilities Decisions• Location– centralization (efficiency) vs. decentralization

(responsiveness)– other factors to consider (e.g., proximity to customers)

• Capacity (flexibility versus efficiency)• Manufacturing methodology (product focused

versus process focused)• Warehousing methodology (SKU storage, job lot

storage, cross-docking)• Overall trade-off: Responsiveness versus efficiency

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Facility –Related Metrics• A manager should track the following facility related metrics

that influence SC performanceThey are• Capacity• Utilization• Theoretical flow/cycle time of production• Actual flow cycle time• Flow time efficiency• Product Variety• Volume contribution of top 20% SKU’s and customers• Processing/Set up/down/idle time• Average production Batch Size• Production Service level

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Overall Tradeoffs• Facilities driversIncrease efficiency Efficiency1) Low no of facilities2) Centralized facilities3) Minimal amounts of excess

capacity4) Single product focusIncrease Effectiveness4) High no of facilities5) DeCentralized facilities6) Large amounts of excess

capacity4) Multiple product focus Responsiveness

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Inventory

• All raw materials ,WIP and finished goods within a SC are referred to as inventory , any change in inventory policies can greatly effect the efficiency and responsiveness of the SC. Decisions such as how much to store and where to store (in the firm’s premises or warehouse or at the retailer’s premises) For Ex. A retailer can quickly meet a customer demand by a maintaining a large inventory of an item but it will increase the retailer’s cost ,thereby affecting its efficiency even though the responsiveness has increased. On the contrary, reducing inventory will increase the retailer’s efficiency but will affect its responsiveness

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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• 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 timeExample• Inventory and throughput are “synonymous” in a supply chain3-12

Inventory: Role in 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

• Trade-off• Example – Nordstrom 3-13

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 predictable variability in demand– cost of carrying additional inventory versus cost of flexible production

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

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Inventory related -Metrics

• Average inventory• Products with more than a specified no of

days of inventory• Average replenishment batch size• Average safety inventory• Seasonal Inventory• Fill rate• Fraction of time out of stock

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Overall Tradeoffs

• Inventory driversIncrease efficiency1) Maintain low levels of inventory Efficiency 2) Single inventory storage location

Increase Effectiveness

1)Maintain high levels of inventory 2)Multiple inventory storage location Responsiveness

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Transportation


strategy• Components of transportation

decisions

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Transportation: Role inthe Supply Chain

• Moves the product between stages in the supply chain• Impact on responsiveness and

efficiency• Faster transportation allows greater

responsiveness but lower efficiency• Also affects inventory and facilities

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Transportation

• Inventory has to be moved from point to point in the SC using transportation facilities taking the form of many combinations of modes(multi modal) and routes, each having its own performance characteristics .

• The responsiveness and efficiency of the SC is significantly affected by the choice of transportation modes and routes (affecting the speed and cost of transportation).

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Transportation

• Hence decisions regarding issues related to how to move a product from one location to another and by what mode of transportation that are usually trade-off decisions. It is necessary to evaluate economies on one hand and desired level of customer on the other. It is concerned with movement of the product between different stages of the SC.

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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

• Example 3.3: Laura Ashley3-21

Components ofTransportation Decisions

• 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

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Overall Tradeoffs• Transportation driversIncrease efficiency1) Reduced speed of delivery Efficiency 2) Reduced cost of delivery 3) Ship products to a distributor


4) Increased speed of delivery 5) Increased cost of delivery3) Ship products directly to a customer Responsiveness

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Information: Role inthe 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

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Information

• Information consist of data and analysis regarding inventory , facilities ( location, capacity etc) , transportation and customers through out the SC. Information affects each of the other drivers and hence is the biggest driver of the SC performance. The information is helpful in making the SC more efficient and responsive at the same time for Ex. Information regarding the demand pattern results in the more accurate forecast of demand, which in turn will enable a firm to produce the required quantity of the product at the right time to meet customer demand .This makes the SC more responsive and yet efficient. 3-25

Information


strategy• Components of information

decisions

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Information: Role in the Competitive Strategy

• Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off)

• Information technology• What information is most valuable?• Example : Andersen Windows• Example : Dell

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Components of Information Decisions• Push (MRP) versus pull (demand information

transmitted quickly throughout the supply chain)• Coordination and information sharing• Forecasting and aggregate planning• Enabling technologies– EDI– Internet– ERP systems– Supply Chain Management software

• Overall trade-off: Responsiveness versus efficiency

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Overall Tradeoffs

• Transportation driversIncrease efficiency1) Openly shares information with all Efficiency individuals2) Pull information strategyIncrease Effectiveness

2) Selectively shares certain information with certain individuals3) Push information strategy Responsiveness

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Sourcing

• It is the choice of who will perform a particular SC activity such as production,storage, transportation or the MIS. At the strategic level ,these decisions determine what functions a firm performs and what function the firm outsources. Sourcing decision affects both the responsiveness and efficiency of the SC. Ex. Motorla outsourced much of its production to contract manufacturers in China, it saw its efficiency improve but its responsiveness suffered because of long distances. To overcome this, Motorla started flying in some of its cell phones from China but at the cost of transportation (that increased the cost) 3-30

Sourcing


strategy• Components 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 chain• Supplier selection, single vs.

multiple suppliers, contract negotiation

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Sourcing: Role in the Competitive Strategy

• Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain

• In-house vs. outsource decisions- improving efficiency and responsiveness

• Example : Cisco

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Components of Sourcing Decisions

• In-house versus outsource decisions• Supplier evaluation and selection• Procurement process• Overall trade-off: Increase the supply chain

profits

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Overall Tradeoffs• Sourcing drivers

Increase efficiency Efficiency

1) Focusing on in-house processes 2) Maintaining JIT format for sourcing


2) Outsourcing the product in SC 3) Holding inventory through proper sourcing

Responsiveness3-35

Pricing• Pricing determines how much a firm will charge for

the goods and service that it makes available in the SC. Pricing affects the behaviour of the buyer of the good or service ,thus affecting SC performance . Ex. If a transportation company varies its charges based on the lead provided by the customers , it is very likely that the customers who will efficiency will order early and who value responsiveness will be willing to wait and order just before they need a product transported. Early orders are less likely if prices do not vary with the lead time.

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Pricing

•Role in the supply chain•Role in the competitive

strategy•Components of pricing

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Pricing: Role in the Supply Chain

• Pricing determines the amount to charge customers in a supply chain• Pricing strategies can be used

to match demand and supply

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Pricing: Role in the Competitive Strategy

• Firms can utilize optimal pricing strategies to improve efficiency and responsiveness• Low price and low product

availability; vary prices by response times• Example : Amazon

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Components of Pricing Decisions

• Pricing and economies of scale• Everyday low pricing versus high-low

pricing• Fixed price versus menu pricing• Overall trade-off: Increase the firm

profits

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Overall Tradeoffs• Pricing drivers

Increase efficiency Efficiency

1) *EDLP pricing that foster stable demand 2) Cost based and standard pricing format


2) Differential pricing that attracts customers 3) Demand base and variable pricing format Responsiveness

EDLP: Every day low price

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Obstacles to Achieving Strategic Fit

• Increasing variety of products• Decreasing product life cycles• Increasingly demanding customers• Fragmentation of supply chain ownership• Globalization• Difficulty executing new strategies • Refer others that is mentioned in class

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Summary

• What are the major drivers of supply chain performance?

• What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)?

• What are the major obstacles to achieving strategic fit?• In the remainder of the course, we will learn how to

make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles

Assignment : What are the metrics of other drivers?3-43

Ssscmmodule 1-4th sem

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