A company’s competitive strategy is the set of customer needs that it seeks to satisfy through its

products and services, relative to its competitors.

Supply chain strategy is a iterative process that evaluates the cost benefit trade off of operational
Components

The goal of a supply chain strategy is to strike the balance between responsiveness and efficiency that
fits with the competitive strategy.

To reach this goal, a company must structure the right combination of the three logistical and three
cross-functional drivers.

DRIVERS OF SUPPLYCHAIN PERFORMANCE:

To understand how a company can, improve supply chain performance we must examine the logistical
and cross-functional drivers of supply chain performance: facilities, inventory, transportation,
information, sourcing and pricing

These drivers interact with each other to determine the supply chain’s performance in terms of
responsiveness and efficiency.

As a result, the structure of these drivers determines if and how strategic fit is achieved across the
supply chain.

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 storages sites.

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Decision regarding the role, location, capacity, and flexibility or facilities have a significant impact on
the supply chain’s performance.

Role in the supply chain

– the “where” of the supply chain
– manufacturing or storage (warehouses)

1.10.1.2 Role in the competitive strategy

– economies of scale – Product is manufactured or stored at only one location (efficiency priority)
– larger number of smaller facilities (responsiveness priority)

Components of Facilities Decisions:

Role of the production facility:

For production facilities, firms must decide whether they 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 many different functions (e.g. fabrication and assembly) in
producing a single type of product.

A product-focused facility performs many different functions (e.g. fabrication and assembly) in
producing a single type of product.

Role of storage facility:

Storage vs. cross-docking

Location:

-centralization (efficiency) vs. decentralization (responsiveness)

– other factors to consider – quality and cost of workers, macroeconomic factors, availability and
cost of infrastructure, proximity to customers)

Facility related Metrics:

Capacity
Utilization
Production cost per unit
Theoretical flow/cycle time of production
Actual average flow
Flow time efficiency
Product variety
Processing/setup/down/idle time
Quality losses
Average production batch size
Production service level

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INVENTORY:

Inventory encompasses all raw materials, work in process, and finished goods within a supply chain.

Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness.

A large inventory increases the retailer’s cost, thereby making it less efficient. Reducing inventory
makes the retailer more efficient but hurts its responsiveness.

Role in the Supply Chain:

Inventory exists because of a mismatch between supply and demand.

o Source of cost and influence on responsiveness

o Impact on material flow time( time elapsed between when material enters the supply chain to
when it exits the supply chain
o Throughput, rate at which sales to end consumers occur
o I = DT (Little’s Law)

I = inventory; D = throughput; T = flow time

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.
Components of Inventory Decisions:
Cycle inventory:
Cycle inventory is the average amount of inventory used to satisfy demand between shipments.
Safety inventory:
Safety inventory is inventory held in case demand exceeds expectation; it is held to counter
uncertainty.

Seasonal inventory:
Seasonal inventory is built up to counter predictable variability in demand.

Level of product availability

Level of product availability is the fraction of demand that is served on time from product held in
inventory.

Inventory related metrics:

Cash-to-cash cycle time
Average inventory
Inventory turns
Products with more than a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate (order/demands met on time)
Fraction of time out of stock (Zero inventory)

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Obsolete inventory

TRANSPORTATION:
Transportation entails moving inventory from point to point in the supply chain.

Transportation can take the form of many combinations of modes and routes.

Transportation choices have a large impact on supply chain responsiveness and efficiency.

Role in the 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

1.10.3.2 Role in Competitive Stratergy:

Allows a firm to adjust the location of its facilities and inventory to find the right balance
between responsiveness and efficiency
Components of Transportation Decisions:
Mode of transportation: air, truck, rail, ship, pipeline,etc 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

transportation related Metrics:

Average inbound transportation cost
Average income shipment size
Average inbound transportation cost per shipment
Average outbound transportation cost
Average outbound shipment size
Average outbound transportation

SOURCING

Sourcing is the choice of who will perform a particular supply chain activity such as a 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.

Role in SC:

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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1.10.4.2 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

1.10.4.3 Components of Sourcing Decisions:

o In-house versus outsource decisions

o Supplier evaluation and selection
o Procurement process

1.10.4.4 Sourcing related metrics:

Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Fraction of on time deliveries
Supply quality
Supply lead time
Supplier reliability

Information:

Information consists of data and analysis concerning facilities, inventory, transportation, costs,
prices, 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.

The connection between the various stages in the supply chain – allows coordination between
stages
o Crucial to daily operation of each stage in a supply chain – e.g., production scheduling,
inventory levels
o Allows supply chain to become more efficient and more responsive at the same time

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–
RFID

Information-related metrics :
Forecast horizon
Frequency update
Forecast error
Seasonal factors
Variance from plan
Ratio of demand variability to order variability

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Pricing:

Pricing determines how much a firm will charge for goods and services that it makes available in the
supply chain.

Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain
performance.

Pricing strategies can be used to match demand and supply

Role in 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.com
1.10.6.2 Components of Pricing Decisions:
Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu pricing

1.10.6.3 Pricing related metrics:

Profit margin.
Days sales outstanding
Incremental fixed cost per unit
Incremental variable cost per unit
Average sales price
Average order size
Range of sale price
Range of periodic sales

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