Chapter 3

Supply Chain Drivers and

Obstacles

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Drivers of Supply Chain Performance
Competitive Strategy

Supply Strategy
Efficiency Responsiveness

Supply chain structure

Inventory Transportation Facilities

Logistical Drivers
Information Sourcing Pricing

Cross functional Drivers

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Logistical 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

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 Cross Functional Drivers of
Supply Chain Performance
• Information
– Data and analysis regarding inventory, transportation,
facilities throughout the supply chain
– Potentially the biggest driver of supply chain
performance
• Sourcing
– The choice of who will perform a particular supply
chain activity.
• Pricing
– Determines how much a firm will charge for goods and
services .
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 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 are almost always necessary.

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 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
• Level of product availability
– It is the 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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 Inventory: Role in the Supply Chain

• Inventory exists because of a mismatch between

supply and demand and for economic sizing.
• 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 time

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 Inventory Related Metrics
• Average inventory • Average safety inventory

• Products with more than • Seasonal inventory

a specified number of
days of inventory • Fill rate

• Average replenishment • Fraction of time out of

batch size stock

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 Transportation: Role in 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.
• Efficiency, use slower transportation modes for
customers, strategies whose priorities are price
(cost).
• How to best balance inventory, facilities, and
transportation?

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Components of Transportation 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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 Transportation related metrics
• Average inbound • Average outbound
transportation cost shipment size
• Average incoming
• Average outbound
shipment size
transportation cost per
• Average inbound shipment
transportation cost per
shipment • Fraction transported
by mode
• Average outbound
transportation cost per
shipment
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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)

• 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)

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 Facility related metrics
• Capacity • Volume contribution
of top 20 percent
• Utilization SKUs and customers
• Theoretical flow/cycle • Processing/setup/down
time of production /idle time
• Actual average
• Average production
flow/cycle time
batch size
• Flow time efficiency
• Production service
• Product variety level
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 Information
• 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.
• More Timely Information reduces variations and
forecast errors.
• Reduces the Bullwhip effect.
• Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a
trade-off).
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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.
• Pricing and revenue management
• Enabling technologies:
– EDI
– Internet
– ERP systems
– Supply Chain Management software
– RFID
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Overall trade-off: Responsiveness
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versus efficiency.
16
 Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Min cost of holding and Max.
transportation availability
Transportation Consolidation/bulk Speed
shipments
Facilities Consolidation/dedicated Proximity/Flexi
bility
Information Information best suited for each objective

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 Information related Metrics
• Forecast horizon • Seasonal factors
(Extent to which avg.
• Frequency update demand in a season is
above or below avg. in
the year)
• Forecast error
• Variance of plan

• Ratio of demand
variability to order
variability

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 Sourcing

• Components of Sourcing Decision

– In-house or Outsource

– Supplier selection

– Procurement

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 Sourcing related Metrics
• Days payable • Average purchase
outstanding quantity

• Average purchase • Fraction on-time

price deliveries

• Range of purchase • Supply lead time

price

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 Pricing
• Components of pricing decision

– Pricing and economies of scale

– Everyday low pricing versus High low

pricing

– Fixed price versus menu pricing

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 Pricing related metrics
• Profit margin • Average sales price

• Days sales outstanding • Average order size

• Incremental fixed cost • Range of sales price

per order
• Range of periodic
• Incremental variable sales
cost per order

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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
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 Major Obstacles to Achieving Fit
• Multiple owners / incentives in a supply chain

Local optimization and lack of global fit

• Increasing product variety / shrinking life

cycles / customer fragmentation

Increasing implied uncertainty

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 Trade-offs within each driver are summarized
in the table:
Driver More Responsive More Efficient
Facilities Multiple Plants Single Plant
Flexible Plants Dedicated Plant
Inventory Higher Inventory Lower Inventory
Transportation Higher Speed Lower Speed
Information Accurate Less Accurate
Real Time Transmission Batched Transmission
Sourcing Responsive supplier Efficient supplier

Pricing Differential Pricing Everyday Low Pricing

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 SUPPLY CHAIN
MANAGEMENT

Designing Distribution Networks

and applications to E-business

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 Outline
• The Role of Distribution in the Supply Chain
• Factors Influencing Distribution Network
Design
• Design Options for a Distribution Network
• The Value of Distributors in the Supply Chain
• E-business and the distribution network
• Distribution Networks in Practice
• Summary of Learning Objectives

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The Role of Distribution in Supply Chain
• Distribution: the steps taken to move and store a
product from the supplier stage to the customer
stage in a supply chain
• Distribution directly affects cost and the customer
experience and therefore drives profitability
• Choice of distribution network can achieve supply
chain objectives from low cost to high
responsiveness
• Examples: Wal-Mart, Dell, Proctor & Gamble,
Grainger
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 Factors Influencing
Distribution Network Design (DND)
• Distribution network performance evaluated along
two dimensions at the highest level:
– Customer needs that are met
– Cost of meeting customer needs

• Distribution network design options must

therefore be compared according to their impact
on customer service and the cost to provide this
level of service
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 Factors Influencing DND
• Elements of customer service influenced by network
structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Returnability

• Supply chain costs affected by network structure:

– Inventories
– Transportation
– Facilities and handling
– Information

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 Service and Number of Facilities
Number of
Facilities

Response Time
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 Inventory Costs and Number
of Facilities
Inventory
Costs

Number of facilities
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 Transportation Costs and
Number of Facilities
Transportation
Costs

Number of facilities
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 Facility Costs and Number
of Facilities
Facility
Costs

Number of facilities
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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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 Variation in Logistics Costs and
Response Time with Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
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