Lecture BUILDING A

STRATEGIC
2 FRAMEWORK (II)
2
SUPPLY CHAIN
PERFORMANCE

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SUPPLY CHAIN PERFORMANCE
Introduction

• Where are we talking about if we talk

about supply chain performance?

• What is the relation between

strategy and supply chain
management?

• What are difficulties could

organisations face when trying to
realise strategic fit?
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SUPPLY CHAIN PERFORMANCE
Introduction
• Wal-Mart sells commonplace
products and competes on every
day low prices.

• McMaster-Carr sells car repair

products and competes on
availability, convenience, speed.

• Blue nile sells diamond jewelry via

the web and competes on variety
and low price.

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SUPPLY CHAIN PERFORMANCE
Introduction
Supply Chain strategy at Wal-Mart

Mission Provide value for our customers

Competitive priority Low prices every day

Operations
strategy Low inventories Short flow times

Operations
structure Linked systems Fast transport systems

Enabling processes
EDI/satellites Focussed
And technologies Cross-docking
locations

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SUPPLY CHAIN PERFORMANCE
The value chain in a company
• The value chain in a company:

Finance, Accounting, Information Technology, Human Resources

New product Marketing

Operations Distribution Service
development & Sales

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SUPPLY CHAIN PERFORMANCE
Strategic fit
• A strategic fit requires the overall strategy and the
supply chain strategy is aligned.

• Achieving strategic fit is realized by:

– Competitive strategy and functional strategies must fit
together
– Functions must be structured appropriately to be able
to execute their strategies successfully
– The design of the supply chain and each step must be
aligned to support the supply chain strategy

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Achieving strategic fit
• Strategic fit is realised with 3 steps:
1. Understanding the customer and supply chain
uncertainty - what are customer needs (per
segment), determine the costs and service levels,
determine the demand predictability

2. Understanding the supply chain capabilities – how is

the supply chain designed to do well

3. Achieving strategic fit – if a mismatch exist then

restructure to align the supply chain

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SUPPLY CHAIN PERFORMANCE
Achieving strategic fit: Step 1
• Understanding the customer and supply chain
uncertainty:
– The quantity needed in each lot
– The response time customers are willing to tolerate
– The variety of the products needed
– The service level required
– The price of the product
– The desired rate of innovation in the product

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SUPPLY CHAIN PERFORMANCE
Supply chain and uncertainty
• Supply chain and uncertainty:
Predictable supply Predictable supply and uncertain demand or Unpredictable supply
and demand uncertain supply and predictable demand and demand

Salt at a An existing A new communication

supermarket automobile model device

• Uncertain products:
– Are often less mature and have less direct competition
– Are difficult to forecast
– Easily results in stock-out or oversupply
– In case of oversupply could result in markdown

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SUPPLY CHAIN PERFORMANCE
Achieving strategic fit: Step 2
• Understanding the supply chain capabilities:

• Responsive means:
– Respond to wide range of quantities demand
– Meet short lead-time
– Handle a large variety of products
– Build highly innovate products
– Meet a high level of service
– Handle supply uncertainty

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Supply chain and responsiveness
• Responsiveness comes at a cost
Responsiveness

High

7/11 replenishes breakfast

products in the morning,
lunch products in the
Cost-responsive afternoon and dinner items
Efficient frontier in the night.

Low
Costs
High High

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Achieving strategic fit: Step 3
• Achieving strategic fit

• This step is to ensure that the supply chain set-up is

in line with implied uncertainty, examples:
Targets customers who expect a Responsive, more
large variety of products expensive logistics
delivered within 24 hours

Targets customers who expect Efficient, low cost

fair priced pasta available in logistics
stores.

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Achieving strategic fit: Step 3
• Supply chain and strategic fit:
Responsive
supply chain

The large scale of stores

and limited variety
Responsive
decreases the supply
spectrum
chain uncertainty.

Efficient
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum

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SUPPLY CHAIN PERFORMANCE
Expanding strategic scope
• Expanding the scope

Supplier Manufacturer Wholesale Retail

• Benefits for IKEA:

– Suppliers: Focus on producing large volumes at low
cost
– Transportation: Large quantities of high dense
(unassembled) products at low cost

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Expanding strategic scope
• Stages of expansion:
– Intra-operation scope (minimize local cost view): focus
on lowering cost per operation
– Intra-functional scope (minimize functional cost view):
focus on total cost per function
– Inter-functional scope (maximize company profit view):
focus on co-operation between conflicting functions
like marketing/sales and operations/logistics
– Inter-company scope (maximize supply chain surplus
view): focus on co-operation between all supply chain
stages

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Agile intercompany scope
• Agile intercompany scope refer to a firm’s ability to
achieve strategic fit when partnering with supply
chain stages that change over time.

Flexible interfacing with suppliers and distributors, adopting to changes

Supplier Manufacturer Wholesale Retail

Flexible interface Flexible interface

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Challenges to achieve strategic fit
• Challenges to achieve strategic fit
are:
– Increasing product variety and
shrinking of life cycles
– Globalization and increasing
uncertainty
– Fragmentation of supply chain
ownership
– Changing technology and business
environment
– The environment and sustainability

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 SUPPLY CHAIN

3 DRIVERS AND
METRICS

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SUPPLY CHAIN DRIVERS AND METRICS
Introduction

• What costs are related to supply

chain management?

• What two factors are on high level

behind every supply chain decision?

• By which drivers are these two

factors influenced?

• What metrics could you think of?

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Example
• ROE = Return on Equity
• ROA = Return on Assets
= Earnings before interest
Average total assets

• How to increase ROA?

– Growing profit margin = efficiency
• Better prices
• Reducing expenses
– Growing asset-turnover = responsiveness
• Responsive supply chain

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Financial measures of performance
• Supply chain management is about balancing
efficiency and responsiveness.

• That means: Supply chain management activities

such as planning, transportation, inventory and
warehousing clearly have a significant impact on
financial performance.

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Drivers of supply chain performance
• Drivers of supply chain performance are:
– Facilities: Production sites, storage sites. Decisions
based on: role, location and flexibility.
– Inventory: Includes all raw materials, work in progress
and finished goods.
– Transportation: Moving inventory from point to pint in
the supply chain.
– Information: Consists of data and analysis concerning
facilities, inventory, transportation, costs, prices and
customers throughout the supply chain
– >>

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Drivers of supply chain performance
• Drivers of supply chain performance are (continued):
– Sourcing: The choice who will perform a particular
activity
– Pricing: What price will be charged for goods and
services that it makes available in the supply chain

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SUPPLY CHAIN DRIVERS AND METRICS
Framework for structuring drivers
Competitive strategy

Supply chain strategy

Supply chain structure

Efficiency Responsiveness

Logistical drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross-functional drivers
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SUPPLY CHAIN DRIVERS AND METRICS
Facilities
• Facilities
– Role in the supply chain
– Role in the competitive strategy

• Components of facility decisions

– Role: flexible or dedicated
– Location: economies of scale or
close to customer
– Capacity: narrow or large band to
deviation

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SUPPLY CHAIN DRIVERS AND METRICS
Facilities related metrics
• Facilities related metrics:
– Capacity
– Utilization
– Processing/setup/idle time
– Production costs per unit
– Quality losses
– Theoretical and actual flow/cycle time
– Flow time efficiency
– Product variety
– Average production batch size
– …

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Inventory
• Inventory
– Role in the supply chain
– Role in the competitive strategy

• Components of inventory
decisions
– Cycle (average) inventory
– Safety inventory
– Seasonal inventory
– Level of product availability

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SUPPLY CHAIN DRIVERS AND METRICS
Inventory related metrics
• Inventory related metrics:
– Cash-to-cash cycle time
– Average inventory
– Inventory turns
– Products with more than a
specified number of days inventory
– Average replenishment batch size
– Average safety inventory
– Fill rate
– Fraction of time out-of-stock
– Obsolete inventory

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Transportation
• Transportation
– Role in the supply chain
– Role in the competitive strategy

• Components of transportation
decision:
– Design of transportation network
– Choice of transportation mode

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Transportation related metrics
• Transportation related metrics:
– Average inbound transportation
costs
– Average incoming shipment size
– Average inbound transportation
costs per shipment
– Average outbound transportation
costs
– Average outbound shipment size
– Average outbound transportation
costs per shipment
– Fraction transported mode
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Information
• Information:
– Role in the supply chain
– Role in the competitive strategy

• Components of information
decisions:
– Push versus pull
– Coordination and information
sharing
– Sales and operations planning
– Enabling technologies

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Information related metrics
• Information related metrics:
– Forecast horizon
– Frequency of update
– Forecast error
– Seasonal factors
– Variance from plan
– Ration of demand variability
versus to order variability

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Sourcing
• Sourcing:
– Role in the supply chain
– Role in the competitive strategy

• Components of sourcing decisions:

– In-house or outsource
– Supplier selection
– Procurement

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Sourcing related metrics
• Sourcing related metrics:
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quantity
– Supply lead-time
– Fraction on-time delivery
– Supplier reliability

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Pricing
• Pricing
– Role in the supply chain
– Role in the competitive strategy

• Components of pricing decisions:

– Pricing and economies of scale
– Everyday low pricing versus high-
low pricing
– Fixed price versus menu pricing

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Pricing related metrics
• Pricing related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sales price
– Average order size
– Range of sales price
– Range of periodic sales

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