Supply Chain Driver and Matrix

3-2

Outline
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing
• Obstacles to achieving fit
 3-3

A Framework for Structuring Drivers

Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

 3-4

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
 3-5

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
 3-6

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
Facility Related Metrics
• Capacity
• Utilization
• Processing/setup/down/idle time
• Quality losses
• Production cost/unit
• Theoretical flow/cycle time of production
• Actual average flow/cycle time
• Product variety
• Volume contribution of top 20 percent SKUs and customers
• Average production batch size
• Production service level
 3-8

Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions
Inventory
• Convenience: Cycle inventory
• -No customer buys eggs one by one
• Unstable demand: Seasonal inventory
• -Bathing suits
• -Xmas toys and computer sales
• Randomness: Safety inventory
• -20% more syllabi than the class size were
available in the first class
• -Compaq’s loss in 95
• Pipeline inventory
• -Work in process or transit
 3-10

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 time
 Example
 Inventory and throughput are “synonymous” in a supply chain
Little’s law
Long run averages = Expected values
I=R.T
I=Pipeline inventory;
R=output per time=throughput;
T=delay time=flow time

10/minute
Spend 1 minute

Flow time? Thruput? Pipeline (work in process)

Inventory?
 3-12

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
 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
Inventory Related Metrix
• C2C cycle time
• Average Inventory
• Inventory Turns
• Products with more than a specified no of days of inventory
• Average replenishment batch size
• Average safety inventory
• Seasonal inventory
• Fil rate
• Fraction of time out stock
• Obsolete inventory
 3-15

Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions
 3-16

Transportation: 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
 3-17

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
 3-18

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
Transportation Related Metrix
• Average inbound transportation cost
• Average incoming shipment size
• Average inbound transportation cost per
shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per
shipment
• Fraction transported by mode
 3-20

Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions
 3-21

Information: Role in the 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
 3-22

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?
 3-23

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
Information Related Metrix
• Forecast horizon
• Frequency of update
• Forecast error
• Variance from plan
• Ratio of demand variability to order variability
 3-25

Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions
 3-26

Sourcing: Role in the Supply Chain

• Set of business processes required to purchase
goods and services in a supply chain
• Supplier selection, single vs. multiple suppliers,
contract negotiation
 3-27

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
 3-28

Components of Sourcing Decisions

• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply chain
profits
 3-29

Sourcing: 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 3.7: Amazon
Sourcing Related Metrix
• Days payable outstanding
• Average purchase price
• Range of purchase price
• Average purchase quantity
• Supply quality
• Supply lead time
• Percentage of on time deliveries
• Supplier reliability
 3-31

Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions
 3-32

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
 3-33

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
Pricing Related Metrix
• Profit Margin
• Days sales outstanding
• Incremental fixed cost per order
• Incremental variable cost per order
• Average sale price
• Average order size
• Range of sale price
• Range of periodic sales
Infrastructure
• Infrastructure Orientation
• Integration with international infrastructure
design and standards
• Extent of penetration
 3-36

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
 3-37

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
SWARA-WASPAS
• Step 1. Determine the set of the relevant evaluation criteria (supplier selection
• criteria in this case) and sort them in descending order, based on their expected
significances.
• Step 2. Starting from the second criterion, determine the relative importance sj
of the criterion j in relation to the previous (j-1) criterion, and do so for each
particular criterion.
• Step 3. Determine the coefficient kj as follows:
• Kj =1, if j=1
• Kj= Sj+1, if j>1
• Step 4. Determine the recalculated weight qj as follows:
• qj =1 , if j=1
• qj = (qj-1)/Kj, if j>1
• Step 5. Determine the relative weights wj of the evaluation criteria as follows:
•
• Wj =qj/
Drawing a set of criteria Respondent survey
Respondent survey
(Respondents arrange criteria according to rank
and the most important criterion being list as the
first and so on.)
Determination of criteria ranks
Determination of criteria weights
Presentation of j criterion Presentation of j criterion
Evaluation of how much j+1
Value of criterion is more important
importance of than j criterion: Relative
j+1 criterion comparison should be applied
j= j+1
j <=n? (n is the
no. f unrelated
criteria)
Listing of main criteria
Drawing general list of criteria
Arrangement of criteria according
to frequency of indication
Analysis of criteria list
Deletion of interrelated attributes
Drawing of unrelated criteria list
Determination of criteria
important vector
Determination of criteria
importance
Stop
WASPAS (used when you want to rank suppliers
based on prioritized criteria by SWARA)

• The WASPAS method is basically a combination

of two established multi criteria decision making
techniques i.e. weighted sum model (WSM) and
weighted product model (WPM). This method
has proved to be more accurate in comparing the
accuracy of one of the models. Weighted
Aggregated Sum Product Assessment (WASPAS)
method is used for ranking of alternatives
(Zavadskas et ai, 2012). Following steps are being
used for WASPAS calculation.
•
•Normalized
•
decision making matrix formed by: If optimal value is maximum
= x ∕opt x where i=1, m; j=1,n
ij ij ij

•
•
• If optimal value is minimum
•
• ij = opt xij ∕ xij where i=1, m; j=1,n
•
•
• Calculating weighted and normalized decision making matrix for summarizing part:
•
• ijsum =ijqj , where i= 1, m; j=1,n
•
• Calculating weighted and normalized decision making matrix for multiplication
part:
•
• ij, mult =ijqj , where i= 1, m; j=1,n
•
•
• Final calculation for evaluation and prioritizing the various alternatives:
•
• WPSi = 0.5 + 0.5 , where i= 1, m; j=1,n
Final results of SWARA method in weighting
criteria
Final results of SWARA method in weighting criteria

Comparative advantage Coefficient Recalculated Weight

Criteria SWARA weight
of Avg Value Sj Kj=Sj+1 Wj=Kj-1/Kj

C1 Supplier management 1.0000 1.0000 0.1328

C2 Information sharing/communication 0.1760 1.1760 0.8503 0.1129

C3 Joint actions 0.1336 1.1336 0.7501 0.0996

C4 Relationship handling 0.1118 1.1118 0.6747 0.0896

C5 Supplier support 0.0864 1.0864 0.6210 0.0825

C6 Relationship quality 0.0715 1.0715 0.5796 0.0770

C7 TQM 0.0542 1.0542 0.5498 0.0730

C8 Leadership 0.0433 1.0433 0.5270 0.0700

C9 Policy and strategy 0.0331 1.0331 0.5101 0.0677

C10 Human resources 0.0257 1.0257 0.4973 0.0660

C11 Partnerships and resources 0.0175 1.0175 0.4888 0.0649

C12 Process management 0.0130 1.0130 0.4825 0.0641

SUM 7.5312
 Decision making matrix

Decision making matrix

C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

Q 0.1328 0.1129 0.0996 0.0896 0.0825 0.0770 0.0730 0.0700 0.0677 0.0660 0.0649 0.0641

MAX MAX MAX MAX MAX MAX MAX MAX MAX MAX MAX MIN

A1 7 6 6 6 7 7 8 7 8 5 5 8

A2 8 7 8 8 6 5 6 5 6 5 7 6

A3 6 7 6 6 8 7 5 5 6 7 6 5

A4 4 5 7 7 6 6 6 6 7 6 6 5

A5 5 8 7 6 5 7 6 7 5 8 7 7
WASPAS normalized decision making matrix

WASPAS normalized decision making matrix

C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

Q 0.1328 0.1129 0.0996 0.0896 0.0825 0.0770 0.0730 0.0700 0.0677 0.0660 0.0649 0.0641

MAX MAX MAX MAX MAX MAX MAX MAX MAX MAX MAX MIN

A1 0.875 0.75 0.75 0.75 0.875 1 1 1 1 0.625 0.714 1

A2 1 0.875 1 1 0.75 0.714 0.75 0.714 0.75 0.625 1 0.75

A3 0.75 0.875 0.75 0.75 1 1 0.625 0.714 0.75 0.875 0.857 0.625

A4 0.5 0.625 0.875 0.875 0.75 0.857 0.75 0.857 0.875 0.75 0.857 0.625

A5 0.625 1 0.875 0.75 0.625 1 0.75 1 0.625 1 1 0.875

WASPAS weighted and normalized decision making matrix
for summarizing part

WASPAS weighted and normalized decision making matrix for summarizing part
C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

A1 0.1162 0.0847 0.0747 0.0672 0.0722 0.0770 0.0730 0.0700 0.0677 0.0413 0.0464 0.0641

A2 0.1328 0.0988 0.0996 0.0896 0.0618 0.0550 0.0548 0.0500 0.0508 0.0413 0.0649 0.0480

A3 0.0996 0.0988 0.0747 0.0672 0.0825 0.0770 0.0456 0.0500 0.0508 0.0578 0.0556 0.0400

A4 0.0664 0.0706 0.0871 0.0784 0.0618 0.0660 0.0548 0.0600 0.0593 0.0495 0.0556 0.0400

A5 0.0830 0.1129 0.0871 0.0672 0.0515 0.0770 0.0548 0.0700 0.0423 0.0660 0.0649 0.0561
WASPAS weighted and normalized decision making matrix
for multiplication part

WASPAS weighted and normalized decision making matrix for multiplication part
C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12

A1 0.9824 0.9680 0.9718 0.9746 0.9890 1.0000 1.0000 1.0000 1.0000 0.9694 0.9784 1.0000

A2 1.0000 0.9850 1.0000 1.0000 0.9766 0.9744 0.9792 0.9767 0.9807 0.9694 1.0000 0.9817

A3 0.9625 0.9850 0.9718 0.9746 1.0000 1.0000 0.9663 0.9767 0.9807 0.9912 0.9900 0.9703

A4 0.9121 0.9483 0.9868 0.9881 0.9766 0.9882 0.9792 0.9893 0.9910 0.9812 0.9900 0.9703

A5 0.9395 1.0000 0.9868 0.9746 0.9620 1.0000 0.9792 1.0000 0.9687 1.0000 1.0000 0.9915
Result of WASPAS
0.5
0.5
WPSi Rank
WPSi Rank
0.42713
A1 0.42713 0.422428 0.849562 1
A1 0.422428 0.849562 1
0.42366
A2 0.42366 0.418322 0.841985 2
A2 0.418322 0.841985 2
0.39977
A3 0.39977 0.39566 0.795432 4
A3 0.39566 0.795432 4
0.37475
A4 0.37475 0.368232 0.742979 5
A4 0.368232 0.742979 5
0.41639
A5 0.41639 0.408743 0.825133 3
A5 0.408743 0.825133 3