Supply Chain Management (3rd Edition)

Chapter 3 Supply Chain Drivers and Obstacles

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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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1. 2. 3. 4. 5. 6.

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Drivers of Supply Chain Performance

1. 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

2.

3.

4.

5. 6.

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A Framework for Structuring Drivers

Efficiency Responsiveness Supply chain structure

Facilities

Transportation

Inventory

Information

Drivers

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Supply Chain Decisions: Structuring Drivers

Strategy (Design) Planning Operation

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Framework for Structuring Drivers

C om petitive Strategy Supply C hain Strategy E fficiency Supply chain structure Logistical Drivers F acilities Inventory Transportation R esponsiveness

Inform ation

Sourcing C ross Functional D rivers

Pricing

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Facilities
Role in the supply chain
the where of the supply chain, aka nodes manufacturing (plant) or storage (warehouses)

Role in the competitive strategy

economies of scale (efficiency priority), global (BBraun, Schlumberger, Zara, Benetton) larger number of smaller facilities (responsiveness priority) (Toyota, Honda, Motorola)

Example 3.1: Toyota and Honda (compete on responsiveness by siting manufacturing facilities) 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

Capacity max amount a facility can process Utilisation actual capacity that is being used, affects unit cost and associated delays (unit cost but delay ) Theoretical flow/ cycle time time needed to process unit if no delays exist Actual flow/ cycle time =theoretical time + delays Flow time efficiency = theoretical time / actual time Product variety no. of products / families processed in a facility, processing cost and flow times <= product variety Volumetric contribution of top 20% SKUs and clients use separate process for top 20% Processing/ setup/ idle time defines value added time Average production batch size average amount produced in each batch (large batch size => production cost but inventory cost in SC ) Production service level = % of orders completed on time and in full (OCOTF)
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Inventory
Role in the supply chain the what is being passed along 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 = DT (Littles Law) I = inventory; D = throughput; T = flow time Example: T=10, D=60, I =600, if I=300, T=30 => speed to market Inventory and throughput are synonymous in a supply chain
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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 central location make the firm more efficient (low cost producer) Trade-off Example 3.2 Nordstrom (high responsiveness and more variety and better service to higher paying customers)
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Components of Inventory Decisions

Cycle inventory
Average amount of inventory used to satisfy demand between shipments Depends on lot size = EOQ/2

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 vs chase strategy in services

Product availability level

Portion 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 related metrics

Average inventory ave units of stock held Products with more than specified no. of days of inventory (DSI) => products by which firm is carrying high levels of stock (oversupply or slow mover) SCALA Average replenishment size ave amount in each replenishment order (SKUs) = (Imax Imin)/replenishment time Average safety stock - ave amont of stock on hand when replenishment order arrives. Seasonal inventory cycle and safety stock ordered due to seasonal changes in demand Fill rate = % of orders or demand met on time from inventory Fraction of time out of stock - % of time a SKU had zero inventory (estimate demand during stockout period)
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Transportation
Role in the supply chain Role in the competitive strategy Components of transportation decisions

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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

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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 Ashley (quick response through air freight high speed by Fedex)
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Amazon Books, VHS videotapes, software, video games (US to Asia)

International shipping (business days) 10-15 (standard) 5-9 (expedited) 2-4 (priority) Any combination of the above items
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Per Shipment

Per Item

$4.99 $13.99 $29.99 Highest applicable pershipment charge

$4.99 $5.99 $5.99 As above

Source: ww.amazon.com/gp/help/customer/display.html , 2008

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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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Modal Profile of Freight Transportation

Mode Truck Value Volume Service On-time performance above 90%. Distance Driver can go 500 miles/ day. 2/3 of tonnage carried over less than 100 miles.

Moderate to Loads of less than high 50,000 lbs.

Rail Intermodal Air

Moderate to Multiple car loads. No 4 to 7 days delivery time. 60 to 85% Average haul length between 600 low weight restriction. on-time performance. and 800 miles. Moderate to No weight restrictions. 3 days for cross country. On-time Average haul between 700 and high performance between truck and rail. 1,500 miles. High Small. Most loads less Normally overnight or second day. than 100 lbs. Varies according to segment. Competitive with rail. More than 1,300 miles. Between 250 and 1,600 miles.

Inland Water Moderate to Bulk shipments. low Coastal Water Moderate to Containers, general low freight & bulk shipments.

Function of distance. Between 2 to 5 Between 500 and 2,000 miles. days.

International High to low Mainly containers and 7 to 10 days trans-Atlantic and trans- More than 2,600 miles. Water bulk shipments. Pac routes. Pipeline Low Bulk shipment of liquids and gasses. According to demand. 0 to 20 mph. 825 miles average distance for crude oil.
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Information
Role in the supply chain Role in the competitive strategy Components of information decisions

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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

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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 3.4: Andersen Windows (uses window of Knowledge, use information to drive inventory of customised windows, speed to market) Example 3.5: Dell (complete visibility of customer demand, high investment in information, DOMS, SMART)
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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 (some countries find this expensive) Internet (XML, ASP) ERP systems (Internet is the medium) Supply Chain Management software (APO, Infor, CyberLog, etc) RFID active vs passive, 18185 standards
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Overall trade-off: Responsiveness versus efficiency

Information related metrics

Forecast horizon how far in advance of actual event forecast is made =lead time of the decision that is driven by forecast Frequency of update of forecast R&R Forecast error MAD, MSE, MAPE Seasonal factors need to calculate seasonal index Variance from planned identify shortages and surpluses Ratio of demand var to order variability (if ratio < 1 then bullwhip effect exists)
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Sourcing
Role in the supply chain Role in the competitive strategy Components of sourcing decisions

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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

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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 3.6: Cisco (outsource lower end products (eg routers) for greater efficiency). Cisco outsource almost all of mfg (like Nike) lower end to China and higher end to US

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Components of Sourcing Decisions

In-house versus outsource decisions
Emerson Process Management and Schlumberger insource, Dell, Cisco outsource

Supplier evaluation and selection - AVL Procurement process supplier send products in response to customer orders, for MRO products should be procured cheaply (lower transaction costs)
Procurement for direct materials to ensure good coordination between buyer and seller

Overall trade-off: Increase the supply chain profits

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Sourcing related metrics

Days payable outstanding days when supplier performs task to when he is paid Average purchase price ave price when good bought during year (weight this by quantity bought at each price) Range of purchase price measure price fluctuations (usually correlates with amount bought) Average qty purchased amt bought per order measures aggregation level across locations (spatial aggregation) Fraction on time deliveries - % of deliveries made on time Supply quality quality of supply Supply lead time ave time between order placed and order arrival
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Pricing
Role in the supply chain Role in the competitive strategy Components of pricing decisions

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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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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 (uses pricing of shipping to shift high demand workload in warehouse)

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Some common supply chain strategies

Driver Facilities Inventory More Responsive Multiple Plants (proximity) Flexible Plants More Efficient Single (consol) Plant Dedicated Plant

Higher Inventory (available) Lower Inventory (cost of holding) Transportation Higher Speed Lower Speed (consol) Information Sourcing Pricing
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Accurate Real Time Transmission Responsive supplier Differential Pricing

Less Accurate Batched Transmission Efficient supplier Everyday Low Pricing

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Components of Pricing Decisions

Pricing and economies of scale quantity discount Everyday low pricing versus high-low pricing Walmart and Metro (EDLPP) Fixed price versus menu pricing pick, pack and deliver to home higher than personal pickup at warehouse, zonal pricing (DHL), Overall trade-off: Increase the firm profits

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DHL International rate zone table

Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antigua Argentina Armenia Aruba Australia
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L E M I D M J J K L J

Dominican Republic East Timor Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands

J Lebanon I Lesotho K Liberia L Libya K Liechtenstein M Lithuania M Luxembourg E Macau M Macedonia K Madagascar D Malawi I Malaysia

L M M M D E C H2 E M M H2

Saipan San Marino Sao Tome & Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands

H2 C M L M E M M H1 E E I
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H2 Fiji Islands

Pricing related metrics

Profit margin = % of revenue (type of margin gross, net), scope (SKU, product line, customer) Days sales outstanding (DSO) = time when sales is made and when money collected Incremental fixed cost per order incremental cost that is indep of order, changeover cost, transportation cost Average sale price - - weighted by quantity of goods sold Average order size ave qty per order Range of sale price (min, max) Range of periodic sales (min, max) of qty sold per period helps to show correlation between sales and price, potential opportunity to shift sales by price changes
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Obstacles to Achieving Strategic Fit

Increasing variety of products Decreasing product life cycles Increasingly demanding customers (not same as demands) Fragmentation of supply chain ownership so called focus on core competency => less vertical or horizontal integration Globalization adds stress to SC as facilities are now further apart, making coordination difficult 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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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
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Reality check
List and define four major drivers of supply chain performance. (**)

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Explain the supply chain decision-making framework and the role of the major drivers. (**)

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Explain the basic trade-off between responsiveness and efficiency for each of the major drivers of supply chain performance.(**)

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How has globalization made strategic fit even more important to a companys success?

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