Unit 6: Supply chain Drivers and Matrices

Topic Covered in Syllabus:

Drivers of supply chain performance Framework for structuring drivers

Role of each cross functional drivers in competitive strategy and supply chain strategy with components

Facility, inventory, transportation, information, sourcing, pricing

Class Presentations:

Role of MIS, ERP, ESS, EIS, AI, DSS in cross functional driver performance

Drivers of Supply Chain Performance

In the previous chapter we discuss how to achieve strategic fit; the balance between responsiveness and efficiency that best meets the need of the company’s competitive strategy. To understand how a company can improve supply chain performance we must examine the logistical and cross functional drivers of supply chain performance: facility, inventory, information, transportation, sourcing and pricing.

• Facilities: places where inventory is stored, assembled, or fabricated production sites and storage sites

• Inventory: raw materials, WIP (work in process), 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, costs, prices and customers throughout the supply chain potentially the biggest driver of supply chain performance

• Sourcing: functions a firm performs and functions that are outsourced

Is the choice of who will perform a particular supply chain activity such as production,

storage, transportation or the management of information?

• Pricing: Price associated with goods and services provided by a firm to the supply chain Affects the behaviors of buyers of the goods and services.

Framework for structuring Drivers

Facility

Facilities include all locations in the supply chain to store, assemble, or fabricate inventory. Decisions regarding location, capacity, and flexibility of facilities significantly affect supply chain performance. A facility is a place where inventory is stored, manufactured or assembled. Hence facilities can be categorized into production facilities and storage facilities.

Role in the supply chain

the “where” of the supply chain

Within a facility, inventory is either transformed into another state (manufacturing) or it is stored (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

Role: For production facility, firms must decide whether they will be flexible, dedicated or a combination of two. Flexible capacity can be used for many types of product, whereas dedicated capacity can be used for only a limited number of products.

Location: where a company will locate; whether to centralize or decentralize. Centralize in order to get economics of scale or decentralize to become more responsive by being closer to the customer.

Capacity: determine a facility’s capacity to perform its intended function or functions.

Facility Related Metrics

A manger should track the following facility-related metrics that influence supply chain performance:

• Capacity: measures the maximum amount a facility can process.
• Utilization: measures the fraction of capacity that is currently being used in the facility. Utilization affects both the unit cost and associated delays.
• Production cost per unit: measures the average cost to produce a unit of output.
• Theoretical flow/cycle time of production: measures the time required to process a unit if there are absolutely no delays at any stage.
• Actual average flow/cycle time: measures the average time taken for all units proceed over a specified duration such as week or month.
• Flow time efficiency: is the ration of the theoretical flow time to the average flow time.
• Product variety: measures the number of products processed in a facility.
• Volume contribution of top 20 percent SKUs and customers: measures the fraction of total volume processed by a facility that comes from the top 20 percent SKUs or customers.
• Processing/setup/down/idle time: measure the fraction of time that the facility was processing units.
• Average  production  batch  size:  measures  the  average  amount  produced  in  each production batch.
• Production service level: measures the fraction of production orders completed on time and in full.

Inventory

Inventory “stockage” exists in all supply chains because of a mismatch between supply and demand. Inventory plays a significant role in a supply chain’s ability to support a firm’s competitive strategy. A supply chain manager must make routine decisions to create a more responsive and more efficient supply chain. Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.

Role in Competitive Strategy:

Source of cost and influence on responsiveness

Role in supply chain:

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) where, I = inventory; R = throughput; T = flow time

Inventory and flow time are synonymous in a supply chain because throughput is often determined by customer demand.

Components of Inventory

• Cycle Inventory: These results due to producing or buying larger lots to minimize acquisition costs related to processing each purchase order or production order. It is the average amount of inventory used to satisfy demand between receipts of supplier shipments. The size of cycle inventory is a result of the production, transportation, or purchase of material in large lots.

• Safety Inventory: It is held to counter against uncertainty or variability of demand. It is the inventory held in case demand exceeds expectations; it is held to counter uncertainty.

• Seasonal  Inventory: It is inventory maintained to satisfy higher demands in a period compared  to  production  capacity.  It  arises  due  to  the  decision  to  service  predicted variability  in  demand  through  extra  production  during  slack  period  or  low  demand periods.  Seasonal  inventory is  built  up  to  counter predictable variability in  demand. Companies using seasonal inventory buildup inventory in periods of low demand and store it for periods of high demand when they will not have the capacity to produce all that is demanded.

Metrics of Inventory

A manger should track the following inventory-related metrics that influence supply chain performance:

• Average inventory: measures the average amount of inventory carried.
• Products with more than a specified number of days of inventory: identifies the products for which the firm is carrying high level of inventory.
• Average replenishment batch size: measures the average amount in each replenishment order.
• Average safety inventory: measures the average amount of inventory on hand when a replenishment order arrives.
• Seasonal inventory: measures the amount of both cycle and safety inventory that is purchased solely due to seasonal changes in demand.
• Fill rate: (order/case) measures the fraction of orders/ demand that were met on time from inventory.
• Fraction of time out of stock: measures the fraction of time that a particular SKU had zero inventories.

Transportation

Transportation moves the product between different stages in a supply chain. Like the other supply chain drivers, transportation has a large impact on both responsiveness and efficiency.

Roles in SC strategy

• 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.

Roles 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.
• 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.

Components of transportation

• Choice of transportation mode

The mode of transportation is the manner in which a product is moved from one location to another in supply chain network. Companies can choose between air, truck, rail, ship, pipeline as modes of transportation. All the modes vary in cost, speed, size of shipment and flexibility.

• Design of transportation network

The transportation network is the collection of transportation modes, locations and routes along which product can be shipped. A company must decide whether transportation from a supply source will be direct to the demand point or will go through intermediate consolidation point.

• • Route: path along which a product is shipped
  • Network: collection of locations and routes

Metrics of transportation

A manger should track the following transportation-related metrics that influence supply chain performance:

• Average inbound transportation cost: measures the cost of bringing product into a facility as a percentage of sales or cost of goods sold.
• Average incoming shipment size: measures the average number of units or dollars in each incoming shipment at a facility.
• Average inbound transportation cost per shipment: measures the average transportation cost of each incoming delivery.
• Average outbound transportation cost: measures the cost of sending product out of facility to the customer.
• Average outbound shipment size: measures the average number of units or dollars on each outbound shipment at a facility.
• Average outbound transportation cost per shipment: measures the average transportation cost of each outgoing delivery.
• Fraction transported by mode: measures the fraction of transportation (in units or dollars) using each mode of transportation.

Information

Information is important driver that companies have used to become both more efficient and more responsive. Information deeply affects every part of the supply chain and impacts every other driver. Good information on supply and demand can help improve the utilization and responsiveness of a facility.

Roles in SC strategy

• 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

Roles in competitive strategy

• Allows supply chain to become more efficient and more responsive at the same time
• Information is most valuable in reducing cost and improving responsiveness within a supply chain.

Components of information

Push (MRP) versus pull: When designing processes of the supply chain, managers must determine whether these processes are part of push or pull phase in the chain. Push system generally require information in the form of elaborate material requirements planning (MRP) systems to take the master production schedules for suppliers with part types, quantities and delivery dates. Pull system require information on actual demand to be transmitted extremely quickly throughout the entire chain so that production and distribution of products may reflect the real demand accurately.

Coordination and information sharing: supply chain coordination occurs when all stages of a supply chain work toward the objective of maximizing total supply chain profitability based on shared information. Coordination among different stages in a supply chain requires each stage to share appropriate information with other stages.

Forecasting and aggregate supply planning: Forecasting is the art and science of making projections about what future demand and conditions will be. Managers must decide how they will make forecasts and to what extent they will rely on forecasts to make decisions. Aggregate supply planning transforms forecasts into plans of activity to satisfy the projected demand.

Enabling technologies: Many technologies exist to share and analyze information in the supply chain.

• EDI: Electronic Data Interchange allows companies to place instantaneous, paperless purchase orders to suppliers.

• Internet: The internet has critical advantages over EDI with respect to information sharing. The internet conveys much more information and therefore offers much more visibility than EDI.

• ERP systems: Enterprise Resource planning systems provides the transactional tracking and global visibility of information from within a company and across its supply chain.

• Supply Chain Management software: It uses the information in ERP systems to provide analytical decision support in addition to the visibility of information.

Information Related Metrics

A manger should track the following information-related metrics that influence supply chain performance:

• Forecast horizon: identifies how far in advance of the actual event a forecast is made.
• Frequency of update: identifies how frequently each forecast is updated.
• Forecast error: measures the difference between forecast and actual demand.
• Seasonal factors: measures the extent to which the average demand in a season is above or below the average in the year.
• Variance from plan: identifies the difference between the planned production/inventories and the actual values.
• Ratio of demand variability to order variability: measures the standard deviation of incoming demand and supply orders placed.

Sourcing

Sourcing is the set of business process required to purchase goods and services. Managers must decide which task will be outsourced and those that will be performed within the firm.

Roles in SC strategy

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

Roles in 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

Components

• In-house or outsource decisions: The most significant sourcing decision for a firm is whether to perform a task in-house or outsource it to a third party.

• Supplier evaluation and selection: Managers must decide on the number of suppliers they will have for a particular activity.

• Procurement process: Procurement is the process in which the supplier sends product in response to customer orders. Managers must decide on the structure of procurement of direct as well as indirect materials, and strategic as well as general materials.

Sourcing related metrics

A manger should track the following sourcing-related metrics that influence supply chain performance:

• Days payable outstanding: measures the number of days between when a supplier performed a supply chain task and when it was paid.
• Average purchase price: measures the average price at which a good or service was purchased during a year.
• Range of purchase price: measures the fluctuation in purchase price during a specified period.
• Average purchase quantity: measures the average amount purchased per order.
• Fraction of on-time deliveries: measures the fraction of deliveries from the supplier that were on time.
• Supply quality: measures the quality of product supplied.
• Supply lead time: measures the average time between when an order is placed and the product arrives.
• Supplier reliability: measures the variability of the supplier’s lead time as well as the delivered quantity relative to plan.

Pricing

Pricing is the process by which a firm decides how much to charge customers for its goods and services. Pricing affects the customer segments that choose to buy the product, as well as the customer’s expectations.

Roles in SC strategy

Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply

Roles 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

Components

• Pricing and economies of scale: Most supply chain activities display economies of scale. Changeovers make small production runs more expensive per unit than large production runs. A common approach to reflect economic of scale is to quality discounts.

• Everyday low pricing versus high-low pricing: Some supply chain offer everyday low pricing. In contrast, most practice high-low pricing and offer steep discounts on a subset of their product every week.
• Fixed price versus menu pricing: A firm must decide whether it will charge a fixed price for its supply chain activities or have a menu with prices that vary with some other attributes such as response time or location of delivery.

Pricing related metrics

A manger should track the following pricing-related metrics that influence supply chain performance:

• Profit margin: measures profit as a percentage of revenue.
• Days sales outstanding: measures the average time between when a sale is made and when the cash is collected.
• Incremental fixed cost per order: measures the incremental costs that are independent of the size of the order.
• Incremental variable cost per order: measures the incremental costs that vary with the size of the order.
• Average sale price: measures the average price at which a supply chain activity was performed in a given period.
• Average order size: measures the average quantity per order.
• Range of sale price: measures the maximum and minimum of sale price per unit over a specified time horizon.
• Range of periodic sales: measures the maximum and minimum of the quantity sold per period (day/week/month) during a specified time horizon.

Questions:

1. Explain the framework of supply chain drivers.

• What is logistical and cross-functional driver?

• List the drivers of supply chain and explain their roles in supply chain and competitive strategy.

• Explain the components of facility and its related metrics.

• Explain the components of inventory and its related metrics.

• Explain the components of transportation and its related metrics.

• Explain the components of information and its related metrics.

• Explain the components of sourcing and its related metrics.

• Explain the components of pricing and its related metrics.