3 Supply Chain Drivers

and Metrics

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
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 Starting
• The strategic fit requires that a company's supply
chain achieve the balance between
responsiveness and efficiency that best meets the
needs of the company's competitive strategy. To
understand how a company can improve supply
chain performance in terms of responsiveness and
efficiency, we must examine the logistical and
cross- functional drivers of supply chain
performance: facilities, inventory, transportation,
information, sourcing, and pricing.

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Drivers of Supply Chain Performance
Logistical Drivers

• Facilities ( location)
– places where inventory is stored, assembled (put together), or fabricated
– production sites and storage sites, e.g. several stores for responsiveness, e.g. auto- parts
distributor different location to satisfy their customer's demand

• Inventory
– raw materials, finished goods within a supply chain
– inventory policies e.g. clothing retailer by stock the product(large inventory) to satisfy
the customer demand and increase responsive and the opposite, smaller inventory,
increase efficiency, clothing retailers

• Transportation
– moving inventory from point to point in a supply chain transportation has a large impact
on supply chain responsiveness and efficiency
– combinations of transportation modes and routes, e.g. A mail- order company use fedex

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 Cross-Functional Drivers
• Information
– data and analysis regarding inventory, transportation, facilities, price
throughout the supply chain
– potentially the biggest driver of supply chain performance. The
information of customer demand in drugs to stock, pharmaceutical
companies, can be more responsiveness because customer require
when need, or the opposite because the firms can forecast the amount
of needs
• Sourcing
– functions a firm performs and functions that are outsourced
– determine what functions a firm performs and what functions the firm
out- sources. E.g. Motorola, in china, efficiency improved but
responsiveness suffered because of distance so flying some of the
cellphones even though its increased transportation cost
Or Flextronics very responsive so keep the production facilities in the
U.S. but keep another facilities in the low-cost countries

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 Cross-Functional Drivers

• Pricing
– Price associated with goods and services provided by a firm to the
supply chain, effect on consumer behavior

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 Cross-Functional Drivers
• These drivers are working independently but
interact with each other to determine the supply
chain’s performance in terms of responsiveness
and efficiency.
• As a result, the structure of these drivers
determines if and how strategic fit is achieved
across the supply chain. Good supply chain
design and operation recognizes this interaction
and makes the appropriate trade-offs to deliver
the desired level of responsiveness.
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 Facilities

Role in competitive strategy:

• Facilities are the key driver of the supply

chain, e.g. a company can gain economies of
scale when the product is manufactured or
stored in only one location(centralization) and
increase the efficiency or the opposite

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 Facilities
• Components of facilities decisions
– Role: companies must decide about:
• Flexible, dedicated (more efficient, can use for number
of product), or a combination of the two
• Product is stored or cross-docking
– Location
• Where a company will locate its facilities
• Centralize for economies of scale, decentralize for
responsiveness
• Consider macroeconomic factors, quality of workers,
cost of workers and facility, availability of
infrastructure, proximity to customers, location of other
facilities, tax effects

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 Facilities
• Components of facilities decisions
– Capacity
• Large amount of extra capacity – responsive,
costly
• Little excess capacity – more efficient, less
responsive
• A company must make a trade-off to determine
the right amount of capacity to have at each of its
facilities

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 Facilities
• Components of facilities decisions
• A manager should track the following facility-related
metrics that influence supply chain performance.

– Facility-related metrics
• Capacity
• Utilization (operation)
• Processing/setup/down/idle time
• Production cost per unit
• Quality losses
• Theoretical flow/cycle time of production
• Actual average flow/cycle time

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 Components of Inventory Decisions
• Cycle inventory
– 1.Is the average amount of inventory used to satisfy demand between supplier
shipments,
– 3. As an example of a cycle stock decision, consider an online book retailer,
replenishment, 10 truckload each month or one each three days, cycle
inventory high or low
– The first cost of holding larger lots of inventory(cycle is high), second cost of
ordering product frequently
– 2. How much to order for replenishment and how often to place the order
– Function of lot size decisions
• Safety inventory(if the world were perfectly predictable, only cycle
inventory would be enough) e.g. toy retailer holiday for safety
– Inventory held in case highly unexpected demand(high uncertainly) e.g. toy
retailer must calculate its safety inventory for holiday buying
Too much inventory will face with unsold product,

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 Safety inventory

• safety inventory involves making a trade-off

between the costs of having too much
inventory and the costs of losing sales due to
not having enough inventory.

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 Components of Inventory Decisions
• Seasonal inventory if can rapidly change the
rate of production no need seasonal inventory
– Inventory built up to counter predictable variability
in demand, store product for a period of time
- If the company can change the rate of product system
quickly so no need to have a seasonal inventory
• Level of product availability
– The fraction of demand that is served on time from
product held in inventory, lower product lower
holding cost, opposite
– Trade off between customer service and cost
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 Transportation
• Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes along which product
can be shipped
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single
run

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 Transportation
• Components of Transportation Decisions
– Choice of transportation mode(manner of
moving)
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping,
and flexibility

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 Transportation
– Transportation-related metrics
• Average inbound transportation cost
• Average income 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

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 Information
• Role in the Supply Chain
• Serves as a connection within various stages of
supply chain
• The company can then use this information to
determine whether new orders can be filled.

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 Information
• Role in the Competitive Strategy

– Improves visibility of transactions and

coordination of decisions across the supply chain
– Right information can help a supply chain better
meet customer needs at lower cost

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Components of Information Decisions
• Push versus Pull
• Different system requires different information
• Push needs information in terms of MRP (material
requirement planning) which is the schedule of
planning inventory system
• Pull requires information in terms of actual demand

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Components of Information Decisions
• Coordination and information sharing
– Supply chain coordination, all stages of a supply
chain work toward the objective of maximizing
total supply chain profitability based on shared
information
• Sales and operations planning (S&OP)
– The process of creating an overall supply plan
(production and inventories) to meet the
anticipated level of demand (sales)

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Components of Information Decisions

• Enabling technologies
1. Electronic data interchange (EDI)
2. The Internet
3. Enterprise resource planning (ERP) systems
4. Radio frequency identification (RFID)

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Components of Information Decisions
• Information-related metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability

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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
– Outsource to responsive third parties if it is too
expensive to develop their own

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 Components of Sourcing Decisions
• Sourcing-related metrics
– Days payable outstanding
– Average purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Fraction of on-time deliveries
– Supplier reliability

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 Components of Pricing Decisions

• Pricing-related metrics
– Profit margin
– Average sale price
– Average order size
– Range of sale price

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