Supply Chain Management

(3rd Edition)

Chapter 3
Supply Chain Drivers and Obstacles

© 2007 Pearson Education 3-1

 Learning Objectives
 Identify the major drivers of supply chain
performance
 Discuss the role of each driver in creating strategic fit
between the supply chain strategy and the competitive
strategy
 Define the key metrics that track the performance of
the supply chain in terms of each driver

© 2007 Pearson Education 3-2

 Outline
 Drivers of supply chain performance
 A framework for structuring drivers
 Facilities
 Inventory
 Transportation
 Information
 Sourcing
 Pricing
 Obstacles to achieving fit
© 2007 Pearson Education 3-3
 Drivers of SC Performance
 The strategic fit discussed in Ch 2 requires that company’s
achieve the balance between responsiveness and efficiency that
best supports the competitive strategy.

 In order to understand how company can improve SC

performance in terms of responsiveness and efficiency,
logistical and cross functional drivers must be examined.

 The drivers interact with each other to determine the SC

performance in terms of responsiveness and efficiency

© 2007 Pearson Education 3-4

 Drivers of Supply Chain Performance
(Logistical Drivers)
 Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
– Decisions regarding role, location, capacity and flexibility of facilities have a
significant impact on the SC performance
 Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies can dramatically alter SC efficiency and responsiveness
– Eg: Zara provides responsiveness at low cost by shorten new product and
replenishment LT
 Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
– Eg: McMaster-Carr and w.wGrainger structured SC to provide next day using
ground transportation

© 2007 Pearson Education 3-5

 Drivers of Supply chain Performance
(Cross-functional Drivers)
 Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance because it directly affects
each of the other drivers
– Able to increase responsiveness while lowering cost
 Sourcing –in house or outsource?
– The choice of who will perform a particular SC activity such as production, storage,
transportation or the management of information
– functions a firm performs and functions that are outsourced
– Eg: Motorola outsourced its production to China resulted low cost but low
responsiveness due to long distance
 Pricing
– Price associated with goods and services provided by a firm to the supply chain
– Affects the behaviour of the buyer of the goods or service thus affecting SC
performance
– Eg: Different charges for transportation affect the buyer behaviour

© 2007 Pearson Education 3-6

 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

© 2007 Pearson Education 3-7

 Facilities
 Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
 Role in the competitive strategy
– Facilities are a key driver of SC performance
– Can gain economies of scale when a product is
manufactured or stored in only one location (centralisation
increases efficiency)
– larger number of smaller facilities (responsiveness priority)
 Example 3.1: Toyota and Honda use facilities decision to be
more responsive to their customers

© 2007 Pearson Education 3-8

 Facilities
 Benefits to opening local facilities including
protection from currency fluctuation and trade barriers
thus increase the responsiveness
 Flexibility of Honda facilities to assemble both SUVs
and cars in the same plant allow company to cut down
in the downturn of 2008 (SUV sales dropped, but
Honda keep maintained a high level of utilisation

© 2007 Pearson Education 3-9

 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

© 2007 Pearson Education 3-10

 Inventory
 Role in the supply chain
 Role in the competitive strategy
 Components of inventory decisions

© 2007 Pearson Education 3-11

 Inventory: Role in the Supply Chain
 Inventory exists because of a mismatch between supply and
demand
– To balance with demand vs future sales
 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

© 2007 Pearson Education 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
 Example 3.2 – Nordstrom

© 2007 Pearson Education 3-13

 Components of Inventory
Decisions
 Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Depends on lot size, increase lot size could increase carrying cost
 Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
– If too much ss, products go unsold and may have to be discounted
 Seasonal inventory (eg: ice cream)
– 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

© 2007 Pearson Education 3-14

 Transportation
 Role in the supply chain
 Role in the competitive strategy
 Components of transportation decisions

© 2007 Pearson Education 3-15

 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 (no of trips vs
space for inventory)

© 2007 Pearson Education 3-16

 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: Blue Nile (online retailer for diamonds)
– Balance the responsiveness with low cost of facilities and inventory
expense. Thus lower cost than its bricks and mortar competition

© 2007 Pearson Education 3-17

 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
 Overall trade-off: Responsiveness versus efficiency

© 2007 Pearson Education 3-18

 Information
 Role in the supply chain
 Role in the competitive strategy
 Components of information decisions

© 2007 Pearson Education 3-19

 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
 Good information on supply and demand can help improve the
utilisation and responsiveness of a facility
 Eg: Seven-Eleven Japan uses information to improve product
availability while decreasing inventories
 Eg: WalMart uses information on shipments from suppliers to facilitate
cross-docking and lower inventory and transportation expense
 Eg: Air Asia uses information to offer a discounted price for no of
seats

© 2007 Pearson Education 3-20

 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 3.5: Dell

© 2007 Pearson Education 3-21

 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
© 2007 Pearson Education 3-22
 Assignment 3
 Explain five of SC enablers including pictures,
example of application in company and how it works.

Submit by 3rd April 2016 (Sunday)

© 2007 Pearson Education 3-23

 Assignment 2 (2017 2018 2)
 Fashion valet (Ching, Luqman, Augeny,Ainun)
 Naelofar Hijab (Zafirah, Syazila, Talha,Mustaqim)
 Gardenia (Nurul Huda, Surian, Anis, Kishnu)
 Faiza (Toh, Faizal, Baayah,Sheeda)

© 2007 Pearson Education 3-24

 Sourcing
 Role in the supply chain
 Role in the competitive strategy
 Components of sourcing decisions

© 2007 Pearson Education 3-25

 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

© 2007 Pearson Education 3-26

 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: Hewlett Packard, Cisco, Dyson

© 2007 Pearson Education 3-27

 Components of Sourcing
Decisions
 In-house versus outsource decisions
 Supplier evaluation and selection
 Procurement process
 Overall trade-off: Increase the supply chain profits

© 2007 Pearson Education 3-28

 Pricing
 Role in the supply chain
 Role in the competitive strategy
 Components of pricing decisions

© 2007 Pearson Education 3-29

 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

© 2007 Pearson Education 3-30

 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

© 2007 Pearson Education 3-31

 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

© 2007 Pearson Education 3-32

 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

© 2007 Pearson Education 3-33

 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
© 2007 Pearson Education 3-34