After reading this chapter, you will be able to: I. Identify the major drivers of supply chain performance. 2.
Discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy. 3. Detine the key metrics that track the performance of the supply chain in terms of each driver. In this chapter, we introduce the three logistical drivers-facilities, inventory, and transportation-and the three cross-functional drivers-information, sourcing, and pricing-that determine the performance of any supply chain.
We discuss how these drivers are used in the design, planning, and operation of the supply chain. We define several metrics that can be used to gauge the performance of each driver. The strategic fit discussed in Chapter 2 requires that a company’s supply chain achieve the balance between responsiveness and efficiency that best supports the company’s competitive strategy.
To understand how a compa- ny can improve supply chain performance in terms of responsiveness and efficiency, we must examine the logisti- cal and cross-functional drivers of supply chain performance: facilities, inventory, transportation, information, sourcing, and pricing. These drivers interact with each other to determine the supply chain’s performance in terms of responsiveness and efficiency. The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost. First we define each driver and discuss its impact on the performance of the supply chain. . Facilities are the actual physical locations in the supply chain network where product is stored, assembled, or fabricated. The two major types of facilities are production sites and storage sites. Decisions regarding the role, location, capacity, and flexibility of facilities have a significant impact on the supply chain’s performance. For instance, an auto parts distributor striving for responsiveness could have many warehousing facilities located close to customers even though this practice reduces efficiency.
Alternatively, a high-efficiency distributor would have fewer warehouses to increase efficiency despite the fact that this practice will reduce responsiveness. 2. Inventory encompasses all raw materials, work in process, and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness. For example, 41 42 Part I • Building a Strategic Framework to Analyze Supply Chains a clothing retailer can make itself more responsive by stocking large amounts of inventory and satisfying customer demand from stock.
A large inventory, however, increases the retailer’s cost, thereby making it less efficient. Spanish apparel retailer Zara has worked hard to shorten new product and replenishment lead times. As a result, the company is very responsive but carries low levels of inventory. Zara thus provides responsiveness at low cost. 3. Transportation entails moving inventory from point to point in the supply chain. Transportation can take the form of many combinations of modes and routes, each with its own performance characteristics. Transportation choices have a large impact on supply chain respon- siveness and efficiency.
For example, a mail-order catalog company can use a faster mode of . ‘ transportation such as FedEx to ship products, thus making its supply chain more responsive, but also less efficient given the high costs associated with using FedEx. McMaster-Carr and W. W. Grainger, however, have structured their supply chain to provide next-day service to most of their customers using ground transportation. They are providing a high level of responsiveness at lower cost. 4. Information consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers tthroughout the supply chain.
Information is potentially the biggest driver of performance in the supply chain because it directly affects each of the other drivers. Information presents management with the oopportunity to make supply chains more responsive and more efficient. For example, with information on. customer demand patterns, a pharmaceuti- cal company can produce and stock drugs in anticipation of customer demand, which makes the supply chain very responsive because customers will find the drugs they need when they need them.
This demand information can also make the supply chain more efticient because the phar- maceutical firm is better able to forecast demand and produce only the required amount. Seven- Eleven Japan has used information to increase the responsiveness it provides while also lowering cost. 5. Sourcing is the choice of who will perform a particular supply chain aactivity such as pro- duction, storage, transportation, or the management of information. At the strategic level, these decisions determine what functions a firm performs and what functions the firm outsources.
Sourcing decisions affect both the responsiveness and efficiency of a supply chain. After Motorola outsourced much of its production to contract manufacturers in China, it saw its effi- ciency improve but its responsiveness suffer because of the long distances. To make up for the drop in responsiveness, Motorola started flying in some of its cell phones from China even though this choice increased transportation cost. Flextronics, an electronics contract manufactur- er, is hoping to offer both responsive and efficient sourcing options to its customers.
It is trying to make its production facilities in the United States very responsive while keeping its facilities in low-cost countries efficient. Flextronics hopes to become an effective source for all customers using this combination of facilities. 6. Pricing determines how much a firm will charge for goods and services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain performance.
For example, if a transportation company varies its charges based on the lead time provided by the customers, it is very likely that customers who value effi- ciency will order early and customers who value responsiveness will be willing to wait and order just before they need a product transported. Differential pricing provides reoponsiveness to customers that value it and low cost to customers that do nor value responsiveness as much. Our definition of these drivers attempts to delineate logistics and supply chain manage- ment.
Supply chain management includes the use of logistical and cross-functional drivers to increase the supply chain surplus. Cross-functional drivers have become increasingly important in raising the supply chain surplus in recent years. While logistics remains a major part, supply chain management is increasingly becoming focused on the three cross-functional drivers. It is important to realize that these drivers do not act independently but interact with each other to determine the overall supply chain performance. Good supply chain design and operation Chapter 3 • Supply Chain Drivers and Metrics 43 ecognizes this interaction and makes the appropriate trade-offs to deliver the desired level of responsiveness. Consider, for example, the furniture industry in the United States. Low-cost furni- ture sourced from Asia is available at many discount retailers. The primary goal of this supply chain is to deliver a low price and acceptable quality. Vvariety is typically low and retailers such as Wal-Mart stock inventory of finished goods. The low vvariety and stable replenishment orders allow furniture manufacturers in Asia to focus on efficiency. Given the available inventory, low- cost modes of transportation from Asia are used.
In this instance, relatively low-cost inventory at the retailer allows the supply chain to become efficient by lowering transportation and production costs. In contrast, some U. S. furniture makers have chosen to focus on providing vvariety. Given the high vvariety and high prices, keeping inventory of all variants at a retailer would be very expensive. In this case the supply chain has been designed so the retailer carries very little inven- tory. Customers place their orders with the retailer by seeing one variant of the furniture and selecting among the various options.
The supply chain is made responsive by using information technology to convey order information effectively, structuring very flexible manufacturing facil- ities to be able to produce in small lots, and using responsive transportation to deliver the furniture to the customer. In this instance, responsive facilities, transportation, and information are used to lower inventory costs. As the rest of this chapter will illustrate, the key to achieving strategic fit across the supply chain is to structure the supply chain drivers appropriately to provide the desired level of responsiveness.