Supply Chain Drivers &

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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 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

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 Drivers of Supply Chain Performance
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
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 Example

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 Wal-Mart’s competitive strategy is to be a reliable, low-
cost retailer for a wide variety of mass-consumption
goods.
Wal-Mart aims to provide high availability of a variety of
products of reasonable quality at low prices

•This strategy dictates that the ideal supply chain will

emphasize efficiency but also maintain an adequate level
of responsiveness. Wal Mart uses the three logistical and
three cross functional drivers effectively to achieve this
type of supply chain performance.
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 Facilities

In the case of Facilities, Wal- Mart uses centrally located

DCs within its network of stores to decrease the number
of facilities and increase efficiency at each DC.
Wal- Mart builds retail stores only where the demand is
sufficient to justify having several of them supported by a
DC, there by increasing efficiency of its transportation
assets.

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 With the Inventory driver, Wal-Mart
maintains an efficient supply chain by
keeping low levels of inventory. For instance,
Wal-Mart pioneered cross-docking ,a
system in which inventory is not stocked in a
warehouse but rather is shipped to stores
from the manufacturer.

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 These shipments make only brief stops at distribution
centers(DCs), where they are transferred to trucks that
make deliveries to stores. This significantly lowers
inventory because products are stocked only at stores
,not at both stores and warehouses.
With respect to inventory, Wal-Mart favors efficiency
over responsiveness.

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 On the Transportation front , Wal- Mart
runs its own fleet, to keep responsiveness
high . This increases transportation cost,
but the benefits in terms of reduced
inventory and improved product availability
justify this cost in Wal-Mart’s case.

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 To utilize Information in the supply chain,
Wal- Mart has invested significantly more than
its competitors in information technology. As a
result, Wal-Mart is a leader in its use of the
information driver to improve responsiveness
and decrease inventory investment

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 With regard to the Sourcing driver, Wal- Mart
identifies efficient sources for each product it
sells. Wal-Mart feeds them large orders,
allowing them to be efficient by exploiting
economies of scale.

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 Finally, for the Pricing driver, Wal-Mart
practices “every day low pricing ”(EDLP) for its
products. This ensures that customer demand
stays steady and does not fluctuate with price
variations. The entire supply chain then focuses
on meeting this demand in an efficient manner.

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 Wal-Mart uses all the supply chain drivers to
achieve the right balance between
responsiveness and efficiency so that its
competitive strategy and supply chain
strategy are in harmony

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 Facilities
Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness priority)
Example 3.1: Toyota and Honda
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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 Inventory
Role in 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 = RT (Little’s Law)
» I = inventory; R = throughput; T = flow time
» Example
» 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
make the firm more efficient
Trade-off
Example 3.2 – Nordstrom

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 Components of Inventory
Decisions
Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Depends on lot size
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
Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness

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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

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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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 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
Example 3.5: Dell

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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
– Internet
– ERP systems
– Supply Chain Management software
Overall trade-off: Responsiveness versus efficiency
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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

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

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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

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 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

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 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

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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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