SUPPLY CHAIN PERFORMANCE

SUPPLY CHAIN PERFORMANCE

• A company’s supply chain performance must achieve balance between

responsiveness and efciency that best meets the needs of the
company’s compettve strategy.
• For a company to improve its supply chain performance in terms of
responsiveness and efciency, it is necessary to understand the supply
chain drivers.
• There are logistcal and cross functonal drivers of supply chain
performance.
• These drivers interact with each other , so the structure of these drivers
determines how strategic ft is achieved across the supply chain.
• Logistcal drivers include facilites, inventory and transportaton.
• Cross-functonal drivers include informaton, sourcing and pricing.
 FACILITIES

• Facilites are the actual physical locatons in the supply chain network
where product is stored, assembled or fabricated.
• The two major types of facilites are producton sites and storage sites.
• Decisions regarding the role, locaton, capacity and fexibility of facilites
have a signifcant impact on supply chain’s performance.
• For instance, an auto parts distributor striving for responsiveness could
have many warehousing facilites located close to customers even
though this practce reduces efciency.
• Alternatvely, a high efciency distributor would have fewer warehouses
located at key locatons to increase efciency despite the fact that this
practce will reduce the responsiveness.
• Facilites play important long term role in success of a company.
 INVENTORY

• Inventory encompasses all raw materials, work in progress and fnished

goods within a supply chain.
• Changing inventory policies can dramatcally alter supply chain’s
efciency and responsiveness.
• For example, a clothing retailer can make itself more responsive by
stocking large amounts of inventory and satsfying customer demand
from the stock.
• However, a large inventory increases the retailer’s cost, thereby making
it less efcient.
• Reducing inventory makes the retailer more efcient but hurts its
responsiveness in terms of customers dissatsfacton.
 TRANSPORTATION

• Transportaton entails moving inventory from point to point in the

supply chain.
• Transportaton can take the form of many combinatons of modes and
routes, each with its own performance characteristcs.
• Choice of mode of transportaton has a large impact on supply chain
responsiveness and efciency.
• A mail-order catalog company can use mode of transportaton such as
FedEx to ship products thus making its supply chain more responsive but
also less efcient given the high cost associated with using FedEx.
• The company can use slower but cheaper ground transportaton ways to
ship product, making the supply chain efcient but limitng its
responsiveness.
 INFORMATION

• Informaton consists of data and analysis concerning facilites, inventory,

transportaton, costs, prices and customers throughout the supply chain.
• Informaton is potentally the biggest driver of performance in the
supply chain because it directly afects each of the other drivers.
• It presents management with the opportunity to make supply chains
more responsive and more efcient.
• With informaton on customer demand paterns, a pharmaceutcal
company can produce and stock drugs in antcipaton of customer
demand, which makes the supply chain very responsive. The customers
will fnd ready availability of medicines when they need them.
• This demand informaton can also make the supply chain more efcient
because the frm is beter able to forecast its demand.
 INFORMATION

• With accurate demand forecast the pharmaceutcal company can

produce the required brands of medicines in required quanttes.
• This ensures tmely availability and increased customer satsfacton for
the brand.
• Timely informaton also makes the managers of supply chain more
efcient by providing them with advance planning for various shipping
optons. It allows them to choose lowest-cost alternatve while stll
meetng the service requirements at destnatons.
 SOURCING

• Sourcing is the choice of who will perform a partcular supply chain

actvity such as producton, storage, transportaton or the management
of informaton.
• At the strategic level these decisions determine what functons the frm
performs and what functons the frm outsources.
• Sourcing decisions afect both the responsiveness and efciency of a
supply chain.
• Some US frms outsource most of the spares, assembly, producton etc
to China thereby increasing the efciency of the supply chain. But at
tmes, they sufer on responsiveness due to distance and transport
disruptons.
• It is important to strike a pragmatc balance to suit market needs.
 PRICING

• Pricing determines how much a company will charge for goods and
services that it makes available in the supply chain.
• Pricing afects the behavior of the buyer of the goods or service thus
afectng the supply chain.
• If a transportaton company varies its charges based on the lead tme
given by the customer for shipment, it is likely that customers who value
efciency will order early at a lower cost.
• Customers value responsiveness and are willing to wait and will order
just before they need the product, even at a higher shipping cost.
• Some markets are price sensitve to a high degree. The supply chain
strategy will have to be formulated accordingly by being more efcient
even at the cost of responsiveness.
 SUPPLY CHAIN PERFORMANCE

• Supply chain performance management includes the use of logistcal

and cross-functonal drivers to increase the supply chain surplus.
• While logistcs remains a major part, gradually cross-functonal drivers
have become increasingly important in raising the supply chain surplus.
• It is important to realise that these drivers do not act independently but
interact with each other to determine the overall supply chain
performance.
• Good supply chain design and operaton recognises this interacton and
makes appropriate trade-ofs to deliver the desired level of
responsiveness.
• In US low cost furniture is sourced from Asia by many discount retailers.
The goal of this supply chain to ofer low price at acceptable quality
 SUPPLY CHAIN PERFORMANCE

• Variety is typically low and big retailers like Wal-Mart stock large
inventory of fnished goods. The low variety and stable replenishment
orders allow furniture manufacturers in Asia to focus on efciency .
• Given sufcient inventory levels available at retailers, low-cost modes of
transportaton from Asia are used for sending furniture to US. In this
way relatvely low cost inventory at the retailer allows the supply chain
to become efcient by lowering transportaton and producton costs.
• In contrast, some US furniture makers choose to focus on providing
variety . Given the large variety and range, keeping inventory of all
variants at a retailer would be very expensive.
• So the supply chain is designed such that the retailer carries very litle
inventory of fnished furniture.
 SUPPLY CHAIN PERFORMANCE

• Customers visit and place orders with the retailer by seeing one variant
of the furniture available with the retailer and selectng their preferred
choice from the catalog where many optons are available
• The supply chain is made responsive by giving customer wide choice to
suit requirement/taste . Also informaton technology is used to convey
order informaton efectvely, structuring very fexible manufacturing
facilites to be able to produce in small lots. Simultaneously responsive
transportaton mode is used to deliver the furniture in least transit
tme.
• In the above example fexible manufacturing, responsive transportaton
and informaton are used to achieve lower inventory costs. The
customer segment is willing to bear high cost for getng specifc choice.
 FRAMEWORK FOR STRUCTURING DRIVERS

• Goal of a supply chain is to strike the balance between responsiveness

and efciency that fts with the compettve strategy.
• To reach this goal, the company must structure the right combinaton of
3 logistcal drivers ( facilites, inventory, transportatonn and 3 cross
functonal drivers ( informaton, sourcing, pricing n.
• For each of the individual drivers, supply chain managers must make a
trade-of between efciency and responsiveness based on interacton
with other drivers.
• The combined efect of these drivers then determines the profts of the
entre supply chain.
• Most companies begin with a well thought out compettve strategy as
decided by the Board considering the business model and strengths.
 FRAMEWORK FOR STRUCTURING DRIVERS

• Going to the next stage, the supply chain strategy is chosen which fts
with and compliments the compettve strategy.
• The supply chain strategy determines how the supply chain should
perform with respect to efciency and responsiveness – and the
weightage to be given at diferent stages.
• Interplay of the logistcal and cross-functonal drivers are used to reach
the performance levels dictated by supply chain strategy in order to
maximise the profts.
• Although this framework is generally viewed from top down, in many
instances, a study of the 6 drivers may indicate a need to change the
supply chain and potentally even the compettve strategy.
 FRAMEWORK FOR STRUCTURING DRIVERS

• Wal-Mart’s compettve strategy is to be a reliable, low cost retailer for a

wide variety of mass consumpton goods. This strategy dictates that the
ideal supply chain will emphasize efciency but also maintain an
adequate level of responsiveness.
• It uses the logistcal and cross-functonal drivers efectvely to achieve
this type of supply chain performance.
• With the inventory driver, Wal-Mart maintains an efcient supply chain
by keeping low levels of inventory. It pioneered cross-docking, a system
in which the inventory is not stocked in a warehouse but rather is
shipped to stores from the manufacturers.
• These shipments make only brief stops at distributon centres (DCn
where they are transferred to trucks that make deliveries to stores.
 FRAMEWORK FOR STRUCTURING DRIVERS

• This signifcantly lowers inventory because products are kept only at

stores , not at both stores and warehouses. With respect to inventory,
Wal-Mart favors efciency over responsiveness.
• For transportaton , Wal-Mart runs its own feet to keep responsiveness
high for this critcal actvity. While this increases the transportaton cost,
but the benefts in terms of reduced inventory and improved product
availability justfy this cost.
• For facilites, it uses centrally located DCs within its network of stores to
decrease setng up of additonal separate facilites and increase
efciency at each DC.
• Retail stores are build only where demand potental justfes having
several of them , supported by a DC for servicing them.
 FRAMEWORK FOR STRUCTURING DRIVERS

• This helps in increasing the efciency of its transportaton assets.

• To utlise informaton in the supply chain, Wal-Mart has invested
signifcantly more than its compettors in informaton technology ( ITn.
• As a result it is the leader in use of IT to improve responsiveness and
decrease inventory investment.
• Wal-Mart feeds demand informaton across the supply chain to its
suppliers who manufacture only what is being demanded by the
customer.
• The supply chain’s ability to share demand informaton on-line has
required large investments but the result is in improved supply chain in
terms of responsiveness and efciency.
 FRAMEWORK FOR STRUCTURING DRIVERS

• As regards the sourcing driver Wal-Mart identfes efcient sources for

each product it sells. It feeds them large orders, allowing them to be
efcient by exploitng economies of scale.
• For pricing driver, it practces the moto ‘ Every Day Low Pricing ‘ for its
products. This ensures that customer demand stays steady and does not
fuctuate with price variatons.
• The entre supply chain then focuses on meetng this demand in an
efcient manner.
• Wal-Mart uses all the supply chain drivers to achieve the right balance
between responsiveness and efciency so that its compettve strategy
and supply chain strategy are in harmony.
 FACILITIES

ROLE IN THE SUPPLY CHAIN

• If inventory is WHAT is being passed along the supply chain and
transportaton is HOW it is passed along, then facilites are the WHERE
of the supply chain.
• They are the locatons ‘ to and from ‘ which the goods are transported.
• Within a facility , inventory is either transformed into another state
( manufacturingn or it is stored ( warehousing n.
ROLE IN THE COMPETITIVE STRATEGY
• Facilites are a key driver of supply chain performance in terms of
responsiveness and efciency. For example companies can gain
economies of scale by manufacturing or storing product at one locaton.
 FACILITIES

ROLE IN THE COMPETITIVE STRATEGY

• Such centralisaton increases efciency resultng in cost reducton.
However, this comes at the cost of responsiveness, as many of a
company’s customers may be located far of from the producton facility.
• The opposite is also true. Locatng facilites close to the customers
provides responsiveness but increases the number of facilites needed
and consequently reduces the efciency of the supply chain.
• But if the customer demands and is willing to pay for the
responsiveness that having numerous facilites adds, then decision of
multple facilites helps to meet the company’s compettve strategy
goal.
 FACILITIES

ROLE IN THE COMPETITIVE STRATEGY

• Both Honda and Toyota use facilites decisions to be more responsive
to their customers. These companies have an end goal of opening
manufacturing facilites in every major market that they enter.
• While there are other benefts of opening local facilites like protecton
against currency fuctuaton, trade barriers, state govt incentves etc,
the increase in responsiveness plays a large part in taking such a major
decision having long term implicatons for the supply chain.

COMPONENTS OF FACILITIES DECISION

• For producton facilites, frms to decide whether they will be fexible,
dedicated or combinaton of the two
 FACILITIES

COMPONENTS OF FACILITIES DECISION –

• Flexible capacity can be used for many types of products but is ofen less
efcient. A dedicated facility can be used for only a limited number of
products but is more efcient.
• Firms must also decide whether to design a facility with a product focus
or a functonal focus. A product focus facility performs many diferent
functons ( fabricaton, assemblyn in producing a single type of product.
A functonal focused facility performs few functons ( only fabricaton/
moulding or only assembly non many types of products .
• A product focus tends to result in more expertse about a partcular
type of product at the expense of the functonal expertse.
 FACILITIES

COMPONENTS OF FACILITIES DECISION –

• For warehouses and DCs, frms must decide whether they will be
primarily cross-docking facilites or storage facilites. At cross-docking
facilites , inbound trucks from suppliers are unloaded, the product is
broken into smaller lots and is quickly loaded into store bound trucks.
• Each store bound truck carries a variety of products, some from each
in-bound truck. For storage facilites, frms must decide on the products
to be stored at each facility, locaton etc.
 CAPACITY

- Firms must also determine a facility’s capacity to perform its intended

functon or functons. A large amount of excess capacity allows the
facility to be very fexible and to respond to wide swings in demand.
- Excess capacity , however, costs money and therefore decreases
efciency of the supply chain.
- A facility with litle excess capacity will likely be more efcient per unit
of product it produces than one with a lot of unused capacity.
- The high utlisaton facility will have difculty responding to demand
fuctuatons.
- So a company must make a trade-of to determine the right amount of
capacity to have at each of its locatons.
 FACILITY RELATED ASPECTS

– A manager should track the following facility related aspects that

infuence the supply chain performance.
• CAPACITY: measures the maximum amount a facility can process.
• UTLISATION : measures the fracton of capacity that is currently being
used in the facility. Utlisaton afects both the unit cost of processing
and the associated delays. Unit costs tend to decline and delays increase
with increased utlisaton.
• THEORETICAL FLOW/CYCLE TIME OF PRODUCTION : measures the tme
required to process a unit if there are absolutely no delays at any stage.
• ACTUAL AVERAGE FLOW/CYCLE TIME: measures the average actual tme
taken for all units processed over a specifc duraton say a week . The
actual cycle tme includes theoretcal tme and any delays.
 FACILITY RELATED ASPECTS

• FLOW RATE EFFICIENCY: is the rato of theoretcal fow tme to the actual
average fow tme.
• PRODUCT VARIETY: measures the number of products/ product families
processed in a facility. Processing costs and fow tmes are likely to
increase with product variety.
• PROCESSING/SETUP/DOWN/IDLE TIME: measures the fracton of tme
that the facility was processing units or being setup to process units or
was unavailable because it was down, idle because it had no units to
process .
• AVERAGE PRODUCTION BATCH SIZE: measures the average amount
produced in each batch. Large batches decrease producton costs.
 OVERALL TRADE-OFF

OVERALL TRADE-OFF : RESPONSIVENESS VERSUS EFFICIENCY

• The fundamental trade-of managers face when making facilites

decision is between the cost of the number, locaton and type of
facilites ( efciencyn and the level of responsiveness that these facilites
provide the company’s customers.
• Increasing the number of facilites increases the facility and inventory
costs but decreases transportaton costs and reduces response tme.
• Increasing the fexibility of a facility increases facility costs but decreases
inventory costs and response tme.
 INVENTORY

ROLE IN THE SUPPLY CHAIN

• Inventory exists in the supply chain because of a mismatch between
supply and demand. This mismatch is intentonal at a steel manufacturer
where it is economical to manufacture in large lots that are then stored
for future sales.
• The mismatch is also intentonal at a retail store where inventory is held
in antcipaton of future demand.
• An important role that inventory plays in a supply chain is to increase
the amount of demand that can be satsfed by having the product ready
and available when the customer demands it.
• Another signifcant role that inventory plays is to reduce cost by
exploitng economies of scale that may exist in producton/distributon.
 INVENTORY

ROLE IN THE SUPPLY CHAIN

• Inventory is held throughout the supply chain in the form of raw
materials, work in progress and fnished goods. It is a major source of
cost and has a huge impact on responsiveness.
• The locaton and quantty of inventory can directly impact the working
of the supply chain in meetng the customer demand.
• A fashion garments retail chain with high inventory levels has a high
level of responsiveness. A customer can walk in and be exposed to a
wide range of apparel in terms of quality , design, price etc, providing
multple choices for a favorable decision to purchase.
• Another store may be more efcient with lesser inventory costs but
may not be able to satsfy customers like the frst one.
 INVENTORY

ROLE IN THE SUPPLY CHAIN

• Inventory also has a signifcant impact on the material fow tme in a
supply chain.
• Material fow tme is the tme that elapses between the point at which
material enters the supply chain to the point at which it exits. For a
supply chain thruput is the rate at which sales occur.
• If inventory is represented by ‘ I ’, fow tme by ‘T’ and thruput by ‘D’
then as per Litle’s Law : I = DT
• For example in a factory the fow tme is 5 hours and the thruput is 30
units per hour, as per Litle’s Law the Inventory = 5 x 30 = 150 units.
• For reducing the inventory to 90 units with same thruput, the fow tme
will have to be reduced to 3 hours.
 INVENTORY

ROLE IN THE COMPETITIVE STRATEGY

• Inventory plays a signifcant role in a supply chain’s ability to support a
frm’s compettve strategy .
• If a company’s compettve strategy requires very high level of
responsiveness, this can be achieved by locatng large amounts of
inventory close to the customer.
• Conversely a company can also use inventory to become more efcient
by reducing inventory through centralised stocking. This strategy would
support a compettve strategy of being a low cost producer.
• The trade-of implicit in the inventory driver is between the
responsiveness that results from high inventory and the efciency that
results from low inventory.
 INVENTORY

ROLE IN THE COMPETITIVE STRATEGY

• The compettve strategy of a company like Nordstrom targets upper-
end customers with high responsiveness requirements. These customers
are willing to pay a premium to have the products they want , WHEN
they want.
• To support this compettve strategy Nordstrom stocks large variety and
quantty of products, ensuring high level of responsiveness.
• The inventory levels of Nordstrom are higher than the compettors.
• For this, it incurs extra cost and needs larger storage space – both
factors resultng in higher costs. But it gains extra margin from its
satsfed customers who are willing to pay for the level of service that
Nordstrom’s inventory makes possible.
 INVENTORY

COMPONENTS OF INVENTORY DECISIONS : CYCLE INVENTORY

Cycle inventory is the average amount of inventory used to satsfy
demand between receipts of supplier shipments. The size of the cycle
inventory is a result of producton, demand , transportaton and
purchase of material in large lots.
• Firms produce or purchase in large lots to exploit economies of scale in
producton, transportaton or purchasing process. Increase in lot size
results in increase in carrying cost.
• An on-line book retailer on an average sells 10 truck loads of books per
month. He could order 10 truckloads every month or one truckload
every 3 days. Trade-of is between cost of holding larger inventory vs
cost of ordering in smaller lots.
 INVENTORY

COMPONENTS OF INVENTORY DECISIONS : SAFETY INVENTORY

• Safety inventory is inventory held in case demand exceeds expectatons.

It is kept to counter uncertainty. If the demand was perfectly
predictable, only cycle inventory will be needed.
• However demand is uncertain and may exceed forecast levels. To satsfy
such conditons, companies hold safety inventory. Managers face big
dilemma to determine how much safety inventory to hold, for taking
care of unexpected high demand.
• A toy retailer during holidays keeps high safety inventory. Actual sales
are lower, unsold toys have to be sold at discount at a loss. If keeps low
safety inventory, then loses sales and opportunity to earn high proft.
 INVENTORY

COMPONENTS OF INVENTORY DECISIONS : SEASONAL INVENTORY

• Seasonal inventory is build up to counter predictable variability in

demand. Companies build up inventory during low demand periods for
using the same during peak season when higher demand takes place.
• Using producton capacity during of-season when demand is low,
enables frms to cater to the peak season demand which exceeds the
producton capacity.
• Managers face key decision regarding how much of seasonal inventory
to build up. Some use historical fgures and apply reasonable growth
rate to arrive at the seasonal inventory level.
• Trade-of between additonal cost and additonal margin is necessary .
 INVENTORY

INVENTORY RELATED ASPECTS

- Supply chain managers need to track the following inventory related
aspects :
• AVERAGE INVENTORY: measures the average amount of inventory
carried and should be measured in units, days of demand and fnancial
value.
• HIGH INVENTORY PRODUCTS : identfes the products for which a frm is
carrying a high level of inventory. Helps in identfying products that are
in oversupply, identfy reasons that justfy the high inventory such as
price discounts, a slow moving product etc.
• AVERAGE REPLENISHMENT BATCH SIZE: measures the average amount
in each replenishment order.
 INVENTORY

INVENTORY RELATED ASPECTS

• AVERAGE REPLENISHMENT BATCH SIZE: The batch size should be
measured in terms of both units and days of demand. It can be
estmated by averaging over tme the diference between the maximum
and the minimum inventory ( measured in each replenishment cycle n
on hand.
• AVERAGE SAFETY INVENTORY: measures the average inventory on hand
when a replenishment order arrives. Average safety inventory should be
measured in both units and days of demand. It can be estmated by
averaging over tme the minimum inventory on hand in each
replenishment cycle.
• SEASONAL INVENTORY: measures the amount of both cycle and safety
 INVENTORY

INVENTORY RELATED ASPECTS

inventory that is purchased solely due to seasonal changes in demand.
• FILL RATE: measures the fracton of orders/demand that were met on
tme from inventory. Fill rate should not be averaged over tme but over
a specifed number of units of demand ( say every thousand, million
etcn.
• FRACTION OF TIME OUT OF STOCK: measures the fracton of tme that a
partcular unit had zero inventory. This fracton can be used to estmate
the demand during the stock out period.
• OVERALL TRADE-OFF : the fundamental trade-of that managers face
when making inventory decisions is between responsiveness and
efciency. Increasing inventory generally makes the supply chain more
 INVENTORY

INVENTORY RELATED ASPECTS

responsive to the customer. A higher level of inventory also facilitates
a reducton in producton and transportaton costs because of improved
economies of scale in both functons. The choice, however increases
inventory holding cost.