Chapter 3

Supply Chain
Drivers and
Metrics

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Outline
Financial Measures of performance
Drivers of supply chain performance
A framework for structuring drivers
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
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 Financial Measures of Performance
 return on equity (ROE)
 return on assets (ROA)
 accounts payable turnover (APT)

 -

 There are two important measures, however, that are not explicitly part of a firm’s
financial statements: markdowns and lost sales.
– Markdowns represent the discounts required to convince customers to buy excess
inventory.
– Lost sales represent customer sales that did not materialize because of the absence of
products the customer wanted to buy
 Both markdowns and lost sales reduce net income and arguably represent the biggest
impact of supply chain performance on the financial performance of a firm.
 Ex: Walmart and Zara (their supply chains allow a better matching of supply and
demand, thereby reducing markdowns and lost sales).
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Drivers of Supply Chain Performance

 The strategic fit requires that a company’s supply chain achieve the balance between
responsiveness and efficiency that best supports the company’s competitive strategy.

 A supply chain’s performance in terms of responsiveness and efficiency is based on

the interaction between the following logistical and cross-functional drivers of
supply chain performance:
– facilities, inventory, transportation, and
– information, sourcing, and pricing.

 The goal is to structure the drivers to achieve the desired level of responsiveness at
the lowest possible cost, thus improving the supply chain surplus and the firm’s
financial performance.

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 Drivers of Supply Chain Performance
 Facilities
– Physical locations where product is stored, assembled, or fabricated
– two major types of facilities: 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
 Inventory
– raw materials, WIP, finished goods within a supply chain
– Changing inventory policies can dramatically alter the supply chain’s efficiency
and responsiveness.
– Ex: Grainger (high inventory- products hold value), Zara (shorten new product
and replenishment lead times)
 Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes ( Fast mode of transportation
vs. ground transportation)

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Drivers of Supply Chain Performance

 Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance as it directly affects
other drivers
 Sourcing
– functions a firm performs and functions that are outsourced
– who will perform a particular supply chain activity, such as production, storage,
transportation, or the management of information
– Ex: Motorola (much of its production was outsourced to china manufacturers---
improved efficiency but lower responsiveness-long lead times)
 Pricing
– Price associated with goods and services provided by a firm to the supply chain
– Differential pricing provides responsiveness to customers that value it and low
cost to customers that do not value responsiveness as much.

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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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Facilities
Role in the supply chain
– Increasing the number of facilities increases facility and
inventory costs but decreases transportation costs and
reduces response time.
– Increasing the flexibility or capacity of a facility increases
facility costs but decreases inventory costs and response
time.
– Each supply chain must find the appropriate tradeoff when
designing its facilities network.

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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-(little excess capacity) versus efficiency-(large
amount of excess capacity)
Overall trade-off: Responsiveness versus efficiency

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Inventory: Role in the Supply Chain

Inventory exists because of a mismatch between
supply and demand
This mismatch is intentional:
– where it is economical to manufacture in large lots that are
then stored for future sales, or
– where inventory is held in anticipation of future demand or
when the retail store builds up inventory to prepare for a
surge in sales during the holiday season.
In these instances, inventory is held to reduce cost or
increase the level of product availability.

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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

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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, it is held to counter
uncertainty
– 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
Moves the product between stages in the supply chain
Impact on both responsiveness and efficiency
Faster transportation allows greater responsiveness
but lower efficiency
The appropriate choice of transportation allows a firm
to adjust the location of its facilities and inventory to
find the right balance between responsiveness and
efficiency.

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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

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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
In-house or outsource
Overall trade-off: Responsiveness versus efficiency

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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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 Components of Information
Decisions
Push (start with forecasts) versus pull (require information
on actual demand)
Coordination and information sharing (Coordination
among different stages in a supply chain requires each stage to
share appropriate information with other stages.)
Sales and Operations planning
Enabling technologies
– Electronic data interchange (EDI),Internet, ERP systems,
Supply Chain Management software, RFID, etc.
Overall trade-off: Responsiveness versus efficiency

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Sourcing: Role in
the Supply Chain
Set of business processes required to purchase goods
and services in a supply chain
decide whether each task will be performed by a
responsive or efficient source and then whether the
source will be internal to the company or a third party.

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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
Pricing determines the amount to charge customers in
a supply chain for its goods and services.
Pricing strategies can be used to match demand and
supply.
Short-term discounts can be used to eliminate supply
surpluses or decrease seasonal demand points by
moving some of the demand forward.
Low price and low product availability; vary prices by
response times

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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 (response time or
location of delivery)
Overall trade-off: Increase the firm profits

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