Supply Chain Drivers

Drivers determine supply chain performance. For each driver, managers must make tradeoffs between efficiency (cost) and responsiveness.

Drivers of Supply Chain Performance

Inventory Transportation Facilities Information

Halliburton in Iraq

Inventory

All of the raw materials, work in process (WIP), and finished goods within the supply chain. Inventory policies can dramatically alter a supply chain’s efficiency and responsiveness.

Why hold inventory?

Unexpected changes in customer demand (always hard to predict, and uncertainty is growing) Short product life cycles Product proliferation

Why hold inventory?

Uncertain supply Quantity Quality Costs Delivery time

Why hold inventory?

What if there was no uncertainty in supply or demand—would it still be necessary to hold inventory?

Inventory’s Impact

Inventory can increase amount of demand that can be met by increasing product availability.

Inventory can reduce costs by exploiting economies of scale in production, transportation, and purchasing.

Inventory can be used to support a firm’s competitive strategy. More inventory increases responsiveness, less inventory increases efficiency (reduces cost).

Inventory’s Impact

Inventory can significantly affect material flow/cycle/ throughput time.

Little’s law: Inventory = flow time x throughput rate.

In other words: If you move your inventory faster, you don’t need as much inventory (inventory velocity)

Types of Inventory Needed

Cycle Inventory Think convenience (no customer buys eggs

one by one)

The average amount of inventory used to meet demand between replenishments.

Types of Inventory Needed

Seasonal Inventory Think bathing suits and snow-shovels

Inventory that is built up to meet predictable variation in demand. Amount of seasonal inventory depends on

how quickly and inexpensively a firm can change its rate of production.

Types of Inventory

Safety Inventory Random, unpredictable, unexpected

Inventory held to counter uncertainty in demand or supply (“just-in-case” inventory).

Types of Inventory

Pipeline Inventory Work-in process of transit

Inventory held to do business.

Transportation

Modes and routes for moving inventory throughout the supply chain.

Transportation’s Impact

Faster transportation allows a supply chain to be more responsive but generally less efficient.

Less than full truckloads allows a supply chain to be more responsive but generally less efficient.

Transportation can be used to support a firm’s competitive strategy. Customers may demand and be willing to pay for a high level of responsiveness.

Transportation Decisions

Mode of transportation is the manner in which a product is moved (air, truck, rail, ship, pipeline, electronic). Each mode differs with respect to speed, size of shipments, cost, and flexibility.

Routes are paths along which a product can be shipped.

In house or outsource the transportation function. Many companies use third-party logistics providers (3PL) to perform some or all of their transportation activities

Facilities

Places within the supply chain where inventory is stored, assembled, or fabricated. Decisions on location, capacity, and flexibility of facilities have a significant impact on performance.

Facilities Impact

Facilities either store inventory between supply chain stages (warehouses, distribution centers, retailers) or transform inventory into another state (fabrication or assembly plants).

Centralization of facilities uses economies of scale to increase supply chain efficiency (fewer locations and less inventory) usually at the expense of responsiveness (distance from customer).

Facility Decisions

Location. Centralize to gain economies of scale or decentralize to be more responsive. Other issues include quality and cost of workers, cost of facility, infrastructure, taxes, quality of life, etc.

Capacity. Excess capacity allows a company to be more responsive to changes in the level of demand, but at the expensive of efficiency.

Facility Decisions

Manufacturing Methodology. Decisions between a product or functional focus, between flexible or dedicated capacity.

Warehousing Methodology. Chose between SKU storage (stores all of one type of product together), Job lot storage (stores different products together to satisfy a particular customer or job), or cross-docking.

Information

Data and analysis regarding inventory, transportation, facilities, and customers throughout the supply chain. It is potentially the biggest driver since it affects all the other drivers.

Information’s Role

Information connects various supply chain stages and allows them to coordinate activities.

Information is crucial to the daily operations of each stage of the supply chain.

An information system can enable a firm to get a high variety of customized products to customers rapidly

An information system can enable a firm to understand changing consumer needs more quickly

Information Decision Components

Push versus Pull. Push systems (like MRP) need information on anticipated demand to create production and purchasing schedules. Pull system (like JIT) need accurate and quick information on actual demand to move inventory and schedule production in the chain.

Coordination and Information Sharing. How will the goal of maximizing supply chain profitability be achieved through the coordination of activities and sharing of appropriate information?

Information Decision Components

Forecasting and Aggregate Planning. How will future demand and market conditions be forecast, and to what extent will collaborative forecasting be used? How will aggregate planning be used to meet forecasted demand and to what extent will it be shared throughout the supply chain?

Enabling Technologies. Which information technologies will be used and integrated throughout the supply chain? electronic data interchange (EDI), the Internet, enterprise resource planning (ERP) systems, supply chain management (SCM) software.

Considerations for Supply Chain Drivers

Driver Efficiency (Cost)

Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Dedicated

Proximity / Flexibility

Information Low cost / slow High cost / streamlined / reliable

Major Obstacles to Achieving Fit

SCM is big: Variety of products and services Spoiled/ demanding customers Multiple owners (procurement, production, inventory,

marketing) / multiple objectives Globalization

Local optimization and lack of global fit

Major Obstacles to Achieving Fit

Instability and Randomness: Increasing product variety Shrinking life cycle Customer fragmentation

Increasing implied uncertainty

Major Obstacle / Challenge

Impact of the internet on supply chain strategies

What shifts in supply chain strategy are occurring because of the internet?

Traditional Fulfillment vs.E-Fulfillment

Traditional Fulfillment

E-Fulfillment

Supply chain strategy

Push Push-pull

Shipment size Bulk Parcel

Reverse logistics Small part of business Important and highly complex

Delivery destination Small # of stores Large #, geographically dispersed

Lead times Relatively long Relatively short

Simchi-Levi, Kaminsky, and Simchi-Levi, 2003, p.133

Common Problesm

Lack of SCM metrics :How do we measure responsiveness?

Poor IT design Poor delivery status information Ignoring uncertainties Internal customer discrimination Poor integration Elusive inventory costs SC-insensitive product design