Module 2 - Supply Chain
Performance, Drivers &
Metrics
Chapters 2 and 3
Logistics and Supply Chain Management
Dr. Kathryn Abel
School of Systems and Enterprises
Date
Topics
1.Strategies and Strategic Fit
2.Achieving Strategic Fit
3.Challenges in Achieving Strategic Fit
4.Supply Chain Drivers & Metrics
2
Topics
1.Strategies and Strategic Fit
2.Achieving Strategic Fit
3.Challenges in Achieving Strategic Fit
4.Supply Chain Drivers & Metrics
3
Different Customer Needs….
4
Different Customer Needs….
7-11 versus Sam’s Club
5
Competitive Strategy
• Defines the set of customer needs a firm seeks to
satisfy through its products and services
• Based on how the customer prioritizes product cost,
delivery time, variety, and quality
• Wal-Mart:
- Provide high availability of a variety of products of
reasonable quality at low prices
6
Other Strategies
• Product development strategy: specifies the portfolio
of new products that the company will try to develop
• Marketing and sales strategy: specifies how the
market will be segmented and product positioned,
priced, and promoted
• Supply chain strategy: determines the nature of
material procurement, transportation of materials,
manufacture of product or creation of service,
distribution of product
- Consistency and support between supply chain
strategy, competitive strategy, and other functional
7
Strategic Fit
- Strategic fit indicates…
• Competitive and supply chain strategies have the
same goals
• Consistency between customer priorities of
competitive strategy and supply chain capabilities
specified by the supply chain strategy
- A company may fail because of a lack of strategic fit or
because its processes and resources do not provide
the capabilities to execute the desired strategy
8
Topics
1.Strategies and Strategic Fit
2.Achieving Strategic Fit
3.Challenges in Achieving Strategic Fit
4.Supply Chain Drivers & Metrics
9
How is Strategic Fit Achieved?
Step 1: Understand customer and supply chain
uncertainty
Step 2: Understand supply chain capabilities
Step 3: Align these to achieve a good strategic fit
10
How is Strategic Fit Achieved?
Step 1: Understand customer and supply chain uncertainty
Step 2: Understand supply chain capabilities
Step 3: Align these to achieve a good strategic fit
11
Step 1: Understand the Customer
Identify the needs of the customer segment being served
•
•
•
•
•
•
Quantity of product needed in each lot
Response time customers will tolerate
Desired rate of innovation in the product
Variety of products needed
Service level required
Price of the product
12
Step 1: Understand the Customer …
and Supply Chain Uncertainty
• Demand Uncertainty: uncertainty of customer demand
for a product
• Implied Demand Uncertainty: demand uncertainty
imposed on the supply chain because of the customer
needs it seeks to satisfy
• Supply Uncertainty: uncertainty in the capability of the
supply chain
13
Impact of Customer Needs on
Implied Demand Uncertainty
14
Attributes Affected by Implied Uncertainty
Salt
iPhone
15
Impact of Supply Source Capability on Supply Uncertainty
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Implied Uncertainty Spectrum
Salt
PREDICTABLE
SUPPLY AND
DEMAND
Salt at a
supermarket
Auto
Hi-Tech
Predictable supply and uncertain
demand or uncertain supply and
predictable demand or somewhat
uncertain supply and demand
An existing
automobile
model
HIGHLY
UNCERTAIN
SUPPLY AND
DEMAND
A new
communication
device
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How is Strategic Fit Achieved?
Step 1: Understand customer and supply chain
uncertainty
Step 2: Understand supply chain capabilities
Step 3: Align these to achieve a good strategic fit
18
Step 2: Understanding Supply Chain Capabilities
• How does the firm best meet demand?
• Supply Chain Characteristics:
• Supply Chain Responsiveness
• Supply Chain Efficiency
19
Responsiveness and Efficiency
• Supply chain responsiveness is the ability to
• respond to wide ranges of quantities demanded
• meet short lead times
• handle a large variety of products
• build highly innovative products
• meet a very high service level
• Supply chain efficiency is the inverse of the cost of
making and delivering the product to the customer
§ Increasing responsiveness results in higher costs that
lower efficiency
20
Cost-Responsiveness Efficient Frontier
Responsiveness
High
BE HERE!
DON’T
Low BE HERE
High
Low
Cost
• Shows the lowest possible cost for a given level of
responsiveness
• Lowest cost is defined based on existing technology
• A firm can improve responsiveness and cost performance by
moving toward the efficient frontier
21
Responsiveness Spectrum
22
How is Strategic Fit Achieved?
Step 1: Understand customer and supply chain
uncertainty
Step 2: Understand supply chain capabilities
Step 3: Align these to achieve a good strategic fit
23
Step 3: Align to Achieve Strategic Fit
• Ensure that what the supply chain does well is
consistent with target customers needs
• Zone of strategic fit
• Two key points
• there is a right supply chain strategy for a given
competitive strategy
• there is no supply chain strategy that is always right
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Zone of Strategic Fit
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Efficient vs. Responsive Supply Chains
Efficient
Responsive
Primary goal
Lowest cost
Quick response
Product design strategy
Minimum product cost
Modularity to allow
postponement
Pricing strategy
Lower margins
Higher margins
Manufacturing strategy
High utilization
Capacity flexibility
Inventory strategy
Minimize inventory
Buffer inventory
Lead time strategy
Reduce but not at expense
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy Cost and low quality
Speed, flexibility, quality
Transportation strategy
Greater reliance on
responsive (fast) modes
Greater reliance on low cost
modes
Textbook Table 2-4
26
Topics
1.Strategies and Strategic Fit
2.Achieving Strategic Fit
3.Challenges in Achieving Strategic Fit
4.Supply Chain Drivers & Metrics
27
Challenges in Achieving Strategic Fit
§ 1) Multiple Products and Customer Segments
§ 2) Product Life Cycle
§ 3) Globalization
§ 4) Competitive Changes Over Time
§ 5) Increasingly Demanding Customers
§ 6) Growing Supply Chain Uncertainty
§ 7) Environment and Sustainability
§ 8) Changing Business Environment
§ 9) Nature of Goods
28
Multiple Products and Customer Segments
• Firms sell different products to different customer
segments (with different implied demand uncertainty)
• The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products and
customer segments
• Two approaches:
• Different supply chains
• Tailor supply chain to best meet the needs of
each product’s demand
• Increase in product variety makes forecasting difficult
29
1) Multiple Products and Customer Segments
30
India
31
Taco Bell in India
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China
33
Guess
34
Guess
35
2) Product Life Cycle
• The demand characteristics of a product and the needs
of a customer segment change as a product goes
through its life cycle (in the market)
• Supply chain strategy must evolve throughout the life
cycle
• Early: uncertain demand, high margins (time is
important), product availability is most important, cost
is secondary
• Late: predictable demand, lower margins, price is
important
• Life cycle of products has been shrinking
36
3) Globalization
• Products and services can be easily sourced from
anywhere in the world
• A global supply chain has many benefits and challenges
• Coordination becomes difficult
• Increased competition
vs.
Made in USA vs. Globally
37
Global Sourcing
• Out sourcing is now global sourcing
• Practice of sourcing from the global market for goods
and services across geopolitical boundaries.
• Aims to exploit global efficiencies in
the delivery of a product or service.
• These efficiencies include low cost
skilled labor, low cost raw material and
other economic factors like tax breaks
and low trade tariffs.
38
4) Competitive Changes Over Time
• Competitive pressures can change over time
• More competitors may result in an increased emphasis
on variety at a reasonable price
• The supply chain must change to meet these changing
competitive conditions
39
5) Increasingly Demanding Customers
• Today’s customers want
• Faster fulfillment
• Better quality
• Better performance
• Same or less price
High quality
Cutting Prices
Making Customers Happy
40
6) Growing Supply Chain Uncertainty
• Significant Fluctuations in:
• Exchange rates
• Global demand
• Price of crude oil
Changes in demand
• Technological Challenges
• Quality Issues
• Inability to meet deadlines
41
7) Environment and Sustainability
• New environmental regulations
• Pollution / Emissions
• Use of Hazardous material
• Disposal of Hazardous waste
• Significant impact on sourcing decisions
• Sustainability is a big challenge
Pollution from a factory
42
8) Changing Business Environment
§ Customers, technologies, and business models change
constantly
Can interact with many places on the planet via technology
43
9) Nature of Goods
• Many products are now available in the digital form
• Ease of purchase and instant gratification for customers
• Challenges for traditional supply chains
SC Performance
Exercise
44
Topics
1.Strategies and Strategic Fit
2.Achieving Strategic Fit
3.Challenges in Achieving Strategic Fit
4.Supply Chain Drivers & Metrics
45
Drivers of SC Performance
Logistical Drivers:
§ 1) Facilities: places where
inventory is stored, assembled,
or fabricated
§ 2) Inventory: raw materials, WIP,
finished goods within a supply
chain
§ 3) Transportation: moving
inventory from point to point in a
supply chain
46
Drivers of SC Performance
Cross-Functional Drivers:
§ 4) Information: data and analysis regarding inventory,
transportation, facilities throughout the supply chain
5) Sourcing: functions a firm performs
and functions that are outsourced
6) Pricing: Price associated with goods
and services provided by a firm
47
A Framework for
Structuring Drivers of
Supply Chain
Performance
48
1) Facilities
• Within a facility, inventory is either transformed into
another state (manufacturing) or stored (warehousing)
• Components of facilities decisions:
• Role
• Location
• Capacity
• Related metrics:
• Capacity
• Production cost per unit
• Average production batch size
49
2) Inventory
• Inventory exists because of a mismatch between supply and
demand
• It’s a major source of cost and influence on responsiveness
• Components of inventory decisions:
• Cycle inventory
• Safety inventory
• Seasonal inventory
• Related metrics:
• Average inventory
• Average replenishment batch size
• Fraction of time out of stock
Tallying inventory
50
3) Transportation
• Moves the product between stages in the S.C.
• Impact on responsiveness and efficiency
• Faster transportation allows greater responsiveness but lower
efficiency
• Components of transportation decisions
• Design of transportation network
• Choice of transportation mode
• Related Metrics
• Average inbound transportation cost
• Average outbound shipment size
• Fraction transported by mode
51
4) Information
• The connection between the various stages in the supply chain
– allows coordination between stages
• Good information on supply and demand can help improve
utilization and responsiveness of a facility
• Components of information decisions:
• Push Vs. Pull; Coordination & Information sharing;
forecasting & aggregate supply planning
• Enabling technologies:
• EDI; Internet; ERP; RFID
• Related Metrics:
• Forecast horizon and error; frequency of update
52
5) Sourcing
• Set of business processes required to purchase goods
and services in a supply chain
• Components of sourcing decisions:
• In-house or Outsource
• Supplier selection
• Procurement
• Related metrics:
• Average purchase price
• Average purchase quantity
• Supplier reliability
53
6) Pricing
• Determining the amount to charge customers for its
good and services
• Pricing affects customer segments
• Components of pricing decisions:
• Pricing & economies of scale
• Variable pricing
• Fixed pricing
• Menu pricing
• Related metrics:
• Profit margin
• Average sale price
• Range of sale price
54
THANK YOU
Stevens Institute of Technology
1 Castle Point Terrace, Hoboken, NJ 07030
The End