Supply Chain Guidance: Performance, Structure, and Key Decisions
Chapter 3: Supply Chain Guidance Performance
3.1 Performance of Supply Chain Guidance
The supply chain balances responsiveness and efficiency to align with the company’s competitive strategy.
Types of Guidelines:
- Facilities: Physical locations in the supply chain network where product is stored, assembled, or manufactured.
- Inventory: Includes all raw materials.
- Transportation: Moving inventory between locations.
- Information: Data and analysis concerning facilities.
- Provisioning (Procurement): Deciding who performs specific supply chain activities like production.
- Pricing: Determining charges for goods and services.
3.2 Structure for Supply Chain Guidelines
Balancing responsiveness and efficiency is key to a successful strategy.
3.3 Role of Facilities in the Supply Chain
Facilities process inventory into another state (manufacturing) or store it.
Key Considerations for Facilities:
- Competitive Strategy Alignment: A key guideline for supply chain performance in terms of responsiveness and efficiency.
- Decision Components:
- Function: Purpose of production facilities.
- Location: Placement of company facilities.
- Capacity: Determining facility capacity.
- Metrics:
- Capacity: Maximum processing amount.
- Utilization: Fraction of capacity used.
- Flow Time/Theoretical Production Cycle: Time to process one unit.
- Flow Time Efficiency: Ratio of theoretical to actual flow time.
- Product Range: Number of products or families.
- Contribution of Top 20% SKUs and Customers: Volume fraction processed.
- Process/Setup/Breakdown/Downtime: Time fraction spent processing.
- Average Production Lot Size: Amount produced per batch.
- Production Service Level: Fraction of orders fulfilled.
3.4 Role of Inventory in the Supply Chain
Inventory exists due to supply-demand mismatch.
Key Considerations for Inventory:
- Competitive Strategy Alignment: Supporting the company’s competitive strategy.
- Decision Components:
- Cycle Inventory: Average inventory used to meet demand between shipments.
- Safety Stock: Inventory held to mitigate demand uncertainty.
- Seasonal Inventory: Inventory held to address predictable demand variations.
- Product Availability: Fraction of demand met on time from stock.
- Metrics:
- Average Inventory: Average inventory level.
- Products with Excess Days in Inventory: Items with high inventory levels.
- Average Replenishment Lot Size: Average quantity per replenishment.
- Average Safety Stock: Average inventory upon replenishment arrival.
- Seasonal Inventory: Inventory held due to seasonal demand changes.
- Fill Rate: Fraction of requests met on time from stock.
- Stockout Rate: Time fraction with zero inventory for a SKU.
- Balancing Responsiveness and Efficiency: Crucial for inventory decisions.
3.5 Role of Transportation in the Supply Chain
Products move through various supply chain stages.
Key Considerations for Transportation:
- Competitive Strategy Alignment: Transportation plays a key role in meeting customer needs.
- Decision Components:
- Transportation Network Design: Modes, locations, and routes for shipping.
- Mode Selection: How products move between locations.
- Metrics:
- Average Inbound Transportation Cost: Cost of bringing product to facility.
- Average Inbound Shipment Size: Units or value per inbound shipment.
- Average Inbound Transportation Cost per Shipment: Cost per inbound delivery.
- Average Outbound Transportation Cost: Cost of shipping to customer.
- Average Outbound Shipment Size: Units or value per outbound shipment.
- Average Outbound Transportation Cost per Shipment: Cost per outbound delivery.
- Fraction of Transportation by Mode: Usage of different modes.
3.6 Role of Information in the Supply Chain
Information is crucial for connecting and operating supply chain stages.
Key Considerations for Information:
- Competitive Strategy Alignment: Information enhances efficiency and responsiveness.
- Decision Components:
- Push vs. Pull: Determining push or pull strategy for supply chain processes.
- Coordination and Information Sharing: Working towards total return maximization based on shared information.
- Forecasting and Aggregate Planning: Projecting future demand and conditions.
- Technologies: EDI, Internet, ERP, supply chain management software, RFID.
- Metrics:
- Forecast Horizon: Time in advance of forecast.
- Refresh Rate: Frequency of forecast updates.
- Forecast Error: Difference between forecast and actual demand.
- Seasonality Factors: Degree of average demand variation per season.
- Plan Variance: Difference between planned and actual inventory/production.
- Demand Variability to Order Variability Ratio: Ratio of standard deviations of demand and orders.
3.7 Role of Procurement in the Supply Chain
Procurement encompasses processes for purchasing goods and services.
Key Considerations for Procurement:
- Competitive Strategy Alignment: Sourcing decisions impact supply chain efficiency and responsiveness.
- Decision Components:
- Own or Outsource: Performing tasks internally or externally.
- Supplier Selection: Number of suppliers for an activity.
- Supply: Supplier sending product in response to requests.
- Metrics:
- Days Payable Outstanding: Days between task completion and payment.
- Average Purchase Price: Average price of purchased goods/services.
- Purchase Price Range: Fluctuation in purchase price.
- Average Purchase Quantity: Average amount per order.
- On-Time Delivery Rate: Proportion of on-time deliveries.
- Supplier Lead Time: Time between order and receipt.
3.8 Role of Pricing in the Supply Chain
Pricing determines charges for goods and services.
Key Considerations for Pricing:
- Competitive Strategy Alignment: Pricing is a key attribute for executing competitive strategy.
- Decision Components: Pricing and economies of scale, EDLP vs. Hi-Lo pricing, fixed vs. menu pricing.
- Metrics:
- Profit Margin: Profit as a percentage of revenue.
- Days Sales Outstanding: Time between sale and payment.
- Incremental Fixed Cost per Order: Order-independent costs.
- Incremental Variable Cost per Unit: Order-dependent costs.
- Average Sale Price: Average price of a supply chain activity.
- Average Order Size: Average amount per order.
- Sale Price Range: Maximum and minimum selling price.
- Periodic Sales Range: Maximum and minimum quantity sold.
3.9 Barriers to Achieving Strategic Fit
Achieving strategic fit requires balancing responsiveness and efficiency to meet customer needs. Key barriers include:
- Increasing Product Variety: Customized products for specific clients.
- Decreasing Product Life Cycles: Shorter product lifespans.
- Increasingly Demanding Customers: Customers switching providers easily.
- Fragmented Supply Chain Ownership: Outsourcing non-core functions.
- Globalization: Increased distance between facilities.
- Difficulty Implementing New Strategies: Implementation challenges.