CHAPTER3 SUPPLY CHAINDRIVERS AND METRICS~Learning ObjectivesAfter reading this chapter, you will be able to:1. Identify the major drivers of supply chain performance.2. Discuss the role each driver plays in creating strategic fit between thesupply chain strategyand the competitive strategy.3. Define the key metrics that track the performance of the supply chain interms of each driver.4. Describe the major obstacles that must be overcome to manage a supply chainsuccessfully.nthis chapter, we introduce the three logistical drivers-facilities,inventory, and !!:ansportatiQn-and the three cross-functional drivers-information, sourcing, and p.tiQ.ng-that determine the performance of anysupply chain. We discuss how these drivers are used in the design,planning, and operation of the supply chain. We define several metricsthat can be used to gauge the performance of each driver. We alsointroduce many of the obstacles faced by supply chain managers.3.1 DRIVERS OF SUPPLY CHAIN PERFORMANCEThe strategic fit discussed in Chapter 2 requires that a company's supplychain achieve the balance between responsiveness and efficiency that bestmeets the needs of the company's competitive strategy. To understand how acompany can improve supply chain performance in terms of responsivenessand efficiency, we must examine the logistical and crossfunctional driversof supply chain performance: facilities, inventory, transportation,information, sourcing, and pricing. These drivers interact with each otherto determine the supply chain's performance in terms of responsiveness andefficiency. As a result, the structure of these drivers determines if andhow strategic fit is achieved across the supply chain. First we defineeach driver and discussits impact on the performance of the supply chain.

1. Facilities areThe actual physical locations in the supply chain networkwhere I_:lroduct i~d, assembled, or fabricated. The two major typesof facilities are pro~~ s and s~s. Qecisions regarding the role,location, c~and flexibility of facilities have a significant impacton the supply chain's performance. For instance, an auto-partsdistributor striving for responsiveness could have many warehousingfacilities located close to customers even though this practicereduces efficiency. Alternatively, a high-efficiency distributorwould have fewer warehouses to increase efficiency despite the factthat this practice will reduce responsiveness.

2. Inventory encompasses all raw materials, work in process, andfinished goods within a supply chain.

Changing inventory policies can dramatically alter the supply cham'sefficiency and responsiveness. For example, a clothing retailer can makeitself more responsive by stocking large amounts of inventory andsatisfying customer demand from stock. A large inventory, however,increases the retailer's cost, thereby making it less efficient. Reducinginventory makes the retailer more efficient but hurts its responsiveness.

3. Transportation entails moving inventory from point to point in thesupply chain. Transportation can take the form of many combinationsof modes and routes, each with its own performance characteristics.Transportation choices have a large impact on supply chainresponsiveness and efficiency. For example, a mail-order catalogcompany can use a faster mode of transportation such as FedEx toship products, thus making its supply but also less efficient giventhe high costs associated with using FedEx. Or the company can useslower but cheaper ground transportation to ship the product, makingthe supply chain efficient but limiting its responsiveness.

4. Information consists of data and analysis concerning facilities,inventory, transportation, costs, prices, and

customers throughout thesupply chain. Information ispotentiallythe biggestdriver of performance inthe supply chain because itdirectlyaffectseachof theother drivers.Information presentsmanagement withtheopportunity tomake supply chains more responsive and more efficient. For example, withinformationon customer demand patterns, a pharmaceutical company can produce andstock drugsinanticipationof customer demand, whichmakesthe

supply chain very responsivebecausecustomers willfindthedrugsthey need when they need them. Thisdemandinformation can also make the supply chain more efficient because thepharmaceuticalfirmisbetterabletoforecastdemandandproduceonlytherequiredamount.Informationcanalsomakethissupply chain more efficient byprovidingmanagerswithshipping options, forinstance, that allow them to choose the lowest-cost alternativewhile still meeting the necessary service requirements.5.Sourcing isthe choice of who willperform a particular supply chain activity such as production,storage, transportation, or the management of information. At thestrategic level,these decisions determine what functionsa firmperforms and what functions the firmoutsources.

Sourcing decisions affect both the responsiveness and efficiency of asupply chain.After Motorola outsourced much of its production to contract manufacturersin China, itsawitsefficiencyimprove but itsresponsiveness suffer because of the longdistances. Tomake up for the drop in responsiveness, Motorola started flying in some ofits cell phonesfromChina even thoughthischoice increased transportation cost. Flextronics, an electronicscontract manufacturer, ishopingtoofferboth responsive and efficient sourcingoptions to itscustomers. It istrying to make itsproduction facilitiesin the United Statesvery responsive whilekeeping itsfacilitiesinlow-costcountries efficient. Flextronicshopes to become an effective source for allcustomers using this combination of facilities.6.Pricing determines how much a firm willcharge for goods and services that it makesavailablein the supply chain. Pricingaffectsthe behavior of the buyerof the good orservice, thus affecting supply chain performance. For example, if atransportation companyvaries

itschargesbased onthe lead timeprovided by thecustomers, itisverylikely thatcustomerswhovalueefficiencywillorderearly and customerswho valueresponsiveness willbe willingto waitand order just before they need aproduct transported.Early orders are less likely if prices do not vary with lead time.Our definition of these drivers attempts to delineate logisticsand supply chain management.Supply chain management includesthe useof logisticaland cross-functionaldriverstoincrease thesupply chainsurplus.Cross-functionaldrivershavebecome46PART I+Building aStrategic Framework to Analyze Supply Chainsincreasingly important in raising the supply chain surplus in recentyears. While logistics

remains amajor part, supply chain management isincreasingly becoming focused on thethree cross-functional drivers.It isimportant to realize that these driversdo not actindependently but interactwith each other to determine the overall supply chain performance. Goodsupply chaindesign and operation recognizesthis interaction and makes the appropriate trade-offstodeliver thedesired levelof responsiveness.Consider, forexample,the furnitureindustry intheUnited States.Low-cost furnituresourced from Asiaisavailableatmany discount retailers. The primary goal of thissupply chain isto deliver alow priceand acceptable quality. Varietyistypically lowandretailerssuchasWal-Mart stockinventoryof finishedgoods. The lowvariety andstablereplenishment

ordersallowfurnituremanufacturersinAsia tofocusonefficiency.Giventhe availableinventory,low-cost modes of transportation fromAsiaare used.In thisinstance, relativelylow-cost inventory at the retailer allows the supply chain to becomeefficient by loweringtransportation and production costs.In contrast, some U.S.furnituremakers havechosen to focuson providing variety.Giventhe highvariety andhighprices, keepinginventoryof allvariants at aretailer would be very expensive.In thiscase the supplychainhasbeen designedsotheretailer carries very littleinventory.Customersplace

their orders with the retailer by seeing one variant of the furniture andselecting amongthe variousoptions. The supply chain ismade responsive by using information technologyto conveyorder informationeffectively,structuringvery flexiblemanufacturingfacilitiesto be ableto produce insmall lots,andusing responsive transportation todeliver the furnitureto the customer. In thisinstance, responsive facilities, transportation,and information areused to lowerinventory costs.As the followingchapter willillustrate, the key to achieving strategicfitacrossthesupply chain istostructurethesupply chain drivers appropriately to provide the desired level ofresponsiveness.Before wediscusseachof the sixdriversindetail, weputthesedrivers

into aframework thathelpsto clarifytheroleofeachdriver inimprovingsupplychainperformance.3.2FRAMEWORK FORSTRUCTURINGDRIVERSRecall fromChapter 2 that the goal of asupply chain strategy isto strikethe balancebetween responsiveness and efficiency that fitswith the competitive strategy. To reachthisgoal,acompany must structurethe rightcombinationof the three logisticalandthree cross-functional driversdiscussed earlier. For each of the individual drivers, supplychain managersmust make atrade-off betweenefficiencyand responsivenessbased on interaction with the other drivers. The combined impact of thesedrivers thendetermines the responsiveness and the profits of the entire supply chain.Weprovide avisual framework

forsupply chaindecisionmakinginFigure 3-1.Most companiesbegin witha competitivestrategy and then decide what their supplychain strategy ought to be. The supply chain strategy determines how thesupply chainshouldperform with respect to efficiencyand responsiveness. Thesupplychain mustthen usethe threelogisticalandthreecross-functional driversto reach theperformancelevel the supply chain strategy dictatesand maximizethe supply chain profits.Although thisframework isgenerally viewedfrom the topdown, inmany instances, astudy of the six drivers may indicate the need to change the supply chainand potentiallyeven the competitive strategy.Considerthisframeworkusing Wal-Martasan example. Wal-Mart'scompetitive

strategyisto be areliable, low-costretailer forawidevarietyof mass-consumptionEfficiencyCHAPTER 3+Supply Chain Drivers and Metrics47SupplyChainStrategySupplyChain StructureCross-Functional DriversResponsivenessgoods. Thisstrategydictates that the ideal supplychain willemphasizeefficiencybutalsomaintainan adequatelevelof responsiveness. Wal-Mart usesthe three logisticalandthree cross-functional drivers effectivelytoachievethistypeof supply chain performance.With the inventorydriver, Wal-Mart maintainsan efficient supply chain bykeeping low levelsof inventory. For instance, Wal-Mart pioneered cross-dockigg, a system

in which inventoryisnotstocked inawarehouse but ratherlsSli1pped to storesfrom the manufacturer. These shipments make only brief stopsat distribution centers(DCs), wherethey are transferred to trucks that make deliveries to stores. Thissignificantlylowers inventory because products arestocked only at stores, not at both storesand warehouses. With respect to inventory, Wal-Mart favors efficiency overresponsiveness.On the transportation front, Wal-Mart runsitsown fleet, to keepresponsivenesshigh. This increases transportation cost, but the benefits in terms ofreduced inventoryandimprovedproduct availability justify thiscost in Wal-Mart's case.In thecaseoffacilities, Wal-Mart uses centrally located DCs within itsnetwork of stores to decreasethenumber of facilitiesandincreaseefficiencyat each DC. Wal-Mart builds retailstores only where the demand issufficient to justify having several of them supportedbyaDC, therebyincreasing efficiency of itstransportation assets.To utilize informationin the supply chain, Wal-Mart has invested significantly more than its

competitorsin information technology. As a result, Wal-Mart isa leader in itsuse of the informationdriver to improveresponsiveness and decrease inventory investment. Wal-Martfeedsdemand information across the supply chain to suppliers who manufactureonlywhat isbeing demanded. The supply chain'sability to sharedemand information has48PART I+BuildingaStrategic Framework to Analyze Supply Chainsrequired large investments, buttheresultisanimprovedsupplychain intermsofbothresponsivenessand efficiency.Withregardtothesourcingdriver, Wal-Martidentifies efficientsources for each product it sells. Wal-Mart feedsthem large orders,allowingthem tobe efficient by exploiting economies of scale. Finally, for the pricingdriver, Wal-Martpractices "every day low

pricing"(EDLP)foritsproducts. Thisensures thatcustomer demand stayssteady anddoesnot fluctuatewith pricevariations.The entire supply chain then focuseson meeting this demand in an efficient manner.Wal-Mart usesall thesupplychaindrivers to achieve the right balance betweenresponsiveness and efficiency so that its competitive strategy and supplychain strategyare in harmony.Wedevote the next six sections to a detailed discussion of each of the threelogisticaland three cross-functional drivers and their roles in the supply chain.3.3FACILITIESIn thissection, wediscussthe role that facilitiesplay in the supply chain aswell ascriticalfacility-related decisions that supply chain managersneed to make.ROLE IN THE SUPPLY CHAINIf we think of inventory aswhat isbeing passed along the supply chain and transportationashow it ispassed along, then facilities are the where of the supply chain. They arethe locations to or from which the inventory is

transported. Within a facility,inventoryiseither transformed into another state (manufacturing) or it isstored (warehousing).ROLE IN THE COMPETITIVE STRATEGYFacilitiesare akey driver of supply chain performance in terms of responsivenessandefficiency. For example, companies can gain economies of scale when aproduct ismanufacturedor stored in only onelocation;thiscentralization increasesefficiency.Thecostreduction, however, comesattheexpenseof responsiveness, asmanyof acompany'scustomers may be located farfromthe production facility. The opposite isalsotrue. Locating facilitiescloseto customersincreasesthenumber offacilitiesneededand consequently reduces efficiency. If the customer demands and iswillingtopay forthe responsiveness

that havingnumerous facilitiesadds,however, then thisfacilitiesdecision helps meet the company's competitive strategy goals.Example 3-1:ToyotaandHondaBoth Toyota andHonda use facilities decisions to be more responsive to their customers.Thesecompanies have anend goal of opening manufacturing facilitiesineverymajor marketthat they enter.While thereareother benefits to openinglocal facilities,such asprotectionfromcurrency fluctuationandtrade barriers,theincrease inresponsivenessplays alargeroleinToyota andHonda's decision to place facilitiesintheir localmarkets.COMPONENTS OF FACILITIES DECISIONSDecisions regarding facilitiesare acrucial part of supply chain design. Wenow identifycomponents of facilitiesdecisions that companies must analyze.RoleFor production facilities, firms

must decide whether they will be flexible, dedicated, oracombination of the two. Flexible capacity can be used for many types ofproducts butCHAPTER 3+Supply ChainDrivers andMetrics49isoften lessefficient, whereas dedicated capacitycan beused foronlyalimited numberof products but ismore efficient. Firms must also decide whether to design a facilitywithaproduct focusorafunctionalfocus.Aproduct-focused facilityperformsmany different functions(e.g.,fabricationand assembly)in producing asingletype ofproduct. Afunctional-focused facility performs fewfunctions(e.g., only fabrication oronly assembly)on many typesof products. Aproduct focus

tendsto resultin moreexpertise about aparticular typeof product at the expense of the functionalexpertisethat comes from afunctional methodology.For warehouses and DCs, firmsmust decide whether they willbe primarily crossdockingfacilitiesor storage facilities.At cross-dockingfacilities,inbound trucks fromsuppliersare unloaded; the product isbroken into smaller lots,and isquicklyloadedonto store-boundtrucks.Each store-bound truckcarriesavarietyof products, somefrom each inbound truck. For storage facilities, firmsmust decide on the products to bestored at each facility.LocationDeciding where a company will locate its facilitiesconstitutes a large part of the designofasupplychain. Abasictrade-off here iswhether tocentralize inorder

to gaineconomies of scale or to decentralize to become more responsive by beingcloser to thecustomer. Companies must also consider ahost of issues related to the various characteristicsof the local area in which the facility issituated. These include macroeconomicfactors,quality of workers, cost of workers, cost of facility,availability of infrastructure,proximity to customers, the location of that firm'sother facilities, tax effects, and otherstrategic factors.CapacityCompanies must also determine a facility's capacity to perform itsintended function orfunctions. Alarge amount of excess capacity allowsthe facilityto be very flexibleandto respond to wide swings in the demands placed on it.Excess capacity,however, costsmoney and therefore candecrease efficiency. Afacilitywith littleexcesscapacity willlikely be more efficient per unit of product itproducesthan one withalot of unusedcapacity. Thehigh-utilizationfacility,however,willhavedifficultyrespondingtodemand

fluctuations. Therefore, acompany must make atrade-off todeterminetheright amount of capacity to have at each of itsfacilities.Facility-Related MetricsAmanagershould track thefollowingfacility-relatedmetrics that influence supplychain performance.•Capacity measures the maximum amount a facility can process.•Utilization measures the fraction of capacity that iscurrently being used in thefacility.Utilization affects both the unit cost of processing and the associateddelays. Unit coststend to decline and delays increase with increasing utilization.•Theoretical flow/cycle time of production measures the time required to processaunit ifthere are absolutely no delays at any stage.•Actual average flow/cycle time measures the average actual time taken for allunits processed over aspecified duration such asaweek or month. The actualflow/cycletime includesthe theoretical time and any delays.•Flow time efficiencyisthe ratio of the theoretical flow time to the actual averageflowtime.•

Product variety measures the number of products/product families processed inafacility.Processing costs and flow times are likely to increase with productvariety.50PART I+Building aStrategic Framework to Analyze Supply Chains•Volumecontribution of top20 percent SKUs and customers measures the fractionof total volume processed by a facilitythat comes from the top 20percent SKUs orcustomers. An 80/20 outcome in which the top 20 percent contribute 80percent ofvolume indicates likely benefits fromfocusingthe facility where separate processesare used to process the top 20percent and the remaining 80 percent.•Processing/setup/down/idle time measure the fraction of time that the facilitywas processing units, being set up to process units, unavailable becauseit wasdown, or idle because it had no units to process.•Average production batch size measures the average amount produced in eachproduction batch. Large batch sizeswill decrease production cost but increaseinventories in the supply chain.•Production servicelevel measures the fraction of production orders completedon time and in full.OVERALL TRADE-OFF:RESPONSIVENESS VERSUS EFFICIENCYThe fundamentaltrade-offthatmanagersface

whenmakingfacilitiesdecisionsisbetween the cost of the number, location, and type of facilities(efficiency) and the levelof responsiveness that these facilitiesprovide the company's customers. Increasing thenumberof facilitiesincreases facilityand inventory costsbut decreasestransportationcosts and reduces response time. Increasing the flexibilityof afacilityincreases facilitycosts but decreases inventory costs and response time.3.4INVENTORYIn thissection wediscussthe rolethat inventory playsin the supply chain and howmanagers use inventory to drive supply chain performance.ROLE IN THE SUPPLY CHAINInventory exists inthesupplychain becauseof amismatchbetween supplyanddemand. This mismatch is intentional at asteel manufacturer, where it iseconomicaltomanufacture inlarge lotsthat

arethenstored forfuturesales. The mismatch isalso intentional ataretailstorewhereinventory isheldinanticipationof futuredemand. An important rolethat inventory plays inthesupplychainistoincreasethe amount of demand that can be satisfied by having the product ready andavailablewhenthe customer wantsit. Another significant rolethat inventory playsistoreduce cost by exploiting economiesof scalethat may exist during production anddistribution.Inventory is held throughout the supply chain in the form of rawmaterials, work inprocess, and finishedgoods. Inventory isamajor source of cost in asupply chainandhas ahuge impact on

responsiveness. If wethink of the responsivenessspectrum discussedin Chapter 2,the location and quantity of inventory can move the supply chainfrom one end of the spectrum to the other. For example, an apparel supplychain withhighinventory levelsat the retail stagehasahighlevelof responsiveness because aconsumer can walk into astore and walk out with the shirt he or she was looking for. Incontrast, an apparel supply chain with little inventory could be veryefficient but wouldmake customers wait several weeks or even months for their clothes.Inventory also has asignificant impact on the material flow time in asupply chain.Material flowtime isthe time that elapses between the point at which material entersCHAPTER 3+Supply ChainDrivers andMetrics51the supply chain to the point at which it exits. For a supply chain,throughput isthe rateat which sales occur. If inventory isrepresented byl, flow time by T,and throughput byD, the three can be related using Little's law asfollows:~'\\·'-<

l=DT(3.1)For example, if the flowtime

of anautoassemblyprocess is10hoursand thethroughput is60unitsan hour, Little's law tellsus that the inventory is60X10=600units. If wewere ableto reduce inventory to 300units while holding throughput constant,we would reduce our flowtime to fivehours(300/60). Wenote that inthis relationship,inventory and throughput must have consistent units.The logicalconclusionhere isthat inventory andflowtimearesynonymousinasupply chain because throughput isoften determined by customer demand. Managersshould use actions that lower the amount of inventory needed withoutincreasing costor reducing responsiveness, because reduced flowtime can be asignificant advantage

in asupply chain.ROLE IN THE COMPETITIVE STRATEGYInventory plays asignificant role in asupply chain's ability to support afirm's competitivestrategy.If afirm'scompetitivestrategyrequiresaveryhighlevelofresponsiveness,acompanycanachievethisresponsivenessbylocatinglargeamountsof inventory close tothecustomer.Conversely, acompany canalsouseinventorytobecomemore efficientbyreducinginventorythroughcentralized

stocking. Thelatterstrategy would support acompetitive strategyof being alowcostproducer. The trade-off implicit inthe inventory driver isbetween the responsivenessthatresultsfrommore inventory and theefficiencythat resultsfromlessinventory.Example 3-2:NordstromNordstrom's competitive strategy targetsupper-end customers withhigh responsivenessrequirements. These customers arewilling to pay a premium to have the products theywant when they want them.Tosupport this competitivestrategy,Nordstrom uses inventory;the company stocks a large variety andquantity of products to ensure a highlevelofavailability.Infact,Nordstrom stocks a significantly larger amount of inventory thanotherdepartment stores.Nordstrom incurs higher costs because of its largeinventory,but itgains extra margin fromits customers, who are willing topay for thelevelof service thatNordstrom's inventory makes possible.

COMPONENTS OF INVENTORY DECISIONSWenow identify major inventory-relateddecisionsthatsupplychain managersmustmake to effectively create more responsive and more efficient supplychains.Cycle InventoryCycleinventory isthe average amount of inventory used to satisfy demand betweenreceiptsof supplier shipments. The size of the cycle inventory isaresult of the production,transportation, or purchase of material in large lots.Companies produce orpurchase in large lotstoexploiteconomiesof scaleintheproduction, transportation,orpurchasingprocess. Withtheincreasein lotsize,however, alsocomesanincrease in carrying costs.Asan exampleof acyclestock decision, consideran

onlinebook retailer. Thisretailer'ssalesaverage around 10truckloadsof booksamonth. The cycleinventory decisions the retailer must make are how much to orderforreplenishment and how often to place these orders. Thee-retailer couldorder 10truckloads once each month or it could order one truckload every threedays. The basic52PART I+Building aStrategic Framework to Analyze Supply Chainstrade-off supply chainmanagersfaceisthe cost ofholding largerlotsof inventory(whencycle inventory ishigh)versusthe cost of ordering product frequently(whencycle inventory islow).Safety InventorySafetyinventoryisinventory heldin case demand exceedsexpectation; itisheld tocounter uncertainty. If the world were perfectly predictable, only cycle

inventory wouldbe needed. Because demand isuncertain and may exceed expectations, however, companieshold safety inventory to satisfy an unexpectedly high demand. Managersface a keydecisionwhendetermininghowmuchsafetyinventorytohold. Forexample,atoyretailersuchasToys"R" Us must calculate itssafetyinventory for the holidaybuyingseason. If it has too much safety inventory, toys go unsold and may haveto be discountedafter the holidays. If the company hastoo little safety inventory, however, then Toys "R"Us loses sales, along with the margin those sales would have brought.Therefore, choosingsafety inventory involvesmakingatrade-off betweenthecostsof havingtoomuchinventory and the costs of losing sales due to not having enoughinventory.Seasonal InventorySeasonal inventory isbuilt up to counter predictable variability in demand. Companies

using seasonal inventory build up inventory in periods of low demand andstore itforperiodsof high demand when theywillnot have thecapacitytoproduceall that isdemanded. Managers face keydecisionsindeterminingwhether tobuild seasonalinventory, and ifthey do build it,indecidinghowmuch tobuild. If acompany canrapidly change the rate of itsproduction system at very low cost, then it may not needseasonalinventory,because theproductionsystem canadjusttoaperiodof highdemandwithout incurring large costs.However, ifchanging therate of production isexpensive (e.g., when workers must be hiredor fired), then acompany would be wise

toestablish asmooth production rate and build up its inventory during periods of lowdemand. Therefore, the basic trade-off supply chain managers facein determining howmuch seasonal inventory to build isthe cost of carrying the additional seasonal inventoryversus the cost of having amore flexible production rate.Level of Product AvailabilityLevel of product availability isthe fraction of demand that isserved on time from productheldininventory. Ahigh levelof product availabilityprovides ahigh levelofresponsiveness but increases cost because a lot of inventory isheld but rarely used. Incontrast, alow level of product availability lowers inventory holding cost butresults inahigher fractionof customers whoare not servedon time. The basic trade-off whendeterminingthelevelofproductavailability isbetweenthecostofinventorytoincrease product availability and the loss from not serving customers ontime.

Inventory-Related MetricsAmanager should track the following inventory-related metrics thatinfluence supplychain performance.•Average inventory measures the average amount of inventory carried. Averageinventory should be measured in units, days of demand, and financialvalue.•Products with more than aspecified number of days of inventory identifies theproducts forwhich the firm iscarrying ahigh level of inventory. Thismetric canbe used to identify products that are in oversupply or identify reasonsthat justifythe high inventory, such asprice discounts, or being avery slow mover.•Average replenishment batch size measures the average amount in eachreplenishmentorder. The batch size should be measured by SKU in terms of both units

fCHAPTER3+Supply ChainDriversand Metrics53and days of demand. It can be estimated by averaging over time thedifferencebetween the maximum and the minimum inventory (measured in eachreplenishmentcycle) on hartd.•Average safety inventory measures the average amount of inventory on handwhen a replenishment order arrives. Average safety inventory should bemeasuredby SKU in both units and daysof demand. It can be estimated by averaging

over time the minimum inventory on hand in each replenishment cycle.•Seasonal inventory measures the amount of both cycleand safety inventory thatispurchased solely due to seasonal changes in demand.•Fill rate measures the fraction of orders/demand that were met on time frominventory. Fill rate should not be averaged over time but over a specifiednumberof unitsof demand (say, every thousand, million, etc.).•Fractionof time out of stock measures the fraction of time that aparticular SKUhad zero inventory. Thisfraction can be used to estimate the demand during thestock out period.Overall Trade-Off:Responsiveness Versus EfficiencyThe fundamentaltrade-off that managers facewhenmaking inventory decisionsisbetween responsiveness and efficiency. Increasing inventory generallymakes the supplychain more responsive to the customer. Ahigher level of inventory also facilitates areduction inproduction and transportation costsbecause of improved economies ofscale in both functions. This choice, however, increases inventory holdingcost.3.5TRANSPORTATIONIn thissection we discussthe role that transportation plays in the supply chain, as wellaskey transportation-related decisions that supply chain managers must make.ROLE IN THESUPPLY CHAINTransportation

movesproductbetweendifferentstagesin asupply chain. Like theother supply chain drivers, transportation hasalargeimpact on both responsivenessand efficiency.Faster transportationallowsasupplychain to be more responsivebutreduces itsefficiency. The type of transportation a company uses also affects theinventoryand facility locations in the supply chain. Dell, for example, fliessome componentsfrom Asia because doing so allows the company to lower the level ofinventory it holds.Clearly, such apractice also increases responsiveness but decreases transportationefficiencybecause it ismore costly than transporting parts by ship.ROLE IN THE COMPETITIVE STRATEGYThe role of transportation in acompany's competitive strategy figuresprominently inthe company's considerationof thetarget customer's needs.If afirm'scompetitivestrategy targetsacustomer who demandsavery high level

of responsiveness, and thatcustomer iswilling to pay forthisresponsiveness, then afirm can use transportation asone driver formaking the supplychain more responsive. The opposite holdstrue aswell. If acompany's competitive strategy targets customers whose main decisioncriterionisprice, then the company can use transportation to lower the cost of theproductattheexpenseof responsiveness. Because acompany may usebothinventory andtransportation toincrease responsivenessor efficiency,the optimaldecisionfor thecompany often means finding the right balance between the two.54PART I+BuildingaStrategic Framework to Analyze Supply ChainsExample 3-3:Laura AshleyLaura Ashley sells clothing andother household items througha mail-order cataloganduses transportationaspart of its competitivestrategy.LauraAshley's customers are willing

to pay a premium price for a high levelof responsiveness. Tomeet this levelof responsiveness,thecompany has located itsmainwarehouse near the FedExhub inMemphis,Tennessee,to better utilize theresponsive transportation that FedEx offers.Whenanorderisplaced, thegoods are easily andquickly sent fromthe Laura Ashleywarehouse to theFedExhub,where they are sent overnight to the customer. This transportationpolicyenables Laura Ashley'scustomers to order their goods later thanthey canat other companiesand stillreceivethem next day.COMPONENTS OF TRANSPORTATIONDECISIONSWe now identify keycomponents of transportation that companies must analyze whendesigning and operating asupply chain.Design of Transportation NetworkThetransportation network isthe collectionof transportationmodes, locations, androutes along whichproduct can beshipped. Acompany mustdecide

whethertransportationfromasupply sourcewillbe directto the demand point or willgothroughintermediate consolidation points. Design decisions also include whethermultiple supplyor demand points willbe included inasingle run ornot.Finally, companies mustalsodecide on the set of transportation modes that willbe used.Choice of TransportationModeThe mode of transportation isthe manner in which a product ismoved from one locationin the supply chain network to another. Companies can choose between air,truck,rail, sea, and pipeline asmodes of transport for products. Today, information goods canalsobe sent viatheInternet.Each mode hasdifferentcharacteristics with respect tothe speed, sizeof shipments (individual parcels to pallets to fulltrucks to entire ships),costof shipping, and flexibilitythat lead companies to chooseone particular modeover the others.Transportation-Related Metrics

Amanager should track the followingtransportation-related metricsthat influencesupply chain performance.•Average inbound transportation cost typically measures the cost of bringingproduct into afacilityasapercentage of sales or cost of goods sold (COGS).Ideally, this cost should be measured per unit brought in, but this can bedifficult.The inbound transportation cost isgenerally included in COGS. It isuseful toseparate this cost by supplier.•Average incoming shipment size measures the average number of units or dollarsin each incoming shipment at afacility.•Average inbound transportation cost per shipment measures the averagetransportationcost of each incoming delivery. Along with the incoming shipment size,this metric identifies opportunities forgreater economies of scalein inboundtransportation.•Average outbound transportation cost measures the cost of sending product outof a facility to the customer. Ideally, this cost should be measured perunit shipped,but it isoften measured asapercentage of sales. It isuseful to separate this metricby customer.•Average outbound shipment size measures the average number of units or dollarson each outbound shipment at a facility.CHAPTER 3

+Supply Chain Drivers and Metrics55•Average outbound transportation cost per shipment measures the averagetransportationcostof each outgoing delivery. Along with the outgoing shipment size,this metric identifiesopportunities for greater economies of scale in outboundtransportation.•Fractiontransported by mode measures the fractionof transportation (inunits ordollars)using each mode of transportation. This metric can be used to estimate ifcertain modes are overused or underutilized.Overall Trade-Off:Responsiveness Versus EfficiencyThe fundamentaltrade-off fortransportationisbetweenthecostoftransporting agivenproduct(efficiency)andthespeedwithwhichthatproductistransported(responsiveness). Using fastmodes of transport raisesresponsiveness and transportation

cost but lowers the inventory holding cost.3.6INFORMATIONIn this section we discussthe role that information plays in the supply chain, as wellaskey information-related decisions that supply chain managers must make.ROLEIN THE SUPPLY CHAINInformationdeeply affects every part of the supply chain.Itsimpact iseasy tounderestimate,asinformationaffectsasupply chainin many different ways.Considerthefollowing:1.Information servesastheconnectionbetween variousstages of asupply chain,allowing them to coordinate and maximize total supply chain profitability.2.Information isalso crucialto the daily operations of each stage in asupply chain.For instance, a production scheduling system uses information on demand tocreateaschedulethat allowsafactory

toproduce therightproductsin an efficientmanner. Awarehouse management system usesinformation tocreate visibilityofthewarehouse's inventory. The company can then usethisinformationtodeterminewhether new orders can be filled.ROLE IN THE COMPETITIVE STRATEGYInformation isanimportantdriver thatcompanieshave used to become both moreefficient and more responsive. The tremendousgrowth of the importanceof informationtechnology isa testimony to the impact that information can have on improving acompany. Like allthe other drivers, however, even with information, companies reachapoint when they must make the trade-off between efficiencyand responsiveness.Another key decision involves what information is most valuable inreducing cost andimproving responsiveness withina supply chain. This decision willvary depending on thesupplychain structure and the market segmentsserved. Some companies,forexample,target customers who

require customizedproducts that carry a premium price tag. Thesecompaniesmight findthatinvestmentsininformationallowthem torespond morequickly to their customers. The following examples illustrate this type ofinvestment.Example 3-4:Andersen WindowsAndersen Windows, a major manufacturer of residentialwoodwindowslocated inBayport,Minnesota,hasinvestedinaninformationsystem that enables the company to bring customizedproducts to the market rapidly.This system, called"Window of Knowledge,"allowsdistributorsandcustomers to designwindows to custom-fit their needs.Users can56PART I+Building aStrategic Framework to Analyze Supply Chainsselect from a library of over 50,000 components that canbe combined inany number ofways.The systemimmediately gives the customer price quotes and automatically sendsthe order to the factory if the customer decides tobuy.This information investment not

only gives the customer a much wider variety of products, it allows Andersen to bemuchmore responsive to the customer,asit gets the customer's order to the factory assoon asthe order is placed.Example 3-5:DellDelltakes orders directly from consumers over the phone and via the Internet. Buildingthis direct channelrequiredan investment because of the added functions Dellmust perform.Alarge part of that cost can be attributed to information. With the direct channelmodel,however,Dellisable to view the actual consumer demand much sooner thanmostPCmanufacturers. Therefore, the company can respond more quickly to changes inconsumerneeds. Dellcan then modify its product offerings to meet these new needs.Dellisnot the low-cost provider. The company is,however, the cheapest for its level of responsiveness,anda large part of its responsiveness is due to the information flowbetweenDelland its customers, andDelland its suppliers, that is made possible byits investmentininformation.COMPONENTS OFINFORMATION DECISIONSWe now considerkeycomponents of informationthat acompany must analyze to

increase efficiency and improve responsiveness within itssupply chain.Push Versus PullWhen designingprocesses of the supply chain, managersmust determine whetherthese processes are part of the push or pull phase in the chain. Wediscussthis distinctionin Chapter 1, but we mention itagain because different types of systemsrequiredifferent types of information. Push systems generally require informationin the formof elaborate material requirements planning (MRP) systemsto take the master productionschedule and roll it back, creating schedules for suppliers with parttypes, quantities,and deliverydates. Pull systems require information on actual demand to be transmittedextremely quicklythroughout the entire chain so that production and distributionof products may reflect the real demand accurately.Coordination and Information SharingSupply chaincoordinationoccurswhen all stagesof asupply chain work toward theobjective of maximizing total supply chain profitability based on sharedinformation.Lack of coordination can result in asignificant loss of supply chain profit. Coordinationamong different stages in a supply chain requires each stage to shareappropriate informationwith other stages.For example, if asupplier isto produce the right parts in atimelymanner foramanufacturer ina

pullsystem,the manufacturer must sharedemand and production information with the supplier. Information sharingisthus crucialto the success of asupply chain.Forecasting and Aggregate PlanningForecasting is the art and science of making projections about what futuredemand andconditions will be. Obtaining forecasting information frequently meansusing sophisticatedtechniques to estimate future sales or market conditions. Managers mustdecidehowthey will make forecastsand to what extent theywillrelyon forecaststo makedecisions. Companies often use forecasts both on a tactical level toschedule productionand on astrategic level to determine whether to build new plants or even whethertoenter anew market.Once a company creates a forecast, the company needs a plan to act on thisforecast.Aggregateplanning transforms forecastsinto plansof activity to satisfy the projecteddemand. Akeydecision managers faceishowto collaborate onaggregate planningCHAPTER 3+Supply Chain Drivers and

Metrics57throughout the entiresupply chain. Theaggregateplan becomesacriticalpieceofinformation to be shared across the supply chain because itaffects both the demand ona firm's suppliersand the supply to itscustomers.Enabling TechnologiesManytechnologiesexisttoshareandanalyzeinformationinthesupplychain.Managers must decide which technologies to use and how to integrate thesetechnologiesintotheir companiesandtheir partners' companies. The consequences of thesedecisions are becoming more and more important asthe capabilities of these technologiesgrow.Some of these technologies include the following.1.Electronic data interchange (EDI) allows companies to place instantaneous,paperlesspurchaseorders withsuppliers.EDI is

not onlyefficient,italsodecreases thetime needed to get products to customers because transactions are fasterand moreaccuratethan when they are paper based. Although EDI isabitoutdated and haslimited capabilities, it stilloffersefficiency and responsiveness gains for some firms.2.The Internet has critical advantages over EDI with respect to informationsharing.The Internet conveys much more information and therefore offersmuch more visibilitythanEDI.Bettervisibilityimprovesdecisionsacrossthe supplychain.Internet communication among stages in the supply chain isalsoeasier because astandardinfrastructure(theWorld WideWeb)alreadyexists.ThankstotheInternet, e-commerce hasbecome amajor force in the supply chain.

3.Enterpriseresourceplanning(ERP) systemsprovide thetransactional trackingandglobalvisibilityof information fromwithin acompanyandacrossitssupplychain. This real-time information helpsasupply chain to improve the quality of itsoperational decisions.ERP systemskeeptrackof the information, whereas theInternetprovidesonemethodwithwhichtoviewthisinformation.Amoredetailed discussionof ERP systems isin Chapter 17.4.Supply chainmanagement(SCM)software uses

the information in ERP systemsto provide analytical decision support inaddition to the visibilityof information.ERP systemsshow acompanywhat isgoing on,whileSCM systems helpacompanydecide what itshould do.Amore detaileddiscussionof SCM systemsisinChapter 17.5.Radio frequencyidentification(RFID) consistsof an activeorpassive radio frequency(RF)tagapplied to theitem beingtracked andan RF reader/emitter. Apassive tag draws energy from the reader, whereas an active tag has itsown batteryand draws power from there. Wal-Mart has mandated the useof RFID technologyby its top100suppliers at the case level. RFID has many potential uses. It can beusedinmanufacturing

tocheckavailabilityof theentire billof materials. Thetechnology canmakethe receivingof atruck muchfasterandcheaper. Fullimplementation of RFID could eliminate the need formanual counting and barcodescanning at the receivingdock.It can also be used to get an exact count ofincoming items and items in storage. RFID technology, however, has yet toreach100percentaccuracy,and itscostperunitisstillhighenough tomakeglobalacceptance difficult,even at the case level.Information-Related MetricsAmanager should track the followinginformation-related metrics that influence supplychain performance.•Forecast horizon identifies how far in advance of the actual event aforecast is

made. The forecast horizon must equal the lead time of the decision thatisdrivenby the forecast.58PART I+BuildingaStrategic Framework to Analyze Supply Chains•Frequencyof update identifies how frequently each forecast isupdated. The forecastshould be updated somewhat more frequently than adecision willbe revisited,so that large changes can be flagged and corrective action taken.•Forecast error measures the difference between the forecast and actualdemand.The forecast error isameasure of uncertainty and drives all responses to uncertaintysuch as safety inventory or excess capacity.•Seasonal factors measure the extent to which the average demand in aseason isabove or below the average in the year.•Variance from plan identifies the difference between the plannedproduction/inventories and the actual values. These variances can be usedto raiseflagsthat identify shortages and surpluses.•Ratio of demand variability toorder variability measures the standard deviationof incoming demand and supply orders placed. Aratio less than one potentiallyindicates the existence of the bullwhip effect.Overall Trade-Off:Responsiveness Versus EfficiencyGood information can help a firm improve both its responsiveness andefficiency. The

information driver isused to improve the performance of other drivers, and the use ofinformation isbased on the strategic position the other drivers support. Accurateinformationcan help afirmimprove efficiency by decreasing inventory and transportationcosts. Accurate information can improve responsiveness by helping asupply chain bettermatch supply and demand.3.7SOURCINGIn this section we discuss the role that sourcing plays in the supplychain and key sourcingrelated decisionsthat managers need to make.ROLE IN THE SUPPLY CHAINSourcing isthe setof businessprocessesrequiredtopurchasegoodsand services.Managers must firstdecide which tasks willbe outsourced and those that willbe performedwithin the firm. For each outsourced task, the manager must decide whethertosource from asingle supplier or aportfolio of suppliers. If aportfolio of multiple suppliersisto be carried, then the role of each supplier in the portfolio must beclarified.Thenextstepisto identify

the set of criteria that willbe used to select suppliers andmeasure their performance. Managers thenselectsuppliers andnegotiate contractswith them. Contracts define the role of each supply source and should bestructured toimprove supplychainperformance andminimize informationdistortionfrom onestage to the next.Once suppliersand contractsare in place, procurement processesthat facilitate the placement and delivery of orders play amajor role.ROLE IN THE COMPETITIVE STRATEGYSourcing decisionsare crucial because they affectthe level of efficiencyand responsivenessthe supply chain can achieve. Insome instance, firmsoutsource to responsivethird parties if it istoo expensive for them to develop this responsiveness on their own.An example isthe outsourcing of next-day delivery byall firms to afewpackage carriersbecause it istoo expensive for a firm to develop next-day delivery capability onitsown. In other instances firmshavekept the responsive process in-house, to maintaincontrol. An example of this isBenetton, which keeps the dyeing of knit garmentsCHAPTER 3+

Supply ChainDrivers andMetrics59in-houseso itcan respond quicklytoordersastheyarrive.Firms also outsourceforefficiencyif the third party can achievesignificanteconomies of scaleor hasalowerunderlying cost structure for other reasons. Outsourcing decisions shouldbe driven bythe desire for growth in total supply chain profitability.Example 3-6:CiscoCisco hasoutsourced almost allof its manufacturing.It does,however,have a sourcingstrategy that variesby product type.For low-end products suchasrouters for home networks,Cisco aims for efficiency.Theserouters areproduced andpacked inChina andshipped inbulk for sale inthe UnitedStates.Ciscoaims for the lowest-cost manufacturinglocation and economies of

scaleintransportation because the targetedmarket segmentvalues low cost.For high-end products, incontrast,Cisco outsources to contract manufacturersinthe UnitedStates. Thesemanufacturers arenot cheapbut they areresponsiveandcanserve the rapidly evolvingneeds of the high-end market.COMPONENTS OF SOURCING DECISIONSWenow consider key sourcing decisions that are made withina firm.In-House or OutsourceThe most significant sourcing decision for a firmiswhether to perform atask in-houseor outsource itto athird party. This decisionshould be driven in part by its impact onthe total supply chain profit. It isbest to outsource if the growth intotal supply chainprofit issignificant with little additional risk. Within a task such astransportation, managersmust decide whether to outsource all of it, outsource only the responsivecomponent,oroutsourceonlythe efficient component. Onceagain,the decision should bebased in part on the growth in total supply chain profitability.Supplier SelectionManagers must decide on the number of suppliers they will

have for aparticular activity.Theymustthen identifythecriteria alongwhich suppliers willbeevaluated andhowtheywillbe selected. For theselectionprocess, managers mustdecide whetherthey will usedirect negotiations or resort to an auction. If an auction isused, it must bestructured to ensure the desired outcome.ProcurementProcurement istheprocessinwhichthe supplier sends product in responseto customerorders. Managers must decide on the structure of procurement of direct aswellas indirect materials, and strategic aswell asgeneral materiais. In each case, it isimportantto identify the critical mechanism for increasing supply chain profits.For example,afirmshould set upprocurement fordirect materialsto ensure good coordinationbetween the supplier and buyer. In contrast, the procurement of MROproducts should

be structured to ensure that transaction costs are low.'· R!'~. (\~~I.

(': r'.;~'r_~Sourcing-Related MetricsAmanager should trackthe followingsourcing related metrics that influencesupplychain performance.•Days payable outstanding measures the number of days between when a supplierperformed a supply chain task and when itwaspaid.•Average purchase price measures the average price at which a good or servicewaspurchased during the year. The average price should be weighted by thequantitypurchased at each price.•Range of purchase price measures the fluctuation in purchase price during aspecifiedperiod. The goal isto identify if the quantity purchased correlated with theprice.60PARTI+Building aStrategic Framework to Analyze Supply Chains3.8PRICING•Average purchase quantity measures the average amount purchased per order. Thegoal isto identify whether a sufficient level of aggregation isoccurring across

locations when placing an order.•Fractionon-time deliveries measures the fraction of deliveries from the supplierthat were on time.•Supply quality measures the quality of product supplied.•Supply lead time measures the average time between when an order isplacedand the product arrives.Overall Trade-Off: Increase the Supply ChainProfitsSourcing decisions should be made to increase the sizeof the total profit to be sharedacrossthe supply chain. The total profitsare affected bytheimpact of sourcing onsales, service, production costs, inventorycosts,transportationcosts,and informationcosts.Outsourcing to athird party ismeaningful ifthe third party raises the supplychain profits more than the firm can by itsown. In contrast, afirmshould keepasupplychain function in-house if the third party cannot increase the supplychain profits orif the risk associated withoutsourcing issignificant.In this section wediscuss the role that pricing plays inthe supply chain.ROLE IN THE SUPPLY CHAIN

Pricing isthe process by which a firm decides how much to charge customers for itsgoodsand services. Pricing affects the customer segments that choose to buy theproduct, aswellasthe customer's expectations. This directly affects the supply chain interms of the levelof responsiveness required as well asthe demand profile that the supply chain attempts toserve. Pricing isalso a lever that can be used to match supply and demand. Short-termdiscountscan be used to eliminate supply surpluses or decrease seasonal demandspikes bymoving some of the demand forward. In short, pricing isone of the most significant factorsthat affect the level and type of demand that the supply chain will face.ROLE IN THE COMPETITIVE STRATEGYPricing isasignificant attribute through which a firm executes itscompetitive strategy.For example, Costco, a membership-based wholesaler in the United States,has a policythat prices are kept steady but low.Customers expect low pricesbut are comfortablewith alowerlevelof product availability. The steady pricesalsoensurethatdemandstays relatively stable. Costco servesawell-defined segment, and itcan thus design anappropriate supply chain. The Costcosupply chainaims tobe very

efficient, attheexpense of some responsiveness.Incontrast, some manufacturing and transportationfirmsusepricing that varies withthe response time desired by the customer. Throughtheir pricing, these firmsare targeting a broader set of customers, some of whom needresponsiveness while others need efficiency. In this case it becomesimportant for thesefirms to structure asupply chain that can meet the two divergent needs.Example 3-7:AmazonAmazon offersits customers a large menu of prices for products that arepurchased from thecompany.Forexample, inNovember 2005, a personpurchasing two books worth $30 coulduse standard shipping (shipsin3-5 business days) at a cost of $4.98, two-day shipping(ships in2business days) at a cost of $11.47,one-day shipping (shipsin1 business day)at a cost of $20.47or use freeshipping(ships in7-14 business days). The pricing menu

rCHAPTER 3 + Supply Chain Drivers and Metrics 61allows Amazon to attract customers with varying levels of desired responsiveness.Whereas customers paying for one-day shipping impose a high degree of uncertainty onAmazon, customers opting for free shipping can be used to level out the workload atthewarehouse over time. Amazon can thus use its pricing __ !Q_pr~i9._~~§12on_siv§n~§s~se __

!"-h_o valu_E?_it, while usi_n~ t,l:l_o_~~~~() want a. low e_~i_c_~t()help_~~"'ir;nprg~~J!-~"efticie~y.Amaz-on also uses pncmg effectively to sh1ft some of tne-cnnstmas peak to flfovember,when it usually otfers a discount on shipping. The discount moves some of the Decemberdemand forward, allowing it to reduce its December peak and improve its efficiencywithoutgiving up on responsiveness for those customers who do not want to order earlier.COMPONENTS OF PRICING DECISIONSWe now describe key components of pricing decisions that affect supplychain performance.Pricing and Economies of ScaleMost supply chain activities display economies of scale. Changeovers makesmall productionruns more expensive per unit than large production runs. Loading andunloadingcosts make it cheaper to deliver a truckload to one location than four. Ineach case,the provider of the supply chain activity must decide how to price itappropriately toreflect these economies of scale. A commonly used approach is to offerquantity discounts.Care must be taken to ensure that quantity discounts offered areconsistentwith the economies of scale in the underlying process. Otherwise there isa danger ofcustomer orders being driven primarily by the quantity discounts eventhough theunderlying process does not have significant economies of scale.Everyday Low Pricing Versus High-Low PricingA firm such as Costco practices everyday low pricing at its warehousestores, keepingprices steady over time. Costco will go to the extent of not offering anydiscount ondamaged books to ensure its everyday low pricing strategy. In contrast,most supermarketspractice high-low pricing and offer steep discounts on a subset of theirproductevery week. The Costco pricing strategy results in relatively stabledemand. Thehigh-low pricing strategy results in a peak during the discount week,often followed bya steep drop in demand during the following weeks. The two pricingstrategies lead tovery different demand profiles that the supply chain must serve.Fixed Price Versus Menu PricingA firm must decide whether it will charge a fixed price for its supplychain activities or

have a menu with prices that vary with some other attribute, such as theresponse timeor location of delivery. If marginal supply chain costs or the value tothe customer varysignificantly along some attribute, it is often effective to have apricing menu. We havealready discussed Amazon as an example of a firm offering a menu that issomewhatconsistent with the cost of providing the particular supply chain service.An examplewhere the pricing menu is somewhat inconsistent is seen at many MROsuppliers. Theyoften allow customers to have their order shipped to them or to be pickedup in person.A customer pays an additional shipping fee for home delivery but paysnothing fora personal pickup. The pick, pack, and deliver cost at the warehouse,however, is higherin the case of a personal pickup compared to home delivery. The pricingpolicy thus canlead to customer behavior that has a negative impact on profits.Pricing-Related MetricsA manager should track the following pricing-related metrics. With menupricing, eachmetric should be tracked separately for each segment in the menu.• Profit margin measures profit as a percentage of revenue. A firm needs toexaminea wide variety of profit margin metrics to optimize its pricing, includingdimensions62PART I+BuildingaStrategic Framework to Analyze Supply Chainssuch astype of margin (gross, net, etc.), scope (SKU, product line, division,firm),customer type, and others.•Days sales outstanding measures the average time between when a sale ismadeand when the cash iscollected.•

Incremental fixed cost per order measures the incremental costs that areindependentof the size of the order. These include changeover costs at amanufacturingplant or order processing or transportation costs that are incurredindependent ofshipment size at a mail-order firm.•Incremental variable cost per unit measures the incremental costs that varywiththe size of the order. These include picking costs at a mail-orderfirm or variableproduction costs at amanufacturing plant.•Average sale price measures the average price at which a supply chainactivity wasperformed in a given period. The average should be obtained byweighting theprice with the quantity sold at that price.•Average order size measures the average quantity per order. The averagesaleprice, order size, incremental fixed cost per order, and incrementalvariablecost per unit help estimate the contribution from performing thesupply chainactivity.•Range of sale price measures the maximum and the minimum of sale price perunit over aspecified time horizon.•Range of periodic sales measures the maximum and minimum of the quantitysoldper period (day/week/month) during aspecified time horizon. The goal istounderstand any correlation between sales and price and any potentialopportunityto shift sales by changing price over time.Overall Trade-Off: Increase Firm Profits

All pricing decisions should be made with the objective of increasingfirm profits. Thisrequires an understanding of the cost structure of performing asupply chain activityand the value this activity brings to the supply chain. Strategiessuch as everyday lowpricing may foster stable demand that allows for efficiency in thesupply chain. Otherpricing strategies may lower supply chain costs, defend market share,or even stealmarket share. Differential pricing may beusedto attract customers with varyingneeds, aslong as this strategy helps either increase revenues or shrink costs,preferablyboth.In the next section, we discuss the main obstacles companies face whenstriving toachieve strategic fit.3.9OBSTACLESTO ACHIEVINGSTRATEGICFITThe key to achieving strategic fitisacompany's abilityto findabalancebetweenresponsiveness and efficiencythat best matches the needs of itstarget customer. Indeciding where this balance should be located on the responsivenessspectrum, companiesface many obstacles. In this section we discuss some of the obstaclesand also providea feel for how the supply chain environment has changed over theyears. On onehand, these obstacles have made it much more difficult

forcompanies to create theideal balance. On the other hand, they have afforded companiesincreased opportunitiesfor improving supply chain management. Managers need asolid understanding of theimpact of these obstacles because they are critical to acompany's ability to reapthemaximum profitability from itssupply chain.

fCHAPTER 3 + Supply Chain Drivers and Metrics 63INCREASING VARIETY OF PRODUCTSProduct proliferation is rampant today. With customers demanding ever morecustomizedproducts, manufacturers have responded with mass customization and evensegment-of-one (companies view each customer as an independent marketsegment)views of the market. Products that were formerly quite generic are nowcustom-madefor a specific consumer. For example, the number of running shoe stylessold in the UnitedStates went from five in the early 1970s to almost 300 by the late 1990s.The increase inproduct variety complicates the supply chain by making forecasting muchmore difficult.Increased variety tends to raise uncertainty, and increased uncertaintyhurts bothefficiency and responsiveness within the supply chain.DECREASING PRODUCT LIFE CYCLESIn addition to the increasing variety of product types, the life cycle ofproducts hasbeen shrinking. Today there are products whose life cycles can be measuredinmonths, compared to the old standard of years. These are not just nicheproducts,either. PCs now have a life cycle of several months, and even someautomobile manufacturershave lowered their product life cycles from five plus years to about three

years. This decrease in product life cycles makes the job of achievingstrategic fitmore difficult, as the supply chain must constantly adapt to manufactureand delivernew products, in addition to coping with these products' demanduncertainty. Shorterlife cycles increase uncertainty while reducing the window of opportunitywithinwhich the supply chain can achieve fit. Increased uncertainty combinedwith a smallerwindow of opportunity has put additional pressure on supply chains tocoordinate andcreate a good match between supply and demand.INCREASINGLY DEMANDING CUSTOMERSCustomers are constantly demanding improvements in delivery lead times,cost, andproduct performance. If they do not receive these improvements, they moveon to newsuppliers. Many companies had periodic, standard price increases--not dueto a rise indemand or any other factor, but simply because raising prices was the waybusiness wasdone. Now, one repeatedly sees companies that cannot force through anypriceincreases without losing market share. Today's customers are demandingfaster fulfillment,better quality, and better-performing products for the same price theypaid yearsago. This tremendous growth in customer demands (not necessarily demand)meansthat the supply chain must provide more just to maintain its business.FRAGMENTATION OF SUPPLY CHAIN OWNERSHIPOver the past several decades, most firms have become less verticallyintegrated. Ascompanies have shed noncore functions, they have been able to takeadvantage of supplierand customer competencies that they themselves did not have. This newownershipstructure, however, has also made managing the supply chain moredifficult. Withthe chain broken into many owners, each with its own policies andinterests, the chainis more difficult to coordinate. Potentially, this problem could causeeach stage of a

supply chain to work only toward its own objectives rather than the wholechain's,resulting in the reduction of overall supply chain profitability.GLOBALIZATIONSupply chains today are more likely than ever to be global. Establishing aglobal supplychain creates many benefits, such as the ability to source from a globalbase of suppliers64PART I+Building aStrategic Framework to Analyze Supply Chainswho mayofferbetter orcheapergoodsthan wereavailable inacompany's homenation.Globalization, however, also adds stresstothe chain, because facilitieswithinthe chain are farther apart, making coordination much more difficult.Globalization hasalsoincreased competition, asonce-protected national playersmust compete with companies from around the world.In the past, withfewercompaniessatisfyingcustomers' needs,customers werewillingto tolerate longerresponsetimes. However, in most industries there are now many more firmsaggressively pursuingtheir competitors' business. Thiscompetitive situation makes supply chain

performancea key to maintaining and growing sales while also putting more strain onsupplychains and thus forcing them to choose their trade-offs even moreprecisely.DIFFICULTY EXECUTING NEW STRATEGIESCreating asuccessfulsupplychainstrategy isnoteasy.Once agood strategy isformulated,however, the execution of the strategycanbeeven more difficult.For instance,Toyota's production system, which isa supply chain strategy, has been widely known andunderstood. Yet thisstrategy has been a sustained competitive advantage for Toyota formore than two decades. Does Toyota have a brilliant strategy that no oneelse can figureout? Their strategy isbrilliant, but many othershave figureditout. The difficultyotherfirmshave had isin executing that strategy. Many highly talented employees at all levelsof the organization are necessary to make asupply chainstrategy successful. Althoughwedeal mostly with the formulationof strategy inthisbook, one shouldkeep in mind

that skillful execution of a strategy can be asimportant asthe strategy itself.All of the obstacles discussedearlier are making it more difficult forcompanies toachieve strategic fitinthe supplychain. These obstaclesalsorepresent atremendousopportunity in terms of untapped improvement within the supply chain. Theincreasingimpact of these obstacles has led to supply chain management becoming amajor factorin the success or failure of firms.KEY. POINT.Many obstaCles,suchasrisingproduct variety and shorterlifecycles,havemade itincreasinglydi~icult for supply chains to achi.evestrategic fit Overcomingthese obstacles offersa tremehdous opportunity for firms. to use supply chain managementto gaincompetitiveadvantage,3.10SUMMARYOFLEARNINGOBJECTIVES1.Identify the major driversof supply chain performance.The major driversof supply chain performance are facilities,inventory, transportation,information, sourcing, and pricing.2.

Discuss the role of each driver in creating strategic fitbetween the supply chain strategy andthe competitive strategy.Acompanyachieving strategic fithas foundthe right balance between responsivenessand efficiency. Eachdriveraffectsthisbalance. Having more facilitiesgenerally makesachainmoreresponsive,whilehavingfewer,centralfacilitiescreateshigherefficiency.Holding higherlevelsof inventory increasestheresponsivenessof asupply chain, whilekeeping inventory lowincreases the chain's efficiency. Using faster modes of transportationincreases achain's responsiveness, whileusingslower modes generallyincreases efficiency.Investing ininformation can vastly improve thesupplychain performance on both dimensions.This investment, however, must be made based on the strategic position supportedby

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BAB3 PASOKAN JARINGAN DRIVER DAN METRIK~Tujuan pembelajaranSetelah membaca bab ini, Anda akan dapat:1. Mengidentifikasi driver utama kinerja rantai pasokan.2. Diskusikan peranan masing-masing driver berperan dalam menciptakan strategiskesesuaian antara strategi rantai pasokan dan strategi yang kompetitif.3. Mendefinisikan metrik kunci yang melacak kinerja rantai pasokan dalam hal sopirmasing-masing.4. Menjelaskan rintangan utama yang harus diatasi untuk mengelola rantai pasokanberhasil.SayanBab ini, kami memperkenalkan tiga driver-fasilitas logistik, persediaan, dan !:ansportatiQn- dan tiga lintas fungsional driver-informasi, sumber, dan p.tiQ.ng-yang menentukan kinerja setiap rantai pasokan. Kita membahas bagaimana driver yangdigunakan dalam desain, perencanaan, dan pengoperasian rantai pasokan. Kitamendefinisikan beberapa metric yang dapat menjadidigunakan untuk mengukur kinerjasetiap driver. Kami juga memperkenalkan banyak kendala yang dihadapi oleh pasokanjaringan manajer.3.1 DRIVER RANTAI PASOKAN KINERJACocok strategis yang dibahas dalam Bab 2 mensyaratkan bahwa rantai pasokanperusahaan mencapai keseimbangan antara responsif dan efisiensi yang paling sesuaidengan kebutuhan perusahaan strategi yang kompetitif. Untuk memahami bagaimanaperusahaan dapat meningkatkan kinerja rantai pasokan tanggap dan efisiensi, kitaharus memeriksa logistik dan crossfunctional driver supply chain kinerja:Fasilitas, persediaan, transportasi, informasi, sumber, dan harga. Driver iniberinteraksi satu sama lain untuk menentukan pasokan rantai kinerja responsif danefisiensi. Sebagai hasilnya, struktur driver ini menentukan apakah dan bagaimanastrategis cocok dicapai di seluruh rantai pasokan. Pertama kita mendefinisikansetiap driver dan membahas dampak pada kinerja pasokan jaringan.

1. FasilitasThe lokasi fisik yang sebenarnya dalam rantai pasokan jaringan di mana I_:lroductsaya ~ d, dirakit, atau palsu. Dua jenis utama fasilitas pro ~ ~ s dan s ~ s.Qecisions mengenai peran, lokasi, c ~ dan fleksibilitasFasilitas memiliki a dampak pada kinerja rantai pasokan. Misalnya, distributoronderdil mobil berjuang untuk responsif bisa memiliki banyak Fasilitas pergudanganTerletak dekat dengan pelanggan meskipun praktek ini mengurangi efisiensi. Selainitu, distributor efisiensi tinggi akan memiliki lebih sedikit gudang untukmeningkatkan efisiensi meskipun fakta bahwa hal ini akan mengurangi respon.

2. Persediaan mencakup seluruh bahan baku, bekerja dalam proses, dan selesaibarang dalam rantai pasokan. Perubahan kebijakan persediaan dapat secaradramatis mengubah cham pasokan efisiensi dan responsif. Sebagai contoh,seorang pengecer pakaian dapat membuat sendiri lebih responsive dengan kauskaki besar jumlah persediaan dan permintaan pelanggan yang memuaskan darisaham. A besar inventaris, Namun, meningkatkan pengecer biaya, sehinggamembuat kurang efisien. Mengurangi persediaan membuat pengecer lebihefisien tapi sakit yang responsif.

3. Transportasi memerlukan bergerak persediaan dari titik ke titik dalamrantai pasokan. Transportasi dapat mengambil bentuk banyak kombinasi modedan rute, masing-masing dengan Karakteristik kinerja tersendiri. Pilihantransportasi memiliki dampak besar pada pasokan Jaringan responsif danefisiensi. Misalnya, mail order Katalog perusahaan dapat menggunakan cepatmoda transportasi seperti FedEx untuk mengirimkan produk, sehingga pasokanjaringan lebih responsif, tetapi juga kurang efisien diberikan tinggi biayaterkait dengan menggunakan FedEx. Atau perusahaan dapat menggunakan lebihlambat tapi lebih murah transportasi darat untuk kapal produk, membuatrantai pasokan efisien tetapi membatasi yang responsif.

4. Informasi terdiri dari data dan analisis mengenai fasilitas, persediaan,transportasi, biaya, harga, dan Pelanggan di seluruh rantai pasokan.Informasiberpotensi yang terbesar sopir kinerja supply chain karena itulangsung mempengaruhi masing-masing dari pengemudi lain. Menyajikaninformasi manajemen dengan The kesempatan untuk membuat pasokan rantailebih responsif dan lebih efisien. Sebagai contoh, dengan informasi padapola-pola permintaan pelanggan, sebuah perusahaan farmasi dapat memproduksidan persediaan obat dalam antisipasi permintaan pelanggan, yang membuat Thesangat responsif rantai pasokan karena Pelanggan akan Menemukan The obat-obatan mereka perlu ketika mereka membutuhkannya. Ini permintaan informasijuga dapat membuat rantai pasokan lebih efisien karena farmasi perusahaanadalah lebih baik dapat untuk ramalan permintaan dan menghasilkan hanya Thediperlukan jumlah. Informasi dapat juga membuat ini lebih efisien denganrantai pasokan menyediakan Manajer dengan pengiriman pilihan, untukMisalnya, yang memungkinkan mereka untuk memilih alternatif biaya terendahsementara masih memenuhi persyaratan layanan yang diperlukan.

5. Sumber adalah pilihan yang akan melakukan aktivitas rantai pasokan tertentuseperti produksi, Penyimpanan, transportasi, atau manajemen informasi. Ditingkat strategis, keputusan ini menghalangi