Chapter 3 Supply Chain Drivers in Performance

Chapter 3 Supply Chain Drivers in Performance

1. 3 Supply Chain Drivers and Metrics

2. Learning Objectives Describe key financial measures of firm performance. Identify the major drivers of supply chain performance. Discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy. Define the key metrics that track the performance of the supply chain in terms of each driver.

3. Financial Measures Of Performance From a shareholder perspective, return on equity (ROE) is the main summary measure of a firm’s performance

4. Financial Measures Of Performance R eturn on assets (ROA) measures the return earned on each dollar invested by the firm in assets

5. Financial Data for Amazon and Nordstrom TABLE 3-1

6. Financial Measures Of Performance A n important ratio that defines financial leverage is accounts payable turnover (APT )

7. Financial Measures Of Performance ROA can be written as the product of two ratios – profit margin and asset turnover

8. Financial Measures Of Performance Key components of asset turnover are accounts receivable turnover (ART); inventory turnover (INVT); and property, plant, and equipment turnover (PPET )

9. Financial Measures Of Performance C ash -to-cash (C2C) cycle roughly measures the average amount time from when cash enters the process as cost to when it returns as collected revenue C2C = – Weeks Payable (1/APT ) + Weeks in Inventory (1/INVT) + Weeks R eceivable (1/ART)

10. Selected Financial Metrics Across Industries, 2000–2012 TABLE 3-2

11. Financial Measures Of Performance To measures not part of financial statements Markdowns : discounts required to convince customers to buy excess inventory Lost sales : represent customer sales that did not materialize because of the absence of products the customer wanted to buy

12. Drivers of Supply Chain Performance Facilities The physical locations in the supply chain network where product is stored, assembled, or fabricated Inventory A ll raw materials, work in process, and finished goods within a supply chain Transportation M oving inventory from point to point in the supply chain

13. Drivers of Supply Chain Performance Information D ata and analysis concerning facilities, inventory, transportation , costs, prices, and customers throughout the supply chain Sourcing W ho will perform a particular supply chain activity Pricing H ow much a firm will charge for the goods and services that it makes available in the supply chain

14. Framework for Structuring Drivers Figure 3-1

15. Facilities Role in the supply chain Support Responsiveness: More facilities, greater flexibility, or higher capacity help respond to customer needs faster. Affect Costs: More facilities increase facility and inventory costs but lower transportation costs and response time. Need for Balance: Companies must balance cost and responsiveness by designing facility networks that match their supply chain strategy.

16. Key Facility Decisions Role: Decide if facilities should be flexible or dedicated, and product- or function-focused. Location: Choose centralized (efficient) or decentralized (responsive) locations. Capacity: Set high capacity (fast but costly) or low capacity (efficient but less flexible). Facilities

17. Facilities - Example IKEA has few large stores for efficiency; 7-Eleven Japan has many small stores for responsiveness.

18. Inventory Role in the Supply Chain 1. Purpose of Inventory Inventory helps balance supply and demand. It is kept in advance for future or seasonal needs. 2. Impact of Inventory Inventory affects costs, assets, and customer responsiveness. 3. Inventory Trade-offs High Inventory : Increases responsiveness and lowers transport cost but raises storage cost. Low Inventory : Saves cost but can lead to stockouts and lost sales. 4. Goal of Inventory Management Maintain the right amount of inventory — enough to meet demand without extra cost.

19. Components of Inventory Decisions 1. Cycle Inventory Stock kept to meet regular demand between shipments. Trade-off: Large lots reduce cost but increase holding cost; small lots cost more to order frequently. 2. Safety Inventory Extra stock kept for unexpected demand. Trade-off: Too much = high cost; too little = lost sales. 3. Seasonal Inventory Built to handle predictable seasonal demand. Trade-off: Holding extra stock vs. cost of changing production rates. 4. Product Availability Decides how much demand is met on time from inventory. Trade-off : High availability = high cost; low availability = poor service.

20. Inventory - Example Zara keeps low inventory but refills quickly to stay responsive.

21. Transportation Role in the Supply Chain 1. Purpose Moves products between supply chain stages and affects speed and cost. 2. Impact Fast transport → More responsive but costly. Slow transport → Cheaper but less responsive. 3. Goal Choose transport that gives the best balance between cost and responsiveness based on product type.

22. Transportation Components of Transportation Decisions 1. Transportation Network Design Decide how products will move — directly from supplier to customer or through intermediate hubs. Plan routes, locations, and whether multiple suppliers or buyers are served in one trip. 2. Choice of Transportation Mode Select the best mode: air, sea, rail, truck, or internet (for digital goods). Each mode differs in speed, cost, shipment size, and flexibility — choose based on product needs and budget.

23. Transportation - Example Blue Nile uses fast FedEx shipping for diamonds — more cost but quick delivery.

24. Information Role in the Supply Chain Enhances coordination and performance: Accurate information helps manage inventory, improve product availability, and reduce overall supply chain costs. Requires balance: Sharing too much information can increase complexity and cost, so only essential data should be shared for effective decision-making.

25. Information - Example DHL centralized its information systems, reducing cost by 40%.

26. Sourcing Role in the Supply Chain Procurement and Decision-Making Involves purchasing goods and services and deciding whether tasks are done internally or outsourced. Balancing Cost and Responsiveness Ensures the right mix between efficiency (low cost) and responsiveness (speed and flexibility) in operations. Maximizing Value and Managing Risk Aims to increase total supply chain profit (surplus) while minimizing risks from outsourcing.

27. Components of Sourcing Decisions 1. In-House or Outsource Decide whether to do tasks within the company or hire an outside party. Outsource only if it increases efficiency or value without adding major risk. 2. Supplier Selection Choose how many suppliers to work with. Set clear criteria for evaluating and selecting reliable, cost-effective suppliers. 3. Procurement Refers to purchasing goods and services for business needs. Should aim to maximize value and ensure smooth coordination between buyer and supplier.

28. Sourcing - Example Zara outsources basic products but makes trendy items in its own European factories.

29. Pricing Role in the Supply Chain Affects Customer Demand Pricing decides how much customers pay and who buys the product. Helps Balance Supply and Demand Prices or discounts are used to control demand and clear extra stock. Supports Profit and Efficiency Good pricing helps the company earn more and keep the supply chain smooth and cost-effective.

30. Components of Pricing Decisions Pricing and economies of scale Companies often give lower prices when customers buy in large quantities because it costs less to produce or deliver in bulk. Everyday low pricing versus high-low pricing Some firms keep prices low and steady all the time, while others offer big discounts sometimes and higher prices at other times. Fixed price versus menu pricing A company can charge one fixed price or offer different prices based on things like delivery speed or location

31. Pricing - Example Packages Ltd. gives discounts on large orders. Imtiaz keeps prices steady; Carrefour offers weekly deals. Foodpanda charges more for faster or long-distance delivery.

32. Summary of Drivers – Balance between Responsiveness & Efficiency Driver More Responsive More Efficient Facilities More, flexible, close to customer Fewer, centralized, large-scale Inventory High stock levels Low stock levels Transportation Fast (air, express) Slow (ship, rail, full truckload) Information Detailed, real-time data Simplified, aggregate data Sourcing In-house or local suppliers Outsourced, low-cost suppliers Pricing Premium for fast delivery Discounts for steady demand