Lecture No 07-08

Supply Chain Drivers
and Metrics.
Instructor: Shizra Khan
Course Title: Fundamentals of Supply Chain Management.
Lecture Content:
• Drivers of supply chain performance & Facilities.
• Inventory.
• Transportation.
• Information.
• Sourcing and Pricing.
Supply Chain Drivers
Facilities Inventory Transportation Information Sourcing Pricing

Facilities
Facilities are the actual physical locations in the supply chain network where product
is stored, assembled, or fabricated. The two major types of facilities are production
sites and storage sites. Decisions regarding the role, location, capacity, and flexibility
of facilities have a significant impact on the supply chain’s performance. For example,
in 2013, Amazon increased the number of warehousing facilities (and, as a result,
experienced an increase in Property, plant and equipment-PP&E) located close to
customers to improve its responsiveness. In contrast, Best Buy tried to improve its
efficiency in 2013 by shutting down retail facilities even though it reduced
responsiveness. Facility costs show up under PP&E (Property, Plant and Equipment) if
facilities are owned by the firm or under selling, general, and administrative if they are
leased.
Inventory
Inventory includes all raw materials, work in process, and finished goods within a supply
chain. The inventory belonging to a firm is reported under assets. Changing inventory
policies can dramatically alter the supply chain’s efficiency and responsiveness. For
example, W.W. Grainger makes itself responsive by stocking large amounts of inventory and
satisfying customer demand from stock even though the high inventory levels reduce
efficiency. Such a practice makes sense for Grainger because its products hold their value for
a long time. A strategy using high inventory levels can be dangerous in the fashion apparel
business, though, in which inventory loses value relatively quickly with changing seasons
and trends. Rather than hold high levels of inventory, Spanish apparel retailer Zara has
worked hard to shorten new product and replenishment lead times. As a result, the company
is very responsive but carries low levels of inventory.
Transportation
Transportation entails moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes, each with its
own performance characteristics. Transportation choices have a large impact on supply
chain responsiveness and efficiency. For example, a mail-order catalog company can use a
faster mode of transportation such as FedEx to ship products, thus making its supply chain
more responsive— but also less efficient, given the high costs associated with using
FedEx. McMaster-Carr and W.W. Grainger, however, have structured their supply chains to
provide next-day service to most of their customers using ground transportation. They are
providing a high level of responsiveness at lower cost. Outbound transportation costs of
shipping to the customer are typically included in selling, general, and administrative
expense, whereas inbound transportation costs are typically included in the cost of goods
sold.
Information
Information consists of data and analysis concerning facilities, inventory, transportation,
costs, prices, and customers throughout the supply chain. Information is potentially the
biggest driver of performance in the supply chain because it directly affects each of the
other drivers. Information presents management with the opportunity to make supply
chains more responsive and more efficient. For example, Seven-Eleven Japan has used
information to better match supply and demand while achieving production and
distribution economies. The result is a high level of responsiveness to customer demand
while production and replenishment costs are lowered. Information technology-related
expenses are typically included under either operating expense (typically under selling,
general, and administrative expense) or assets. For example, in 2012, Amazon included
$4.54 billion in technology expense under operating expense and another $454 million
under fixed assets to be depreciated.
Sourcing
Sourcing is the choice of who will perform a particular supply chain activity, such as
production, storage, transportation, or the management of information. At the strategic
level, these decisions determine what functions a firm performs and what functions the
firm outsources. Sourcing decisions affect both the responsiveness and efficiency of a
supply chain. After Motorola outsourced much of its production to contract
manufacturers in China, for instance, it saw its efficiency improve but its
responsiveness suffer because of the long lead times. To make up for the drop in
responsiveness, Motorola started flying in some of its cell phones from China even
though this choice increased transportation cost. Flextronics, an electronics contract
manufacturer, is hoping to offer both responsive and efficient sourcing options to its
customers.
It is trying to make its production facilities in high-cost locations very responsive while
keeping its facilities in low-cost countries efficient. Flextronics hopes to become an
effective source for all customers using this combination of facilities. Sourcing costs show
up in the cost of goods sold.
Pricing
Pricing determines how much a firm will charge for the goods and services that it
makes available in the supply chain. Pricing affects the behavior of the buyer of the
good or service, thus affecting demand and supply chain performance. For example, if a
transportation company varies its charges based on the lead time provided by the
customers, it is likely that customers who value efficiency will order early and
customers who value responsiveness will be willing to wait and order just before they
need a product transported. Differential pricing provides responsiveness to customers
that value it and low cost to customers that do not value responsiveness as much. Any
change in pricing affects revenues directly but could also affect costs based on the
impact of this change on the other drivers.
Drivers of supply chain and Walmart Strategies
Wal-Mart as an example. Wal-Mart’s competitive strategy is to be a

reliable, low-cost retailer for a wide variety of mass-consumption
goods. This strategy dictates that the ideal supply chain will emphasize
efficiency but also maintain an adequate level of responsiveness in
terms of product availability. Wal-Mart uses the three logistical and
three cross-functional drivers effectively to achieve this type of supply
chain performance.
With the inventory driver, Wal-Mart maintains an efficient supply chain
by keeping low levels of inventory. For instance, Wal-Mart pioneered
cross-docking, a system in which inventory is not stocked in a warehouse
but rather is shipped to stores from the manufacturer with a brief stop at
a distribution center (DCs), where product is transferred from inbound
trucks from the supplier to outbound trucks to the retail store. This
significantly lowers inventory because products are stocked only at
stores, not at both stores and warehouses. With respect to inventory, Wal-
Mart favors efficiency over responsiveness.
On the transportation front, Wal-Mart runs its own fleet, to keep
responsiveness high. This increases transportation cost, but the
benefits in terms of reduced inventory and improved product
availability justify this cost in Wal-Mart’s case.
In the case of facilities, Wal-Mart uses centrally located DCs within its
network of stores to decrease the number of facilities and increase
efficiency at each DC. Wal-Mart builds retail stores only where the
demand is sufficient to justify having several of them supported by a DC,
thereby increasing efficiency of its transportation assets.
Wal-Mart has invested significantly more than its competitors in
information technology, allowing the company to feed demand
information across the supply chain to suppliers who manufacture
only what is being demanded. As a result, Wal-Mart is a leader in its
use of the information driver to improve responsiveness and
decrease inventory investment.
With regard to the sourcing driver, Wal-Mart identifies efficient
sources for each product it sells. Wal-Mart feeds them large orders,
allowing them to be efficient by exploiting economies of scale.
Finally, for the pricing driver, Wal-Mart practices “everyday low
pricing” (EDLP) for its products. This ensures that customer demand
stays steady and does not fluctuate with price variations. The entire
supply chain then focuses on meeting this demand in an efficient
manner. Wal-Mart uses all the supply chain drivers to achieve the
right balance between responsiveness and efficiency so that its
competitive strategy and supply chain strategy are in harmony.
Task
Read case study of Seven Eleven Japan Co.
from your book page no: 73, Chapter: 03

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Supply Chain Drivers

Facilities Inventory Transportation Information Sourcing Pricing

Wal-Mart as an example. Wal-Mart’s competitive strategy is to be a

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