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1. © 2004 Prentice-Hall, Inc. 3-1
Chapter 3
Supply Chain Drivers and Obstacles
Supply Chain Management
(2nd Edition)

2. © 2004 Prentice-Hall, Inc. 3-2
Outline
 Drivers of supply chain performance
 A framework for structuring drivers
 Facilities
 Inventory
 Transportation
 Information
 Obstacles to achieving fit

3. © 2004 Prentice-Hall, Inc. 3-3
Drivers of Supply Chain Performance
 Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
 Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
 Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
 Information
– data and analysis regarding inventory, transportation, facilities
throughout the supply chain
– potentially the biggest driver of supply chain performance

4. © 2004 Prentice-Hall, Inc. 3-4
A Framework for
Structuring Drivers

5. © 2004 Prentice-Hall, Inc. 3-5
Facilities
 Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
 Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness priority)
 Example 3.1: Toyota and Honda

6. © 2004 Prentice-Hall, Inc. 3-6
Components of Facilities Decisions
 Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
 Capacity (flexibility versus efficiency)
 Overall trade-off: Responsiveness versus efficiency
– Increasing the number of facilities increases facility and
inventory costs but decreases transportation costs and reduces
response time.

7. © 2004 Prentice-Hall, Inc. 3-7
Inventory
 Role in the supply chain
 Role in the competitive strategy
 Components of inventory decisions

8. © 2004 Prentice-Hall, Inc. 3-8
Inventory: Role in the Supply Chain
 Inventory exists because of a mismatch between supply and demand.
 An important role that inventory plays in the supply chain is to increase the
amount of demand that can be satisfied by having the product ready and
available when the customer wants it.
 Impact on
– material flow time: time that elapses between the point at which material enters
the supply chain to the point at which it exits.
– throughput
» rate at which sales occur
» I = RT (Little’s Law)
» I = inventory; R = throughput; T = flow time
» Example
» Inventory and throughput are “synonymous” in a supply chain

9. © 2004 Prentice-Hall, Inc. 3-9
Inventory: Role in Competitive
Strategy
 If responsiveness is a strategic competitive priority, a firm can
locate larger amounts of inventory closer to customers
 If cost is more important, inventory can be reduced to make the
firm more efficient
 Trade-off
 Example – Amazon.com
 Best-selling books are stocked in many regional warehouses
close to customers for high responsiveness. Slower moving
books are stocked at fewer warehouses to lower the cost of
inventory at the expense of some responsiveness

10. © 2004 Prentice-Hall, Inc. 3-10
Components of Inventory
Decisions
 Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Depends on lot size(The basic trade-off supply chain managers face is the cost
of holding larger lots of inventory (when cycle inventory is high) versus the cost
of ordering product frequently (when cycle inventory is low).
 Safety inventory
– inventory held in case demand exceeds expectations
– involves making a trade-off between costs of carrying too much inventory
versus cost of losing sales
 Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible production
 Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness

11. © 2004 Prentice-Hall, Inc. 3-11
Transportation
 Role in the supply chain
 Role in the competitive strategy
 Components of transportation decisions

12. © 2004 Prentice-Hall, Inc. 3-12
Transportation: Role in
the Supply Chain
 Moves the product between stages in the supply chain
 Impact on responsiveness and efficiency
 Faster transportation allows greater responsiveness
but lower efficiency
 Also affects inventory and facilities

13. © 2004 Prentice-Hall, Inc. 3-13
Transportation:
Role in the Competitive Strategy
 If responsiveness is a strategic competitive priority, then faster
transportation modes can provide greater responsiveness to
customers who are willing to pay for it
 Can also use slower transportation modes for customers whose
priority is price (cost)
 Can also consider both inventory and transportation to find the
right balance
 Example : Blue Nile is an online retailer of diamonds that has
used responsive transportation with FedEx to ship diamonds to
customers in the United States, Canada, and several countries
in Europe and Asia.

14. © 2004 Prentice-Hall, Inc. 3-14
Components of
Transportation Decisions
 Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in cost, speed, size of shipment, flexibility
 Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
 Overall trade-off: Responsiveness versus efficiency

15. © 2004 Prentice-Hall, Inc. 3-15
Information
 Role in the supply chain
 Role in the competitive strategy
 Components of information decisions

16. © 2004 Prentice-Hall, Inc. 3-16
Information: Role in
the Supply Chain
 The connection between the various stages in the
supply chain – allows coordination between stages
 Crucial to daily operation of each stage in a supply
chain – e.g., production scheduling, inventory levels

17. © 2004 Prentice-Hall, Inc. 3-17
Information:
Role in the Competitive Strategy
 Allows supply chain to become more efficient and
more responsive at the same time (reduces the need
for a trade-off)
 Information technology
 What information is most valuable?
 Example: Andersen Windows
 Example: Dell

18. © 2004 Prentice-Hall, Inc. 3-18
Components of Information
Decisions
 Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
 Coordination and information sharing
 Forecasting and aggregate planning
 Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
 Overall trade-off: Responsiveness versus efficiency

19. © 2004 Prentice-Hall, Inc. 3-19
Sourcing
 Role in the supply chain
 Role in the competitive strategy
 Components of Sourcing decisions

20. © 2004 Prentice-Hall, Inc.
Role in the supply chain
 Sourcing is the set of business processes required to
purchase goods and services.
– Sourcing from low-cost countries allows a company like
IKEA to provide the basic modules for the furniture it sells
at low cost.
– Sourcing some of its PCs sold at Wal-Mart from China has
allowed Dell to lower their cost.
 As supply chains have globalized, many more
sourcing options now offer both considerable
opportunity and potential risks.
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21. © 2004 Prentice-Hall, Inc.
Role in the competitive strategy
 Firms outsource to responsive third parties if it is too expensive
for them to develop this responsiveness on their own.
 Example-Cisco has outsourced almost all of its manufacturing.
It does, however, have a sourcing strategy that varies by
product type. For low-end products such as routers for home
networks, Cisco aims for efficiency.
 For high-end products, in contrast, Cisco outsources to contract
manufacturers in the United States. These manufacturers are
not low cost, but they are responsive and can serve the rapidly
evolving needs of the high-end market.
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22. © 2004 Prentice-Hall, Inc.
Components of Sourcing Decisions
 In-House or Outsource: The most significant sourcing
decision for a firm is whether to perform a task in-
house or outsource it to a third party.
 Supplier Selection:Managers must decide on the
number of suppliers they will have for a particular
activity. They must then identify the criteria along
which suppliers will be evaluated and how they will
be selected.
 Procurement: It is the process of obtaining goods and
services within a supply chain. Managers must
structure procurement with a goal of increasing supply
chain surplus. 3-22

23. © 2004 Prentice-Hall, Inc.
 OVERALL TRADE-OFF: INCREASE THE SUPPLY CHAIN
SURPLUS
– Sourcing decisions should be made to increase the size of
the total surplus to be shared across the supply chain.
– The total surplus is affected by the impact of sourcing on
sales, service, production costs, inventory costs,
transportation costs, and information costs.
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24. © 2004 Prentice-Hall, Inc. 3-24
Pricing
 Role in the supply chain
 Role in the competitive strategy
 Components of Pricing decisions

25. © 2004 Prentice-Hall, Inc.
Role in the Supply Chain
 Pricing is the process by which a firm decides how
much to charge customers for its goods and services.
 Pricing affects the customer segments that choose to
buy the product, as well as the customer’s
expectations.
 pricing is one of the most significant factors that
affect the level and type of demand that the supply
chain will face.
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26. © 2004 Prentice-Hall, Inc.
Role in the Competitive Strategy
 Pricing is a significant attribute through which a firm
executes its competitive strategy.
– For example, Costco, a membership-based wholesaler
in the United States, has a policy that prices are kept
steady but low.
– Customers expect low prices but are comfortable with a
lower level of product availability.
– The Costco supply chain aims to be efficient, at the
expense of some responsiveness.
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27. © 2004 Prentice-Hall, Inc.
Example: Amazon.com
 Amazon offers its customers a large menu of prices for
products that are purchased from the company.
 For example, in July 2008, a person purchasing two books
worth $30 could use standard shipping (ships in 3–5 business
days) at a cost of $4.98, two-day shipping (ships in 2 business
days) at a cost of $13.97, one-day shipping (ships in 1 business
day) at a cost of $22.97 or use free shipping (ships in 7–14
business days).
 The pricing menu allows Amazon to attract customers with
varying levels of desired responsiveness.
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28. © 2004 Prentice-Hall, Inc.
Components of Pricing Decisions
 Pricing and Economies of Scale
 Everyday Low Pricing Vs High-Low Pricing
 Fixed Price Vs Menu Pricing
 Overall Trade-off: Increase firm profits
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29. © 2004 Prentice-Hall, Inc. 3-29
Obstacles to Achieving
Strategic Fit
 Increasing variety of products
 Decreasing product life cycles
 Increasingly demanding customers
 Fragmentation of supply chain ownership
 Globalization
 Difficulty executing new strategies

30. © 2004 Prentice-Hall, Inc. 3-30
Major Obstacles to Achieving Fit
 Multiple owners / incentives in a supply chain
 Increasing product variety / shrinking life cycles /
customer fragmentation
Increasing implied uncertainty
Local optimization and lack of global fit

31. © 2004 Prentice-Hall, Inc. 3-31
Summary
 What are the major drivers of supply chain
performance?
 What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy
(or between implied demand uncertainty and supply
chain responsiveness)?
 What are the major obstacles to achieving strategic fit?
 In the remainder of the course, we will learn how to
make decisions with respect to these drivers in order to
achieve strategic fit and surmount these obstacles

32. © 2004 Prentice-Hall, Inc.
 What jobs use supply chain management?
 The career opportunities for Supply Chain
Management are:
 Purchase Manager.
 Strategic Planner.
 Materials Analyst.
 Supply Chain Manager.
 Warehouse Manager.
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33. © 2004 Prentice-Hall, Inc.
 How do I get a job in supply chain management?
 How to become a Supply Chain Manager
 Complete a bachelor degree in a relevant field, such as
a Bachelor of Business (Logistics and Supply Chain
Management).
 Gain at least 3-5 years of experience in customer
service, logistics or business. Hiring managers will
be specifically looking for strong negotiation skills
and an ability improve efficiency.
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34. © 2004 Prentice-Hall, Inc.
 Which country is best for supply chain management
jobs?
 Top 10 countries for supply chain resilience
 Japan.
 Sweden.
 Netherlands.
 Germany.
 Finland.
 Hong Kong.
 Singapore.
 Denmark.
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35. © 2004 Prentice-Hall, Inc.
 Is there a demand for supply chain management?
 That's a huge problem. The global supply chain is a
$26 trillion per year industry and it's only getting
more complicated. Between 2010 and 2020, the
number of available jobs in supply chain will grow
by 26 percent. Currently, the demand-to-supply ratio
of jobs to qualified individuals is six to one.
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36. © 2004 Prentice-Hall, Inc.
 What are the best jobs in supply chain?
 9 Supply chain management jobs for degree holders
 Purchasing agent. Median annual salary (2017): $62,1202.
...
 Operations manager. Median annual salary (2017):
$100,4102. ...
 Logistics analyst. ...
 Purchasing manager. ...
 Supply chain manager. ...
 Logistician. ...
 Logistics manager. ...
 Production, planning and expediting clerk.
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37. © 2004 Prentice-Hall, Inc.
 Here are some of the highest paying logistics jobs,
most of which have significant advancement
opportunities attached:
 Fleet manager jobs. ...
 Configuration analyst jobs. ...
 Distribution center manager jobs. ...
 Procurement manager jobs. ...
 Senior level landman jobs. ...
 Business operations specialist jobs. ...
 Customer satisfaction director jobs.
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38. © 2004 Prentice-Hall, Inc.
 What jobs will disappear by 2030?
 15 Disappearing Jobs that Won't Exist in 2030
 Travel agent. ...
 Cashier. ...
 Fast food cook. ...
 4. Mail carrier. ...
 Bank teller. ...
 Textile worker. ...
 Printing press operator. ...
 Sports referee/Umpire. 3-38

39. © 2004 Prentice-Hall, Inc.
 Which is the best course in supply chain management?
 6 Best Supply Chain Management Courses [2020]
[UPDATED]
 Supply Chain Management Certification by Rutgers
Business School (Coursera)
 Supply Chain Management Micromasters by MIT (edX)
 Supply Chain Principles Course Online by Georgia Tech
(Coursera)
 Supply Chain Management Certification by UCL (edX)
 Supply Chain Management Course by KAIST (Coursera)
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