A perspective of drivers of supply chain performance and its metrics (part 1)

Published by Ngoc Tran on

Facility-related metrics photo-1

This article is an extension of the previous blog I wrote about supply chain performance, which you can read here. I am going to discuss with you about the six key drivers, its impacts, and metrics on supply chain performance, developed by S.Chopra and P.Meindl (2016). You can then categorize these metrics, select and apply those best suiting to your needs and strategy!

The six drivers are Facilities, Inventory, Transportation, Information, Sourcing and Pricing. The three first components will be investigated in this blog, and the rest will be analysed in the next one, so stay tuned!

#1: Facilities

As the name suggested, facilities are the physical location in the supply chain network where products are stored, manufactured, or assembled. Production sites and storage sites are the two main types of facilities. Purchasing or renting these sites depends on your strategy (e.g. centralized or decentralized, the number of sites versus their location, capacity, how flexible and responsive you want to be). Changes any of these factors are a trade-off. For example, your firm can increase flexibility and responsiveness by increasing the number of facilities/ capacity; however, the more facilities, the more cost you have to pay. Then, this leads to a trade-off between inventory and transportation costs. Therefore, it is important to find an appropriate trade-off when designing your facilities network.

  • Examples: Although opening no more than one or two large stores per city/country, IKEA has been making profits thanks to its efficiency strategy. On the other hand, the Japanese convenient store Seven Eleven has become profitable with its responsiveness strategy by opening several stores per city in Japan.
  • Recommended facility-related metrics (see Table 1 above)

#2: Inventory

Inventory consists of all raw materials, work in progress (WIP), and finished goods within a supply chain. There is also a trade-off here among the volume of the inventory, cost, and how flexible and responsive your strategy is. Inventory is held to reduce costs (e.g. economics of scale) or increase the level of product availability; however, increasing inventory can result in higher holding cost. In contrast, low levels of inventory can cause lost sales even though carrying costs decrease. Nevertheless, it is advised to reduce inventory in ways that do not rise cost or lower responsiveness.

  • Examples: Low levels of inventory are a key of success in fashion industry. Zara tends to shorten new product and replenish lead time in order to be responsive yet carrying low levels of inventory. Amazon stocks best-selling books in many regional warehouses, while slower-moving books are stored in fewer warehouses. Some slow-moving books are purchased directly from publisher/distributor when requested by a customer. Thus, Amazon has lowered their inventory costs while maintaining their responsiveness.
  • Recommended inventory-related metrics (see Table 2)
Inventory related metrics photo 2

Table 2 Inventory related metrics

#3: Transportation

Transportation covers the movement of inventory from point to point in the supply chain. Selection of transportation modes and carriers has an impact on supply chain responsiveness, efficiency, and costs. Typically, faster transportation is more expensive but allows the supply chain to be more responsive. Therefore, inventory level can be held low and the number of facilities can be reduced. Inbound transportation cost are usually included in COGS, while outbound transport costs are counted in selling expenses. For high-value goods, they are usually transported fast with centralized facilities and low level of inventory. In contrast, low-value bulk and slow-moving products use low-cost transportation. High-demand items can be stored close to customers with a fair amount of inventory, so truck is the common choice for this kind of product.

  • Examples: McMaster-Carr and W.W.Grainger, one of the largest MRO (Maintenance, Repair and Operating) suppliers in the world, use ground transportation to deliver next-day service to their customers. Aviko, one of the four largest potato processors globally, export their products via water shipping due to the product’s characteristics: low-value, large quantity, and no-time sensitiveness.
  • Recommended transportation-related metrics (see Table 3)
Transportation related metrics photo-3

Table 3 Transportation related metrics (created by the author)

So, it is quite interesting how these factors affect each other in terms of responsiveness, flexibility, efficiency, and costs, right? Also, there are so many sub-components in each factor that you can select to monitor your supply chain performance. A tip to understand and apply this knowledge is via attending some business games like The Fresh Connection or The Cool Connection.

As always, thank you very much for reading and share your opinions with the community in the comment section below! Please share this blog if you think someone may find it interesting and useful!

See you in the next blog!

Series of posts “Supply chain performance measurement”


3 Comments

bcrc · 19 December 2021 at 10:49 pm

Interesting read about six supply chain drivers such as Facilities, Inventory, Transportation, Information, Sourcing and Pricing.

JH Jansen · 19 December 2021 at 11:00 pm

Is inventory turnover defined in a correct way?

    bcrc · 20 December 2021 at 10:05 pm

    Thank you, Jan. The inventory turnover has been corrected.

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