A perspective of drivers of supply chain performance and its metrics (part 2)
Welcome back to the last part of the drivers of supply chain performance! As you read from part 1, there are six main drivers that influence the supply chain performance, and we have been through three of those drivers. Feel free to review the three first drivers via this link if you want! And…let’s get started with the rest of this topic.
Information includes data and analysis regarding facilities, inventory, transportation, costs, prices and customers throughout the supply chain. Investment in Information Technology (IT) provides opportunities of improving responsiveness and efficiency and minimizing costs. Besides, supply chain coordination and visibility, and information sharing among different departments are of critical importance to the success of a supply chain, which can be achieved via Sales and Operations Planning (S&OP) and a centralized IT system.
- Examples: Seven-Eleven has transformed their data into useful information in order to better match supply and demand while achieving production and distribution economies. DHL and other third-party logistics providers have integrated RFID (Radio frequency identification) into their supply chain, with the purpose of tracking an item throughout its movements – real-time data. RFID also eliminates the need for manual counting, and reduces risks of human errors and thefts.
- Recommended information-related metrics (see the table above, created by Ngoc Tran)
Sourcing is the set of business processes of purchasing goods and services. Decision in sourcing do affect the responsiveness and efficiency of a supply chain. For example, outsourcing in China can increase efficiency rate, but reduce responsiveness due to long lead times. Therefore, managers must first decide whether each task will be performed by a responsive or efficient source and then whether the source should be internal or assigned to a third party. Outsourcing is only beneficial when the third party raises the supply chain surplus more than the firm can on its own, and if the risk associated with outsourcing is not significant.
- Examples: Zara has a sourcing strategy depending on the product types. Because demand of basic products like T-shirts are predictable, it chooses an efficient sourcing strategy by sourcing from suppliers in low-cost countries. In contrast, trendy products are sourced from company-owned factories in Europe, which are not low-cost yet more flexible and responsive to rapid changes in fashion taste.
- Recommended sourcing-related metrics:
Pricing is how much a firm will charge for the goods and services that it offers in the supply chain. Pricing first influences the consumer behaviours, thus affecting demand and supply chain performance. Therefore, variation in pricing can help companies categorise different groups of customers (e.g. premium pricing for those value responsiveness, and low pricing for those do not). Furthermore, it can act as a lever to match supply and demand, especially when the supply chain is not very flexible. All pricing decisions should be made to increase profits, while considering costs simultaneously. This requires a good understanding of the cost structure of the supply chain, which is often complicated and difficult to calculate accurately.
- Examples: Costco, a membership-based wholesaler in the US, has a policy that prices are kept steady but low, which ensures demand stays relatively stable to be efficient. This strategy is usually known as EDLP (Everyday Low Pricing). Amazon influences price of a product via offering different shipping costs, varying from standard, two-day shipping to free shipping, which allows the firm to meet different needs of different customer groups.
- Recommended pricing-related metrics:
To sum up, there are six factors that affect the supply chain strategy and competitive strategy, which are facilities, inventory, transportation, information, sourcing, and pricing. Decisions on each of these factors should be made in consideration of responsiveness and efficiency; revenues, costs, and profits.
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Have a nice holiday!
Series “Supply chain performance measurement”
Supply chain performance and its metrics (part 2) – Information, Sourcing, Pricing.
The six drivers of supply chain performance – Facilities, Inventory, Transportation, Information, Sourcing and Pricing.
Monitoring supply chain performance – criteria, methods and indicators.
Overview of data and information to monitor manufacturer’s or retailer’s supply chain performance; intelligent supply chain performance measurement in Industry 4.0.