HIGHLIGHTS
- 6 driver of supply chain performance includes facilities, inventory, transportation, information, sourcing, price.
- To best support its competitive strategy, every business needs to achieve a supply chain balance of responsiveness and cost.
FULL ARTICLE
Facilities
Facilities are locations where products are stored, assembled, or manufactured. The two main types of facilities are production facilities and storage facilities.
The fundamental trade-off that managers face when making facilities decisions is between the cost of the number, location, capacity, and type of facilities (efficiency) and the level of responsiveness that these facilities provide the company’s customers. Increasing the number of facilities increases facility and inventory costs but decreases transportation costs and reduces response time. Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and response time.
Honda has opened manufacturing facilities in every major market which they enter, increasing its ability to satisfy customers. The flexibility of Honda facilities to assemble both SUVs and cars in the same plant allowed the company to keep costs down in the downturn of 2008. While competitors’ SUV production facilities were idle, Honda facilities maintained a high level of utilization.
Inventory
Inventories include all raw materials, products in process, and finished products in the supply chain.
With inventory decisions, the fundamental trade-off that managers face is between responsiveness and cost-effectiveness. Increasing inventories generally makes the supply chain more responsive to customer needs. Higher inventory levels also facilitate reduced manufacturing and shipping costs because of improved economies of scale. However, this option increases the cost of holding inventory. The goal of supply chain design is to find the right form, location, and quantity of inventory to provide the right level of responsiveness at the lowest possible cost.
For example, W.W. Grainger, the world’s leading supplier of quality industrial supplies, stocks a large amount of inventory because its products retain value over a long period. However, high inventory levels can be dangerous in the fashion apparel business because of seasonal changes and trends. Instead of keeping inventory high, Zara has shortened the time it takes to launch new products with the frequency 2 times a week. The company also maintains an inventory level of less than 10% compared to the average of 17-20% of many companies in the market. The high production schedules, stability, and rapid delivery times of the Zara supply chain help it provide low-cost responsiveness.
Transportation
Transportation is the movement of inventory from one point to another in the supply chain. This includes many combinations of modes and routes, each with its operating characteristics.
Transportation choices have a major impact on supply chain responsiveness and efficiency. The basic trade-off here is between the cost of shipping a certain product (efficiency) and the speed at which it ships (responsibility). Using a fast mode of transport means high transportation costs, however, it increases responsiveness and reduces storage costs.
DHL is currently the fastest freight forwarder, the orders are always safe and secure, however, the shipping costs are very high compared to the common ground. Therefore, DHL will be suitable for urgent shipments such as invoice documents, exhibition goods, samples, etc. FEDEX is considered to have reasonable, stable prices, but their delivery time is still not as fast as DHL. If it’s not to increaseurgent, FEDEX should be the customer’s choice to optimize costs.
Information
Information includes data and analytics related to facilities, inventory, shipping, costs, pricing and customers throughout the supply chain. Information is the biggest performance driver in the supply chain because it directly affects each other.
Good information helps a company improve both efficiency and responsiveness. The trade-off between complexity and information value is important to consider when setting up an information infrastructure. As more information is shared in a supply chain, the complexity and cost of analysis required increases. However, the marginal value provided by shared information diminishes as more and more information becomes available. Therefore, it is important to assess the reliability of the information so that the desired objectives can be achieved.
Walmart, the world’s leading retailer, used a centralized database system to balance supply and demand. As a result, Walmart can expect almost 100% fulfilment orders while the cost of production and replenishment down.
Sourcing
Sourcing is the choice of people to perform supply chain activities such as production, storage, transportation, or information management. At the strategic level, these decisions correspond to each function, whether the business should make it in-house or outsource it.
Sourcing decisions need to be made to increase the size of the total surplus shared throughout the supply chain. Outsourcing to a third party makes sense if the third party increases the supply chain surplus more than the company can do on its own. Conversely, a company should maintain supply chain functionality internally if third parties are unable to increase supply chain surplus or if the risks associated with outsourcing are substantial.
Currently, the trend of outsourcing logistics services is more and more. According to the announcement of Frost Sullivan, the average growth rate of the world logistics service outsourcing market is 10-20%/year. Most of the world’s major corporations such as Dell, Walmart, Nortel, GAP, Nike all use third or fourth service providers, this trend has helped the world logistics market grow at a double rate. number.
Price
Price is the fee a company will charge for the goods and services it provides in the supply chain. Price affects the behaviour of the buyer of a good or service, which in turn affects the efficiency of the supply chain.
All pricing decisions must be made with the goal of increasing the company’s profits. This requires an understanding of the cost structure of performing an activity and the value it brings to the supply chain. Strategies such as daily low pricing (Walmart) can promote steady demand allowing for efficiency in the supply chain. Other pricing strategies can reduce supply chain costs, protect market share, or even steal market share. Arbitrage pricing can be used to attract customers with different needs, as long as this strategy helps increase revenue or reduce costs, preferably both.
These factors must not act in isolation but interact to determine the overall performance of the supply chain.
Minh Ngo
