Q. No.4 Major Drivers of Supply Chain Performance and Their Role in Strategic Fit.
Their Role in Strategic Fit
1. Facilities
Facilities refer to the physical locations where products are manufactured, stored, or distributed. These include factories, warehouses, and distribution centers.
- Role in Strategic Fit: Facilities determine the efficiency and responsiveness of the supply chain. A company focused on cost leadership may centralize its facilities to minimize costs, while a company focused on responsiveness may decentralize its facilities to be closer to customers and reduce lead times.
- Key Metrics:
- Capacity utilization: Measures how effectively the available facility capacity is being used.
- Throughput time: The time taken for a product to pass through the entire production process.
- Facility-related costs: Operating costs associated with running facilities.
2. Inventory
Inventory includes raw materials, work-in-process (WIP), and finished goods held by the supply chain to meet demand.
- Role in Strategic Fit: Inventory plays a balancing role between responsiveness and efficiency. A firm with a focus on responsiveness may hold higher levels of inventory to ensure product availability, while an efficiency-focused firm may maintain lower inventory to minimize holding costs.
- Key Metrics:
- Inventory turnover: The ratio of how many times inventory is sold or used in a time period, indicating inventory management efficiency.
- Days of inventory (DOI): The average number of days it takes to sell the inventory on hand.
- Inventory carrying costs: The total costs of holding inventory, including storage and obsolescence costs.
3. Transportation
Transportation involves the movement of goods between different stages in the supply chain. It can involve various modes of transport, such as road, air, rail, or sea.
- Role in Strategic Fit: Transportation choices impact the speed and cost of delivery. A company with a strategy of fast response may opt for faster, but more expensive, transportation methods. A cost-efficient strategy may favor slower, more economical modes of transportation.
- Key Metrics:
- Transportation cost per unit: The total cost of transportation divided by the number of units moved.
- On-time delivery: The percentage of orders delivered on or before the scheduled delivery time.
- Freight efficiency: Measures the cost of transportation relative to the distance covered and weight of goods shipped.
4. Information
Information refers to the data and insights shared across the supply chain to facilitate decision-making, coordination, and performance optimization.
- Role in Strategic Fit: Information is crucial for synchronization within the supply chain. Effective use of information can help create a balance between responsiveness and efficiency, enabling demand forecasting, real-time inventory management, and supply chain visibility.
- Key Metrics:
- Forecast accuracy: The accuracy of demand forecasts compared to actual demand.
- Order lead time: The time taken to process and fulfill an order based on available information.
- Information sharing index: A measure of how effectively information is shared across the supply chain partners.
5. Sourcing
Sourcing involves selecting suppliers and deciding whether to produce goods in-house or outsource to other companies.
- Role in Strategic Fit: The sourcing strategy influences both cost and quality. Firms focusing on cost leadership might source from low-cost suppliers, while those focusing on differentiation may source from high-quality suppliers to ensure superior products.
- Key Metrics:
- Supplier lead time: The time a supplier takes to deliver goods after an order is placed.
- Supplier reliability: The ability of suppliers to deliver the correct quantity and quality of products on time.
- Cost of goods sold (COGS): The direct costs attributed to the production of goods sourced from suppliers.
6. Pricing
Pricing refers to the price of the product set by the company, which can influence demand, supply chain performance, and customer behavior.
- Role in Strategic Fit: Pricing strategies affect supply chain responsiveness and efficiency. For example, a company offering premium products at higher prices may invest in faster supply chains, while companies targeting cost-conscious consumers may focus on lowering supply chain costs to maintain competitive pricing.
- Key Metrics:
- Profit margins: The difference between the price of a product and the cost of producing it.
- Price elasticity: How sensitive customer demand is to changes in price.
- Customer retention rate: The percentage of customers who continue to buy a product over time at the current price.
Conclusion
Each of these six supply chain drivers—facilities, inventory, transportation, information, sourcing, and pricing—plays a significant role in creating strategic alignment between a company’s supply chain and its competitive strategy. By carefully managing these drivers and tracking key metrics, companies can achieve a balance between efficiency (cost leadership) and responsiveness (differentiation), enabling long-term competitive advantage.
