What is Supply Chain Drivers? Framework

What is Supply Chain Drivers?

Supply chain drivers are the key factors that affect the performance and success of a supply chain. These drivers can be categorized into two main types: internal and external. Internal drivers are factors within the organization that affect the supply chain, while external drivers are factors outside the organization that have an impact on the supply chain.

In the present dynamic business scenario, every organization needs to have a competitive edge over the rest. To achieve this, organizations are adopting different processes and technologies for aligning the capabilities of their supply chains with their business strategies. This is also required to maintain a balance between supply chain efficiency and responsiveness.

For this, organizations require examining different supply chain drivers and utilizing them appropriately. A supply chain driver is a factor that enables a supply chain to operate efficiently and responsively. There are six key supply chain drivers.

A supply chain’s performance depends on the interaction among these six key supply chain drivers. Let us first discuss the framework for structuring these drivers. The supply chain of each organization targets aligning its competitive strategy with its supply chain strategy for increased efficiency and responsiveness. To achieve this, organizations require structuring a suitable combination of all these six drivers of a supply chain. These drivers interact with one another to determine the supply chain’s responsiveness.

an organization’s supply chain strategy needs to support its competitive strategy. A supply chain strategy seeks to achieve efficiency and responsiveness. To accomplish supply chain activities effectively, both logistical drivers (inventory, facilities, and transportation) and cross-functional drivers (sourcing, information, and pricing) are used.

Framework of Supply Chain Drivers

Let us consider an example to understand this framework. ABC Limited is a retail organization with a competitive strategy that intends to achieve efficiency and responsiveness through its supply chain. To accomplish this, ABC can include both logistics and cross-functional drivers in its supply chain in the following manner:

• The organization can maintain low levels of inventory to maintain supply chain efficiency.
  
  
• It can employ its fleet to increase awareness and ensure better product availability.
  
  
• It can use its central distribution centers to enhance efficiency with fewer facilities.
  
  
• It can ensure a smooth flow of information throughout its supply chain network to improve responsiveness.
  
  
• It can define valid criteria for selecting suppliers to determine reliable and efficient sources for selling its products.
  
  
• It can adopt the Everyday Low Pricing (EDLP) scheme to confirm a steady demand for its products.

Therefore, by utilizing a structured framework of a supply chain, ABC can synchronize its supply chain strategies.

• Facilities
  
• Inventory
  
• Transportation
  
• Information
  
• Sourcing
  
• Pricing

Facilities

Facilities are physical locations in a supply chain network that are used for manufacturing, storing, and transporting products. There are different types of facilities in a supply chain, such as:

• Plant sites
  
• Factories
  
• Warehouses
  
• Distribution centers

The efficiency and responsiveness of a supply chain depend on the capacity, location, and flexibility of facilities. For example, a distributor who wants to respond quickly to customers should choose a facility that is located near the consumption center. An organization usually makes long-term decisions related to facilities in its supply chain.

Therefore, it considers various factors before deciding on facilities, including:

• Transportation costs
  
• Production capacity
  
• Customer demand
  
• Market uncertainties

Inventory

Inventory refers to the stock of materials or goods owned by a business with an aim of production and sale. It includes the following:

• Raw materials that are used to manufacture products
  
• Work-in-progress or goods at the semi-finished stage
  
• Finished goods or final output

It is essential to maintain an appropriate level of inventory in an organization to meet the increasing demands of customers and avoid understocking or over-stocking products. Based on their role in the entire process of customer satisfaction, there are five main types of inventories held by an organization.

Let us now discuss these different types of inventories in detail.

Cycle Inventory

This type of inventory is available or is planned to be made available to meet the normal demand of customers during a given period. If supply lead times and customer demands are known, the cycle inventory is only required to meet the regular demand.

Transit Inventory

This refers to the inventory that is dispatched by the seller but is still not received by the respective purchaser. Its level depends on the distance between the manufacturing facility and consumption centers. If the distance is large, then the transit inventory level increases.

Safety Inventory

This refers to the extra inventory stored by an organization to deal with any unintended and unanticipated situations, such as stock-outs. The level of safety inventory is higher than that of the regular cycle inventory because it helps the organization deal with uncertainties in product demand or supply.

Seasonal Inventory

This inventory is held by an organization to meet its seasonal demand. For example, the demand for raincoats and umbrellas increases during the rainy season. Seasonal inventory helps an organization meet fluctuations in demand caused by unstable production during a specific season.

Obsolete Inventory

This inventory includes only non-moving items, which are expected to have low demand in the future.

An organization can make its supply chain more efficient and responsive by managing its inventories effectively. For example, if a large amount of inventory is stocked near consumption centers, it will help the organization to meet customer demand on time.

Transportation

Transportation refers to the movement of products from one location to another, such as from a supplier to a manufacturer. It directly impacts the product delivery schedules of an organization. Therefore, it plays a crucial role in ensuring the effectiveness and responsiveness of a supply chain.

A supply chain becomes more responsive with faster transportation means. For example, 7-Eleven is a world-renowned supply chain based in Japan. To move its products across various geographical stores, it uses a responsive transportation system to refill its stocks several times a day. This transportation system has also reduced transportation costs for the company.

An organization needs to take various strategic decisions to make its transportation responsive and cost-effective. These decisions are described as follows:

Long-term Decisions

These decisions determine the availability and appropriateness of various transportation modes to be used for a long duration. The organization selects a primary mode of transportation for appropriate inbound or outbound movement of inventory among various facilities. It also needs to decide the level of outsourcing required for the chosen mode of transportation.

For example, an organization can use contractual transporters to move products from centralized stock locations to regional cross-dock facilities for packaging, sorting, and delivering small batches to customers.

Lane Operation Decisions

These decisions determine daily operational freight transactions. The organization uses real-time information to coordinate the movement of products along inbound and outbound shipping lanes among facilities to meet customer demands. Lane operation decisions include the following areas for consideration:

• Temporal consolidation
  
• Inbound/outbound consolidation
  
• Carrier consolidation
  
• Vehicle consolidation

Transportation Mode Decisions

These decisions are related to the carrier and mode for the movement of goods in a specific freight transaction. For example:

• Rail container services can be used for long distances economically.
  
  
• Truckload carriers are used for overnight freight movements to deliver within 24 hours at reasonable rates

Information

Information refers to the consolidated data associated with various facets of a supply chain, such as transportation, facilities, prices, costs, customers, and suppliers. The efficiency and responsiveness of a supply chain depend on timely and accurate information. If suitable information is not provided, various supply chain activities may suffer, including:

• Warehouse management
  
• Inventory control
  
• Transportation planning
  
• Development of customer service standards
  
• Design procurement
  
• Operation of supply and distribution systems

Information also impacts other supply chain drivers. For example, a pharmaceutical company can produce suitable quantities of a product using demand forecasting techniques, provided it has adequate information about customer demand patterns.

Information determines all decisions related to supply chain activities. If information is correct, it improves coordination among various units of the supply chain and thus maximizes total profitability.

Sourcing

Sourcing is an array of business processes used to purchase and deliver products and services. It includes the selection of suppliers for various supply chain activities, such as production, storage, information management, and transportation. It determines whether a particular supply chain activity should be performed in-house or outsourced.

These decisions impact the efficiency and responsiveness of a supply chain considerably. For example, the efficiency of Motorola improved considerably when it outsourced a major part of its production to China. However, its responsiveness suffered because of increased transportation costs and delivery schedules.

While designing the sourcing process, an organization should consider the following steps:

• Decide which tasks should be outsourced.
  
  
• Decide whether to source these tasks from one supplier or multiple suppliers.
  
  
• In the case of multiple suppliers, create a portfolio that defines the role of each supplier.
  
  
• Define appropriate criteria for the selection and measurement of the performance of suppliers.
  
  
• Choose suitable suppliers based on the criteria.
  
  
• Negotiate contracts with the selected suppliers.

This sourcing process may help the organization maintain a consistent and accurate information flow across the various stages of a supply chain and improve its performance.

Pricing

Pricing is a process that is used to determine the amount charged by an organization for making its products and services available to customers. This process impacts the purchase decisions of customers to a large extent. It also plays a critical role in matching the supply and demand of products in the market. For example, an organization can offer short-term discounts to customers to reduce excess supply.

Consider an example to understand the significance of pricing in a supply chain. Costco Wholesale Corporation is a membership-based warehouse company located in the US. It follows a policy for maintaining stable but low prices for its products.

Due to stable prices, its products have a consistent demand as customers are ready to wait for products. As a result, Costco can target a broad range of customers, while maintaining its existing customer base. It has reshaped its supply chain according to its pricing policies and customer demands.