The supply chain strategic fit concept requires that a company achieve the desired responsiveness and efficiency in its supply chain that best meets the needs of the company's competitive strategy.
The performance of a supply chain (responsiveness and efficiency) is determined by decisions in the areas of inventory, transportation, facilities and information. Hence these four areas are identified as drivers of supply chain performance.
A Framework for Structuring Supply Chain Drivers
Supply chain managers have to take research and development efforts to improve both responsiveness and efficiency of their supply chains on a continuous basis. In the past there were technological and managerial breakthroughs which improve one of them without any deterioration in the other and also improvement in both dimensions simulataneously. Actual economic theory tells, new technologies (capital investments) are adopted for capital productivity. Capital productivity in the context of supply chains comes through improvement in responsiveness and efficiency.
But at a certain point in time, there can be tradeoffs between responsiveness and efficiency. Hence supply chain designers come with supply chains that give various combinations of responsiveness and efficiency (responsiveness - efficiency frontier) and the optimal combination is chosen based on the competitive strategy considerations.
Definition/Explanation of Four Drivers
1. Inventory: It consists of all raw material, work in process, and finished goods within a supply chain.
2. Transportation: It involves moving inventory from one point in the supply chain to another point.
3. Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence facilities can be categorised into production facilities and storage facilities.
4. Information: It consists of data and results of analysis regarding inventory, transportation, facilities, customer orders, customers, and funds.
1. Inventory
Inventory is maintained in the supply chain because of mismatches between supply and demand.
Types of inventory based on reasons for keeping them:
A) Cycle inventory: This results due to producing or buying larger lots to minimize acquisition costs related to processing each purchase order or production order.
B) Safety Inventory: It is held to counter against uncertainty or variability of demand.
C) Seasonal Inventory: It is inventory maintained to satisfy higher demands in a period compared to production capacity. It arises due to the decision to service predicted variability in demand through extra production during slack period or low demand periods.
Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.
2. Transportation
Number of decisions have to be taken in designing a supply chain regarding transportation.
• Decisions
• Mode of Transportation
- Air
- Truck (Road)
- Rail
- Ship
- Pipeline
- Electronic transportation (the newest mode for music, documents etc)
• Route and Network Selection
Network is a set of facilities or destinations which can be used for transportation of goods. Route is a specific selection of facilities or destinations through which goods move.
• Own Transport or Outsourced Transport
3. Facilities
Within a facility, inventory is either transformed into another state or stored.
Facilities Related Decisions
• Location
• Capacity
• Manufacturing Methodology or Technology
• Warehousing methodology
4. Information
Information does not have a physical presence. It is likely to be overlooked. But it deeply affects every part of supply chain. Information is the connection between various stages in a supply chain and allows them to coordinate actions and increase the maximum supply chain profitability. It is also essential in daily operations. The stocks available in warehouses must have visibility so that when a customer wants an item, it can be delivered to him.
Decisions related to Information
• Push Process Information and Pull Process Information
• Coordination and information sharing across various facilities in the supply chain.
• Forecasting
• Aggregate Planning
• Enabling technologies
Obstacles to Achieving Strategic Fit
• Increasing Variety of Products. In the era of mass customization production variety is increasing.
• The customers becoming increasingly demanding. Today's customers are demanding faster fulfillment, better quality, and better performing products for the same price that they are paying today.
• The supply chain is getting fragmented. At one time vertical integration was the order of the day. But the present trend is to concentrate on core competence and outsource more activities. Thus the supply chain is more fragmented now.
• Globalization is creating global supply chains and hence physical distance is increasing between a company and its suppliers and a company and its customers.
• While creating a strategy is difficult, executing it is much more difficult. Many companies understand Toyota Production System now, but still find it difficult to implement and operate.
