For any firm to be successful, its supply chain strategy and competitive strategy must have a strategic fir like, both supply chain and competitive strategies should have the same goal. Strategic fit requires consistency between the priorities of the customers that the competitive strategy is designed to satisfy and the capabilities that the supply chain aims to build.
In other words, strategic fit requires that a firm achieve the balance between responsiveness and efficiency in its supply chain which best meets the needs of the company’s competitive strategy.
To understand how a firm can improve supply chain performance in terms of its responsiveness and efficiency, we need to examine the drivers of supply chain performance.
What are the Drivers of Supply Chain Management
These drivers of the supply chain are discussed in the following paragraphs:
1. Production
The performance of the supply chain is very much dependent on a production like, what is produced, how it is produced (the manufacturing process used), and when it has to be produced.
2. Inventory
All raw material, work in progress and finished goods within a supply chain are referred to as inventory. Any change in inventory policies can greatly affect the efficiency and responsiveness of the supply chain.
Decision such as how much to store and where to store (in the firm’s premises or warehouses or at the retailer’s premises).
For example, a retailer can quickly meet customer demand by keeping a large inventory of an item, but it will increase the retailer’s cost, thereby affecting its efficiency even though res[ponsivenss has increased.
On the contrary, reducing inventory will increase the retailer’s efficiency but will affect its responsiveness.
Related: Functions of Transportation in Marketing and Sales.
3. Transportation
Inventory has been moved from point to point in the supply chain using transportation facilities taking the form of many combinations of modes (multimodal) and routes, each having its own performance characteristics.
The responsiveness and efficiency of the supply chain is significantly affected by the choice of transportation modes and routes (affecting the speed and cost of transportation).
Hence, decisions regarding issues related to how to move a product from one location to another and by what mode of transportation are usually trade-off decisions.
It is necessary to evaluate economies on one hand and the desired level of customer satisfaction of the other.
4. Facility Location
Facilities are the places in the supply chain network where inventory is stored, parts are fabricated and assembled into finished goods.
The decision regarding the location of the facilities (plant), their capacity, and the flexibility of the facilities have a major impact on the performance of the supply chain.
For example, an automobile firm can locate its spare parts distributors and service centers close to customers to increase responsiveness at the cost of efficiency.
On the contrary, fewer spare parts distributors and service centers may increase the efficiency of the supply chain network at the cost of its responsiveness.
Documents Used in Transportation and Warehousing.
5. Information
Information consists of data and analysis regarding inventory, facilities (location, capacities, etc.) transportation and customers throughout the supply chain.
Information affects each of the other drivers and hence is the biggest driver of supply chain performance.
Information is helpful in making the supply more efficient and responsive at the same time.
For example, information regarding customer demand patterns results in a more accurate forecast of demand, which in turn will enable a firm to produce the required quantity of the product at the right time to meet customer demand.
This makes the supply chain more responsive and yet efficient.
Related: Characteristics of Chain Stores or Multiple Shops.
6. Sourcing
Sourcing is another important area in supply chain management. The source is a specific location or enterprise from here goods are obtained.
Sourcing is the right activity of buying or procuring the right materials in the right quantities of the right quality, in the right condition, at the right time, at the right price from the right supplier.
The term outsourcing should not be confused with the term sourcing as they are different. Outsourcing s the term used to describe the activity of purchasing parts, components, assemblies, and other services that were previously done within the firm, from sources outside the firm.
Related: Merits & Demerits of Business Process Outsourcing (BPO).
An effective procurement strategy involves volume consolidation through a reduction in the number of suppliers (like sources). By consolidating volumes wit a limited number of suppliers, buyers can increase their negotiating strength in relation to the supplier.
Purchasing in large volumes allows the suppliers to improve economies of scale and also to make investments in capacity or processes to improve customer service.
But when a single source of supply is used by the buyer firm, it has a higher risk of going out of stock when supply gets delayed.
Managers are responsible to take “make or buy” decisions and also take decision regarding which tasks to be outsourced and to whom whether a single supplier or a number of suppliers.
Managers then select suppliers and negotiate contracts with each supplier and are structural to improve supply chain performance (flow of materials, information, and funds).
Once the sourcing process is completed, the procurement process that facilities order placement and delivery of orders play a major role.
Sourcing decisions play a crucial role in logistics and supply chain management as the effect of the level of efficiency and responsiveness of the supply chain.
Key sourcing decisions that are made within a firm include the following:
- In house manufacture or outsource.
- Supplier selection.
- Procurement.
The logistics and supply chain management is driven by sourcing/outsourcing decision made by managers because the location of suppliers, the volume of goods delivered, frequency of suppliers, prices quoted, terms and conditions of supply, return goods handling and replacement, packaging supplier relationship, etc., have a great impact on the performance of logistics and supply chain functions.
Also, one of the major challenges of business today having a major impact on logistics management is the increase in international sourcing, particularly from low-cost countries such as China and Malaysia.
International sources increase the complexity of logistics and supply chain function because of enhanced costs of transportation, inventory, warehousing, etc. which may offset the cost advantages gained because of low prices for materials, components, etc., which are bought from global suppliers.
7. Pricing
Pricing is the process by which a firm decides how much to charge customers for its goods and services. Pricing affects the customer’s segment which is price sensitive.
Also, customers’ expectations are based on the prices they pay for goods purchased.
Therefore pricing affects the supply chains n terms of the level of responsiveness required and the demand profile that the supply chain attempts to serve.
Also, pricing is used as a lever to match supply and demand. Sellers may use incentives such as short term price discounts to eliminate supply surpluses or decrease season demand surges by postponing the demand to a later period.
Pricing is one of the most important factors which affect the level and type of demand by supply chain managers.
Pricing plays a significant role in a firm’s competitive strategy. For example, if customers in a customer segment expect low prices but are comfortable with a lower level of product availability, then the steady prices can ensure that demand stays relatively at a stable level.
Firms serving such a customer segment can design their supply chain structure appropriately so that the supply chains can be very efficient (like, of low cost), at the expense of some responsiveness.
In contrast, some other forms may use pricing that varies with the response time desired by the customer.
In such cases, the firm will vary its pricing according to the degree of responsiveness or efficiency desired of the customers a structure its supply chain which can meet the two divergent needs.
All pricing decisions should be made with the objective of increasing the profits of the firm.
For this, it is essential to have an understanding of the cost structure of performing the logistics and supply chain activities and the value these activities bring to the supply chain.
Some pricing strategies such as “every other pricing low pricing” may promote stable demand and allows for efficiency in the supply chain.
Some other pricing strategies may lower logistics and supply chain costs, retain market share or even increase market share. Customers with varying needs may be attracted by using differential pricing strategy which helps to either increase revenues or decrease costs.
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The information on the drivers is good and clear
happy to help you
A very good and clear presentation. Thank you so much.
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Hi Excellent work putting this together! I question what AI will do in this space over the next five years.