Supply chain capabilities are guided by the decisions you make regarding the five supply chain drivers. Each of these drivers can be developed and managed to emphasize responsiveness or efficiency depending on changing business requirements. As you investigate how a supply chain works, you learn about the demands it faces and the capabilities it needs to be successful. Adjust the supply chain drivers as needed to get those capabilities.
The five drivers provide a useful framework for thinking about supply chain capabilities. Decisions made about how each driver operates will determine the blend of responsiveness and efficiency a supply chain is capable of achieving. The five drivers are illustrated in the diagram below
1. PRODUCTION – This driver can be made very responsive by building factories that have a lot of excess capacity and use flexible manufacturing techniques to produce a wide range of items. To be even more responsive, a company could do their production in many smaller plants that are close to major groups of customers so delivery times would be shorter. If efficiency is desirable, then a company can build factories with very little excess capacity and have those factories optimized for producing a limited range of items. Further efficiency can also be gained by centralizing production in large central plants to get better economies of scale, even though delivery times might be longer.
With SCM Globe you simulate decisions about production by defining different products and production rates in the supply chain, and you define the facilities to make those products.
2. INVENTORY – Responsiveness can be had by stocking high levels of inventory for a wide range of products. Additional responsiveness can be gained by stocking products at many locations so as to have the inventory close to customers and available to them immediately. Efficiency in inventory management would call for reducing inventory levels of all items and especially of items that do not sell as frequently. Also, economies of scale and cost savings can be gotten by stocking inventory in only a few central locations such as regional distribution centers (DCs).
Using SCM Globe you simulate decisions about inventory by setting product production and product demand levels at facilities, and by defining on-hand amounts for different products at facilities throughout the supply chain.
3. LOCATION – A location decision that emphasizes responsiveness would be one where a company establishes many locations that are close to its customer base. For example, a fast-food chain like McDonald’s uses location to be very responsive to their customers by opening up lots of stores in high volume markets. Efficiency can be achieved by operating from only a few locations and centralizing activities in common locations. An example of this is the way Dell serves large geographical markets from only a few central locations that perform a wide range of activities.
Simulate this decision in SCM Globe by the way you locate your facilities (factories, warehouses and stores), and the storage capacities and operating expenses you define for those facilities. The screenshot below shows an example of this.
(click on screenshot to see larger image — from Cincinnati Seasonings case study)
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4. TRANSPORTATION – Responsiveness can be achieved by a transportation mode that is fast and flexible such as trucks and airplanes. Many companies that sell products through catalogs or on the Internet are able to provide high levels of responsiveness by using transportation to deliver their products often within 24 hours. FedEx and UPS are two companies that can provide very responsive transportation services. And now Amazon is expanding and operating its own transportation services in high volume markets to be more responsive to customer desires. Efficiency can be emphasized by transporting products in larger batches and doing it less often. The use of transportation modes such as ship, railroad, and pipelines can be very efficient. Transportation can also be made more efficient if it is originated out of a central hub facility or distribution center (DC) instead of from many separate branch locations.
Simulate transportation decisions in SCM Globe by the modes of transportation you select to move products between facilities, and the frequencies of those deliveries.
5. INFORMATION – The power of this driver grows stronger each year as the technology for collecting and sharing information becomes more wide spread, easier to use, and less expensive. Information, much like money, is a very useful commodity because it can be applied directly to enhance the performance of the other four supply chain drivers. High levels of responsiveness can be achieved when companies collect and share accurate and timely data generated by the operations of the other four drivers. The supply chains that serve the electronics markets are some of the most responsive in the world. Companies in these supply chains from manufacturers, to distributors, to the big retail stores collect and share data about customer demand, production schedules, and inventory levels.
SCM Globe simulates real-time information sharing between all participants in a supply chain by making data about operating costs and on-hand inventory available for all the facilities in the supply chain. As you run a simulation you can see what is happening from end to end across your supply chain. Most companies are not able at present to see much about the overall status of the supply chains they participate in. Information like that from SCM Globe simulations is usually not readily available to most companies in real world supply chains – but that will change.
Over the long run, the cost of one driver — information — continues to drop while the cost of the other four drivers continues to rise. Companies that make effective use of information to increase coordination internally and with their supply chain partners so as to get optimal performance from the other four drivers will gain the most market share and be the most profitable. The table below summarizes what can be done to guide the five supply chain drivers toward responsiveness or efficiency.
See our blog article “Five New Supply Chain Technologies and How to Use Them” for ideas about how new technologies can be used to improve the operation of these supply chain drivers and create competitive advantages for companies.
SCM Globe is a “sandbox” where you can model real supply chains or design new ones anywhere in the world and run simulations to see how well they work. The Cincinnati Seasonings case study is an example. Find out more about SCM Globe in the Getting Started section of this online guide
[ Part of this article is excerpted from my book Essentials of Supply Chain Management, 3rd Edition – http://www.amazon.com/Essentials-Supply-Chain-Management-ebook/dp/B005CPJVGM/ ]
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