Business Drivers in Supply Chain Performance
Supply chain management has become one of the key areas that organizations are focusing on to reduce costs and improve the efficiency of the production process. Four key drivers of supply chain performance are inventory, transportation, facilities and information. They help determine not only the responsiveness and effectiveness, but also the strategic fit of the supply chain. Figure illustrates the position of these drivers in the overall decision-making framework of the supply chain.
Figure: Supply Chain Decision-Making Framework
Inventory
Inventory includes raw materials, work-in-progress, and finished goods in the supply chain. Inventory decisions have considerable influence on the supply chain management system. Inventory exists in organizations due to a mismatch between demand and supply. Inventory is also maintained to increase the responsiveness of organizations to sudden increases in customer demand. As inventory is a major source of cost in the supply chain, organizations need to decide how much inventory they need to store at each level of the supply chain. A manufacturer will be more responsive to customer demand if he has the stock with him that will allow him to meet his demand. But, on the other hand, if the manufacturer has large stockpile of inventory, the holding cost will increase. So, the objective of the supply chain management should be to reduce the inventory cost without compromising the responsiveness of the organization.
Transportation
Organizations use transportation to move components and products between the different stages of the supply chain. Transportation decisions are made on the mode of transportation and route to use in the transfer of products from one point to another. However, there is always a trade-off between responsiveness and efficiency. If an organization uses air transport to transfer its products or components, its responsiveness increases significantly, but its cost efficiency decreases because of high air transport costs. Similarly, if an organization uses land or sea transport, its cost efficiency increases but its responsiveness decreases. Key components in transportation decisions are: selecting the mode of transportation, route and network. Another decision to consider is should the organization have transportations infrastructure of their own or should they outsource the transportation requirements.
Facilities
Facilities are the locations in the supply chain where the raw materials and finished goods are stored, and where work-in-progress materials are assembled or fabricated, and from which finished goods are distributed. Facility's capacity and location has significant affect on the performance of the supply chain. More facilities close to customer may improve the supply chain effectiveness but cost of maintenance of so many facilities will be high. On the other hand, organizations can have fewer warehouses that cater to different market. This would reduce the maintenance cost but their responsiveness would be adversely affected.
Information
Sometimes, the value of information as a supply chain driver is undermined due to its abstract quality. However, in reality, it is one of the key drivers affecting the performance of the supply chain. As the supply chain is made up of various entities, proper coordination is the key to improving the efficiency of the supply chain system. The flow of information also affects the performance of other drivers. With proper information, organizations can predict the quantity to produce, when it is needed and where it is needed. This makes the supply chain more effective and responsive to market demand.
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