Chapter 3

Essay Questions

1) List and define the six major drivers of supply chain performance.
Answer: Facilities are the places in the supply chain network where product is
stored, assembled, or fabricated. The two major types of facilities are production sites
and storage sites.
Inventory is all raw materials, work in process, and finished goods within a supply
chain. Inventory is an important supply chain driver because changing inventory
policies can dramatically alter the supply chain's efficiency and responsiveness.
Transportation entails moving inventory from point to point in the supply chain.
Transportation can take the form of many combinations of modes and routes.
Information consists of data and analysis concerning facilities, inventory,
transportation, and customers throughout the supply chain. Information is potentially
the biggest driver of performance in the supply chain as it directly affects each of the
other drivers.

2) Explain the supply chain decision-making framework and the role of the four major
drivers.
Answer: The goal of a supply chain strategy is to strike the balance between
responsiveness and efficiency, resulting in a strategic fit with the competitive strategy.
To reach this goal, a company uses the four supply chain drivers discussed earlier. For
each of the individual drivers, supply chain managers must make a trade-off between
efficiency and responsiveness. The combined impact of these four drivers then
determines the responsiveness and efficiency of the entire supply chain.
Most companies begin with a competitive strategy and then decide what their supply
chain strategy ought to be. The supply chain strategy determines how the supply chain
should perform with respect to efficiency and responsiveness. The supply chain must
then use the supply chain drivers to reach the performance level the supply chain
strategy dictates.
3) Explain the basic trade-off between responsiveness and efficiency for each of the
major drivers of supply chain performance.
Answer: The fundamental trade-off when making facilities decisions is between the
cost of the number, location, and type of facilities (efficiency) and the level of
responsiveness that these facilities provide the company's customers.

The fundamental trade-off when making inventory decisions is between

responsiveness and efficiency. Increasing inventory will generally make the supply
chain more responsive to the customer. This choice, however, comes at a cost as the
added inventory decreases efficiency. Therefore, a supply chain manager can use
inventory as one of the drivers for reaching the level of responsiveness and efficiency
the competitive strategy targets.

The fundamental trade-off for transportation is between the cost of transporting a

given product (efficiency) and the speed with which that product is transported
(responsiveness). The transportation choice influences other drivers such as inventory
and facilities. When supply chain managers think about making transportation
decisions, they frame the decision in terms of this trade-off.

Good information systems can help a firm improve both its responsiveness and
efficiency. The information driver is used to improve the performance of other drivers
and the use of information is based on the strategic position the other drivers support.
Accurate information can help a firm improve efficiency by decreasing inventory and
transportation costs. Accurate information can improve responsiveness by helping a
supply chain better match supply and demand.

4) Explain the role of each of the major drivers of supply chain performance.
Answer: Facilities are the where of the supply chain if we think of inventory as what
is being passed along the supply chain and transportation as how it is passed along.
They are the locations to or from which the inventory is transported. Within a facility,
inventory is either processed or transformed into another state (manufacturing) or it is
stored before being shipped to the next stage (warehousing).

Inventory exists in the supply chain because of a mismatch between supply and
demand. An important role that inventory plays in the supply chain is to increase the
amount of demand that can be satisfied by having product ready and available when
the customer wants it. Another significant role inventory plays is to reduce cost by
exploiting any economies of scale that may exist during both production and
distribution. Inventory is spread throughout the supply chain from raw materials to
work in process to finished goods that suppliers, manufacturers, distributors, and
retailers hold. Inventory is a major source of cost in a supply chain and it has a huge
impact on responsiveness. The location and quantity of inventory can move the
supply chain from one end of the responsiveness spectrum to the other. Inventory also
has a significant impact on the material flow time in a supply chain. Another
important area where inventory has a significant impact is throughput. Inventory and
flow time are synonymous in a supply chain. Managers should use actions that lower
the amount of inventory needed without increasing cost or reducing responsiveness,
because reduced flow time can be a significant advantage in a supply chain.

Transportation moves product between different stages in a supply chain. Like the
other supply chain drivers, transportation has a large impact on both responsiveness
and efficiency. Faster transportation, whether in the form of different modes of
transportation or different amounts being transported, allows a supply chain to be
more responsive but reduces its efficiency. The type of transportation a company uses
also affects the inventory and facility locations in the supply chain.
Information could be overlooked as a major supply chain driver because it does not
have a physical presence. Information, however, deeply affects every part of the
supply chain. Its impact is easy to underestimate as information affects a supply chain
in many different ways. Information serves as the connection between the supply
chain's various stages, allowing them to coordinate and bring about many of the
benefits of maximizing total supply chain profitability. Information is also crucial to
the daily operations of each stage in a supply chain. For instance, a production
scheduling system uses information on demand to create a schedule that allows a
factory to produce the right products in an efficient manner. A warehouse
management system uses information to create visibility of the warehouse's inventory.
The company can then use this information to determine whether new orders can be
filled.

5) Explain the role of each of the major drivers of supply chain performance in the
competitive strategy.
Answer: Facilities and their corresponding capacities to perform their functions are
a key driver of supply chain performance in terms of responsiveness and efficiency.
For example, companies can gain economies of scale when a product is manufactured
or stored in only one location; this centralization increases efficiency. The cost
reduction, however, comes at the expense of responsiveness, as many of a company's
customers may be located far from the production facility. The opposite is also true.
Locating facilities close to customers increases the number of facilities needed and
consequently reduces efficiency. If the customer demands and is willing to pay for the
responsiveness that having numerous facilities adds, however, then this facilities
decision helps meet the company's competitive strategy goals.

Inventory plays a significant role in a supply chain's ability to support a firm's

competitive strategy. If a firm's competitive strategy requires a very high level of
responsiveness, a company can use inventory to achieve this responsiveness by
locating large amounts of inventory close to the customer. Conversely, a company can
also use inventory to make itself more efficient by reducing inventory through
centralized stocking. The latter strategy would support a competitive strategy of being
a low-cost producer. The trade-off implicit in the inventory driver is between the
responsiveness that results from more inventory and the efficiency that results from
less inventory.
The role of transportation in a company's competitive strategy figures prominently
when the company is considering the target customer's needs. If a firm's competitive
strategy targets a customer that demands a very high level of responsiveness, and that
customer is willing to pay for this responsiveness, then a firm can use transportation
as one driver for making the supply chain more responsive. The opposite is true as
well. If a company's competitive strategy targets customers whose main decision
criterion is price, then the company can use transportation to lower the cost of the
product at the expense of responsiveness. As a company may use both inventory and
transportation to increase responsiveness or efficiency, the optimal decision for the
company often means finding the right balance between the two.

Information is a driver whose importance has grown as companies have used it to

become both more efficient and more responsive. The tremendous growth of the
importance of information technology is a testimony to the impact information can
have on improving a company. Like all the other drivers, however, even with
information, companies reach a point when they must make the trade-off between
efficiency and responsiveness.