Framework for Structuring Drivers of Supply Chain Performance

We provide a visual framework for supply chain decision making in Figure 3-1. 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 three logistical and three cross­functional drivers to reach the performance level the supply chain strategy dictates and maximize the supply chain profits. Although this framework is generally viewed from the top down, in many instances a study of the six drivers may indicate the need to change the supply chain strat­egy and, potentially, even the competitive strategy.

Consider this framework using Walmart as an example. Walmart’s competitive strategy is to be a reliable, low-cost retailer for a wide variety of mass-consumption goods. This strat­egy dictates that the ideal supply chain will emphasize efficiency but also maintain an ade­quate level of responsiveness in terms of product availability. Walmart uses the three logistical and three cross-functional drivers effectively to achieve this type of supply chain performance. With the inventory driver, Walmart maintains an efficient supply chain by keeping low levels of inventory. For instance, Walmart pioneered cross-docking, a system in which inventory is not stocked in a warehouse but rather is shipped to stores from the manufacturer with a brief stop at a distribution center (DC), where product is transferred from inbound trucks from the supplier to outbound trucks to the retail store. This lowers inventory significantly because products are stocked only at stores, not at both stores and warehouses. With respect to inven­tory, Walmart favors efficiency over responsiveness. On the transportation front, Walmart runs its own fleet, to keep responsiveness high. This increases transportation cost, but the benefits in terms of reduced inventory and improved product availability justify this cost in Walmart’s case. In the case of facilities, Walmart uses centrally located DCs within its network of stores to decrease the number of facilities and increase efficiency at each DC. Walmart builds retail stores only where the demand is sufficient to justify having several of them supported by a DC, thereby increasing efficiency of its transportation assets. Walmart has invested significantly more than its competitors in information technology, allowing the company to feed demand information across the supply chain to suppliers that manufacture only what is being demanded. As a result, Walmart is a leader in its use of the information driver to improve responsiveness and decrease inventory investment. With regard to the sourcing driver, Walmart identifies effi­cient sources for each product it sells. Walmart feeds them large orders, allowing them to be efficient by exploiting economies of scale. Finally, for the pricing driver, Walmart practices “everyday low pricing” (EDLP) for its products. This ensures that customer demand stays steady and does not fluctuate with price variations. The entire supply chain then focuses on meeting this demand in an efficient manner. Walmart uses all the supply chain drivers to achieve the right balance between responsiveness and efficiency so its competitive strategy and supply chain strategy are in harmony.

We devote the next six sections to a detailed discussion of each of the three logistical and three cross-functional drivers, their roles in the supply chain, and their impact on financial per­formance.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.