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SCM metrics and Drivers Peter MeindlChapter 3
Citation preview
Supply Chain Drivers and Metrics
(Source: Supply Chain Management, Strategy, Planning and Operation, By Sunil Chopra,
Peter Meindl, D. V. Kalra‐Pearson)For academic purpose and private circulation
only
Financial Measures Of Performance
• Supply Chain Performance impacts financial
performance of each member of supply chain.
• Return on equity (ROE) is the main summary measure
of a firm’s performance.
• It measures the return on investment made by firm’s
shareholders
Higher value is desirable
Financial Measures of Performance
• Return on assets (ROA) measures the return earned
on each dollar invested by the firm in assets
Higher value is desirable
assets totalAverage
interest before EarningsROA
assets totalAverage
)rateTax –1(expenseInterest incomeNet
Financial Measures Of Performance
• ROA can be written as the product of two
ratios—profit margin and asset turnover
margin)Profit .(revenue Sales
interest before EarningseiROA
over)Asset turn.(assets Total
revenue Salesei
Financial Measures Of Performance
• An important ratio that defines financial leverage is accounts payable turnover (APT)
• e.g APT = 3, this means that firm is able to finance its operations by using money it owns to the
suppliers for about 52/3= 17 weeks on an average.
• Lower value is desirable
payable Accounts
sold goods ofCost APT
Financial Measures Of Performance
Key component of asset turnover are:
1. ART = Accounts receivable turnover =
Sales Revenue / Accounts Receivable
e.g ART = 20, this means that firm is able to collect money from sales in about 52/20= 2.6 weeks on an average after it had made the sales.
Higher value is desirable
2. INVT =Inventory turnover= Cost of Goods
Sold / Inventories
e.g. INVT = 9, this means that inventory sat
for about 52/9= 5.8 weeks on an average in an
year
Higher value is desirable4-7
Financial Measures Of Performance
3. PPET = Property, Plant and Equipment turnover
=
Sales Revenue / PP & E (i.e Property , Plant &
Equipment )
e.g. PPET= 20, this means that each dollor/Rs
invested in property, plant or equipment supported
about 20 dollars of sales.
Higher value is desirable4-8
Financial Measures Of Performance
Financial Measures of Performance• Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash enters the process as cost to when it returns
as collected revenue
• From previous figures: C2C= -17 + 5.8 + 2.6 = -8.6 (firm collects money 8.6 weeks before it had to pay to its suppliers.
• Lower or negative value is desirable
C2C = – days payable (1/APT) + days in inventory
(1/INVT) + days receivable
(1/ART)
Two other measures which are not explicitly part of financial statements are:
Markdowns (represent the discounts required to convince customers to buy excess inventory)
Lost Sales (represent customer sales that did not materialize because of absence of desired product)
Need to be minimized as they adversely affect supply chain profitability.
Better matching of supply and demand reduces markdowns and lost sales.
4-10
Financial Measures of Performance
Drivers of Supply Chain Performance
• To achieve strategic fit requires company’s
supply chain to achieve a balance between
responsiveness and efficiency that best
supports the company’s competitive strategy.
• Responsiveness and efficiency defines the supply
chain performance.
• There are six drivers of performance which
interact with each other to determine the supply
chain performance.
• There are six drivers of supply chain performance:
3 logistical drivers
Facilities
Inventory
Transportation
3 cross functional drivers
Information
Sourcing
Pricing
4-12
Drivers of Supply Chain Performance
These drivers need to be structured to achieve
desired level of responsiveness at
lowest possible cost in order to improve supply chain surplus and hence business performance of
the firm
A Framework for Structuring Drivers
Good supply chain design, planning and operation recognize the interaction and make appropriate tradeoffs among
drivers to achieve desired level of
responsiveness and efficiency.
Drivers of Supply Chain Performance
1. Facilities
The physical locations in the supply chain network
where product is stored, assembled, or fabricated.
Two major types of facilities are production and
storage sites
Decisions regarding role, location, capacity and
flexibility of facilities have a significant impact on
supply chain performance.
In the financial statements facilities costs show
up under “property, plant and equipment” if
facilities are owned by the firm and under
“selling, general and administrative” if they
are leased.
E.g. Amazon increased nos. of warehousing
facilities to improve supply chain
responsiveness.
4-15
Facilities
Facilities
• Role in the supply chain
The “where” of the supply chain (locations from
to or from which the inventory is transported)
Within a facility, inventory is either transformed
to another state (Manufacturing) or it is stored
(warehouses)
• Facilities and competitive strategy
Firms can gain economies of scale if product is
manufactured or stored in only one location i.e.
increased efficiency. However, cost reduction is at
the expense of responsiveness.
Larger number of smaller facilities close to customer
increases responsiveness but decreases efficiency.
4-17
Facilities
Facilities
• Components of facilities decisions:
Role Whether flexible, dedicated, or a combination of the
two
Whether product focus or a functional focus (e.g.
fabrication or assembly)
For warehouses, whether cross-docking facilities or
storage type
Location
Where a company will locate its facilities
Centralize/decentralize, centralization for gaining economies
of scale Or decentralization to increase responsiveness
Other factors also considered in location decisions are:
macroeconomic factors, quality of workers, cost of workers
and facility, availability of infrastructure, proximity to
customers, location of other facilities, tax effects etc
4-19
Facilities
Facilities
Capacity A facility’s capacity to perform its intended function or
functions
More excess capacity gives responsiveness but is costly
Little excess capacity is more efficient, high utilisation
but less responsive in face of demand fluctuations
Firm need to make tradeoff and decide right amount of
capacity at a given facility.
Facilities
Facility-related metrics
Capacity Utilization (fraction of capacity currently being used)
Processing/setup/down/idle time (fraction of time)
Production cost per unit Quality losses Theoretical flow/cycle time of production (time
taken for processing units)
Actual average flow/cycle time
Facilities
• Overall trade-off: Responsiveness versus
efficiencyTradeoff is between cost (efficiency) and the level of
responsiveness these facilities provide on account of
decisions regarding the number, location, capacity, and
type of facilities.
Increasing the number of facilities increases
facility and inventory costs but decreases
transportation costs and reduces response time.
Increasing the flexibility or capacity of a facility
increases facility costs, increases responsiveness but
decreases inventory costs & response time
2. Inventory
All raw materials, work in process, and
finished goods within a supply chain.
Exists because of mismatch between supply
and demand
In the financial statements inventory belonging
to firm is reported under “assets”.
Changing inventory policies can alter supply
chain responsiveness and efficiency.
4-23
Drivers of Supply Chain Performance
InventoryHigh level of inventory may increase
responsiveness but decreases efficiency.
Low level of inventory increases efficiency but can lead to decrease in responsiveness and increase in lost sales.
E.g. contrasting strategy of Zara and W.W. Grainger to increase responsiveness on account of different product characteristics.
4-24
Inventory level also effects “material flow time” in a supply chain.
Material flow time is the time that elapses between the point at which material enters the supply chain to the point it exists.
4-25
Inventory
Inventory Throughput is output per time period. For a
supply chain it is the rate at which sales occur. Little’s law
Throughput is often determined by the customer demand and can be considered fixed.
Thus inventory and flow time are synonymous in supply chain.
4-26
I = DT
where, I = Inventory, T = Flow time, D = throughput
Inventory
• Inventory and Competitive strategy
Form, location, and quantity of inventory allow a
supply chain to range from being very low cost to
very responsive.
Objective is to have right form, location, and
quantity of inventory that provides the right level of
responsiveness at the lowest possible cost
E.g. Amazon
4-27
• Cycle inventory
Average amount of inventory used to satisfy
demand between shipments
Function of lot size decisions
• Safety inventory
Inventory held in case demand exceeds
expectations; to counter demand uncertainty
• Seasonal inventory
Inventory built up to counter predictable variability
in demand
4-28
Inventory
• Level of product availability
It is fraction of demand that is served on time
from product held in inventory
High level of product availability increases
responsiveness but decreases efficiency due to
increased inventory levels.
Trade off between cost of inventory to increase
product availability and loss from not serving
customers on time.
4-29
Inventory
• Inventory-related metrics
Inventory turns
Cash-to-cash cycle time
Average inventory
Products with more than a specified number of
days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate (fraction of orders met on time from inventory)
Fraction of time out of stock
Obsolete inventory4-30
Inventory
• Overall trade-off: Responsiveness versus efficiency
Increasing inventory generally makes the supply
chain more responsive.
A higher level of inventory facilitates a reduction
in production and transportation costs because
of improved economies of scale.
However, by doing so, inventory holding costs
increase
4-31
Inventory
3. Transportation
Moving inventory from point to point in the supply chain.
It can take form of many combinations and routes each
with its own performance characteristics.
Huge impact supply chain responsiveness and efficiency.
In the financial statements, outbound transportation costs
are typically included in “ selling, general and
administrative” expense while inbound transportation
costs are typically included in “costs of goods sold”.
4-32
Drivers of Supply Chain Performance
Transportation
• Role in the supply chain
Moves the product between stages in the supply
chain
Impact on responsiveness and efficiency
Faster transportation allows greater
responsiveness but lower efficiency
Also affects inventory and facilities
e.g. High value, low demand items transported by air
mode, low value , high demand items transported
by cheaper mode.4-33
• Transportation and Competitive strategy
Allows a firm to adjust the location of its facilities
and levels of inventory to find the right balance
between responsiveness and efficiency
• Components of transportation decisions
Design of transportation network Modes, locations, and routes Direct or with intermediate consolidation points One or multiple supply or demand points in a
single run
4-34
Transportation
• Choice of transportation mode
Air, truck, rail, sea, and pipeline
Information goods via the Internet
Different speed, size of shipments, cost of
shipping, and flexibility
4-35
Transportation
• Transportation-related metrics
Average inbound transportation cost
Average income shipment size
Average inbound transportation cost per shipment
Average outbound transportation cost
Average outbound shipment size
Average outbound transportation cost per
shipment
Fraction transported by mode
4-36
Transportation
• Overall trade-off: Responsiveness versus
efficiency
The cost of transporting a given product (affects
efficiency) and the speed with which that
product is transported (affects responsiveness)
Using fast modes of transport raises
responsiveness and transportation cost but
lowers the inventory holding cost
4-37
Transportation
Drivers of Supply Chain Performance
4. Information
Consists of data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the
supply chain.
Biggest driver of supply chain performance as it directly
affects each of the other drivers.
Information presents management with opportunity to make
supply chains more responsive and more efficient.
In the financial statements, information technology related
costs are included either under “ selling, general and
administrative” expense ” or under assets.
Information
• Role in the supply chain
Improve the utilization of supply chain assets
and the coordination of supply chain flows to
increase responsiveness and reduce cost.
Information is a key driver that can be
used to provide higher responsiveness
while simultaneously improving
efficiency.
Information
• Information and Competitive strategy
Right information can help a supply chain better
meet customer needs at lower cost
Improves visibility of transactions and
coordination of decisions across the supply
chain
Information sharing and coordination critical to
supply chain performance
• Enabling technologies
Electronic data interchange (EDI)
The Internet
Enterprise resource planning (ERP) systems
Supply chain management (SCM) software
Radio frequency identification (RFID)
Information
Information Technology: A Supply Chain Enabler
Technologies that enable the efficient flow of products and services through the supply chain are called “enablers”.
Information is the essential link between all supply chain processes and members.
Computers & IT allow real time , online communication throughout the supply chain
E-business replacement of physical business processes with electronic ones Supply chain transactions are conducted through variety of
electronic media including EDI, email, electronic fund transfer (EFT), bar coding, fax, internet etc.
Leads to cost savings due lower transaction costs Shorten supply chain response time Reduction or elimination of role of intermediateries.
10-42
Supply Chain Enablers
10-43
Electronic data interchange (EDI) A computer-to-computer exchange of business
documents in a standard format. Format approved by American National Standard Institute
(ANSI) & ISO Enables businesses to exchange business documents –
such as purchase orders, invoices and order status updates – automatically and electronically, eliminating the need for manual processes.
Data exchange between trading partners using internet transactions instead of paper
Helps in reducing Bullwhip Effect. Supply chain members are able to share demand
information in real time & thus able to generate more reliable forecasts, reducing uncertainty.
4-44
Information Technology: A Supply Chain Enabler
E- Procurement:Uses the internet to facilitate purchasing.E-procurement speeds, purchasing, reduce costs, integrates the
supply chain, enhancing the organisational competitive advantages.
The traditional supply chain is full of paper transactions, E-procurement reduces the barrage of paper work.
Electronic Ordering & Funds Transfer: It is a approach to speeding transactions and reducing paperwork typically using internet
Note in contrast Electronic Data Interchange (EDI) is a more structured, standardized data transmittal format for computerised communications between organisations.
4-45
A optical machine readable representation of data/ computer readable codes about the attached item.
Scanned by optical scanners called barcode readers.
Bar code contains identifying information about the item. It might include information like product description, item number, its source, destination, cost, order number, special handling procedures.
4-46
Bar code and point-of-sale
When bar code information is scanned into a company’s computer by an electronic scanner, it provides supply chain members information about item location in supply chain.
When bar codes are scanned at checkout counters, it creates an instantaneous computer record of a sale of a product called – point – of – sale – data
POS System
4-47
Bar code and point-of-sale
A UPC Bar Code
4-48
A 2D Bar Code called Matrix Code Hand Held Bar Code Scanner
Bar code and point-of-sale
RFID is a wireless non-contact use of radio frequency to identify and track items with tags.
Tags contain electronically stored information.
Tag contains electronic chip usually applied to substrate to form a tag or label that is fixed to the item.
RFID reader also called interrogator consists of transmitter and receiver
RFID not limited to line of sight.4-49
RFID Capabilities (Radio Frequency ID)
Radio frequency identification (RFID)Consists of tiny microchip and computer
often as small as thin ribbon which can be put in any form.
RFID scanners transmit a radio signal via antenna to access the tag which responds with product information.
Tags are Electronic product code (EPC) linked to databases.
Send product data from an item to a reader via radio waves
RFID makes it possible for supplier and retailer to know automatically what goods they have and where are they around the world. 10-50
RFID Capabilities (Radio Frequency ID)
Small RFID chip compared to a grain of rice incorporated in consumer products
4-51
RFID Capabilities (Radio Frequency ID)
RFID tag used by Wal-Mart
RFID Capabilities (Radio Frequency ID)
10-52
RFID Capabilities (cont.)
10-53
• Information-related metrics
Forecast horizon
Frequency update
Forecast error
Seasonal factors
Variance from plan
Ratio of demand variability to order variability
Information
Information
• Overall trade-off:
Good information helps a firm improve both efficiency
and responsiveness
More information is not always better
More information increases complexity and cost of
both infrastructure and analysis exponentially while
marginal value diminishes
Evaluate the minimum information required to
accomplish the desired objectives.
Trade-off is between complexity and value while
deciding the required information infrastructure
5. Sourcing
Who will perform a particular supply chain activity
such as production, storage, transportation or
management of information.
Sourcing decisions determine what functions a
firm performs and what function a firm outsources.
These decisions affect both responsiveness and
efficiency of supply chain.
In the financial statements, sourcing costs are
shown under “costs of goods sold” and monies
owed to suppliers under “account payable”.
4-56
Drivers of Supply Chain Performance
Sourcing
• Role in the supply Chain
Set of business processes required to purchase
goods and services
Will tasks be performed by a source internal to
the company, or a third party
Globalization creates many more sourcing
options with both considerable opportunity and
potential risk
Sourcing
• Sourcing and Competitive strategy
Sourcing decisions are crucial because they
affect the level of efficiency and responsiveness
in a supply chain
Outsource to responsive third parties if it is too
expensive to develop their own
Keep responsive process in-house to maintain
control
Components of Sourcing Decisions
• In-house or outsource
Perform a task in-house or outsource it to a third party
• Supplier selection
Number of suppliers, evaluation and selection criteria,
direct negotiations or auction
• Procurement
The supplier sends product in response to customer
orders
Sourcing
• Sourcing-related metrics
Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Supply quality
Supply lead time
Fraction of on-time deliveries
Supplier reliability
Sourcing
Sourcing
• Overall trade-off: Increase the supply chain
surplus
Increase the size of the total surplus to be shared
across the supply chain
Impact of sourcing on sales, service, production costs,
inventory costs, transportation costs, and information
cost
Outsource if it raises the supply chain surplus more
than the firm can on its own
Keep function in-house if the third party cannot
increase the supply chain surplus or if the
outsourcing risk is significant
6. Pricing
Determines how much a firm will charge for the goods
and services that it makes available in the supply chain.
Pricing affect the behavior of buyer of good and service ,
customer expectations and hence affecting supply chain
performance.
Pricing is also employed to match supply and demand e.g.
short term discounting is used to get rid of surplus or to
move the demand forward and reduce demand peaks.
4-62
Drivers of Supply Chain Performance
Everyday low Pricing vs High Low Pricing:
Everyday low pricing results in stable demand.High-Low pricing results in peaks during discount
period and drop in demand during following periods.The two pricing strategies leads to different demand
profiles that supply chain must serve
Fixed Price versus Menu Pricing: In Menu pricing, prices vary with some attribute
such as delivery location, response time etc.
4-63
Drivers of Supply Chain Performance
With differential pricing, firm can offer its
product and/or services at different prices (e.g.
Amazon’s shipping options)
It may provides responsiveness (at a higher
price ) to a customer who value it and low cost
to customers who do not value responsiveness
as much.
4-64
Drivers of Supply Chain Performance
These six drivers of supply chain performance do not act independently but interact to determine the overall supply chain performance.
Good supply chain design and operation recognise the interaction and make the appropriate tradeoff to deliver the desired level of responsiveness at lowest possible cost.
Idea is to structure supply chain drivers appropriately to provide desire
This helps in reducing “markdowns” and “lost sales” and better matching of demand and supply.
4-65
Drivers of Supply Chain Performance
E.g. Wal-Mart
Competitive strategy : To be reliable, low cost retailer for wide variety of mass communication goods
Supply Chain Strategy: Emphasis on efficiency but also maintain adequate level of responsiveness in terms of product availability.
4-66
Drivers of Supply Chain Performance
0Wal-Mart
Drivers Interventions AffectInventory Pioneered cross-docking w.r.t. inventory, Wal-Mart favours efficiency over
responsiveness. Results in efficient Supply Chain Products are stocked only at stores and not at
both stores and warehouses/DC. This significantly lower inventory.
Maintains low levels of inventory Transportation Runs own fleet Makes supply chain more responsive. Costs are
increased but benefit of reduced inventory and increased product availability.
Facilities Uses centrally located DCs within its network of stores tp decrease nos. of facilities
This increases efficiency at each DC.
Builds retail stores only where demand is sufficient to justify having several of them supported by a DC.
This also increases efficiency of transportation
Information Technology
Invested significantly in information Technology.
This allow sharing demand information with suppliers who manufacture only what is demanded. Increases responsiveness and decreases inventory costs.
Suppliers Identifies efficient sources of suppliers for each product it sells.
Increased efficiency
Gives large orders Allow suppliers to exploit economies of scale
Pricing Practices EDLP for its product. This reduces fluctuations in demand because of price variations
Thus entire supply chain focuses to meet demand in an efficient manner and achieve right balance between responsiveness and efficiency. Competitive and supply chain strategy are in harmony.4-67
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