Y Narahari, Computer Science and Automation, Indian Institute of Science

SUPPLY CHAIN PERFORMANCE MEASURES

Y. NARAHARI Computer Science and Automation Indian Institute of Science Bangalore - 560 012 hari@csa.iisc.ernet.in http://www.csa.iisc.ernet.in

Y Narahari, Computer Science and Automation, Indian Institute of Science

OBJECTIVE OF TALK

To identify and understand different indices of supply chain performance To understand the "science" of lead time reduction in supply chains To appreciate the role of Internet technologies in improving the delivery time performance of supply chains

Y Narahari, Computer Science and Automation, Indian Institute of Science

OUTLINE OF TALK

Taxonomy of Supply Chain Performance Measures Quick Response Supply Chains Fundamental Laws of Lead Time Reduction Synchronized Supply Chains

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNCTIONAL VS PROCESS PERFORMANCE MEASURES

Functional measures provide only a partial picture Functional excellence does not imply process excellence Function-based optimization can be disastrous Our attention will be on supply chain process performance measures

Y Narahari, Computer Science and Automation, Indian Institute of Science

FINANCIAL MEASURES OF SUPPLY CHAIN PERFORMANCE

Financial Measures

Market share Stock Valuation Profits ROI Inventory Turns

Financial measures are lagging metrics, a result of past decisions Operational, non-financial measures are excellent indicators of process health

Y Narahari, Computer Science and Automation, Indian Institute of Science

OPERATIONAL, NON-FINANCIAL MEASURES

Cycle time Customer service level

order fill rate stockout rate backorder level probability of ontime delivery

Inventory levels Resource utilization Capacity/Throughput

Y Narahari, Computer Science and Automation, Indian Institute of Science

OPERATIONAL, NON-FINANCIAL MEASURES

Quality Reliability Dependability/Performability Flexibility

volume product mix routing delivery time

Y Narahari, Computer Science and Automation, Indian Institute of Science

QUICK RESPONSE SUPPLY CHAINS

Minimal cycle times

supply chain end-to-end lead time order-to-delivery lead time

Minimal spread in cycle times Synchronization among various stages

Y Narahari, Computer Science and Automation, Indian Institute of Science

LEAD TIME REDUCTION

Cycle time is an all-encompassing measure Provides competitive edge Leads to increased customer satisfaction Leads to reduced inventory, reduced onsolescence and increased quality

Y Narahari, Computer Science and Automation, Indian Institute of Science

COMPONENTS OF SUPPLY CHAIN LEAD TIME

Procurement lead time Manufacturing lead time Distribution lead time Logistics lead time Setup times Waiting times Decision-making times Synchronization times

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNDAMENTAL LAWS OF LEAD TIME REDUCTION

First Law: Little's Law

Average Inventory is the product of average waiting time and throughput rate Inventory reduction and optimal utilization of resources is the key to lead time reduction Throughput and lead time are negatively correlated (classical queueing theory) Load balancing and optimal resource allocation will help

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNDAMENTAL LAWS OF LEAD TIME REDUCTION

Second Law: Pollaczek-Khintchine Formula

Waiting times are positively correlated to variance of arrival and processing times
Input control Process control Fluctuation smoothing

Controlled arrivals can significantly reduce lead times

closed mode operation better than open mode

Strict control of processing times reduces lead times considerably

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNDAMENTAL LAWS OF LEAD TIME REDUCTION

Third Law: Forrester Effect

Inventories grow in successive echelons of the supply chain as demands get amplified in the upstream direction Inventory expansion leads to rising levels of lead time Accurate forecasting and intelligent use of information are is key to reducing the effects of this

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNDAMENTAL LAWS OF LEAD TIME REDUCTION

Fourth Law: Taguchi's Loss

Taguchi's loss function is decided by variability and also bias (deviation from optimal nominal) Do not always try to eliminate variation, but minimize the effects of variability Find robust operating points (nominals)

Y Narahari, Computer Science and Automation, Indian Institute of Science

FUNDAMENTAL LAWS OF LEAD TIME REDUCTION

Fifth Law: Use the Internet

Availability and intelligent use of critical information is a key requirement Use of Internet and Ecommerce Technologies can help dramatically in this Synchronization between the front-end and back-end is critical

Y Narahari, Computer Science and Automation, Indian Institute of Science

SYNCHRONIZED SUPPLY CHAINS

Variability is the main enemy in achieving lead time reduction,as evidenced by:

Forrester Effect Pollaczek-Khintchine Formula Taguchi's Loss Function

Our objective is to design a highly synchronized supply chain network that works like a world class relay racing team We wish to use best practices in manufacturing, design, and tolerancing domains

Y Narahari, Computer Science and Automation, Indian Institute of Science

DESIGN OF SYNCHRONIZED SUPPLY CHAINS

Y = f (X1, X2, . . . , Xn)

Y represents supply chain lead time or order-to-delivery lead time f is a deterministic function X1, X2, . . . , Xn are lead times of individual business processes, continuous random variables

Y is a continuous random variable Analysis: Compute the probability distribution of Y given f and the distributions of X1, X2, . . . , Xn. Synthesis: Find the best nominals and tolerances for X1, X2, . . . , Xn, given nominal and tolerance specifications for Y.

Y Narahari, Computer Science and Automation, Indian Institute of Science

EXAMPLE: A PLASTICS SUPPLY CHAIN

Procurement Sheet Fabrication Transportation Manufacturing Assembly Delivery

Y Narahari, Computer Science and Automation, Indian Institute of Science

A SIX SIGMA FRAMEWORK

Six Sigma Quality: A process is considered to be of six sigma quality if there are no more than 3.4 non-conformities per million opportunities (3.4 ppm) in the presence of typical sources of variation. Analysis and Synthesis are based on:

Characterizing product-process quality using process capability indices Cp and Cpk Use of statistical tolerancing techniques to reduce lead times

Y Narahari, Computer Science and Automation, Indian Institute of Science

WHERE CAN WE APPLY THIS?

Due Date Setting Selection of Supply Chain Resources Make-to-stock versus make-to-order versus build-to-order Resource Allocation Selecting logistics providers Select Robust Operating Points

Y Narahari, Computer Science and Automation, Indian Institute of Science

CONCLUSIONS

There are fundamental laws governing lead time reduction in supply chains Variability reduction and synchronization among internal business processes of a supply chain is a key to achieving a high level of delivery performance Use of Internet and Ecommerce technologies could be a key for achieving outstanding delivery performance