IE 457 Slides03-SupplyChain-Dr. Ammar Y. Alqahtani

6/1/2020
IE 457:
Supply Chain Management
(Supply Chain Engineering)
Dr. Ammar Y. Alqahtani

Assistant Professor of Industrial Engineering
College of Engineering
King Abdulaziz University
Chapter 3: ©Dr. Ammar Y. Alqahtani Supply Chain Management: Strategy, Planning, & 1
Operation
Operation
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Outline
• Financial Measures of Performance

• Drivers of supply chain performance
• A framework for structuring drivers
– Logistical Drivers
• Facilities
• Inventory
• Transportation
– Cross-Functional Drivers
• Information
• Sourcing
• Pricing
• Obstacles to achieving fit
Operation
Financial Measures of Performance (1 of 7)
• From a shareholder perspective, return on equity (ROE)

is the main summary measure of a firm’s performance
Net Income
ROE 
Average Shareholder Equity
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• Return on assets (ROA) measures the return earned on

each dollar invested by the firm in assets
Earnings before interest

ROA 
Average Total Assets
Net Income  Interest Expense  (1  Tax Rate)

Average Total Assets
Operation
Financial Data for Amazon and Nordstrom (1 of 6)
Table 3-1 Selected Financial Data for Amazon.com and

Nordstrom Inc.
Blank Amazon.com Nordstrom Inc.
Period Ending 31-Dec-13 2-Feb-13
Total Revenue 74,452,000 12,148,000
Cost of Goods Sold 54,181,000 7,432,000
Gross Profit 20,271,000 4,716,000
Selling, General, and Administrative 19,526,000 3,371,000
Operating Income or Loss 745,000 1,345,000
Total Other Income/Expenses Net –98,000 –
Earnings Before Interest and Taxes 647,000 1,345,000
Interest Expense 141,000 160,000
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Table 3-1 [Continued]
Income Before Tax 506,000 1,185,000
Income Tax Expense 161,000 450,000
Minority Interest – –
Net Income 274,000 613,000
Assets Blank Blank
Cash and Cash Equivalents 8,658,000 1,285,000
Short-Term Investments 3,789,000 –
Net Receivables 4,767,000 2,356,000
Inventory 7,411,000 1,360,000
Operation

Other Current Assets – 80,000
Total Current Assets 24,625,000 5,081,000
Property, Plant, and Equipment (PP&E) 10,949,000 2,579,000
Goodwill 2,655,000 175,000
Other Assets 1,930,000 254,000
Total Assets 40,159,000 8,089,000
Liabilities and Stockholder Equity Blank Blank
Accounts Payable 21,821,000 1,415,000
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Short-/Current Long-Term Debt – 7,000
Other Current Liabilities 1,159,000 804,000
Long-Term Debt 3,191,000 3,124,000
Other Liabilities 4,242,000 341,000
Deferred Long-Term Liability Charges – 485,000
Total Liabilities 30,413,000 6,176,000
Total Stockholder Equity 9,746,000 1,913,000
Operation

Table 3-2 A Comparison of Financial Metrics for Amazon.com
and Nordstrom Inc.
Metric Amazon.com Nordstrom Inc.

ROE start
274fraction 274 over 9,746 end fraction = 2.81% start
735fraction 735 over 1,913 end fraction =
 2.81% 38.42% 38.42%
9,746 1913
ROA start 141274
274fraction 1+ 0.35   0.91%
141 times left parenthesis 1 160 735
start fraction
735 1+0.35   10.37%
160 times left parenthesis 1
minus 0.35 right parenthesis over 40,159 end minus 0.35 over 8,089 = 10.37%
40,159
fraction = 0.91% 8,089
ROFL 1.90% 28.05%
Profit Margin 274 1+ 141

141 274
start fraction 0.35  0.49%
times left parenthesis 1 start
735fraction 1+ 0.35
160 735   6.91%
160 times left parenthesis 1
minus 0.35 right parenthesisover 74,452 end minus 0.35 over 12,148 = 6.91%
74,452
fraction = 0.49% 12,148
Asset Turnover 74,452
start fraction 74,452 over 40,159 end fraction = 12,148
start fraction 12,148 over 8,089 end fraction =
1.85
 1.85 1.50  1.50
40,159 8,089
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Metric Amazon.com Nordstrom Inc.

APT 54,181
2.48  2.48 7.35  7.35
21,821 1,011
ART 74,452
start fraction 74,452 over 4,767 end fraction = start fraction 12,148 over 2,129 end fraction =
12,148
15.62  15.62 5.71  5.71
4,767 2,129
INVT 54,181
start fraction 54,181 over 7,411 end fraction = start
7,432fraction 7,432 over 1,360 end fraction =
7.31  7.31 5.46  5.46
7,411 1,360
PPET 74,452
6.80  6.80 4.71  4.71
10,949 2,579
C2C start1fraction negative
1 11over 2.48 end fraction + 1
start fraction 1
negative 11over 7.35 end fraction +
start fraction
 1 over15.62 end fraction + start  fraction
start7.35
 1 over15.71 end fraction + start
2.48 15.62 7.31 5.71 5.46
fraction 1 over 7.31 end fraction = negative 0.20 fraction 1 over 5.46 end fraction = 0.22 years =
years
0.20  10.53
years10.53
= negative weeks weeks  0.22
11.56 weeksyears  11.56 weeks
SG&A / Revenue 19,526
start fraction 19,526 over 74,452 end fraction = start3,371
fraction 3,371 over 12,148 end fraction =
26.23%
 26.23% 27.75%
 27.75%
74,452 12,148
Operation
• An important ratio that defines financial leverage is

accounts payable turnover (APT)
Cost of Goods Sold

APT 
Accounts Payable
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• ROA can be written as the product of two ratios – profit

margin and asset turnover
Earnings before interest SalesRevenue

ROA  
Sales Revenue Total Assets
 Profit Margin  Asset Turnover
Operation
• Key components of asset turnover are accounts

receivable turnover (ART); inventory turnover (INVT); and
property, plant, and equipment turnover (PPET)
Sales Revenue Cost of Goods sold

ART  ; INVT  ;
Accounts Receivable Inventories
Sales Revenue
PPET 
PP & E
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• 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
 1 
C2C   Weeks Payable  
 APT 
 1 
 Weeks in Inventory  
 INVT 
 1 
 Weeks Receivable  
 ART 
Operation
Selected Financial Metrics
Table 3-3 Selected Financial Metrics Across Industries, 2000–

2012
Average Average Average Average
Operating C2C Cycle Inventory SG&A Cost/
Industry Margin Turns Revenue
Pharmaceutical 0.25 190.3 2.0 0.31
Medical device manufacturers 0.18 211.6 2.2 0.36
Consumer packaged goods 0.17 28.3 5.6 0.31
Food 0.16 37.4 6.2 0.23
Consumer electronics 0.12 9.3 43.8 0.14
Apparel 0.10 127.7 3.2 0.35
Chemical 0.09 78.1 5.3 0.09
Automotive 0.04 75.9 9.9 0.13
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• To measures not part of financial statements

– Markdowns: discounts required to convince
customers to buy excess inventory
– Lost sales: represent customer sales that did not
materialize because of the absence of products the
customer wanted to buy
Operation
Drivers of Supply Chain Performance
• Recall that the strategic fit requires that a company’s supply

chain achieve the balance between responsiveness and
efficiency. To that end, we need to understand the logistical
and cross-functional drivers of supply chain performance.
• There are three logistical drivers (viz., facilities, inventory

and transportation) and three cross-functional drivers (viz.,
information, sourcing and pricing) that determine the
performance of any supply chain.
• These drivers interact with each other to determine the

supply chain’s performance in terms of responsiveness and
efficiency.
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Drivers of Supply Chain Performance

• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities throughout
the supply chain
– potentially the biggest driver of supply chain performance
• Sourcing
– functions a firm performs and functions that are outsourced
• Pricing
– Price associated with goods and services provided by a firm to the supply
chain
Operation
A Framework for Structuring Drivers
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Facilities: Role in the Supply Chain

• The “where” of supply chain:
– Manufacturing or storage (warehouses)
Operation
Facilities: Role in Competitive Strategy

• Economies of scale (efficiency priority)
• Larger number of smaller facilities (responsiveness
priority)
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Components of Facilities Decisions
• Role
– production facilities must decide if flexible (responsive) or dedicated
(efficient)
– warehouses and DC’s must decide if primarily cross docking or storage
• Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused versus process
focused)
• Warehousing methodology (stock keeping units (SKUs) storage,
job lot storage, cross-docking)
• Overall trade-off: Responsiveness versus efficiency
Operation
Inventory: Role in the Supply Chain

• The “what” of the supply chain
• Inventory exists because of a mismatch between supply
and demand
• Source of cost and influence on responsiveness
• Impact on
– material flow time: time elapsed between when material enters
the supply chain to when it exits the supply chain
– throughput rate at which sales to end consumers occur
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Inventory: Role in Competitive Strategy
• If responsiveness is a strategic competitive priority, a firm

can locate larger amounts of inventory closer to
customers
• If cost is more important, inventory can be reduced to
make the firm more efficient
Operation
Components of Inventory Decisions

• Cycle inventory
– average amount of inventory used to satisfy demand between
shipments
– depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
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Transportation: Role in the Supply Chain
• The “how” of the supply chain

• Moves the product between stages in the supply chain
• Has a large impact on responsiveness and efficiency
• Faster transportation allows greater responsiveness but
lower efficiency
• Also affects inventory and facilities
Operation
Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic competitive priority, then
faster transportation modes can provide greater
responsiveness to customers who are willing to pay for it
• Can also use slower transportation modes for customers
whose priority is price (cost)
• Can also consider both inventory and transportation to
find the right balance
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Components of Transportation Decisions
• Route and network selection

– route: path along which a product is shipped
– network: collection of locations and routes
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in cost, speed, size of shipment, flexibility
• In-house or outsource
Operation
Information: Role in the Supply Chain
• The connection between the various stages in the supply

chain – allows coordination between stages
• Crucial to daily operation of each stage in a supply chain
– e.g., production scheduling, inventory levels
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Information:
• Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a
trade-off)
Operation
Components of Information Decisions

• Push (MRP) versus pull (demand information transmitted
quickly throughout the supply chain)
• Coordination and info sharing to maximize surplus
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
– RFID
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Sourcing: Role in the Supply Chain
• Set of business processes required to purchase goods

and services in a supply chain
• Which tasks will be outsourced and which will be
performed within the firm
• Supplier selection, single vs. multiple suppliers, contract
negotiation
Operation
Sourcing:
• Sourcing decisions are crucial because they affect the
level of efficiency and responsiveness in a supply chain
• In-house vs. outsource decisions- improving efficiency
and responsiveness
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Components of Sourcing Decisions
• In-house versus outsource decisions

• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply chain profits
Operation
Pricing: Role in the Supply Chain
• Pricing determines the amount to charge customers for

goods and services in a supply chain
• Pricing strategies can be used to match demand and
supply
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Pricing:
• Firms can utilize optimal pricing strategies to improve
efficiency and responsiveness
• Low price and lower level of product availability
• Vary prices by response times
Operation
Components of Pricing Decisions
• Pricing and economies of scale

• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits
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Obstacles to Achieving Strategic Fit
• Increasing variety of products

• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies
Operation
Summary
• What are the major drivers of supply chain performance?

• What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy (or
between implied demand uncertainty and supply chain
responsiveness)?
• What are the major obstacles to achieving strategic fit?
• In the remainder of the course, we will learn how to make
decisions with respect to these drivers in order to achieve
strategic fit and surmount these obstacles
Operation
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6/1/2020

Dr. Ammar Y. Alqahtani

• Financial Measures of Performance

Financial Measures of Performance (1 of 7)

• From a shareholder perspective, return on equity (ROE)

Financial Measures of Performance (2 of 7)

• Return on assets (ROA) measures the return earned on

Earnings before interest

Financial Data for Amazon and Nordstrom (1 of 6)

Table 3-1 Selected Financial Data for Amazon.com and

Financial Data for Amazon and Nordstrom (2 of 6)

Financial Data for Amazon and Nordstrom (3 of 6)

Table 3-1 [Continued]

Financial Data for Amazon and Nordstrom (4 of 6)

Table 3-1 [Continued]

Financial Data for Amazon and Nordstrom (5 of 6)

Metric Amazon.com Nordstrom Inc.

Profit Margin 274 1+ 141

Financial Data for Amazon and Nordstrom (6 of 6)

Table 3-2 [Continued]

Metric Amazon.com Nordstrom Inc.

Financial Measures of Performance (3 of 7)

• An important ratio that defines financial leverage is

Cost of Goods Sold

Financial Measures of Performance (4 of 7)

• ROA can be written as the product of two ratios – profit

Earnings before interest SalesRevenue

Financial Measures of Performance (5 of 7)

• Key components of asset turnover are accounts

Sales Revenue Cost of Goods sold

Financial Measures of Performance (6 of 7)

• Cash-to-cash (C2C) cycle roughly measures the average

Selected Financial Metrics

Table 3-3 Selected Financial Metrics Across Industries, 2000–

Financial Measures of Performance (7 of 7)

• To measures not part of financial statements

Drivers of Supply Chain Performance

• Recall that the strategic fit requires that a company’s supply

• There are three logistical drivers (viz., facilities, inventory

• These drivers interact with each other to determine the

Drivers of Supply Chain Performance

A Framework for Structuring Drivers

Facilities: Role in the Supply Chain

Facilities: Role in Competitive Strategy

Components of Facilities Decisions

Inventory: Role in the Supply Chain

Inventory: Role in Competitive Strategy

• If responsiveness is a strategic competitive priority, a firm

Components of Inventory Decisions

Transportation: Role in the Supply Chain

• The “how” of the supply chain

Components of Transportation Decisions

• Route and network selection

Information: Role in the Supply Chain

• The connection between the various stages in the supply

Components of Information Decisions

Sourcing: Role in the Supply Chain

• Set of business processes required to purchase goods

Components of Sourcing Decisions

• In-house versus outsource decisions

Pricing: Role in the Supply Chain

• Pricing determines the amount to charge customers for

Components of Pricing Decisions

• Pricing and economies of scale