Supply Chain Management,

SCM
Dr. L. Ganapathy and Dr. Jinil Persis, NITIE
For HAL Academy Learning Materials
The material presented is prepared from multiple sources in public domain for educational
purposes and classroom discussions only. No part of this presentation can be copied or
distributed in any form, physical or digital, without explicit written consent of copyright
holder(s). Violators will face legal consequences.
Supply Chain Drivers

Dr. L. Ganapathy
 Source / Reference Books, videos on SCM
Sunil Chopra and Peter Meindl, Supply Chain Management
Michael Hugos, Essentials of Supply Chain Management
Dr. Bharatendra Rai, University of Massachusetts, Dartmouth
https://www.youtube.com/channel/UCuWECsa_za4gm7B3TLgeV_A
Prof. Rajat Agarwal, IIT Roorkee (nptel lectures)
https://www.youtube.com/watch?v=ZiUCB6HDc-
8&list=PLPjSqITyvDeWbt4z_91WXuB3UNQrW53vi&index=7
https://www.youtube.com/watch?v=CBLbXTypInA&list=PLPjSqITyvDeWbt4z
_91WXuB3UNQrW53vi&index=9
What are Supply Chain Drivers

• Supply Chain drivers are the factors that move the firm across the
spectrum of efficiency and responsiveness (cost versus time focus)

• Different authors have proposed different drivers, but the commonly

mentioned drivers in the literature or books are the following:

• Facilities, Inventory, Transportation, Information, Sourcing, Pricing

• Of these, the first three drivers are classic and others were added later
 Supply Chain Drivers
• Facilities
– The physical locations where product is produced, assembled, fabricated, or stored.
• Inventory
– All raw materials, work in process, and finished goods
• Transportation
– Moving inventory from point to point in the supply chain
• Information
– On facilities, inventory, transportation, costs, prices, and customers
• Sourcing
– Who will perform a particular supply chain activity
• Pricing
– How much a firm will charge for the goods and services that it makes available in
the supply chain
A Framework for
Structuring Drivers
 Understanding the Supply Chain:
Cost-Responsiveness Tradeoff
Responsiveness (in
Impossible to deliver above
time, high service this responsiveness limit.
level and product High
variety) Efficiency frontier
Impossible to make
Fix Inefficient below this cost
responsiveness

Inefficiency Region
Low

High Low Cost in $

Why decreasing slope (concave) for the efficiency frontier?
1. Facilities Decisions
• Role in the supply chain
• Location in the supply chain (centralized or close to customer)
• Dedicated to SKUs or Flexible or a combination of both
• Manufacturing or storage (warehouses)
• Product focus (project mode) or a functional focus (operations mode)
• Role in the competitive strategy
• Economies of scale (efficiency priority)
• Larger number of smaller facilities (responsiveness priority)
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less responsive
• Challenge
• Should you create the capacity for Peak or Average demand?
1. Facilities Decisions
• Facility-related metrics
• Capacity, utilization, cost per unit, cycle time, quality loss
• Responsiveness versus efficiency trade-off
• Increasing capacity or flexibility of facilities increases facility
costs but decreases inventory costs and response time
• Increasing number of facilities increases facility and inventory
costs but decreases transportation costs and response time
2. Inventory Decisions
• Manage uncertainty / mismatch between supply and demand
• Benefit from economies of scale
• Impacts assets, costs, responsiveness, material flow time
• Right form, location, and quantity to provide the right level of
responsiveness at lowest possible cost
• Responsiveness versus efficiency trade-off
• Increasing inventory makes the supply chain more responsive
• Higher inventory reduces production and transportation costs
because of improved economies of scale, but holding costs
increase
2. Inventory Decisions

• Little’s Law (from Prof. John Little, USA, 1950s).

• Length of Queue = Arrival Rate x Time spent in Queue
• Hopp & Spearman (Factory Physics) from above
• Inventory = Throughput x Cycle Time
Example 1
Onshore oil and gas fields is a temporary production. If the plan is to put
100 wells on-line in 365 work-days, the desired throughput is:
TH = 100 wells/365 days = 0.274 wells/day
If the cycle time for a well from the start of planning phase to on-line is
240 days, then the required WIP to achieve the target TH is:
WIP = 0.274 wells/day x 240 days = 66 wells
This means that at any given time, the production system should be
working on 66 wells.
Management may opt for higher WIP to compensate for uncertainty or
loss in work-days. Increasing WIP maintains responsiveness at higher cost.
Example 2
A fabricator works 10 hours a day, has 20 modules-in-waiting to be
welded within the next 25 days. Each module needs total of 500 inches
of welding. The required throughput is:
TH = WIP / CT = (20 x 500 ) / (25 x 10) = 40 inches per hour.
If the capacity of the welding bay is 50 inches per hour, then the
utilization would be 40 / 50 = 80%
With a capacity of 50 inches per hour, the fabricator can take up
commitments of up to 25 modules in 25 days. If he gets an order of 30
modules, he should not commit less than 30 days for delivery.
 2. Inventory Decisions (Metrics)
• Flow time (time from entry to exit of material in supply chain)
• Cash-to-cash cycle time
• Average inventory, Inventory turns
• Number of days of inventory (product wise)
• Average replenishment batch size
• Average safety inventory
• Seasonal inventory
• Fill rate
• Fraction of time out of stock
• Obsolete inventory
3. Transportation Decisions
• Trade-offs: Responsiveness versus efficiency
• Balance the cost of transporting a given product (efficiency) and
the speed with which that product is transported (responsiveness)
• Faster transport raises responsiveness and transportation cost but
lowers inventory holding cost (efficiency)
• Affects optimal location of facilities and inventory to balance cost
and efficiency
• Choice of transportation mode
• Modes, Locations, Routes, Consolidation facilities
• Air, truck, rail, sea, and pipeline
• Different speed, size of shipments, cost of shipping, and flexibility
3. Transportation Decisions (Metrics)
• Average inbound transportation cost
• Average inbound 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 each mode
4. Information
• Improves utilization of supply chain assets
• Improves coordination to increase responsiveness and reduce cost
• Higher responsiveness while simultaneously improving efficiency
• Helps to better meet customer needs at lower cost
• Improves visibility of transactions, traceability and trust
• More information is not always better. It increases complexity and
cost of infrastructure and analysis, while marginal value falls.
• Assess the minimum information needed to achieve the objectives.
4. Information Decisions (Enablers)
• Electronic data interchange (EDI)
• Enterprise resource planning (ERP) systems
• Supply chain management (SCM) software
• Data Analytics
• Radio frequency identification (RFID)
• Blockchain Technologies
• Internet of Things
• Industry 4.0 sensors and actuators
• Automation, Robotics, Artificial Intelligence, Machine Learning
4. Information Decisions (Metrics)
• Forecast horizon and errors
• Demand variability
• Update Frequency
• Seasonal factors
• Variance from plan
5. Sourcing
• Role in the Supply Chain
• Business processes required to purchase goods and services
• Make / Buy Decisions
• Global procurement: considerable opportunity and potential risk
• Affect efficiency and responsiveness
• Keep responsive processes in-house to maintain control
• Outsource to responsive third parties if it is cost efficient
• Decisions
• Number of suppliers
• Evaluation and selection criteria, direct negotiations or auction
5. Sourcing Decisions (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
5. Sourcing Decisions
• Impact of sourcing on sales, service, production costs, inventory costs,
transportation costs, and information cost
• Outsource only if it increases the total supply chain surplus
• Keep the function in-house if the third party cannot increase the supply
chain surplus or if the outsourcing risk is significant
6. Pricing
• Role in the Supply Chain
• Pricing affects the supply chain responsiveness and the demand
• Pricing strategies can be used to match demand and supply
• Role in the Competitive Strategy
• Firms can utilize pricing strategies to improve efficiency and responsiveness
• Pricing strategies vary to meet different customer responsiveness needs
• Fixed price versus menu pricing
• If marginal supply chain costs or the value to the customer vary significantly
along some attribute, it is often effective to have a pricing menu
• Can lead to customer behavior that has a negative impact on profits
6. Pricing Decisions
• Understand the cost structure and the value an activity brings
to the supply chain
• Economies of scale can influence pricing decisions
• Pricing strategy may support efficiency in the supply chain,
lower costs, defend or increase market share
• Differential pricing can attract customers with varying needs
• Strategy should help increase revenues and/or shrink costs
6. Pricing (Metrics)
• Profit margin
• Days sales outstanding
• Incremental fixed cost per order
• Incremental variable cost per unit
• Average sale price, and Range of sale price
• Average order size
• Range of periodic sales
SCM Drivers and Financial Performance
Source: Dr. Bharatendra Rai, University of Massachusetts,
Dartmouth
Supply Chain Financial Performance
https://www.youtube.com/watch?v=jx7zUXb0l78
SCM Drivers and Financial Performance
• ROE = (Net Income)/ (Average shareholder equity)
• ROA = (Earnings before Interest) / (Average Total Assets)
• Earnings before Interest = Net Income + [Interest Expense x (1 – tax rate)]
• Return on Financial Leverage = ROFL = ROE – ROA
• Accounts Payable Turnover = APT
• Accounts Receivable Turnover = ART = Sales Revenue / Accounts
Receivable
SCM Drivers and Financial Performance
Amazon Nordstrom
ROE 2.81% 32.04%
ROA 0.91% 8.86%
ROFL 1.91% 23.18%
APT 2.48 5.25
Profit Margin 0.87% 11.07%
Asset Turnover 1.85 1.5
ART 15.62 5.16
INVT 7.31 5.46
PPET 6.80 4.71
C2C -10.53 weeks +9.62 weeks
SCM Drivers and Financial Performance
Profit margin is improved by getting better price for products or
reducing our expenses.
Customers are willing to pay higher price for Nordstrom products
because they get better responsiveness.
For Amazon, most of the costs was shipping costs. So they can
significantly improve profit margins by reducing their shipping costs.
 SCM Drivers and Financial Performance
For Amazon, 52 weeks / (APT = 2.48) = 20.97 weeks. So Amazon is able to
finance its operations using its suppliers money for 20.97 wks.
For Nordstrom, 52 weeks / (APT = 5.25) = 9.90 weeks. So Nordstrom is able to
finance its operations using its suppliers money for 9.9 wks.

For Amazon, 52 weeks / (ART = 15.6) = 3.33 weeks. So, Amazon is able to
collect its money from sales within 3.33 weeks.
For Nordstrom, 52 weeks / (ART = 5.16) = 10 weeks. So Nordstrom takes about
10 weeks to get its money from sales).
SCM Drivers and Financial Performance
Inventory Turnover = INVT = Cost of Goods Sold / Inventories
52 weeks / 7.31 = 7.11 weeks (Inventory sat at Amazon for about 7.11
weeks)
52 weeks / 5.46 = 9.52 weeks (Inventory sat at Nordstrom for about
9.52 weeks)

Property Plant and Equipment turnover = PPET (Amazon gets higher

revenue per dollar of capital investment) = Sales Revenue / PP&E
SCM Drivers and Financial Performance
C2C Cycle = Cash-to-Cash Cycle = Weeks Receivable (1/ART) + Weeks in
Inventory (1/INVT) – Weeks Payable (1/APT) years
For Amazon, C2C = 3.33 + 7.11 – 20.97 = -10.53 weeks
Amazon has negative C2C, meaning they got money from customers for
10.53 weeks before paying their suppliers.

For Nordstrom, C2C = 10 + 9.52 – 9.90 = +9.62 weeks

For typical consumer electronics, C2C is about +9.3 weeks.
For pharma this is 190.3 weeks, for apparel 127.7 weeks, for food 37.4
weeks, for automotive 75.9 weeks.
SCM Drivers and Financial Performance
Two measures are not part of financial statements: Markdowns
(surplus inventory disposed at discount due to poor demand) and Lost
Sales (lack of sales due to low inventory of items in demand).
Walmart (commodity retail) and Zara (fashion retail) are able to
manage their supply chains effectively thereby reducing markdowns
and lost sales.
 End of Lecture
Supply Chain Drivers

Dr. L. Ganapathy
Questions?

Thanks
Thank you