Drivers & Metrics

of
Supply Chain
Performance
 Drivers of Supply Chain
Performance
• Logistical drivers
– Facilities
– Inventory
– Transportation
• Cross functional drivers
– Information
– Sourcing
– Pricing

2
Framework for Structuring
Drivers
Competitive strategy
Supply chain strategy
Efficiency Responsiveness

Supply chain structure

Facilities Transportation Inventory

Logistical Drivers
Information Sourcing Pricing
3
Cross functional Drivers
 Facilities
• Role in the supply chain
– “where” of the supply chain
– manufacturing or storage (warehouses)

• Role in the competitive strategy

– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)

4
Components of Facilities
Decisions
• Role
– Operations methodology
– Warehousing methodology
• Location

• Capacity

5
 Role of Facilities
• Operations Methodology
– Product focused vs. process focused
– Flexible vs. dedicated capacity

• Warehousing Methodology
– SKU storage
– Job lot storage
– Cross-docking

6
 Fit of Process, Volume, and Variety
Low-Volume Repetitive Process High-Volume
(Intermittent) (Modular) (Continuous)

High Variety
Process focus Mass Customization
One or few units per run, projects, job shop, (difficult to achieve,
high variety (print, carpentry) but huge rewards)
(allows customization) Standard Register Dell Computer Co.,
Levis Jeans
Changes in modules Repetitive
Modest runs, standardized (autos, motorcycles)
modules Harley Davidson
Low Variety; Changes in Product focus
attributes (such as (commercial baked
grade, quality, size,
goods, steel, glass)
thickness, etc.)
Long runs only Steel, Cement
 Process-Focused
Strategy
 Facilities are organized by process
 Similar processes are together
 Example: All drill presses are together
 Low volume, high variety products
 ‘Jumbled’ flow Product A
Operation
 Other names
11 22 33
 Job shop

Product B
Process-Focused Example
Custom Woodworking Shop
Cutting Planing Shaping Assembly Sanding Finishing
11 22 55 66 77

Job A 22 33

Job B 33 44

11 44 55 66

Drilling Turning
Process Focus - Pros & Cons
• Advantages
– Greater product flexibility
– More general purpose equipment – equipments
not dedicated to one product

• Disadvantages
– High production cost per unit
– More difficult production planning & control
– Low equipment utilization (5% to 25%)
Process-Focus Examples

Bank

Hospital

Machine
Shop
 Repetitive Focused
Strategy
• Facilities often organized by assembly lines
• Characterized by modules
– Parts & assemblies made in modules

• Modules combined for many output options

• Other names
– Assembly line
– Production line
– E.g. auto-manufacturing, pc’s, house-hold appliances, etc
 Assembly Line Example
Raw Material Components
22 4 Su
Co ba
m ss
po em
ne .
nt
s. Assemblies Fin. Goods
1 3 5 7
Raw Material Components Subassem.

Product/Material Flow
Production Operation
Repetitive Focus - Considerations

• Product focused process that uses modules

• More structured than process-focused, less
structured than product focused
• Enables semi-customization
• Using modules, it enjoys economic advantage
of continuous process, and custom advantage
of low-volume, moderately high-variety model
Repetitive Focus - Examples
Fast
Clothes
Food
Dryer
McDonald’s
McDonald’s
over 95 billion served
over 95 billion served

Truck
Repetitive Focus
Product-Focused Strategy
 Facilities are organized by product
 High volume, low variety
 Conversion or further processing of undifferentiated
materials such as petroleum, chemicals, or food
processing
 Follows a predetermined sequence of steps, but flow is
continuous rather than discrete – highly standardized
 Other names
 Line flow production
 Continuous production
Production Process at
NUCOR Steel
Product Focus - Pros & Cons
• Advantages
– Lower production cost per unit
– Lower but more specialized labor skills
– Easier production planning and control
– Higher equipment utilization (70% to 90%)
• Disadvantages
– Lower product flexibility
– More specialized equipment
 Product-Focused
Examples

Soft Drinks
(Continuous, then
Discrete)

Paper (Continuous)
 Mass Customization
• Using technology and imagination to rapidly
mass-produce products that cater to
unique customer desires
• Under mass customization the three
process models become so flexible that
distinctions between them blur, making
variety and volume issues less significant
 Location
• Basic tradeoff: Centralization (efficiency)
vs. decentralization (responsiveness)
• Quality & cost of workers
• Cost of facility
• Infrastructure
• Proximity to customers & rest of network
• Tax benefits

22
 Capacity
• Excess capacity
– Flexible (responsive) but less efficient

• High utilization
– Efficient

23
 Facility related metrics
• Capacity
– Maximum amount a facility can process
• Utilization
– measures the fraction of capacity that is
currently being used in the facility
– affects both the unit cost of processing and
the associated delays.
– Unit costs tend to decline and delays increase
with increasing utilization

24
 Facility related metrics
• Quality losses
• Theoretical Flow/ Cycle Time
– measures the time required to process a unit if
there are absolutely no delays at any stage
• Actual Average Flow/ Cycle Time
– measures the average actual time taken for all
units processed over a specified duration such
as a week or month
– includes the theoretical time and any delays

25
 Facility related metrics
• Flow Time Efficiency
– ratio of the theoretical flow time to the actual
average flow time
• Product variety
– measures the number of products/product
families processed in a facility
– Processing costs and flow times are likely to
increase with product variety

26
 Facility related metrics
• Volume contribution of top 20% SKUs &
customers
– measures the fraction of total volume
processed by a facility that comes from the
top 20 percent SKUs or customers
– An 80/20 outcome in which the top 20 percent
contribute 80 percent of volume indicates
likely benefits from focusing the facility where
separate processes are used to process the top
20 percent and the remaining 80 percent

27
 Facility related metrics
• Processing/ Setup/ Down/ Idle Time
– measure the fraction of time that the
facility was processing units, being set
up to process units, unavailable because
it was down, or idle because it had no
units to process

28
 Facility related metrics
• Average Production batch size
– measures the average amount produced in each
production batch
– Large batch sizes will decrease production cost
but increase inventories in the supply chain
• Production service level
– measures the fraction of production orders
completed on time and in full

29
 Inventory
• Role in the supply chain
– the “what” of the supply chain
– exists because of a mismatch between
supply and demand
– Source of cost and influence
responsiveness

30
 Inventory
• Inventory (I) impacts
– material flow time (T)
• the time that elapses between the point at
which material enters the supply chain to
the point at which it exits
– Throughput (D)
• the rate at which sales occur

31
 Inventory
• Little’s Law
I = DT

– inventory and flow time are synonymous in a supply chain

because throughput is often determined by customer
demand
– Managers should use actions that lower the amount of
inventory needed without increasing cost or reducing
responsiveness, because reduced flow time can be a
significant advantage in a supply chain

32
 Inventory
• Role in the competitive strategy
– Locate large amount close to customer
(responsiveness priority)

– Centralized stocking (efficiency

priority)

33
Components of Inventory
Decisions
• Cycle inventory

• Safety inventory
• Seasonal inventory
• Level of product availability
– fraction of demand that is served on time from
product held in inventory
• Overall trade-off: Responsiveness versus
efficiency
34
 Level Production
Demand

Production
Units

Time

35
 Chase Demand
Demand

Production
Units

Time

36
 Inventory related
metrics
• Average inventory
– Measured in Units, Days of demand or Financial
value
• Products with more than a specified
number of days inventory
– can be used to identify products that are in
oversupply or identify reasons that justify the
high inventory, such as price discounts, or
being a very slow mover
• Average replenishment batch size
– Units & days of demand of each SKU
37
 Inventory related
metrics
• Average safety inventory
• Seasonal inventory
• Fill rate
– fraction of orders/demand that were met on
time from inventory. Fill rate should not be
averaged over time but over a specified
number of units of demand (say, every
thousand, million, etc.).

38
 Inventory related
metrics
• Fraction of time out of stock
– fraction of time that a particular SKU had
zero inventory.
– can be used to estimate the demand during the
stock out period.
• Obsolete inventory

39
 Transportation
• Role in the Supply Chain
– Moves the product between stages in
the supply chain
– Speed & amount transported impact
responsiveness and efficiency
– Affects inventory and facilities

40
 Transportation
• Role in the Competitive Strategy
– Faster transportation modes
(responsiveness) to customers willing to
pay for it

– Slower transportation modes for

customers whose priority is price (cost)

– Find the right balance between

inventory and transportation
41
 Components of
Transportation Decisions
• Mode of transportation:
– Air truck, rail, ship, pipeline, electronic
transportation
– Vary in cost, speed, size of shipment,
flexibility

42
 Components of
Transportation Decisions
• Route and network selection
– route: path along which a product is
shipped
– network: collection of locations and
routes

• In-house or outsource

43
 Transportation related
metrics
• Average inbound transport cost
• Average outbound transport cost
• Average incoming shipment size
• Average outgoing shipment size
• Average inbound transport cost per shipment
• Average outbound transport cost per shipment
• Fraction transported by mode

44
 Information
• Role in the Supply Chain
– 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, warehouse management

45
 Information
• Role in the Competitive Strategy
– Allows supply chain to become more
efficient and more responsive at the
same time (reduces the need for a
trade-off)
– Information technology
– What information is most valuable?

46
 Components of
Information Decisions
• Push (MRP) versus pull
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
– RFID

47
 Information related
metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Seasonal factors
– measure the extent to which the average
demand in a season is above or below the
average in the year

48
 Information related
metrics
• Variance from plan
– identifies the difference between the planned
production/inventories and the actual values.
– variances can be used to raise flags that identify
shortages and surpluses.
• Ratio of demand variability to order variability
– measures the standard deviation of incoming demand and
supply orders placed
– A ratio less than one potentially indicates the existence
of the bullwhip effect

49