Supply Chain Management Performance

Metrics
 Learning Objectives

 What are supply chain drivers?

 What are the key performance metrics in supply chain decisions
a firm?
 What are supply chain strategies?
 Managing Supply Chain Operations

• Demand forecasting
• Procurement planning
• Production planning
• Inventory management
• Transportation
• Order processing
• Relationship management
 Strategic, Tactical and Operational Decisions
Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equipment Dispatching

leasing

Inventories Location, Control policies Safety stock levels Order filling

Order Order entry, transmittal, Processing

processing and processing system orders, Filling
design back orders

Purchasing Development of supplier- Contracting, Expediting

buyer relations Forward buying

Warehousing Handling equipment Space utilization Order picking

selection, Layout design and restocking

Facility Number, size and

location location of warehouses
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 Supply Chain Capabilities
 SC Capabilities :
Supply chain responsiveness :
Capability to respond to
 Demand fluctuations,
 Short lead times,
 Handle large variety of products, High
service level,
 Supply uncertainties.
Supply chain efficiency
Low cost
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 Drivers of Supply Chain Performance
 Facilities (Plant and Warehouse)
 Where of Supply Chains
 places where inventory/ information is stored, assembled, or fabricated
 production sites and storage sites
 Inventory
 What is being passed in Supply Chains
 raw materials, WIP, finished goods within a supply chain
 inventory policies
 Transportation
 How it is being passed
 moving inventory from point to point in a supply chain
 combinations of transportation modes and routes
 Information
 data and analysis regarding other drivers in the supply chain
 potentially the biggest driver of supply chain performance
 Sourcing
 Pricing
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 Supply Chain Drivers
Efficiency Responsiveness
Supply chain structure

Facilities Transportation Inventory

Pricing Information
Sourcing

Drivers
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 FACILITIES

Role in the supply chain

the “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)

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Components of Facilities Decisions
Location
centralization (efficiency) vs. decentralization (responsiveness)
other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Production Methodology (product focused versus process focused)
Warehousing methodology (SKU storage, job lot storage, cross-
docking)

Overall Trade-off: Responsiveness versus efficiency

Trade off between the cost of the number, location and type of
facilities and the level of responsiveness these facilities provide to
customers.
Increasing the number of facilities increases facility and inventory
costs but reduces transportation costs and reduces response time.
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 Facility related metrics
 Capacity
 Utilization
 Theoretical flow/ cycle time of production
 Actual Average flow / cycle time of production
 Product variety
 Volume contribution of top SKUs and Customers
 Processing/setup/down/idle time
 Average production batch size
 Production service level :Measures the fraction of
production orders completed on time and full.

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 INVENTORY
 Role in the Supply Chain
Buffer for supply-demand mismatch
Minimum Inventory
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
 Components of inventory decisions
Cycle inventory
Safety Inventory
Seasonal Inventory
Level of product Availability
It is the fraction of demand that is served on time from product held in
inventory
 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
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 Inventory
Overall Trade Off
Responsiveness versus efficiency
Increasing inventory makes supply chain more
responsive to customer
Higher level of inventory also facilitates a reduction in
production and transportation costs because of
improved economies of scale in both the functions.
But higher inventory increases inventory holding costs.

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 Inventory Related Metrics
 Average inventory
 Products with more than specified number of days of
inventory.
 Average replenishment batch size
 Average safety inventory
 Seasonal inventory
 Fill Rate
 Fraction of orders/demand that were met on time
from inventory
 Fraction of time out of stock

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 TRANSPORTATION
 Role in the Supply Chain
 Moves the product between stages in the supply chain

Also provides product storage

 Impact on responsiveness and efficiency
 Faster transportation allows greater responsiveness but lower efficiency
 Also affects inventory and facilities

 Role of Transportation 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 Transport Decisions

Design of Transportation network

Transportation network is the collection of transportation
modes, locations and routes along which product can be
shipped.
Company must decide – whether transportation from
supply source directly to demand point or through
intermediate consolidation points.
Whether multiple supply and demand points will be
included in a single run or not

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 Components of Transport Decisions
Choice of transportation Mode
External Factors
Basic infrastructure availability , Trade barriers , climate etc.
Customer Characteristics
Service level requirement
Delivery point constraints
Order size Preference
Customer Importance
Physical nature of Product
Volume to weight ratio
Value to weight ratio
Special characteristics
Other logistics components
Facility Locations and Characteristics
Existing delivery systems 16
 Transportation related metrics
 Average inbound transportation cost
 Average incoming 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

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 Overall Trade off : Responsiveness versus Efficiency

 Cost of transporting a given product(efficiency) versus

speed at which it is transported (responsiveness)
 Fast mode increases responsiveness and transportation cost
but lowers the inventory holding cost.

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 Information in the Supply Chain
 Role of Information in the Supply Chain
 The glue between the various stages in the supply chain – allows coordination and control
between stages
 Crucial to daily operation of each stage in a supply chain – e.g., production scheduling,
inventory tracking, increasing visibility of warehouse inventory etc.
 Components of Information Decisions
 Coordination and Information sharing
Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)
 Forecasting and Aggregate Planning
 Enabling Technologies
Electronic Data Interchange( EDI)
Internet
ERP systems/ Supply Chain Management software
RFID/GPS etc.
 Overall Trade off
 Good information improves both efficiency responsiveness.
 Information driver is used to improve the performance of other drivers
Accurate information can help a firm improve efficiency by decreasing inventory and
transportation costs.
Accurate information can improve responsiveness by helping a SC better match supply and
demand.
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 Information in the Supply Chain

Overall Trade off

Good information improves both efficiency and responsiveness.
Information driver is used to improve the performance of other
drivers
Accurate information can help a firm improve efficiency by decreasing
inventory and transportation costs.
Accurate information can improve responsiveness by helping a SC better
match supply and demand.

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 Information – Related Metrics
 Forecast horizon
 Frequency of update
 Forecast error
 Seasonal factors
 Variance from plans
 Ratio of demand variability to order variability : bullwhip
effect

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 SOURCING
 Sourcing – Set of business processes required to purchase goods
and services.
 Components of Sourcing Decision
 In – house or Outsource
Outsource to increase responsiveness or efficiency and taking
associated risk.
 Supplier selection
 Logistics outsourcing (3PL-Third Party Logistics)
 Procurement
 Overall trade off
 Decisions should be made to increase the size of total profit .
 Decisions impact sales , service , production costs , inventory
costs, and information costs.
 Outsourcing to a third party meaningful if the party raises SC
profits more than the firm can by its own and risk associated is
low.
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 Make or Buy (In-house Vs Outsource)
Factors Guiding the Supplier’s Selection

• Strategic Decision
• Decision made at strategic planning stage (or
during design stage)
Following questions need to be answered

1.How critical is the item to the design of the

product or services?
2. Does the organization have the technical
knowledge to produce the items internally?
If not, should that knowledge be developed?
3. Are there suppliers who specialize in
producing the items?
If not, is the organization willing to develop
such a specialized supplier?
Questions to be answered in terms of

• Cost (including tax considerations)

• Delivery
• Quality
• Quantity
• Safety
• Acquisitions of Technical Know-How
• Labour Union Compulsions (if applicable)
• Political and Domestic compulsions
Considerations which favours making the part

• Lower cost of making components (as

comparison to purchase price) or delivering
services
• Desire to integrate plant/service operations
• Utilization of excess plant/service capacity to help
absorb fixed overheads
• Need to have direct control over
production/quality
• Unreliable supplier
• Desire to maintain a stable workforce
Considerations favouring Buying the
part/component)

• Supplier’s specialized know-how

• Lower purchase price (in comparison to cost
of making)
• Small volume requirement
• Limited production capacity
• Desire to maintain multiple sources of supply
and indirect management control
• Focus on core business activities
 Sourcing Metrics
 Days payable outstanding
 Average purchase price
 Range of purchase price
 Average Purchase quantity : measure of aggregation across
locations
 Fraction on-time deliveries
 Supply Quality
 Supply lead time.

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 PRICING
Component of Pricing Decisions
Pricing and economies of scales
Everyday low pricing versus High-Low Pricing
Fixed price versus Menu Pricing
Overall Trade off
Increasing Profit : lower SC costs, defend market share, steal
market share.
Differential pricing – what customer can bear

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 Pricing Metrics

Metrics
Profit margins
Days sales out standings
 Incremental fixed cost per order
Incremental variable cost per unit
Average sale price
Average order size
Range of Sales price
Range of periodic sales

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 Supply Chain Management Operations Strategies
STRATEGY WHEN TO CHOOSE BENEFITS
Make to Stock standardized Low manufacturing costs;
products, relatively meet customer demands
predictable demand quickly

Make to Order customized products, Customization; reduced

many variations inventory; improved
service levels
Configure to Order many variations on Low inventory levels; wide
finished product; range of product
infrequent demand offerings; simplified
planning

Engineer to Order complex products, Enables response to

unique customer specific customer
specifications requirements

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 Impact of Better Supply Chain Management

Supply Chain Typical

Impacts Benefits
 Improved productivity
Revenue  Reduced downtime 2 - 10 %
Revenue
revenue
 Improved customer service
Profitability
Profitability
 Lower distribution costs
 Better purchasing leverage
10-30%
Costs
Costs costs
 Collaboration with 3 parties
rd

Shareholder
Shareholder  Better contract management
Value
Value
 Lower inventories
Working
Working
 Maximum asset utilisation 10-20%
Capital
Capital Inventory
 Reduced lead times Reduction
Invested
Invested
Capital
Capital  Shorter ‘build to order’ times

 Fewer physical assets

Fixed
Fixed 10-30%
(i.e.,plants, warehouses,
Capital
Capital assets
material handling equipment,
trucks, tanks, ships etc.)

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