supply chain management

Supply Chain Management_Janat Shah

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Supply Chain Strategy and Performance Measures

12


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Learning Objectives What are the key supply chain performance measures? How does supply chain performance affect financial

performance? Why is it necessary to ensure a god fit of the business strategy

with the supply chain strategy? What are the different dimensions of customer service? What are the ways in which firm can simultaneously reduce

supply chain costs and improve customer service?


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tdSupply Chain Performance Measures: Cost Versus Service

Cost Service

Order delivery lead time Responsiveness Delivery reliability Product variety


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Supply Chain Performance MeasuresC

ost o

f ser

vice

Service LevelLow High


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tdOrganized Retail Performance comparisons : Inventory Turns

Firm Inventory turns

Pantaloon Retail (India) Ltd.* 3 to 4

Trent Ltd.* 4 to 6

Subhiksha Trading** 20 to 25

* source: Financial statements** Source: Subhiksha case study


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tdAn Automobile Company: An Example

An automaker wrestles with high levels of inventory(83 days) as unsold vehicles sit on lots.

The automaker not only produced too many cars and trucks but also made the wrong mix. The automaker pushed feature-laden vehicles that dealers are hesitant to buy. But the dealers already have enough cars and trucks on their lots to last 80 to 126 days

The dealers say: "The bean counters said, 'This is the mix you need to sell to hit targets for profitability.' They ended up with a huge sales bank of cars, a mix we as dealers wouldn't order”.


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Cos

t

Service LevelLow High

Existing Position

Managing Supply Chains Efficiently

.

Inefficient Practices


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tdImpact of Service Level on Revenue Costs and Profits


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tdSuperior Performers Spend Less on Supply-Chain Management

Best-in-class companies have an advantage in total supply-chain management cost (5% – 6% less in revenue)

Source: Supply-Chain Council

Total Supply-Chain Management Cost


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td Comparative Performance: Best-in-Class Versus Median

Consumer Packaged Goods Focus

81%98%

0%

20%

40%

60%

80%

100%

Median BIC

42.0

8.3

0.0

10.0

20.0

30.0

40.0

50.0

Median BIC

66.6

24.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Median BIC

9.2%

4.9%

0.0%

5.0%

10.0%

Median BIC

Delivery Performance to Request Total Supply-Chain Management Cost

Upside Production Flexibility Cash-to-cash Cycle time

Source: Supply-Chain Council


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tdBenchmarking Supply Chain Performance Using Financial Data

Total length of the chain: = DRM + DWIP + DFG DRM = RM * 365/ CRM, DWIP = SFG*365/ CP, DFG = FG * 365 / CS

DRM , DWIP , DFG = Days of RM, WIP and FG Inventory Supply chain inefficiency ratio: SCC = DC + INV * ICC & SCI = SCC / NS SCC = SC mgnt. costs , ICC= Inv. Car. cost SCI = SC inefficiency ratio Supply chain working capital productivity: SWC = SC working capital, SWCP = SC working capital productivity SWC = INV +AR–AP SWCP = NS / ISWC


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tdIllustration: Supply Chain Performance Measures From Financial Statement: Kurlon

Data* CRM=557.8, CP =670.1, CS : 102.62 RM= 50.1,WIP=9.2, FG=86.5, INV=145.8 AR=238.2 , AP=181.8, NS= 1122.2, DC=89.5, ICC=0.2

Time in chain DRM = 5.01*365/55.78 = 33 ,DWIP = 0.92 *365/67.01 = 5 , DFG = 8.65 *365/ 102.62 = 31 Total Length of chain =33+5+31=70 days Supply chain inefficiency ratio: SCC = 89.5 + 145.8*0.2 =118.66, SCI =118.66 /1122.2=10.6 Supply chain working capital productivity: SWC = 145.8+ 238.2 - 181.8 =202.2 SWCP = 202.2/1122.2 =0.18

* Source: Exhibit 2 and 3 Kurlon case, Assumption : ICC=0.2


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tdBenchmarking Supply Chain Performance:Top Ten Supply Chains : AMR Ranking

2007 rankings 2005 rankings

1. Nokia 1. Dell

2. Apple 2. Procter & Gamble

3. Procter & Gamble 3. IBM

4. IBM 4. N0kia

5. Toyota Motor 5. Toyota Motor

6. Wal-Mart 6. Johnson & Johnson

7. Anheuser Busch 7. Samsung

8. TESCO 8. Wal-Mart

9. Best Buy 9. Tesco

10. Samsung Electronics 10. Johnson Control


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The Strategic Profit Model


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tdImpact of supply Chain Initiative on Business Performance

Cost reduction achieved by: Reducing Inventory, Reducing logistics expenses, Reducing

direct material expenses, Reducing indirect material expenses Improved revenue and profitability by:

Selling higher margin products, Achieving higher market share, Reducing backorder and lost sales, Attacking new markets, Decreasing supply time to market

Improved Operational efficiency by: Reducing procurement expenses, Increasing assets utilization,

Delaying capital expenditure Reducing working capital by

Reducing inventory, Reducing accounts receivables


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tdImpact of Supply Chain on Business Performance

Supply Chain

Performance

Business Performance

Supply Chain

Initiative


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Enhancing Supply Chain Performance


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The SCOR Model

The Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations 800 world-wide members Multi-industry

SCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivity

Promotes research and thought leadership in the supply chain management area

Adoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration


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04/08/23

Supply Chain Operations Reference (SCOR) Model

Developed by the Supply-Chain Council for SCM diagnostic benchmarking, & process improvement. The SCOR model separates supply chain operations into 5 process categories:

PlanSourceMakeDeliverReturn


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SCOR Model Processes

04/08/2310-20

PlanDevelop a course of action that best meets sourcing, production and delivery requirements

SourceProcure goodsand services tomeet plannedor actualdemand

MakeTransformproduct to a finished state to meet planned or actualdemand

DeliverProvide products to meet demand, including ordermanagement, transportation and distribution

ReturnReturnproducts,post-deliverycustomersupport


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SCOR Model (Cont.)

04/08/2321


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Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results

Benchmarking

Characterize the management practices and software solutions that result in “best-in-class” performance

Best Practices Analysis

Process Reference Model

Capture the “as-is” state of a process and derive the desired “to-be” future state

Business Process Reengineering

Capture the “as-is” state of a process and derive the desired “to-be” future state

Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results

Characterize the management practices and software solutions that result in “best-in-class” performance

Process Reference Models Process reference models integrate the well-known concepts of business

process reengineering, benchmarking, and process measurement into a cross-functional framework


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SCOR Structure

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

SCORSCOR ModelModel

Return Return Return Return Return Return Return Return

Building Block Approach

Processes Metrics

Best Practice Technology


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Cus

tom

ers

Cus

tom

ers

Supp

liers

Supp

liers

P1 Plan Supply ChainP1 Plan Supply ChainPlanPlan

P2 Plan SourceP2 Plan Source P3 Plan MakeP3 Plan Make P4 Plan DeliverP4 Plan Deliver

SourceSource MakeMake DeliverDeliverS1 Source Stocked ProductsS1 Source Stocked Products M1 Make-to-StockM1 Make-to-Stock

M2 Make-to-OrderM2 Make-to-Order

M3 Engineer-to-OrderM3 Engineer-to-Order

D1 Deliver Stocked ProductsD1 Deliver Stocked Products

D2 Deliver MTO ProductsD2 Deliver MTO Products

D3 Deliver ETO ProductsD3 Deliver ETO Products

S2 Source MTO ProductsS2 Source MTO Products

S3 Source ETO ProductsS3 Source ETO Products

Return Return SourceSource

P5 Plan ReturnsP5 Plan Returns

Return Return DeliverDeliver

EnableEnable

D4 Deliver Retail ProductsD4 Deliver Retail Products

SCOR 7.0 Model Structure


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Material FlowMaterial Flow

SCOR Level 1

Operations Operations StrategyStrategy

Analyze Basisof

Competition

SCOR Level 2Configure

supply chain

AlignPerformance

Levels, Practices, and

Systems

Implementsupply chain

Processes and Systems

SCOR Implementation Roadmap•Competitive Performance Requirements•Performance Metrics•Supply Chain Scorecard•Scorecard Gap Analysis•Project Plan

•AS IS Geographic Map•AS IS Thread Diagram•Design Specifications•TO BE Thread Diagram•TO BE Geographic Map

InformationInformationand Work Flowand Work Flow

•AS IS Level 2, 3, and 4 Maps•Disconnects•Design Specifications•TO BE Level 2, 3, and 4 Maps

Develop, Develop, Test, and Roll Test, and Roll

OutOut

•Organization•Technology•Process•People

SCOR Level 3


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Consumer Foods Project Time (Start to Finish) – 3 months Investment - $50,000 1st Year Return - $4,300,000

Electronics Project Time (Start to Finish) – 6 months Investment - $3-5 Million Projected Return on Investment - $ 230 Million

Software and Planning SAP bases APO key performance indicators (KPIs) on SCOR Model

Aerospace and Defense SCOR Benchmarking and use of SCOR metrics to specify performance

criteria and provide basis for contracts / purchase orders

Examples of SCOR Adoptions


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SCOR Model

Supplier

Plan

CustomerCustomer’sCustomerSuppliers’

Supplier

MakeDeliverSource Make

DeliverMakeSourceDeliver SourceDeliver


Your Company

Source

Return Return Return Return Return ReturnReturn Return

Segment Analysis, Marketing Planning

Marketing Data

Suppliers

Pharmacies, Hospitals,

Doctors

Marketing and Sales Functions

Doctors, Hospitals

Patients

Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model


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The SCOR Model (contd)

Supplier

Plan


Supplier




Your Company

Source

Return Return Return Return Return ReturnReturn Return

Two interrelated “supply chains” work together to deliver drugs to market: The Marketing and Sales “supply chain” which is principally information-based The Logistics supply chain which is principally product-based

Supplier

Plan


Supplier




Your Company

Source

Return Return Return Return Return Return Return Return

Sales

Manufacturing&

Distribution


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SCOR Model (Cont.)Additions have been made to the SCOR model

Original SCOR model did not address sales & marketing processes, some aspects of service, & support processes (i.e., HR & technology development).

Customer Chain Operations Reference model (CCOR)Defines the customer part of the SC as the integration of Plan,

Relate, Sell, Contract, Service, & Enable processes.Design Chain Operations Reference model (DCOR)

Defines the design portion of the SC as the integration of Plan, Research, Design, Integrate, Amend, & Enable processes.

04/08/2329


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04/08/23

Performance measurement systems must: Link SC trading partners to achieve breakthrough

performance in satisfying the end users. Overlay the entire supply chain to assure that all

contribute to supply chain strategy.

In a successful chain, members jointly agree on a SC performance measurement system.Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace

SC Performance Measurement Systems


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04/08/23

Environmental sustainability- Addressing the need for protecting the environment & reducing

greenhouse gas emissions as well business & consumer needs

Green supply chain management (GSCM)- Sharing of environmental responsibility along the SC such that sound

environmental practices predominate, & adverse global environmental effects are minimized.

Carbon footprint- Supply chains evaluate design configurations and various options for

reducing total carbon emissions

SC Performance Measurement Systems (Cont.)


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Measuring Supply Chain Performance Key performance indicators

inventory turnover cost of annual sales per inventory unit

inventory days of supply total value of all items being held in inventory

fill rate fraction of orders filled by a distribution center

within a specific time period


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04/08/23

SC Performance Meas. Systems (Cont.)

Supply Chain Performance Measures1. Total SCM costs: cost to process orders; purchase & manage

inventories; & information systems.2. SC cash-to-cash cycle time: Avg. # of days between paying for

materials & getting paid by SC partners.3. SC production flexibility: avg. time required to provide an unplanned

20% increase in production.4. SC delivery performance: avg. % of orders filled by requested delivery

date.5. SC perfect order fulfillment performance: average % of orders that

arrive on time, complete, & undamaged.6. Supply chain e-business performance: avg. % of electronic orders

received for all SC members.7. Supply chain environmental performance: % of SC w/ISO 14000

partners; avg. % env. goals met.


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04/08/23

Number of days to achieve an unplanned 20% change in orders without a cost penalty

Production flexibility

Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty

Supply chain response time

Supply Chain Flexibility

Number of days from order receipt to customer delivery

Order fulfillment lead time

Supply Chain Responsiveness

Percentage of orders delivered on time and in full, perfectly matched with order with no errors

Perfect order fulfillment

Percentage of orders shipped within24 hours of order receipt

Fill rate

Percentage of orders delivered on time and in full to the customer

Delivery performance

Supply Chain Delivery Reliability

DefinitionPerformance Metric

Performance Attribute

SCOR: Customer FacingSCOR: Customer Facing


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04/08/23

DefinitionPerformance Metric

Performance Attribute

SCOR: Internal FacingSCOR: Internal Facing

Revenue divided by total assets including working capital and fixed assets

Asset turns

Number of days that cash is tied up as inventoryInventory days of supply

Number of days that cash is tied up as working capital

Cash-to-cash cycle time

Supply Chain Asset Management Efficiency

Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory

Warranty/returns processing cost

Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee

Value-added productivity

Direct cost of material and labor to produce a product or service

Cost of goods sold

Direct and indirect cost to plan, source and deliver products and services

Supply chain management cost

Supply Chain Cost


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tdSupply Chain Performance Measures: SCOR Model

Internal Facing Cost

Total logistics management cost, Value-added productivity , Warranty cost

Assets Cash-to-cash cycle time, Inventory days of supply, Asset turns

Customer facing Reliability

Order fulfilment performance ,Perfect order fulfilment Flexibility

Supply-chain response time, Production flexibility


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tdEvaluation of Supply Chain Performance in Competitive Environments

19 turns 12 turns 8 turns2.2 turnsNet asset turns (working capital)

28 days 46 days 80 days A96 days Cash-to-cash cycle time

22 days38 days 55 days 119 days Inventory days of supplyAssets

$ 460k$306k$ 156k$122 kValue added per employee productivity

NANA NANAWarranty cost, returns and allowances

3%8%13%19%Total logistics management costsCost

Internal

20 days 25 days 30 days 45 days Production flexibility (days master schedule fixed)

3 days 5 days 7 days 7 days Order fulfillment lead times (customer to customer)

90%85%80%0%Perfect order fulfillment (on time in full)

98%96%94%63%Fill ratesSupply chain reliability

Flexibility and responsiveness

External

Superior95%

Advantage90%

Parity85%

Actual50%

SCOR level 1 metricsDelivery performance to commit date

Overview metrics

Performance versus competitive population

Supply chain scorecard v. 3.0


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Enhancing Supply Chain Performance Supply Chain Integration

Toyota, Ford Motor Company (1910-1920), The Dubbawallas of Mumbai

Supply Chain Optimisation Use of Quantitative models in supply chain design and

operations Supply Chain Reconfiguration

Dell, TVS Scooty


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Supply Chain Analysis

Supply chain

performance

Business performance

Supply chain initiative

Supply chain diagnostics


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Summary-I A firm must ensure a smooth fit between business strategy and supply

chain strategy. As a part of the business strategy, a firm decides the market segment in

which it wants to operate and the level of customer service it wants to offer.

Supply chain strategy results in costs that firms have to incur to provide the targeted level of customer service. Firms must recognize the nature of trade-offs between customer

service and costs and arrive at an optimal decision on this front. Firms will have to decide on the optimum level of customer service by

targeting performance levels across four dimensions of customer service: order delivery lead time, responsiveness, delivery reliability and

product variety.


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Summary-II Supply Chain Typology

order delivery time : MTS, MTO or CTO. Product Demand characteristics : efficient chain or a responsive chain

Firms must monitor their supply chain performance and benchmark the same against competitors. not all supply chain measures are of equal importance.

supply chain initiative planned by a firm must get translated into business performance (ROI) , since a firm is ultimately interested in improving its return on investment (ROI). strategic profit model framework to prioritize initiatives.

customer service versus cost trade-offs, in the long run, firms have to find a way of increasing performance on both the costs and the services fronts.

By working on supply chain innovations involving SC optimization, SC integration and SC reconfiguration firms can improve performance on these fronts on a sustained basis.

supply chain management

Documents

supply chain strategy

supply chain costs

supplychain managementbest

chain drm

supplychain council

supply time

total length of chain

janat shah illustration