Supply Chain Strategy and Performance Measures

1

Chapter 2

Content…….

Customer service and cost trade offsSupply chain performance measuresLinking supply chain and business

performanceEnhancing supply chain performance

Cost Versus Service

A firm must ensure a smooth fit between its business strategy and supply chain strategy

Business strategy: the firm decides the market segment in which it wants to operate and the level of customer services it wants to offer

Supply chain strategy: issues of costs that the firm has to incur to provide the targeted level of customer service

Supply Chain Performance Measures

Cost

of

serv

ice

Service LevelLow High

Cost

Service LevelLow High

Existing Position

Managing Supply Chains Efficiently

.

Inefficient Practices

Impact of Service Level on Revenue Costs and Profits

Supply Chain Performance Measures: Cost Versus Service

CostService

Order delivery lead time Responsiveness Delivery reliability Product variety

Order delivery lead time

It is the time taken by the supply chain to complete all the activities from order to delivery

Supply chain lead time

Order penetration point/decoupling point

Customer order

Order delivery lead time

Supply Chain Typology

Order Penetration Point/ Decoupling Point Make to Stock Make to Order Configure to Order

Supply Chain Focus Efficiency Responsiveness

Supply Chain Typology: Order Penetration Point/ Decoupling Point

Push-Pull Boundary of Supply Chains

Supply Chains responsiveness

Responsiveness captures the firm’s ability to handle the uncertainty of market demand

Functional products are those that satisfy the basic needs of a customer and therefore have low variety, stable and predictable demand, long life cycles and low profit margins

Innovative products are those that try to satisfy a broad rand of customers’ wants and have the high variety, unstable, very hard to predict demand, short life cycles, high profit margins and frequent stock outs and markdowns

Physical function is the process of converting materials into parts, then to finished products and then transporting them across the various stages of the chain

Market mediation function ensures that the variety of products reaching the market matches the needs of the customers

Aspects of demand Functional (predictable Demand)

Innovative (Unpredictable Demand)

Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of sales price)

5% to 20% 20% to 60%

Product variety Low ( 10 to 20 variants per category)

High ( often thousands of variants per category)

Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%

End-of-season mark markdown

0% 10% to 30%

Functional Versus Innovative Products: Differences in Demand

Match Supply Chain Design with Product Category

Delivery reliability

It is the degree to which a firm is able to service its customers within the promised delivery time

Product varietyThe quantum of variety offered by a firm Variety explosion

Supply 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 turnsCustomer facing

Reliability Order fulfilment performance ,Perfect order fulfilment

Flexibility Supply-chain response time, Production flexibility

Benchmarking 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 ratioSupply chain working capital productivity:

SWC = SC working capital, SWCP = SC working capital productivity SWC = INV +AR–AP

SWCP = NS / ISWC

The Strategic Profit Model

Impact of supply Chain Intiative 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 expenditureReducing working capital by

Reducing inventory, Reducing accounts receivables

Enhancing Supply Chain Performance

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