SCM 3 Performance Drivers CHAP 3.pdf

8/19/2019 SCM 3 Performance Drivers CHAP 3.pdf

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Supply Chain Drivers and Metrics

(Source: Supply Chain Management, Strategy, Planningand Operation, By Sunil Chopra, Peter Meindl, D. V.

Kalra‐Pearson)

For academic purpose and private circulation only


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Financial Measures Of Performance

• Supply Chain Performance impacts financial

performance of each member of supply chain.

• Return on equity (ROE) is the main summary measure of

a firm’s performance.

• It measures the return on investment made by firm’s

shareholders

Higher value is desirable


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Financial Measures of Performance

• Return on assets (ROA) measures the return earned

on each dollar invested by the firm in assets


assets totalAverage

interest beforeEarnings ROA

assetstotalAverage )rateTax –

1(expenseInterestincome Net


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• An important ratio that defines financial leverage is

accounts payable turnover (APT)

• e.g APT = 3, this means that firm is able to finance its

operations by using money it owns to the suppliers

for about 52/3= 17 weeks on an average.

• Lower value is desirable

payable Accounts

soldgoodsof Cost

APT


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Key component of asset turnover are:

1. ART = Accounts receivable turnover =

Sales Revenue / Accounts Receivable

e.g ART = 20, this means that firm is able to collect

money from sales in about 52/20= 2.6 weeks on an

average after it had made the sales.



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2. INVT =Inventory turnover= Cost of Goods Sold /

Inventories

e.g. INVT = 9, this means that inventory sat for about

52/9= 5.8 weeks on an average in an year


4-6



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3. PPET = Property, Plant and Equipment turnover =

Sales Revenue / PP & E (i.e Property , Plant & Equipment )

e.g. PPET= 20, this means that each dollor/Rs invested

in property, plant or equipment supported about 20

dollars of sales.


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• Cash-to-cash (C2C) cycle roughly measures the

average amount time from when cash enters the

process as cost to when it returns as collected revenue

•

From previous figures: C2C= -17 + 5.8 + 2.6 = -8.6(firm collects money 8.6 weeks before it had to pay to

its suppliers.

•

Lower or negative value is desirable

C2C = – days payable (1/APT)+ days in inventory (1/INVT)

+ days receivable (1/ART)


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Two other measures which are not explicitly part offinancial statements are:

Markdowns (represent the discounts required to convince customers

to buy excess inventory)

Lost Sales (represent customer sales that did not materialize becauseof absence of desired product)

Need to be minimized as they adversely affect supplychain profitability.

Better matching of supply and demand reduces

markdowns and lost sales. 4-9



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Drivers of Supply Chain Performance

•

To achieve strategic fit requires company’s supply chain to achieve a balance between responsiveness

and efficiency that best supports the company’s

competitive strategy.

• Responsiveness and efficiency defines the supply

chain performance.

• There are six drivers of performance which interact

with each other to determine the supply chain

performance.


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• There are six drivers of supply chain performance:

3 logistical drivers

Facilities

Inventory

Transportation

3 cross functional drivers

Information

Sourcing

Pricing

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These drivers need to be

structured to achieve

desired level ofresponsiveness at

lowest possible cost in

order to improve supply

chain surplus and hence

business performance ofthe firm


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A Framework for Structuring Drivers

Good supply chain

design, planning and

operation recognize

the interaction andmake appropriate

tradeoffs among

drivers to achieve

desired level of

responsiveness andefficiency.


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1. Facilities The physical locations in the supply chain network

where product is stored, assembled, or fabricated.

Two major types of facilities are production and storage

sites

Decisions regarding role, location, capacity and

flexibility of facilities have a significant impact on supply

chain performance.


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In the financial statements facilities costs show up

under “property, plant and equipment” if facilities are

owned by the firm and under “selling, general and

administrative” if they are leased.

E.g. Amazon increased nos. of warehousing facilities to

improve supply chain responsiveness.

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Facilities


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Facilities

Components of facilities decisions:

No. of Facilities: Larger number of smaller facilities close to

customer increases responsiveness but decreases efficiency.

Role

Whether flexible, dedicated, or a combination of the two

For warehouses, whether cross-docking facilities or storage

type


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Location

Where a company will locate its facilities

Centralize/decentralize, centralization for gaining economies of scale Or decentralization to increase responsiveness

Other factors also considered in location decisions are:

macroeconomic factors, quality of workers, cost of workers andfacility, availability of infrastructure, proximity to customers,

location of other facilities, tax effects etc

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Facilities


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Facilities

Capacity A facility’s capacity to perform its intended function or

functions

More excess capacity gives responsiveness but is costly

Little excess capacity is more efficient, high utilisation

but less responsive in face of demand fluctuations

Firm need to make tradeoff and decide right amount of

capacity at a given facility.


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Facilities

Facility-related metrics

Capacity (max. amount a facility can process)

Utilization (fraction of capacity currently being used) Processing/setup/down/idle time(s) (fraction of time)

Production cost per unit

Quality losses

Theoretical flow/cycle time of production (time taken for processing units)

Actual average flow/cycle time


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Facilities

•

Overall trade-off: Responsiveness versus efficiency Tradeoff is between cost (efficiency) and the level of

responsiveness these facilities provide on account of decisions

regarding the number, location, capacity, and type of

facilities.Increasing the number of facilities increases facility and

inventory costs but decreases transportation costs and

reduces response time.

Increasing the flexibility or capacity of a facility

increases facility costs, increases responsiveness but

decreases inventory costs & response time.


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2. Inventory

All raw materials, work in process, and finished goods

within a supply chain.

Exists because of mismatch between supply and

demand

In the financial statements inventory belonging to firm

is reported under “assets”.

Changing inventory policies can alter supply chain

responsiveness and efficiency.

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Inventory

High level of inventory may increase responsiveness butdecreases efficiency.

Centralisation of inventory reduces inventory and thereby increase efficiency but it may also decrease responsiveness.

Low level of inventory increases efficiency but can lead to

decrease in responsiveness and increase in lost sales.

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Inventory level also effects “material flow time” in a supply

chain.

Material flow time is the time that elapses between the point

at which material enters the supply chain to the point it

exists.

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Inventory


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Inventory Throughput is output per time period. For a supply chain

it is the rate at which sales occur.

Little’s law

For a supply chain, Throughput is the rate at which the

sales occur Throughput is often determined by the customer demand

and can be considered fixed.

Thus inventory and flow time are synonymous in supply

chain. 4-23

I = DT

where, I = Inventory, T = Flow time, D = throughput


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Inventory

• Inventory and Competitive strategy

Form, location, and quantity of inventory allow a supply

chain to range from being very low cost to very

responsive.

Objective is to have right form, location, and quantity of

inventory that provides the right level of responsiveness

at the lowest possible cost

E.g. Amazon: Fast moving/slow moving / very slow

moving products 4-24


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• Cycle inventory

Average amount of inventory used to satisfy demand

between shipments

Function of lot size decisions

• Safety inventory

Inventory held in case demand exceeds expectations; to

counter demand and supply uncertainty • Seasonal inventory

Inventory built up to counter predictable variability in

demand4-25

Inventory


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• Inventory and Level of product availability

It is fraction of demand that is served on time from

product held in inventory High level of product availability increases

responsiveness but decreases efficiency due to increased

inventory levels.

Trade off between cost of inventory to increase

product availability and loss from not serving

customers on time.

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Inventory


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•

Inventory-related metricsInventory turnover ratio

Cash-to-cash cycle time

Average inventory

Products with more than a specified number of days of

inventory

Average replenishment batch size

Average safety inventory Seasonal inventory

Fill rate (fraction of orders met on time from inventory)

Fraction of time out of stock

Obsolete inventory 4-27

Inventory


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• Overall trade-off: Responsiveness versus efficiency

Increasing inventory generally makes the supply chain

more responsive.

A higher level of inventory facilitates a reduction in

production and transportation costs because of

improved economies of scale.

However, by doing so, inventory related costs

increases. 4-28

Inventory


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3. Transportation

Moving inventory from point to point in the supply chain.

It can take form of many combinations and routes each

with its own performance characteristics.

Huge impact supply chain responsiveness and efficiency.

In the financial statements, inbound transportation costs

are typically included in “costs of goods sold” while

outbound transportation costs are typically included in “

selling, general and administrative” expenses.

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Transportation

• Role in the supply chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness butlower efficiency

Also affects inventory and facilities

e.g. High value, low demand items transported by air mode,

low value , high demand items transported by cheaper

mode.

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•

Components of transportation decisions Design of transportation network

Modes, locations, and routes

Direct or with intermediate consolidation points

One or multiple supply or demand points in a single run

Choice of transportation mode

Air, truck, rail, sea, and pipeline

Information goods via the Internet Different speed, size of shipments, cost of shipping, and

flexibility

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Transportation


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• Transportation-related metrics

Average inbound transportation cost

Average income 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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Transportation


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• Overall trade-off: Responsiveness versus efficiency

The cost of transporting a given product (affects

efficiency) and the speed with which that product is

transported (affects responsiveness)

Using fast modes of transport raises

responsiveness and transportation cost but lowers

the inventory holding cost

e.g. Blue Nile and Zales

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Transportation


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4. Information

Consists of data and analysis concerning facilities, inventory,transportation, costs, prices, and customers throughout the

supply chain.

Biggest driver of supply chain performance as it directly affects each of the other drivers.

Information is a key driver that can be used to provide

higher responsiveness while simultaneously improving

efficiency.


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Information

• Role in a supply chain

Right information can help a supply chain better meet

customer needs at lower cost

Improves visibility of transactionsImproves coordination of decisions across the supply

chain

In the financial statements, information technology

related costs are included either under “ selling, general

and administrative” expense ” or under assets.


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•

Technologies that enable the efficient flow of productsand services through the supply chain are called

“enablers”.

• Enablers or Enabling technologies:

The Internet

Electronic data interchange (EDI)

Enterprise resource planning (ERP) systems

Supply chain management (SCM) softwareRadio frequency identification (RFID)

Information Technology: A Supply Chain Enabler


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Enabling technologies

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Electronic data interchange (EDI) “…the computer-to-computer interchange of strictly formatted

messages that represent documents other than monetary instruments”- NIST, US

Structured, standardized data transmittal format

Enables businesses to exchange business documents – such aspurchase orders, invoices, shipping notices and order status updates– automatically and electronically, eliminating the need for manualprocesses.

Supply chain members are able to share demand informationin real time & thus able to generate more reliable forecasts,reducing uncertainty.

Many EDI standards (including EDIFACT, X12, GS1EDI, ODETTEetc) 4-38

Information Technology: A Supply Chain Enabler


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A optical machine readable representation of data

relating to the item to which it is attached.

Scanned by optical scanners called barcode readers.

Bar code contains identifying information about the item.It might include information like product description, its

source, destination, cost, order number, special handlingprocedures etc.

Originally barcodes represented data by varying the

widths and spacings of parallel lines i.e. linear orone-dimensional (1D).

Evolved into rectangles, dots, hexagons and othergeometric patterns in two dimensions (2D).

UPC ; EAN ; GS1 4-39

Bar code and point-of-sale


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A UPC Bar Code

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A 2D Bar Code called Matrix CodeHand Held Bar Code Scanner



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When bar code information is scanned into a company’scomputer by an electronic scanner, it provides supply chain members information about item location in

supply chain.

When bar codes are scanned at checkout counters, itcreates an instantaneous computer record of a sale of aproduct called – point – of – sale – data

POS System

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RFID is a wireless non-contact use of radiofrequency to identify and track items with tags.

Tags contain electronically stored information.

Tag contains electronic chip usually applied to

substrate to form a tag or label that is fixed to the item

RFID not limited to line of sight.

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RFID Capabilities (Radio Frequency

ID)

RFID C biliti (R di F


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Radio frequency identification (RFID) RFID reader also called interrogator consists of

transmitter and receiver RFID scanners transmit a radio signal via antenna to

access the tag which responds with productinformation.

Tags contain Electronic product code (EPC) linked todatabases.

Send product data from an item to a reader via radio

waves RFID makes it possible for supplier and retailer to

know automatically what goods they have and whereare they around the world.

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ID)


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Small RFID chip compared to

a grain of rice incorporated in

consumer products

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ID)

RFID tag used by Wal-Mart


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ID)

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RFID Capabilities (cont.)

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• Information-related metrics

Forecast horizonFrequency update

Forecast error

Variance from planRatio of demand variability to order variability

Information


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Information

• Overall trade-off:

Good information helps a firm improve both efficiency

and responsiveness

More information is not always betterMore information increases complexity and cost of both

infrastructure and analysis exponentially while marginal

value diminishes

Evaluate the minimum information required to

accomplish the desired objectives.

Trade-off is between complexity and value while

deciding the required information infrastructure


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5. Sourcing

Who will perform a particular supply chain activity such

as production, storage, transportation or management

of information.

Sourcing decisions determine what functions a

firm performs and what function a firm outsources.

These decisions affect both responsiveness and

efficiency of supply chain. In the financial statements, sourcing costs are shown

under “costs of goods sold” and monies owed to

suppliers under “account payable”. 4-49



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Sourcing

• Role in the supply Chain

Sourcing decisions are crucial because they affect

the level of efficiency and responsiveness in a

supply chain

Outsource to responsive third parties if it is too

expensive to develop their own

Keep responsive process in-house to maintain control

i


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Components of Sourcing Decisions

• In-house or outsource

Perform a task in-house or outsource it to a third party

• Supplier selection

Number of suppliers, evaluation and selection criteria,

direct negotiations or auction

Sourcing


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• Sourcing-related metrics

Average purchase price

Range of purchase price

Average purchase quantity

Supply quality

Supply lead time

Days payable outstandingFraction of on-time deliveries

Supplier reliability

Sourcing

S i


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Sourcing

• Overall trade-off: Increase the supply chain surplus

Increase the size of the total surplus to be shared across

the supply chain

Impact of sourcing on sales, service, production costs,inventory costs, transportation costs, and information

cost

Outsource if it raises the supply chain surplus more than

the firm can on its own

Keep function in-house if the third party cannot increase

the supply chain surplus or if the outsourcing risk is

significant


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6. Pricing

Determines how much a firm will charge for the goods

and services that it makes available in the supply chain.

Pricing affect the behavior of buyer of good and service ,customer expectations and hence affecting supply chain

performance.

Pricing is also employed to match supply and demand e.g.

short term discounting is used to get rid of surplus or to move

the demand forward and reduce demand peaks.

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Everyday low Pricing vs High Low Pricing:

Everyday low pricing results in stable demand.

High-Low pricing results in peaks during discount periodand drop in demand during following periods.

The two pricing strategies leads to different demandprofiles that supply chain must serve

Fixed Price versus Menu Pricing:

In Menu pricing, prices vary with some attribute such asdelivery location, response time etc.

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With differential pricing, firm can offer its product

and/or services at different prices (e.g. Amazon’s

shipping options) It may provides responsiveness (at a higher price ) to a

customer who value it and low cost to customers who do

not value responsiveness as much.

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These six drivers of supply chain performance do not act

independently but interact to determine the overall supply chain performance.

Good supply chain design and operation recognise the

interaction and make the appropriate tradeoff todeliver the desired level of responsiveness at lowestpossible cost.

Idea is to structure supply chain drivers appropriately.

This helps in reducing “markdowns” and “lost sales” and

better matching of demand and supply.


SCM 3 Performance Drivers CHAP 3.pdf

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