Wike Agustin Prima Dania, STP,M.Eng

Supply Chain Drivers and Metrics

Drivers of Supply Chain Performance

To understand how company can improve supply chain performance in terms of responsiveness and efficiency, it must examine the logistical and cross functional drivers of the SC.

These driver interact with each other to determine the SC performance in terms of responsiveness and efficiency.

The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost.

There are 7 drivers in the SC:FacilitiesInventoryTransportationInformationSourcingPricing

Supply chain decision making framework

Responsiveness

Efficiency

Supply Chain Structure

Facilities Inv & trans. Sourcing&Pricing Info system

Competitive Strategy

Supply Chain Strategy

Strategic Fit

Drivers

Facilities (1) Actual physical location in the SC network where product is stored,

assembled, or fabricated production sites and storage sites.Components of Facilities Decision:

RoleFor Production Facilities:

Must decide whether they will be flexible, dedicated or a combination of the two.Must decide whether product focus or functional focus.

For Warehouses and DCsMust decide whether will be primarily cross-docking facilities or storage facilities.

CapacityA large amount of excess capacity allows the facility to be very flexible

and respond to wide range of demand less efficientLittle excess capacity will more efficient per unit product it produces

than one with a lot of unused capacity.High utilization facility will have difficulty responding to demand

fluctuations NEED TRADE OFF TO DETERMINE THE RIGHT AMOUNT OF CAPACITY

Facilities (2)LocationDecide where the company will locate its facilities. Must consider a host of issues related to the various

characteristics of the local area in which the facility is located:

- Macroeconomic factor- Quality of worker- Cost of workers- Cost of facility- Availability of infrastructure- Proximity to customers- The location of that firm’s other facilities- Tax effect

Facilities (3)Facility Related Metrics:

CapacityUtilizationProduction cost per unitTheoretical flow/cycle time of productionActual average flow/cycle timeFlow time efficiencyProduct varietyVolume contribution of top 20% SKUs and customersProcessing/setup/down/idle timeQuality lossesAverage production batch sizeProduction service level

Inventory (1) Encompasses all raw materials, WIP, and finished goods within a supply

chainComponents of Inventory Decision:

Cycle InventoryAverage amount of inventory used to satisfy demand between receipts of supplier shipments. The size of cycle inventory is a result of production, transportation, or purchase of material.

Safety InventoryInventory held in case demand exceeds expectation to counter uncertainty.

Seasonal InventoryBuilt up to counter predictable variability in demand. Company using seasonal inventory in periods of low demand and store it for periods of high demand.

Level of Product AvailabilityFraction of demand that is served on time from product held in inventory. High level of product availability provides a high level of responsiveness but increases cost.Low level of product availability lower holding cost but result in a higher fraction of customers who are not served on time.

Inventory (2)Inventory Related Metrics:

Cash-to-cash cycle timeAverage inventoryInventory turnsProduct with more than a specified number of days of

inventoryAverage replenishment batch sizeAverage safety inventorySeasonal inventoryFill rateFraction of time out of stockObsolete inventory

Transportation Moving inventory from point to point in the SCComponents of Transportation Decisions:

Design of the transportation networkTransportation network is the collection of transportation modes, location, and routes along which product can be shipped. Company must decide whether transportation from supply source will be direct to demand point or go through intermediate consolidation point, whether multi supply or demand point will be included in a single run or not.

Choice of transportation modeCompanies can choose between air, rail, sea, and pipeline. Each mode has different characteristics (speed, size, cost, flexibility

Transportation Related Metrics: Average inbound and outbound transportation cost Average incoming and outbound shipment size Average inbound and outbound transportation cost per shipment Fraction transported by mode

Information (1) Consist of data and analysis concerning facilities, inventory,

transportation, costs, prices, and customers throughout the SC.Component of Information Decisions:

Push vs PullPush system require information in the form of elaborate MRP system to take the MPS and roll it back, creating schedules for suppliers with part types, quantities, and delivery dates.Pull system require information on actual demand to be transmitted extremely quickly throughout the entire chain so that production and distribution of product may reflect the real demand accurately.

Coordination and Information SharingSC coordination occurs when all stages of a SC work toward the objectives of maximizing total SC profitability based on shared information. Lack of coordination can result in significant loss of SC surplus.

Forecasting and Aggregate Supply PlanningCompanies often use forecasts both on tactical level to schedule production and on strategic level to determine whether to build new plants or even whether to enter a new market.

Information (2)Forecasting and Aggregate Supply Planning

Companies often use forecasts both on tactical level to schedule production and on strategic level to determine whether to build new plants or even whether to enter a new market. Aggregate supply planning transforms forecasts into plan of activity to satisfy the projected demand.

Enabling Technology1.Electronic Data Interchange (EDI): instant, paperless purchase orders

with the supplier, time decreased, more accurate.2.The internet has critical advantages over EDI with respect to

information sharing: more information, more visibility than EDI.3. Enterprise Resource Planning (ERP): provide transactional tracking

and global visibility of information from within a company and across its SC.

4.SCM software uses the information in ERP systems to provide analytical decision support in addition to the visibility of information.

5.Radio Frequency Identification (RFID) consists of an active or passive radio frequency (RF) tag applied to the item being tracked and an RF (reader/emitter).

Information (3)Information Related Metrics:

Forecast horizonFrequency of updateForecast errorSeasonal factorsVariance from planRatio of demand variability to order variability

Sourcing (1) The choice of who will perform a particular SC activity such as

production, storage, transportation, or the management of information.

Components of Sourcing DecisionsIn house or outsource

It is best to outsource if the growth in total SC surplus is significant with little additional risk.

Supplier Selectiondeciding the number of suppliers and criteria of suppliers.

ProcurementDeciding the structure of procurement of direct and indirect materials.

Sourcing (2)Sourcing Related Metrics

Days payable outstanding Average of purchase price Range of purchase price Average purchase quantity Fraction of on time deliveries Supply quality Supply lead time Supplier reliability

Pricing (1) Determines how much a firm will charge for goods and services

that it makes available in the SC.Components of Pricing Decisions

Pricing and Economies of ScaleSmall production runs more expensive per unit than large production runs. Loading and unloading costs make it cheaper to deliver a truckload to one location than four.

Everyday low pricing vs high low pricingThe high low pricing strategy results in a peak during the discount week, often followed by a steep drop in demand during the following weeks. Everyday low pricing is keeping price steady over time.

Fixed price vs menu pricingIf marginal SC costs or the value to the customer vary significantly along some attribute, it is often effective to have a pricing menu.

Pricing (2)Pricing Related Metrics:

Profit marginDays sales outstandingIncremental fixed cost per orderIncremental variable cost per unitAverage sale priceAverage order sizeRange of sale priceRange of periodic sales