Module II

Supply Chain Drivers and Metrics

MODULE II DRIVERS AND METRICS 1

 Content…..
• Impellers of Supply Chain
• Supply Chain Concepts
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing
• Obstacles to achieving fit
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 IMPELLERS OF SUPPLY CHAIN

• Empowered Customer

• Developments in Information Technology

Tools

• Globalisation

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Empowered customer:
The present day consumer with access to
abundant information about product
Availability,
Variety,
Quality and
Prices is far more demanding than the customers
of the past who had few choices and who were
content with picking out of limited range and
variety of mass produced consumer goods that the
manufacturers offered at the prices they
demanded. MODULE II DRIVERS AND METRICS 4
Development in information Technology tools:
The exponential growth in information technology
tools has been among the major contributors to the
development and expansion of the practice of
concept of supply chain management, the world over.
The development of
information technology enabled-ITE
Tools like
Material requirement planning-MRP
Collaborative planning forecasting and replenishment-CPFR
Enterprise resource planning-ERP
Vendor managed inventory-VMI
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Globalization:
In the globalized business environment of today,
markets, manufacturing facilities, and sourcing
opportunities are widely dispersed.

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 SUPPLY CHAIN CONCEPTS

• Systems Concept
– Multiple organizations
– Intracompany, interfunctional and
interdependence
• Total Cost Concept
– Integrated system
• Trade off Concept
– Responsiveness Vs. Efficiency
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System Concept:
•This emphasizes interdependence not only
between functions within an organisation but also
among multiple organisations that collectively
deliver products and end to end.
•Neglect of the appreciation of intracompany,
interfunctional interdependence, can result in un-
intended losses and wastages.

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Total Cost:
•Flowing directly from the realization that
businesses ought to be viewed as integrated
systems and interconnected chains or networks
involving multiple links, it incurred by all the links
in the chain or network serving the customer is
minimized.
•The concept emphasizes the need for
intercompany co-ordination, co-operation and
collaboration in all activates from design and
development to manufacture and distribution in
order minimize the total cost and there by
maximize the value delivered to the customer. 9
Trade off concept:
•The Trade-off concept enjoins upon the decision
makers to explore the possibilities of choosing
among alternatives or combination of alternatives
in fulfilling a supply chin objective, in a manner that
the overall cost of the operation is minimized.
•Faster transportation, through a more expensive
mode may be acceptable if it helps lower
inventories carried and increases responsiveness to
a time sensitive customer.

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 Drivers of Supply Chain Performance
• Three logistical drivers
– Facilities
– Inventory
– Transportation
• Three cross functional drivers
– Information
– Sourcing
– Pricing

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 Logistical Drivers
• Facilities
– places where inventory is stored, assembled, or
fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply
chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
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 Cross – Functional Drivers
Information
– data and analysis regarding inventory, transportation,
facilities throughout the supply chain
– potentially the biggest driver of supply chain
performance
Sourcing
– functions a firm performs and functions that are
outsourced
Pricing
– Price associated with goods and services provided by a
firm to the supply chain

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 A Framework for
Structuring Drivers
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional 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)
• Example : Toyota and Honda
• Components of facilities decisions
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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)
• Manufacturing methodology (product focused
versus process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)
• Overall trade-off: Responsiveness versus efficiency
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 Facility related metrics
• Capacity • Processing/setup/
• Utilization down/idle time
• Production cost per unit • Quality losses
• Theoretical flow/cycle • Average production
time of production batch size
• Actual average flow • Production service level
• Flow time efficiency
• Product variety

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 Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions

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Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between
supply and demand
Source of cost and influence on responsiveness
Impact on
– material flow time: time elapsed between when
material enters the supply chain to when it exits the
supply chain
throughput
• rate at which sales to end consumers occur
• I = DT (Little’s Law)
• I = inventory; D = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply chain

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 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
• Trade-off
• Example – Nordstrom (customer service 115Y)

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 Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
• Overall trade-off: Responsiveness versus efficiency

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 Inventory related metrics
• Cash-to-cash cycle time
• Average inventory
• Inventory turns
• Products with more than a specified number of days of
inventory
• Average replenishment batch size
• Average safety inventory
• Seasonal inventory
• Fill rate (order/demands met on time)
• Fraction of time out of stock (Zero inventory)
• Obsolete inventory
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 Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions

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 Role in the Supply Chain
• Moves the product between stages in
the supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities

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 Role 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
• Example: Blue Nile (online retailer of diamonds)
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 Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus efficiency

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 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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 Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions

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 Role in the Supply Chain
• The connection between the various
stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels

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 Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
• Example:
– Andersen Windows (Mfg. of residential wood
windows)
– Sunsweet Growers (Dried fruit producers)

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Components of Information Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
– RFID
• Overall trade-off: Responsiveness versus efficiency

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 Information related metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Seasonal factors
• Variance from plan
• Ratio of demand variability to order
variability
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 Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions

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 Role in the Supply Chain
• Set of business processes required to
purchase goods and services in a supply chain
• Supplier selection, single vs. multiple
suppliers, contract negotiation

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 Role in the Competitive Strategy
• Sourcing decisions are crucial because
they affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions-
improving efficiency and responsiveness
• Example : Cisco

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Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply
chain profits

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

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 Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions

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 Role in the Supply Chain
• Pricing determines the amount to charge
customers in a supply chain
• Pricing strategies can be used to match
demand and supply

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 Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
• Example : Amazon.com

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 Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits

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 Pricing related metrics
• Profit margin
• Days sales outstanding
• Incremental fixed cost per unit
• Incremental variable cost per unit
• Average sales price
• Average order size
• Range of sale price
• Range of periodic sales
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 Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies

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Text Book: Supply Chain Management: Strategy,
Planning, and Operation, seventh edition, Sunil Chopra

Chapter 3: supply chain drivers and matrics, page

number 52 to 79

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