1588262461-chapter3-supply-chain-driver-and-metrics (1).pptx

Supply chain management third chapter on drivers and metrics for studies

1. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Chapter 3 Supply Chain Drivers and Metrics

2. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Learning Objectives Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Describe key financial measures of firm performance. Identify the major drivers of supply chain performance. Discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy. Define the key metrics that track the performance of the supply chain in terms of each driver.

3. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Measures Of Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra From a shareholder perspective, return on equity (ROE) is the main summary measure of a firm’s performance

4. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Measures of Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra R e t u r n o n ass e t s (R O A) m e a s ur e s th e r e t u r n e a rne d o n e a c h dollar invested by the firm in assets ROA  Earnings before interest Average total assets  N et i n c o m e   I n t e r e s t e x p e n s e  ( 1 – T a x r a t e )  A v e r a g e t o t a l a s s e t s

5. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Data for Amazon Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Table 3-1

6. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Measures Of Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra A n i m p o rt a nt ratio t h at d e fin e s fin an c i al lev e r a g e i s a c c o u n t s payable turnover (APT) APT  Cost of goodssold Accounts payable

7. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Measures Of Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra ROA can be written as the product of two ratios—profit margin and asset turnover ROA  Earnings beforeinterest (Profit margin) T o t a l a s s e t s Sales revenue Sales revenue (Asset turnover)

8. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra ART= Sales revenue/Accounts Recievable PPET= Sales revenue/PP & E

9. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Financial Measures of Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra 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 C2C = – days payable (1/APT) + days in inventory (1/INVT) + days receivable (1/ART)

10. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Drivers of Supply Chain Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra network w he r e Facilities T h e p h ysi c al locations i n t he s upply cha i n product is stored, assembled, or fabricated Inventory All raw materials, work in process, and finished goods within a supply chain Transportation Moving inventory from point to point in the supply chain

11. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Drivers of Supply Chain Performance Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Inf o rm a tion Data and analysis concerning facilities, inventory, tra n spo r t a ti o n, cos ts , pr i c e s, and c u sto me rs t hr o u g h ou t t h e supply chain Sourcing Who will perform a particular supply chain activity Pricing How much a firm will charge for the goods and services that it makes available in the supply chain

12. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. A Framework for Structuring Drivers Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Figure 3-1

13. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Facilities Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra 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)

14. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Facilities Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Components of facilities decisions Role Flexible, dedicated, or a combination of the two Product focus or a functional focus Location Where a company will locate its facilities Ce n tra l iz e / d e c en tra l iz e , m a cr oe c o no m i c f a c t o r s, workers, cost of workers and facility, availability qua l it y of of infr as t r u c t u r e , pr o xi m it y to c u s t o me rs, l o cat i on o f o ther facilities, tax effects Contd…

15. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Facilities Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Components of facilities decisions Capacity A facility’s capacity to perform its intended function or functions Excess capacity – responsive, costly Little excess capacity – more efficient, less responsive

16. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Facilities Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Components of facilities decisions Facility-related metrics Capacity Utilization Processing/setup/down/idle time Production cost per unit Quality losses Theoretical flow/cycle time of production Actual average flow/cycle time

17. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Facilities Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Overall trade-off: Responsiveness versus efficiency Cost of the number, location, capacity, and type of facilities (efficiency) and the level of responsiveness 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 but decreases inventory costs and response time

18. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Overall Trade-Off Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Responsiveness versus efficiency Cost of the number, location, capacity, and type of facilities (efficiency) Level of responsiveness Increasing number of facilities increases facility and inventory costs, decreases transportation costs and reduces response time Increasing the flexibility or capacity of a facility increases facility costs, decreases inventory costs and response time

19. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Invent o ry Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the supply chain Mismatch between supply and demand Satisfy demand Exploit economies of scale Impacts assets, costs, responsiveness, material flow time Material flow time: The time that elapses between the point at which material enters the supply chain to the point at which it exits Throughput, the rate at which sales occur Little’s law I = DT where, I = flow time, T = throughput, D = demand

20. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Inventory Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in 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

21. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Inventory Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Cycle inventory Average amount of inventory used to satisfy demand between shipments Function of lot size decisions Safety inventory Costs of carrying too much inventory versus cost of losing sales Inventory held in case demand exceeds expectations

22. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Inventory Decisions Seasonal inventory Inventory built up to counter predictable variability in demand Cos t o f ca r ry i ng add i t i onal inv e n t o r y ve r s us c o st o f fl e xi b le production Level of product availability Th e fra c ti o n o f d e m a nd t hat i s s e rv e d o n ti m e from pr o du c t held in inventory Trade off between customer service and cost Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra

23. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Inventory Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra 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 Fraction of time out of stock Obsolete inventory

24. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Inventory Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Overall trade-off: Responsiveness versus efficiency I n cr e as i ng inv e ntory g e ne r a l l y mak e s t he s upply cha i n m o re responsive A higher level of inventory facilitates a reduction in production and transportation costs because of improved economies of scale Inventory holding costs increase

25. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Transportati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the supply chain Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster tr a n sp o rt a ti o n all o ws gr e a te r r e sp on s iv e ne s s b ut l o wer efficiency Also affects inventory and facilities

26. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Transportati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the competitive strategy Allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency 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

27. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Transportati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra c o st o f s hippi n g , a nd Choice of transportation mode Air, truck, rail, sea, and pipeline Information goods via the Internet Diff e r en t s p ee d , size o f s hip m ents, flexibility

28. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Transportati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra 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

29. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Transportati o n Overall trade-off: Responsiveness versus efficiency Th e c o st o f t ra n sporting a giv e n pr o du c t (e f ficiency) a n d t he speed with which that product is transported (responsiveness) U s in g f a st m o de s o f tr a n sp o rt r a i s e s r e spo n siven es s a n d transportation cost but lowers the inventory holding cost Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra

30. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Infor m ati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the supply chain I m pr o ve th e util i zat i on o f su p pl y cha i n ass e t s a nd t he coordination of supply chain flows to increase responsiveness and reduce cost Information is a key driver that can be used to provide higher responsiveness while simultaneously improving efficiency

31. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Infor m ati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the competitive strategy Right information can help a supply chain better meet customer needs at lower cost Improves visibility of transactions and coordination of decisions across the supply chain Share t he m i n i mum a m ount o f i nf o r m at i on required to a c hi e v e coordination

32. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Information Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Push versus pull Different information requirements and uses Coordination and information sharing Supply chain coordination, all stages of a supply chain work toward the objective of maximizing total supply chain profitability based on shared information Sales and operations planning (S&OP) The process of creating an overall supply plan (production and inventories) to meet the anticipated level of demand (sales)

33. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Information Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Enabling technologies Electronic data interchange (EDI) The Internet Enterprise resource planning (ERP) systems Supply chain management (SCM) software Radio frequency identification (RFID)

34. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Information Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Information-related metrics Forecast horizon Frequency update Forecast error Seasonal factors Variance from plan Ratio of demand variability to order variability

35. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Infor m ati o n Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Overall trade-off: Complexity versus value bot h e f fic ie ncy a nd Goo d in fo r mation he l p s a fi r m i m pr o ve responsiveness More information is not always better More 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

36. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Sourcing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the supply Chain S e t o f b u s in e ss pr o c e ss e s r e quir e d to p u r ch a se go o d s a n d services Will tasks be performed by a source internal to the company, or a third party G l oba l izat i o n cr e a t e s m a ny m o r e s o u r cing opt i ons w it h bo t h considerable opportunity and potential risk

37. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Sourcing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the competitive strategy Sou r cing d e cis i ons ar e c r uci a l b e c ause t hey af f e ct t he l e vel of efficiency and responsiveness in a supply chain Ou t s o u r ce t o r e spo n sive t hird pa r t i e s i f i t i s to o e xp e n sive to develop their own Keep responsive process in-house to maintain control

38. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Sourcing Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra In-house or outsource Perform a task in-house or outsource it to a third party Supplier selection Numb e r o f s uppl ie rs, e va l uati o n and s e l e cti o n cr i te r i a , dir e ct negotiations or auction Procurement The supplier sends product in response to customer orders

39. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Sourcing Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Sourcing-related metrics Days payable outstanding Average purchase price Range of purchase price Average purchase quantity Supply quality Supply lead time Fraction of on-time deliveries Supplier reliability

40. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Sourcing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Overall trade-off: Increase the supply chain surplus I n cr e ase t h e size o f t he t o ta l s u rp l us to b e sh a r e d ac r oss 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 Ke e p f u n cti o n i n-h o u s e i f t he t hi r d p a rty c a n not inc r e a se t he supply chain surplus or if the outsourcing risk is significant

41. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Pricing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the supply chain Prici n g d e t e r m in e s t h e a m o u n t t o ch a rge c u s to me rs f or go o ds and services Affects the supply chain level of responsiveness required and the demand profile the supply chain attempts to serve Pricing strategies can be used to match demand and supply

42. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Pricing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Role in the competitive strategy Firms can utilize optimal pricing strategies to improve efficiency and responsiveness Prici n g s t r a teg i e s va r y to mee t diff e r en t c u sto me r responsiveness requirements

43. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Pricing Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra to pr i ce it Pricing and economies of scale T h e pr o vid e r o f th e a c tiv i t y must d e cide how appropriately to reflect these economies of scale Everyday low pricing versus high-low pricing Different pricing strategies lead to different demand profiles that the supply chain must serve

44. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Pricing Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Fixed price versus menu pricing If marginal supply chain costs or the value to the customer vary significantly along some attribute, it is often effective to have a pricing menu C an l e ad t o c ustom e r b e havi o r t hat h a s a neg a tiv e impac t on profits

45. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Components of Pricing Decisions Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Pricing-related metrics Profit margin Days sales outstanding Incremental fixed cost per order Incremental variable cost per unit Average sale price Average order size Range of sale price Range of periodic sales

46. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Pricing Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Overall trade-off: Increase firm profits Understand of the cost structure of performing a supply chain activity and the value this activity brings to the supply chain St r at e g y m ay s upp o rt ef fic i e ncy i n t he su ppl y cha in , l o wer supply chain costs, defend market share, or steal market share Diff e r en ti a l pricin g m a y b e u s e d to attr a c t c u sto me r s with varying needs Strategy should help either increase revenues or shrink costs or preferably both

47. Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Summary of Learning Objectives Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra Describe key financial measures of firm performance Identify the major drivers of supply chain performance Dis c u s s t he r o l e o f e a ch drive r i n cr e a tin g st r a teg i c fit b e t w e e n the supply chain strategy and the competitive strategy Define the key metrics that track the performance of the supply chain in terms of each driver