Supply Chain Drivers & Metrices

Supply Chain Chapter of Supply Chain Drivers & Metrices Chopra Meindl Adaptation

1. Supply Chain Drivers and metrics Group 15: 1802073 – Kapil Gavali 1802074 – Gowtham M 1802075 – Lionel Gracias 1802076 – Venkatesh G 1802077 – Harish N

2. Impellers of Supply chain Empowered Customer Indian buyers during 1960s and 70s waited for 5 to 6 years to get a scooter after paying the booking amount Customers today have access to a plethora of information like availability, variety, quality, and prices Developments in Information Technology tools Exponential growth in information technology section major factor in development and expansion of supply chain POS data and its real time availability has been revolutionary Globalization Manufacturing and sourcing opportunities and widely dispersed Developing countries provide low labor costs but underdeveloped logistics infrastructure can be a challenge

3. Supply chain concepts Systems concept It emphasizes an interdependence not only between the functions within an organization but also among multiple organizations that is to connect the supplier’s supplier with the buyer’s buyer from end to end. Total cost concept The value delivered to the customer can be maximized only if the total cost incurred by all the links in the chain or network serving the customer is minimized. Trade off concept The “trade off” concept enjoins the decision makers to explore the possibilities of choosing among the alternatives or a combination of alternatives to fulfil a supply chain objective minimize costs.

4. Financial Measures of performance ROE (Return on equity)= Net income / Average Shareholder Equity ROA (Return on assets)= Earnings before interest / Average total assets APT (Accounts payable turnover) = Cost of goods sold / Accounts payable ART (Accounts receivable turnover) = Sales revenue / Accounts receivable INVT (Inventory turnover) = Cost of goods sold / Inventory PPET (Property plant and equipment turnover) = Sales revenue / PPE C2C (Cash to cash) = - Weeks payable + weeks in inventory + Weeks receivable

5. Supply chain 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 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

6. Importance of Data

7. Supply chain decision making framework Logistical drivers – Effective production, storage & movement of goods Cross-functional drivers – Every supply chain activity Right Sourcing  Higher profits Differential Pricing  Customers who value responsiveness Example - Walmart Driver Lever More/Fast Less/Slow Facility Capacity Responsive Efficient Inventory Inventory Responsive Efficient Transportation Time Responsive Efficient Information Information Responsive & Efficient Less of both

8. 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 3.1: Toyota and Honda (Both use facility decisions to increase responsiveness) Toyota – 20% excess capacity at each plant to meet demand effectively despite any fluctuations in demand / production delays Honda facilities are flexible enough to assemble both SUVs & cars in the same plant (helped the company during 2008 downturn giving high level of utilization)

9. Components of Facilities Capability Decision – Flexible, dedicated or combination of both Flexible  Many products  More Efficient Dedicated  Less products  Less Efficient Decision – Product (single product) vs functional (many products) focused Decision – Cross-docking Vs Storage Location (where a company will locate its facilities) Centralize Vs Decentralize Centralize  Higher economies of scale Decentralize  More responsive Parameter – Taxes & tariffs, quality of workers, cost of workers, cost of facility, infrastructure, proximity to customers, location of other facilities and strategic factors Capacity A facility’s capacity to perform its intended function or functions Excess capacity – responsive, costly Little excess capacity – more efficient, less responsive

10. 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 Product Variety Volume contribution of top 20% SKUs and customers Average production batch size Production service level

11. Inventory Encompasses all raw materials, work in process and finished goods with in a supply chain Exists because of mismatch between supply and demand Affects assets held, cost incurred and responsiveness in supply chain Inventory is product of throughput and material flow time; I=DT

12. Cycle Inventory Average amount of inventory used to satisfy demand between receipts of supplier shipments Large batches are preferred to exploit economics of scale & lower cost in production Smaller batches are preferred to reduced inventory and associated carrying costs Safety Inventory Held in case demand exceeds expectations Choosing high or low safety inventory involves trade-off between costs of having too much inventory and costs of losing sales on account of insufficient inventory Seasonal Inventory Build up to counter predictable seasonal variability in demand If volume flexibility in rate of production is expensive it is advisable to maintain smooth production rate and build up inventory Level of Product Availability Fraction of demand that is served on time from product held in inventory Trade off involves cost of inventory and responsiveness Inventory decisions

13. Inventory related Metrics C2C Cycle Time High level metric that includes inventories, a/c payable, a/c receivables Average Inventory Measures average amount of inventory carried in units of financial value and days of demand Inventory turns Ratio of average inventory to sales Products with more than a specified number of inventory days To identify products that are in oversupply or to identify reasons of high inventory such as price discounts / product is a very slow mover Average replenishment batch size Average amount in each replenishment order, measured by SKU units and days of demand Seasonal Inventory Amount by which inflow exceeds sales, built solely to deal with anticipated spikes in demand Fill rate Fraction of orders/demand that is met on time from inventory, averaged over specified number of units of demand Fraction of time out of stock Fraction of time a particular SKU had zero inventory. Used to estimate lost sales during stockout period Obsolete inventory Fraction of inventory older than specified obsolescence date

14. Transportation Entails moving inventory from point to point in supply chain Involves choosing from many combinations of modes and routes with its own performance characteristics Affects both responsiveness and efficiency For high value items rapid transportation is required to be responsive, while for low value items low cost transportation coupled with holding inventory close to customer is advisable

15. Transportation decisions Design of transportation network Collection of transportation modes, locations and routes along which product can be shipped Decisions include whether or not multiple supply or demand points will be included in a single run Choice of transportation mode Manner in which product is moved from one location to another in supply chain network Choice involves speed, size of shipments, cost of shipping and flexibility Inbound transportation decisions affect cost of goods sold (COGS), whereas outbound transportation costs are part of SG&A (Selling, General & Administrative Expenses)

16. Transportation related Metrics Average inbound transportation co st Measures cost of bringing product into facility, often measured as % of sales or COGS Average incoming shipment size Measures average number of units or dollars in each incoming shipment at a facility Average inbound transportation cost per shipment Measures average transportation cost of each incoming delivery, it identifies opportunities for greater economies of scale in inbound transportation Average outbound transportation cost Measures cost of sending product out of facility to customer Average outbound shipment size Number of units or dollars on each outbound shipment at a facility Average outbound transportation cost per shipment  Measures average transportation cost of each outgoing delivery, it identifies opportunities for greater economies of scale in outbound transportation Fraction transported by mode Transportation (in units or dollars) using each mode of transportation, to estimate whether certain modes are over used or under used

17. 3.7. Define the key performance metrics for information and discuss its role in creating strategic fit between the supply chain strategy and the competitive strategy.

18. Information It consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout supply chain. Information has a direct impact on all other drivers of supply chain, hence influence the overall performance. It makes the supply chain more responsive and more efficient. Example : 7-Eleven’s better match of supply and demand while achieving production and distribution economies. Which resulted in high level of responsiveness to cx demand while replenishment costs are lowered.

19. Role of Information in the Supply Chain Good information can help improve the utilization of supply chain assets and coordination of supply chain flows to increase responsiveness and reduce costs. Example: 7-Eleven Japan uses information to improve product availability and while decreasing inventories. Walmart uses information on shipment from the suppliers to facilitate cross-docking and lower inventory and transportation expense. Airlines uses information to offer the right number of seats at discount prices leaving sufficient number of seats for business customers.

20. Shortcomings Even though the sharing of information helps supply chain better, there is danger in the assumption that more information is always better. More information increases the complexity and the cost of both the required infrastructure and the follow-up analysis grow exponentially. As more information is available the marginal value provided by the additional information diminishes. Therefore, the trade-off between the complexity and value is important to consider when setting the information infrastructure.

21. Components of information decisions The key components of information that a company must analyse to improve efficiency and responsiveness within its supply chain. Demand Planning Coordination and Information sharing Sales and Operations Planning

22. Information related metrics A Manager should track the following information-related metrics that influence supply chain performance. Metrics that influence supply chain performance. Forecast horizon. Frequency of update. Forecast error. Variance from plan. Ratio of demand variability to order variability.

23. 3.8. Define the key performance metrics for Sourcing and discuss its role in creating strategic fit between the supply chain strategy and the competitive strategy.

24. Sourcing The choice of who will perform a particular supply chain activity, such as production, storage, transportation, or the management of information. At the strategic level, these decisions determine what functions a firm performs and what functions the firm outsources. Sourcing affects both the responsiveness and the efficiency of the supply chain.

25. Role in the Supply Chain Managers must decide whether each task will be performed by a responsive or efficient source and then whether the source will be internal to the company or a third party. Sourcing decision should be made to focus on increasing the size of the total surplus to be shared across the supply-chain. Outsourcing to third party is meaningful if it can do a better job at it than the firm itself. Example: Zara, For basic products such as white T-shirts, Zara aims of efficiency because the demand is predictable. Therefore, the products are outsourced from suppliers in low cost countries. For trendy products, the demand is unpredictable. Therefore, Zara sources from company-owned factories in Europe. These factories are not low cost but flexible and responsive.

26. Components of Sourcing decisions Key sourcing decisions that are made within a firm. In-House or Outsourcing. Supplier Selection Procurement

27. Sourcing related metrics Sourcing decisions has direct impact on the cost of goods sold and account payable. The performance of the source affects the quality. Inventories. And inbound transportation cost. A Manager should track the following Sourcing-related metrics that influence supply chain performance. Days payable outstanding Average purchase price Range of purchase price Average purchase quantity Supply quality Supply lead time Percentage of on-time deliveries Supplier reliability

28. Pricing Role in the supply chain Pricing determines the amount to charge customers for goods 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 Amazon uses pricing to provide responsiveness to those who value it while using customers who want a low price , thereby improving efficiency

29. Pricing Role in the competitive strategy Firms can utilize optimal pricing strategies to improve efficiency and responsiveness Pricing strategies vary to meet different customer responsiveness requirements

30. Components of Pricing Decisions Pricing and economies of scale The provider of the activity must decide how to price it appropriately to reflect these economies of scale Everyday low pricing v/s high-low pricing Different pricing strategies lead to different demand profiles that the supply chain must serve

31. Components of Pricing Decisions 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 Can lead to customer behaviour that has a negative impact on profits

32. Components of Pricing Decisions 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

33. Pricing 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 Strategy may support efficiency in the supply chain, lower supply chain costs, defend market share, or steal market share Differential pricing may be used to attract customers with varying needs Strategy should help either increase revenues or shrink costs or preferably both

34. Infrastructure Well developed infrastructure needed to: Support the transportation Smooth flow of information Getting countries integrated into global economies

35. Components of Infrastructure Decision Infrastructure orientation Existing infrastructure in developing countries due to colonial rule; insufficient today Production centres need to be linked to seaports, rail, road, airports; Requires revamping India considers create a logistics arm to Indian railways Integration with International Infrastructure Design and standards Conform to global standards & practices to permit smooth end-to-end flow The Southern Corridor of the Trans-Asian Rail would connect Turkey, Iran, Pakistan, India, Bangladesh, Myanmar & Thailand Indian railways is exercising “ Unigauge ” Extent of Penetration Physical infrastructure should extend to rural areas due to Penetration of IT into rural areas Higher disposable income in rural areas “Bharat Nirman Yojana” aims to integrate rural parts to mainstream economic activities

36. Infrastructure Infrastructure Related Metrics Well-defined & widely defined performance indicators are absent Traffic Handling Capacity, efficiency of intermodal hubs, turnaround time, agility-including scalability, level of mechanized & computerized operations considered as performance drivers Components of Infrastructure State-provided transportation facilities like seaports, railways, roads, airports, inland water transport & pipeline Communication network Judicial system Banking services Functional Distribution Channel

37. International Logistics Backbone of global supply chains Perhaps misunderstood for transportation only “The process of planning, implementing, and controlling the flow and storage of goods, services, and related information from a point of origin to a point of consumption in a different country” Required to successfully manage complex networks