Supply Chain Strategy and Performance Measures

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1
Supply Chain Strategy and Performance
Measures
Supply Chain Management_Janat Shah

Learning Objectives
What are the key supply chain performance measures?
How does supply chain performance affect financial
performance?
Why is it necessary to ensure a god fit of the business strategy
with the supply chain strategy?
What are the different dimensions of customer service?
What are the ways in which firm can simultaneously reduce
supply chain costs and improve customer service?

Supply Chain Performance Measures:
Cost Versus Service
Cost
Service
Order delivery lead time
Responsiveness
Delivery reliability
Product variety

Supply Chain Performance Measures
Cost of service
Low High
Service Level

Organized Retail Performance
comparisons : Inventory Turns
Firm Inventory turns
3 to 4
Pantaloon Retail (India) Ltd.*
4 to 6
Trent Ltd.*
Subhiksha Trading** 20 to 25
* source: Financial statements

** Source: Subhiksha case study
An Automobile Company: An
Example
An automaker wrestles with high levels of inventory(83 days)

as unsold vehicles sit on lots.
The automaker not only produced too many cars and trucks but
also made the wrong mix. The automaker pushed feature-laden
vehicles that dealers are hesitant to buy. But the dealers already
have enough cars and trucks on their lots to last 80 to 126 days
The dealers say: "The bean counters said, 'This is the mix you
need to sell to hit targets for profitability.' They ended up with a
huge sales bank of cars, a mix we as dealers wouldn't order.

Managing Supply Chains
Efficiently
Inefficient Practices
.
Existing Position
Cost
Low High
Service Level

Impact of Service Level on Revenue
Costs and Profits

Supply Chain Typology
Order Penetration Point/ Decoupling Point

Make to Stock
Make to Order
Configure to Order
Supply Chain Focus
Efficiency
Responsiveness

Supply Chain Typology: Order
Penetration Point/ Decoupling Point

Push-Pull Boundary of Supply Chains

Match Supply Chain Design with
Product Category

Functional Versus Innovative Products:
Differences in Demand
Aspects of demand Functional (predictable Innovative (Unpredictable
Demand) Demand)
Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of 5% to 20% 20% to 60%
sales price)
Product variety Low ( 10 to 20 variants per High ( often thousands of

category) variants per category)
Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%
End-of-season mark 0% 10% to 30%
markdown

Supply Chain Performance Measures:
SCOR Model
Internal Facing
Cost
Total logistics management cost, Value-added
productivity , Warranty cost
Assets
Cash-to-cash cycle time, Inventory days of supply, Asset
turns
Customer facing
Reliability
Order fulfilment performance ,Perfect order fulfilment
Flexibility
Supply-chain response time, Production flexibility

Superior Performers Spend Less on
Supply-Chain Management
Best-in-class companies have an advantage in total supply-chain
management cost (5% 6% less in revenue)
Total Supply-Chain Management Cost
Source: Supply-Chain Council

Comparative Performance:
Best-in-Class Versus Median
Consumer Packaged Goods Focus
Delivery Performance to Request Total Supply-Chain Management
100% 98% Cost
81% 10.0% 9.2%
80%
60%
4.9%
5.0%
40%
20%
0% 0.0%
Median BIC Median BIC
Upside Production Flexibility Cash-to-cash Cycle time

50.0
70.0 66.6
42.0
40.0 60.0
50.0
30.0
40.0
20.0 30.0 24.7

20.0
10.0
8.3
10.0
0.0 0.0
Median BIC Median BIC
Source: Supply-Chain Council Supply Chain Management_Janat Shah

Evaluation of Supply Chain Performance in
Competitive Environments
Supply chain scorecard v. 3.0 Performance versus competitive
population
Overview SCOR level 1 metrics Actual Parity Advantage Superior
metrics Delivery performance to 50% 85% 90% 95%
commit date
Supply chain Fill rates 63% 94% 96% 98%
reliability
Perfect order fulfillment (on 0% 80% 85% 90%
time in full)
External
Order fulfillment lead times 7 days 7 days 5 days 3 days
(customer to customer)
Flexibility and
Production flexibility (days 45 days 30 days 25 days 20 days
responsiveness
master schedule fixed)
Total logistics management 19% 13% 8% 3%
Cost costs
Warranty cost, returns and NA NA NA NA
Internal allowances
Value added per employee $122 k $ 156k $306k $ 460k
productivity
Inventory days of supply 119 days 55 days 38 days 22 days
Assets
Cash-to-cash cycle time A96 days 80 days 46 days 28 days
Net asset turns (working 2.2 turns 8 turns 12 turns 19 turns

capital)

Benchmarking Supply Chain
Performance Using Financial Data
Total length of the chain: = DRM + DWIP + DFG
DRM = RM * 365/ CRM, DWIP = SFG*365/ CP, DFG = FG * 365 /
CS DRM , DWIP , DFG = Days of RM, WIP and FG Inventory
Supply chain inefficiency ratio:
SCC = DC + INV * ICC & SCI = SCC / NS
SCC = SC mgnt. costs , ICC= Inv. Car. cost SCI = SC inefficiency
ratio
Supply chain working capital productivity:
SWC = SC working capital, SWCP = SC working capital productivity
SWC = INV +ARAP SWCP = NS / ISWC

Illustration: Supply Chain Performance
Measures From Financial Statement: Kurlon
Data*
CRM=557.8, CP =670.1, CS : 102.62
RM= 50.1,WIP=9.2, FG=86.5, INV=145.8
AR=238.2 , AP=181.8, NS= 1122.2, DC=89.5, ICC=0.2
Time in chain
DRM = 5.01*365/55.78 = 33 ,DWIP = 0.92 *365/67.01 = 5 ,
DFG = 8.65 *365/ 102.62 = 31
Total Length of chain =33+5+31=70 days
Supply chain inefficiency ratio:
SCC = 89.5 + 145.8*0.2 =118.66, SCI =118.66 /1122.2=10.6
Supply chain working capital productivity:
SWC = 145.8+ 238.2 - 181.8 =202.2
SWCP = 202.2/1122.2 =0.18
* Source: Exhibit 2 and 3 Kurlon case, Assumption : ICC=0.2

Benchmarking Supply Chain Performance:
Top Ten Supply Chains : AMR Ranking
2007 rankings 2005 rankings
1. Nokia 1. Dell
2. Apple 2. Procter & Gamble
3. Procter & Gamble 3. IBM
4. IBM 4. N0kia
5. Toyota Motor 5. Toyota Motor
6. Wal-Mart 6. Johnson & Johnson
7. Anheuser Busch 7. Samsung
8. TESCO 8. Wal-Mart
9. Best Buy 9. Tesco
10. Samsung Electronics 10. Johnson Control

The Strategic Profit Model

Impact of supply Chain Intiative on Business
Performance
Cost reduction achieved by:
Reducing Inventory, Reducing logistics expenses, Reducing
direct material expenses, Reducing indirect material
expenses
Improved revenue and profitability by:
Selling higher margin products, Achieving higher market
share, Reducing backorder and lost sales, Attacking new
markets, Decreasing supply time to market
Improved Operational efficiency by:
Reducing procurement expenses, Increasing assets
utilization, Delaying capital expenditure
Reducing working capital by
Reducing inventory, Reducing accounts receivables

Impact of Supply Chain on Business
Performance
Supply
Business
Chain
Performance
Performance
Supply
Chain
Initiative

Enhancing Supply Chain Performance

Enhancing Supply Chain Performance
Supply Chain Integration
Toyota, Ford Motor Company (1910-1920),
The Dubbawallas of Mumbai
Supply Chain Optimisation
Use of Quantitative models in supply chain design and
operations
Supply Chain Reconfiguration
Dell, TVS Scooty

Supply Chain Analysis
Supply
Business
chain
performance
performance
Supply chain Supply chain

diagnostics initiative

Summary-I
A firm must ensure a smooth fit between business strategy and supply
chain strategy.
As a part of the business strategy, a firm decides the market
segment in which it wants to operate and the level of customer
service it wants to offer.
Supply chain strategy results in costs that firms have to incur to
provide the targeted level of customer service.
Firms must recognize the nature of trade-offs between customer
service and costs and arrive at an optimal decision on this front.
Firms will have to decide on the optimum level of customer service by
targeting performance levels across four dimensions of customer
service:
order delivery lead time, responsiveness, delivery reliability and
product variety.

Summary-II
Supply Chain Typology
order delivery time : MTS, MTO or CTO.
Product Demand characteristics : efficient chain or a responsive chain
Firms must monitor their supply chain performance and benchmark the same
against competitors.
not all supply chain measures are of equal importance.
supply chain initiative planned by a firm must get translated into business
performance (ROI) , since a firm is ultimately interested in improving its return
on investment (ROI).
strategic profit model framework to prioritize initiatives.
customer service versus cost trade-offs, in the long run, firms have to find a way
of increasing performance on both the costs and the services fronts.
By working on supply chain innovations involving SC optimization, SC
integration and SC reconfiguration firms can improve performance on these
fronts on a sustained basis.

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What are the different dimensions of customer service discussed in the document?

What are the different dimensions of customer service discussed in the document?

What are the different types of supply chain typologies mentioned?

What are the different types of supply chain typologies mentioned?

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Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Firm Inventory turns

* source: Financial statements

An automaker wrestles with high levels of inventory(83 days)

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Order Penetration Point/ Decoupling Point

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Product Life cycle More than 2 years 3 months to 1 year

Product variety Low ( 10 to 20 variants per High ( often thousands of

Likely forecast error 5% to 20% 40% to 100%

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Source: Supply-Chain Council

Supply Chain Management_Janat Shah

Upside Production Flexibility Cash-to-cash Cycle time

20.0 30.0 24.7

Source: Supply-Chain Council Supply Chain Management_Janat Shah

Net asset turns (working 2.2 turns 8 turns 12 turns 19 turns

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

* Source: Exhibit 2 and 3 Kurlon case, Assumption : ICC=0.2

Supply Chain Management_Janat Shah

2. Apple 2. Procter & Gamble

3. Procter & Gamble 3. IBM

5. Toyota Motor 5. Toyota Motor

6. Wal-Mart 6. Johnson & Johnson

7. Anheuser Busch 7. Samsung

9. Best Buy 9. Tesco

10. Samsung Electronics 10. Johnson Control

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply chain Supply chain

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

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