21 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 Supply Chain Management_Janat Shah Supply Chain Performance Measures: Cost Versus Service • Cost • Service – Order delivery lead time – Responsiveness – Delivery reliability – Product variety Supply Chain Management_Janat Shah Supply Chain Performance Measures Cost of service Low High Service Level Supply Chain Management_Janat Shah * Subhiksha Trading** 20 to 25 * source: Financial statements ** Source: Subhiksha case study Supply Chain Management_Janat Shah .* 4 to 6 Trent Ltd.Organized Retail Performance comparisons : Inventory Turns Firm Inventory turns 3 to 4 Pantaloon Retail (India) Ltd. • 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. An Automobile Company: An Example An automaker wrestles with high levels of inventory(83 days) as unsold vehicles sit on lots. But the dealers already have enough cars and trucks on their lots to lastSupply 80 Chain to 126 days Shah Management_Janat . Managing Supply Chains Efficiently Inefficient Practices . Existing Position Cost Low High Service Level Supply Chain Management_Janat Shah . Impact of Service Level on Revenue Costs and Profits Supply Chain Management_Janat Shah . 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 Supply Chain Management_Janat Shah . 0% 9.0 60.2% 80% 60% 4.0 20.9% 5.6 42.3 10.0 0.0 40.0 50.0 Median BIC Median BIC Source: Supply-Chain Council Supply Chain Management_Janat Shah .0 30.0 40.0% Median BIC Median BIC Upside Production Flexibility Cash-to-cash Cycle time 50. 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 66.0 0.0% 40% 20% 0% 0.0 70.0 10.7 20.0 8.0 30.0 24. DWIP = SFG*365/ CP. ICC= Inv. costs . cost SCI = SC inefficiency ratio • Supply chain working capitalSupply Chain Management_Janat Shah productivity: . WIP and FG Inventory • Supply chain inefficiency ratio: • SCC = DC + INV * ICC & SCI = SCC / NS SCC = SC mgnt. DFG = Days of RM. DFG = FG * 365 / CS DRM . Car. DWIP . Benchmarking Supply Chain Performance Using Financial Data • Total length of the chain: = DRM + DWIP + DFG • DRM = RM * 365/ CRM. 8*0.2 =0.2.62 – RM= 50. Assumption : ICC=0.5 + 145.8 =202.2 • Time in chain DRM = 5.66 /1122.8. SCI =118.2.181.2/1122.8. INV=145. FG=86.2 =118. DFG = 8.2 . NS= 1122.01 = 5 . CP =670.01*365/55.DWIP = 0.2=10. CS : 102. AP=181.2 SWCP = 202.5.62 = 31 Total Length of chain =33+5+31=70 days • Supply chain inefficiency ratio: SCC = 89.78 = 33 .2 Supply Chain Management_Janat Shah .1. Illustration: Supply Chain Performance Measures From Financial Statement: Kurlon • Data* – CRM=557.8+ 238.2 .WIP=9. DC=89.92 *365/67.66.18 * Source: Exhibit 2 and 3 Kurlon case.1.6 • Supply chain working capital productivity: SWC = 145.5. ICC=0.8 – AR=238.65 *365/ 102. N0kia 5. Toyota Motor 5. Best Buy 9. Wal-Mart 6. Dell 2. Samsung Electronics 10. IBM 4. Procter & Gamble 3. Toyota Motor 6. Apple 2. TESCO 8. Samsung 8. Wal-Mart 9. Tesco 10. IBM 4. Anheuser Busch 7. Johnson & Johnson 7. Benchmarking Supply Chain Performance: Top Ten Supply Chains : AMR Ranking 2007 rankings 2005 rankings 1. Johnson Control Supply Chain Management_Janat Shah . Procter & Gamble 3. Nokia 1. The Strategic Profit Model Supply Chain Management_Janat Shah . Impact of supply Chain Initiative on Business Performance • Cost reduction achieved by: – Reducing Inventory. Decreasing supply time to market • Improved Operational efficiency by: – Reducing procurement expenses. Attacking new markets. Reducing indirect material expenses • Improved revenue and profitability by: – Selling higher margin products. Reducing direct material expenses. Reducing logistics expenses. Achieving higher market share. Reducing backorder and lost sales. Increasing Supply Chain Management_Janat Shah . Impact of Supply Chain on Business Performance Supply Business Chain Performance Performance Supply Chain Initiative Supply Chain Management_Janat Shah . Enhancing Supply Chain Performance Supply Chain Management_Janat Shah . the process reference model designed to improve users' efficiency and productivity • Promotes research and thought leadership in the supply chain management area • Adoption of common standards for reference to process. information and material goods flows is essential to enable trading partner collaboration Supply Chain Management_Janat Shah . and development of the Supply-Chain Operations Reference-model (SCOR). retreats. not-for-profit trade association open to all types of organizations – 800 world-wide members – Multi-industry • SCC sponsors and supports educational programs including conferences. benchmarking studies. The SCOR Model • The Supply-Chain Council (SCC) is a global. & process improvement. The SCOR model separates supply chain operations into 5 process categories: – Plan – Source – Make – Deliver – Return 9/7/2017 Supply Chain Management_Janat Shah . Supply Chain Operations Reference (SCOR) Model Developed by the Supply-Chain Council for SCM diagnostic benchmarking. post-delivery customer support 1 9/7/2017 Supply Chain Management_Janat Shah 0 . or actual delivery or actual transportation demand requirements demand and distribution Return Return products. and services to meets sourcing. SCOR Model Processes Plan Make Deliver Source Develop a course of Transform Provide products Procure goods action that best product to a to meet demand. finished state to including order meet planned production and meet planned management. SCOR Model (Cont.) 2 9/7/2017 Supply Chain Management_Janat Shah 1 . Process Reference Models • Process reference models integrate the well-known concepts of business process reengineering. benchmarking. “best-in-class” results class” results Characterize the management Characterize the practices and management software solutions practices and that result in “best. software solutions in-class” that result in “best-in- performance class” performance Supply Chain Management_Janat Shah . and process measurement into a cross- functional framework Business Process Best Practices Process Reference Reengineering Benchmarking Analysis Model Capture the “as-is” state Capture the “as-is” of a process and derive state of a process the desired “to-be” future and derive the state desired “to-be” Quantify the future state operational performance of Quantify the operational similar companies performance of similar and establish companies and establish internal targets internal targets based on based on “best-in. SCOR Structure Plan Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source Return Return Return Return Return Return Return Return Suppliers’ Supplier Your Company Customer Customer’s Supplier Customer Internal or External Internal or External SCOR Model Building Block Approach Processes Metrics Best Practice Technology Supply Chain Management_Janat Shah . SCOR 7.0 Model Structure Plan P1 Plan Supply Chain P2 Plan Source P3 Plan Make P4 Plan Deliver P5 Plan Returns Source Make Deliver Suppliers Customers S1 Source Stocked Products M1 Make-to-Stock D1 Deliver Stocked Products S2 Source MTO Products M2 Make-to-Order D2 Deliver MTO Products S3 Source ETO Products M3 Engineer-to-Order D3 Deliver ETO Products D4 Deliver Retail Products Return Return Source Deliver Enable Supply Chain Management_Janat Shah . 3. Practices. SCOR Implementation Roadmap Analyze Basis •Competitive Performance Requirements Operations •Performance Metrics of Strategy •Supply Chain Scorecard Competition •Scorecard Gap Analysis •Project Plan SCOR Level 1 •AS IS Geographic Map Configure •AS IS Thread Diagram supply chain Material Flow •Design Specifications •TO BE Thread Diagram SCOR Level 2 •TO BE Geographic Map Align Performance •AS IS Level 2. and 4 Maps Levels. •Organization supply chain Test. 3. and 4 Maps Implement Develop. Information •Disconnects and Systems and Work Flow •Design Specifications SCOR Level 3 •TO BE Level 2. and Roll •Technology •Process Processes and Out •People Systems Supply Chain Management_Janat Shah . 000 – 1st Year Return .000 • Electronics – Project Time (Start to Finish) – 6 months – Investment .$4.$ 230 Million • Software and Planning – SAP bases APO key performance indicators (KPIs) on SCOR Model • Aerospace and Defense – SCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders Supply Chain Management_Janat Shah .$3-5 Million – Projected Return on Investment . Examples of SCOR Adoptions • Consumer Foods – Project Time (Start to Finish) – 3 months – Investment .$50.300. Marketing Plan Planning Patients Pharmacies. Marketing Hospitals Data Marketing Suppliers and Sales Functions Supply Chain Management_Janat Shah . Doctors Make Deliver Deliver Source Make Deliver Source Source Make Deliver Source Return Return Return Return Return Return Return Return Customer’s Suppliers’ Supplier Your Company Customer Customer Supplier Internal or External Internal or External Doctors. SCOR Model • Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model Segment Analysis. Hospitals. The SCOR Model (contd) • Two interrelated “supply chains” work together to deliver drugs to market: – The Marketing and Sales “supply chain” which is principally information-based – The Logistics supply chain which is principally product- based Plan Make Deliver Source Sales Deliver Source Make Deliver Source Make Deliver Source Return Return Return Return Return Return Return Return Customer’s Suppliers’ Supplier Your Company Customer Customer Supplier Plan Internal or External Internal or External Manufacturing Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source & Return Return Return Return Return Return Return Return Distribution Suppliers’ Supplier Supplier Your Company Customer Customer’s Customer Supply Chain Management_Janat Shah Internal or External Internal or External . Relate..) Additions have been made to the SCOR model – Original SCOR model did not address sales & marketing processes. Service. 2 9/7/2017 Supply Chain Management_Janat Shah 9 . Amend. Customer Chain Operations Reference model (CCOR) – Defines the customer part of the SC as the integration of Plan. Integrate. Research. & Enable processes. & Enable processes. Design. Design Chain Operations Reference model (DCOR) – Defines the design portion of the SC as the integration of Plan. Sell. some aspects of service. HR & technology development). & support processes (i.e. SCOR Model (Cont. Contract. SC Performance Measurement Systems Performance measurement systems must: Link SC trading partners to achieve breakthrough performance in satisfying the end users. Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace 9/7/2017 Supply Chain Management_Janat Shah . Overlay the entire supply chain to assure that all contribute to supply chain strategy. In a successful chain. members jointly agree on a SC performance measurement system. Carbon footprint- Supply chains evaluate design configurations and various options for reducing total carbon emissions 9/7/2017 Supply Chain Management_Janat Shah . SC Performance Measurement Systems (Cont.) Environmental sustainability- Addressing the need for protecting the environment & reducing greenhouse gas emissions as well business & consumer needs Green supply chain management (GSCM)- Sharing of environmental responsibility along the SC such that sound environmental practices predominate. & adverse global environmental effects are minimized. Measuring Supply Chain Performance • Key performance indicators – inventory turnover • cost of annual sales per inventory unit – inventory days of supply • total value of all items being held in inventory – fill rate • fraction of orders filled by a distribution center within a specific time period Supply Chain Management_Janat Shah . & information systems. complete. SC production flexibility: avg. SC perfect order fulfillment performance: average % of orders that arrive on time. purchase & manage inventories. 5. 2. SC cash-to-cash cycle time: Avg. 7. avg. 9/7/2017 Supply Chain Management_Janat Shah .) Supply Chain Performance Measures 1. % of electronic orders received for all SC members. Total SCM costs: cost to process orders. goals met. Systems (Cont. 4. % of orders filled by requested delivery date. 6. & undamaged. Supply chain environmental performance: % of SC w/ISO 14000 partners. % env. # of days between paying for materials & getting paid by SC partners. SC Performance Meas. SC delivery performance: avg. Supply chain e-business performance: avg. time required to provide an unplanned 20% increase in production. 3. perfectly matched with order with no errors Supply Chain Order fulfillment Number of days from order receipt to customer Responsiveness lead time delivery Supply Chain Supply chain Number of days for supply chain to respond to Flexibility response time an unplanned significant change in demand without a cost penalty Production Number of days to achieve an unplanned 20% flexibility change in orders without a cost penalty 9/7/2017 Supply Chain Management_Janat Shah . SCOR: Customer Facing Performance Performance Definition Attribute Metric Supply Chain Delivery Percentage of orders delivered on time and in Delivery Reliability performance full to the customer Fill rate Percentage of orders shipped within24 hours of order receipt Perfect order Percentage of orders delivered on time and in fulfillment full. SCOR: Internal Facing Performance Performance Definition Attribute Metric Supply Chain Supply chain Direct and indirect cost to plan. planned maintenance and excess inventory Supply Chain Cash-to-cash Number of days that cash is tied up as working cycle time capital Asset Management Inventory days of Number of days that cash is tied up as inventory supply Efficiency Asset turns Revenue divided by total assets including working capital and fixed assets Supply Chain Management_Janat Shah 9/7/2017 . source and deliver management cost products and services Cost Cost of goods Direct cost of material and labor to produce a sold product or service Value-added Direct material cost subtracted from revenue and productivity divided by the number of employees. similar to sales per employee Warranty/returns Direct and indirect costs associated with returns processing cost including defective. Value-added productivity .Perfect order fulfilment – Flexibility • Supply-chain response time. Production flexibility Supply Chain Management_Janat Shah . Warranty cost – Assets • Cash-to-cash cycle time. Asset turns • Customer facing – Reliability • Order fulfilment performance . Inventory days of supply.Supply Chain Performance Measures: SCOR Model • Internal Facing – Cost • Total logistics management cost. Evaluation of Supply Chain Performance in Competitive Environments Supply chain scorecard v. 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. 3.2 turns 8 turns 12 turns 19 turns capital) Supply Chain Management_Janat Shah .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. Ford Motor Company (1910-1920). Enhancing Supply Chain Performance Supply Chain Integration Toyota. 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 Management_Janat Shah . Supply Chain Analysis Supply Business chain performance performance Supply chain Supply chain diagnostics initiative Supply Chain Management_Janat Shah . – Firms must recognize the nature of trade-offs between customer service and costs and arrive at an optimal decision on this front. a firm decides the market segment in which it wants to operate and the level of customer service it wants to offer. Summary-I • A firm must ensure a smooth fit between business strategy and supply chain strategy. – As a part of the business strategy. • Supply chain strategy results in costs that firms have to incur to provide the targeted level of customer service. Supply Chain Management_Janat Shah . SC integration and SC reconfiguration firms can improve performance on these fronts on a sustained basis. • customer service versus cost trade-offs. in the long run. • By working on supply chain innovations involving SC optimization. firms have to find a way of increasing performance on both the costs and the services fronts. MTO or CTO. since a firm is ultimately interested in improving its return on investment (ROI). Supply Chain Management_Janat Shah . – not all supply chain measures are of equal importance. – Product Demand characteristics : efficient chain or a responsive chain • Firms must monitor their supply chain performance and benchmark the same against competitors. – strategic profit model framework to prioritize initiatives. Summary-II • Supply Chain Typology – order delivery time : MTS. • supply chain initiative planned by a firm must get translated into business performance (ROI) .