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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 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 Service Level


Supply Chain Management_Janat Shah

High

Organized Retail Performance comparisons : Inventory Turns


Firm Inventory turns 3 to 4

Pantaloon Retail (India) Ltd.* Trent Ltd.* Subhiksha Trading**

4 to 6 20 to 25

* source: Financial statements ** Source: Subhiksha case study


Supply Chain Management_Janat Shah

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.

Supply Chain Management_Janat Shah

Managing Supply Chains Efficiently


Inefficient Practices

Existing Position

Cost Low Service Level


Supply Chain Management_Janat Shah

High

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

Comparative Performance: Best-in-Class Versus Median


Consumer Packaged Goods Focus
Delivery Performance to Request
100%

98% 81%
10.0%

Total Supply-Chain Management Cost


9.2%

80% 60% 40% 20% 0% Median BIC


0.0% Median BIC 5.0%

4.9%

Upside Production Flexibility


50.0

Cash-to-cash Cycle time


70.0 60.0 50.0

42.0
40.0 30.0 20.0 10.0 0.0 Median BIC

66.6

40.0 30.0

24.7

8.3

20.0 10.0 0.0 Median BIC

Source: Supply-Chain Council

Supply Chain Management_Janat Shah

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

Supply Chain Management_Janat Shah

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

Supply Chain Management_Janat Shah

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

2005 rankings
1. Dell 2. Procter & Gamble 3. IBM 4. N0kia 5. Toyota Motor 6. Johnson & Johnson 7. Samsung 8. Wal-Mart 9. Tesco 10. Johnson Control

Supply Chain Management_Janat Shah

The Strategic Profit Model

Supply Chain Management_Janat Shah

Impact of supply Chain Initiative 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
Supply Chain Management_Janat Shah

Impact of Supply Chain on Business Performance

Supply Chain Performance

Business Performance

Supply Chain Initiative

Supply Chain Management_Janat Shah

Enhancing Supply Chain Performance

Supply Chain Management_Janat Shah

The SCOR Model


The Supply-Chain Council (SCC) is a global, 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, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), 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

Developed by the Supply-Chain Council for SCM diagnostic benchmarking, & process improvement. The SCOR model separates supply chain operations into 5 process categories: Plan Source Make Deliver Return

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Supply Chain Management_Janat Shah

SCOR Model Processes


Plan Develop a course of action that best meets sourcing, production and delivery requirements Make Transform product to a finished state to meet planned or actual demand Deliver Provide products to meet demand, including order management, transportation and distribution Return Return products, post-delivery customer support

Source Procure goods and services to meet planned or actual demand

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Supply Chain Management_Janat Shah

SCOR Model (Cont.)

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Supply Chain Management_Janat Shah

Process Reference Models


Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a crossfunctional framework

Business Process Reengineering Capture the as-is state of a process and derive the desired to-be future state

Benchmarking

Best Practices Analysis

Process Reference Model Capture the as-is state of a process and derive the desired to-be future state

Quantify the operational performance of similar companies and establish internal targets based on best-inclass results

Characterize the management practices and software solutions that result in bestin-class performance

Quantify the operational performance of similar companies and establish internal targets based on best-in-class results Characterize the management practices and software solutions that result in best-inclass performance

Supply Chain Management_Janat Shah

SCOR Structure
Plan

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source

Return

Suppliers Supplier

Supplier
Internal or External

Your Company

Customer
Internal or External

Customers Customer

SCOR Model
Building Block Approach Processes Best Practice Metrics Technology
Supply Chain Management_Janat Shah

SCOR 7.0 Model Structure


Plan
P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns

Suppliers

Source
S1 Source Stocked Products S2 Source MTO Products

Make
M1 Make-to-Stock

Deliver
D1 Deliver Stocked 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 Source

Return Deliver

Enable
Supply Chain Management_Janat Shah

Customers

SCOR Implementation Roadmap


Analyze Basis of Competition Operations Strategy
Competitive Performance Requirements Performance Metrics Supply Chain Scorecard Scorecard Gap Analysis Project Plan

SCOR Level 1

Configure supply chain

Material Flow

AS IS Geographic Map AS IS Thread Diagram Design Specifications TO BE Thread Diagram TO BE Geographic Map

SCOR Level 2

Align Performance Levels, Practices, and Systems

Information and Work Flow

AS IS Level 2, 3, and 4 Maps Disconnects Design Specifications TO BE Level 2, 3, and 4 Maps

SCOR Level 3

Implement supply chain Processes and Systems

Develop, Test, and Roll Out

Organization Technology Process People

Supply Chain Management_Janat Shah

Examples of SCOR Adoptions


Consumer Foods Project Time (Start to Finish) 3 months Investment - $50,000 1st Year Return - $4,300,000 Electronics Project Time (Start to Finish) 6 months Investment - $3-5 Million Projected Return on Investment - $ 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

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, Marketing Planning

Plan

Patients

Pharmacies, Hospitals, Doctors


Deliver Source Make Deliver Return Return Return

Source Return

Make

Deliver
Source Make Deliver Source Return Return

Return

Return

Suppliers Supplier

Supplier

Your Company

Customer

Customers Customer

Internal or External

Internal or External

Marketing Data Suppliers

Doctors, Hospitals

Marketing and Sales Functions

Supply Chain Management_Janat Shah

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 productbased
Plan

Sales

Deliver Return

Source Return

Make

Deliver Return

Source

Make

Deliver
Source Make Deliver Return Source Return

Return

Return

Return

Suppliers Supplier

Supplier

Your Company

Customer

Customers Customer

Plan
Internal or External Internal or External

Manufacturing & Distribution

Deliver Return

Source Return

Make

Deliver Return

Source

Make

Deliver
Source Make Deliver Return Source Return

Return

Return

Return

Suppliers Supplier

Supplier

Your Company

Customer

Customers Customer

Supply Chain Management_Janat Shah


Internal or External Internal or External

SCOR Model (Cont.)


Additions have been made to the SCOR model Original SCOR model did not address sales & marketing processes, some aspects of service, & support processes (i.e., HR & technology development). Customer Chain Operations Reference model (CCOR) Defines the customer part of the SC as the integration of Plan, Relate, Sell, Contract, Service, & Enable processes. Design Chain Operations Reference model (DCOR) Defines the design portion of the SC as the integration of Plan, Research, Design, Integrate, Amend, & Enable processes.

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Supply Chain Management_Janat Shah

SC Performance Measurement Systems


Performance measurement systems must:

Link SC trading partners to achieve breakthrough performance in satisfying the end users. 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. Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace
3/9/2013 Supply Chain Management_Janat Shah

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.

Carbon footprint

Supply chains evaluate design configurations and various options for reducing total carbon emissions

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Supply Chain Management_Janat Shah

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

Supply Chain Performance Measures


1. Total SCM costs: cost to process orders; purchase & manage inventories; & information systems. 2. SC cash-to-cash cycle time: Avg. # of days between paying for materials & getting paid by SC partners. 3. SC production flexibility: avg. time required to provide an unplanned 20% increase in production. 4. SC delivery performance: avg. % of orders filled by requested delivery date. 5. SC perfect order fulfillment performance: average % of orders that arrive on time, complete, & undamaged. 6. Supply chain e-business performance: avg. % of electronic orders received for all SC members. 7. Supply chain environmental performance: % of SC w/ISO 14000 partners; avg. % env. goals met.
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SCOR: Customer Facing

Performance Attribute

Performance Metric

Definition
Percentage of orders delivered on time and in full to the customer Percentage of orders shipped within24 hours of order receipt Percentage of orders delivered on time and in full, perfectly matched with order with no errors Number of days from order receipt to customer delivery Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty Number of days to achieve an unplanned 20% change in orders without a cost penalty
Supply Chain Management_Janat Shah

Supply Chain Delivery Delivery Reliability performance Fill rate Perfect order fulfillment Supply Chain Responsiveness Supply Chain Flexibility Order fulfillment lead time Supply chain response time Production flexibility
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SCOR: Internal Facing

Performance Performance Definition Attribute Metric Supply Chain Cost


Supply chain management cost Cost of goods sold Value-added productivity Warranty/returns processing cost Direct and indirect cost to plan, source and deliver products and services Direct cost of material and labor to produce a product or service Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory

Supply Chain Asset Management Efficiency

Cash-to-cash cycle time


Inventory days of supply Asset turns

Number of days that cash is tied up as working capital


Number of days that cash is tied up as inventory Revenue divided by total assets including working capital and fixed assets
Supply Chain Management_Janat Shah

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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
Supply Chain Management_Janat Shah

Evaluation of Supply Chain Performance in Competitive Environments


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

Cost Internal

Assets

Net asset turns (working capital)

2.2 turns

8 turns

12 turns

19 turns

Supply Chain Management_Janat Shah

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 Management_Janat Shah

Supply Chain Analysis

Supply chain performance

Business performance

Supply chain diagnostics

Supply chain initiative

Supply Chain Management_Janat Shah

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.
Supply Chain Management_Janat Shah

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.
Supply Chain Management_Janat Shah