Actual Lecture 2 Slides

Supply Chain Performance

Achieving Strategic Fit

1. The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy. Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy goal.
2. The different functions in a company must appropriately structure their processes and
resources to be able to execute these strategies successfully.
3. The design of the overall supply chain and the role of each stage must be aligned to support
the supply chain strategy.

Strategic Fit – competitive and supply chain strategies have aligned goals

How is Strategic Fit Achieved

1) Understanding the Customer and Supply Chain Uncertainty

Demand uncertainty – uncertainty of customer demand for a product

Implied demand uncertainty – resulting uncertainty for the supply chain given the portion of the
demand the supply chain must handle and attributes the customer desires

Other factors like: response time, batch size, variety etc.

2) Understanding Supply Chain Capabilities

How best meet demand

Cost – Responsiveness trade off (higher cost, lower efficiency)

The cost-responsiveness efficient frontier curve shows the lowest possible cost for a given level of
responsiveness

3) Strategic Fit

Ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty

Assign roles to different stages of the supply chain that ensure the appropriate level of
responsiveness

Ensure that all functions maintain consistent strategies that support the competitive strategy
Supply Chain’s performance in terms of responsiveness and efficiency is based on the interaction
between 6 logistical and cross-functional drivers of supply chain performance.

1) Facilities
2) Invetory
3) Transportation
4) Information
5) Sourcing
6) Pricing
Exercises

Increasing uncertainty will need you to produce more units

To model 50% chance of 2 and 6, use random number generator.

The process view of the organization

Average Inventory (I) = Average Flow Rate (D) x Average Flow Time (T)

Average Flow Rate is also known as Throughput Rate (D)

The maximum rate with which the process can generate supply is called capacity of the process.

Difference in cumulative inflow and outflow is inventory. Work in Progress.

Three Measures of Performance

1. The number of flow units contained within the process is called inventory or work in process
(WIP). Keep this in mind when assessing the case of the Morrison Company!

2. The rate at which the process is delivering output is called the flow rate or the throughput rate. In
the motivating example, the throughput was 11 patients per day (10 hours per day).

3. The time it takes a flow unit (e.g., patient) to get through the process is called flow time. The flow
time takes into account that the item (flow unit) may have to wait to be processed because there
other flow units (inventory) competing for the same resources. In our motivating example, the
average patient takes about 2 hours to leave the hospital.
Remmeber Unit of Analysis when using the Little’s Law.

Cash Conversion Cycle

Measures duration between purchase of inventory and collection of accounts receivable:

Cash Conversion Cycle = Inventory processing period (days) +

Days to Collect Accounts receivable - Days to Pay Accounts
Payable

How long does it take between outlay of cash and collecting

the reward?
(Apple is financing production process with suppliers money)

(A negative number in the cash conversion cycle can be good).

Inventory Turns

Higher margins usually allow for lower inventory turns.

Reduce margin to try turn inventory a lot.

Financial Measures Of Performance

From a shareholder perspective, return on equity (ROE) is the main summary measure of a firm’s
performance

ROE = Net Income / Average Shareholder Equity

Return on assets (ROA) measures the return earned on each dollar invested by the firm in assets