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Supply Chain Strategy and Performance
Measures

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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:

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Cost Versus Service

Cost
Service
Order delivery lead time
Responsiveness
Delivery reliability
Product variety

Supply Chain Management_Janat Shah


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Supply Chain Performance Measures
Cost of service

Low High
Service Level

Supply Chain Management_Janat Shah


Organized Retail Performance

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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
Supply Chain Management_Janat Shah
An Automobile Company: An

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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 lastSupply
80 Chain
to 126 days Shah
Management_Janat
Managing Supply Chains

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Efficiently
Inefficient Practices

.
Existing Position
Cost

Low High
Service Level

Supply Chain Management_Janat Shah


Impact of Service Level on Revenue

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Costs and Profits

Supply Chain Management_Janat Shah


Superior Performers Spend Less on

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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:

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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


Benchmarking Supply Chain

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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:
Supply Chain Management_Janat Shah
Illustration: Supply Chain Performance

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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:

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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

Supply Chain Management_Janat Shah


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The Strategic Profit Model

Supply Chain Management_Janat Shah


Impact of supply Chain Initiative on Business

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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, DelayingSupply
capital expenditureShah
Chain Management_Janat
Impact of Supply Chain on Business

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Performance

Supply
Business
Chain
Performance
Performance

Supply
Chain
Initiative

Supply Chain Management_Janat Shah


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Enhancing Supply Chain Performance

Supply Chain Management_Janat Shah


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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


Supply Chain Operations Reference

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(SCOR) Model
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

9/3/17 Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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,
and services to
meets sourcing, finished state to including order
meet planned
production and meet planned management,
or actual
delivery or actual transportation
demand
requirements demand and distribution

Return
Return
products,
post-delivery
customer
support

1
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0
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SCOR Model (Cont.)

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

Business Process Best Practices Process Reference


Reengineering Benchmarking Analysis Model
Capture the as-is state
Capture of a process and derive
Capturethetheas-is
as-is
state of a process the desired to-be future
state of a process
and state
andderive
derivethe
the
desired to-be
desired to-be Quantify
Quantifythe
the Quantify the operational
future
futurestate
state operational
operational performance of similar
performance
performanceof of companies and establish
similar companies
similar companies internal targets based on
and
andestablish
establish best-in-class results
internal Characterize the
internaltargets
targets
based Characterize
Characterizethe management
based onbest-in-
on best-in- the
class results management
management practices and
class results
practices
practices and
and software solutions
software solutions
software solutions that result in best-in-
that
thatresult
resultinin class performance
best-in-class
best-in-class
performance
performance
Supply Chain Management_Janat Shah
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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 Customers


Supplier Customer
Internal or External Internal or External

SCOR Model

Building Block Approach


Processes Metrics
Best Practice Technology

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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


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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, 3, and 4 Maps
Levels, Information
Practices, and and Work Flow
Disconnects
Design Specifications SCOR Level 3
Systems TO BE Level 2, 3, and 4 Maps

Implement
Implement Develop, Organization
Technology
supply
supplychain
chain Test, and Roll
Process
Processes
Processesand
and Out People
Systems
Systems

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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


Copyright 2009 Dorling Kindersley India Pvt Ltd
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
Plan Planning
Patients

Pharmacies,
Hospitals,
Doctors Make Deliver
Deliver Source Make Deliver Source Source Make Deliver Source

Return Return Return Return Return


Return Return Return

Customers
Suppliers Supplier Your Company Customer Customer
Supplier

Internal or External Internal or External


Doctors,
Marketing Hospitals
Data Marketing
Suppliers and Sales
Functions

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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

Customers
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
Customers
Customer

Supply Chain Management_Janat Shah


Internal or External Internal or External
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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.

2
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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
9/3/17 Supply Chain Management_Janat Shah
SC Performance Measurement

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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.

Carbon footprint-

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

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Copyright 2009 Dorling Kindersley India Pvt Ltd
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


Copyright 2009 Dorling Kindersley India Pvt Ltd
SC Performance Meas. Systems
(Cont.)
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.

9/3/17 Supply Chain Management_Janat Shah


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SCOR: Customer Facing

Performance Performance Definition


Attribute Metric
Supply Chain Delivery Percentage of orders delivered on
Delivery performance time and in full to the customer
Reliability Fill rate Percentage of orders shipped
within24 hours of order receipt
Perfect order Percentage of orders delivered on
fulfillment time and in full, perfectly matched
with order with no errors
Supply Chain Order Number of days from order receipt to
Responsivenes fulfillment lead customer delivery
s time
Supply Chain Supply chain Number of days for supply chain to
Flexibility response time respond to an unplanned significant
change in demand without a cost
Production Number
penalty of days to achieve an
flexibility unplanned 20% change in orders
without a cost penalty
9/3/17 Supply Chain Management_Janat Shah
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SCOR: Internal Facing

Performanc Performanc Definition


e Attribute e Metric
Supply Chain Supply chain Direct and indirect cost to plan, 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, 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


9/3/17
Supply Chain Performance Measures:

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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

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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
responsiveness Production flexibility (days 45 days 30 days 25 days 20 days
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)

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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


Copyright 2009 Dorling Kindersley India Pvt Ltd
Supply Chain Analysis

Supply
Business
chain
performance
performance

Supply chain Supply chain


diagnostics initiative

Supply Chain Management_Janat Shah


Copyright 2009 Dorling Kindersley India Pvt Ltd
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 onSupply
theChainoptimum level
Management_Janat Shah
Copyright 2009 Dorling Kindersley India Pvt Ltd
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