4029 5504 02_strategy_and_performance_measure

Supply Chain Management_Janat Shah

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Supply Chain Strategy and Performance Measures

12


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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?


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LtdSupply Chain Performance Measures:

Cost Versus Customer Service

Cost Customer Service Dimensions

Order delivery lead time Responsiveness Delivery reliability Product variety


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Supply Chain Performance MeasuresC

ost o

f se

rvic

e

Service LevelLow High


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LtdOrganized Retail Performance

comparisons : Inventory Turns

Firm Inventory turns

Pantaloon Retail (India) Ltd.* 3 to 4

Trent Ltd.* 4 to 6

Subhiksha Trading** 20 to 25

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


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LtdAn 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”.


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Cos

t

Service LevelLow High

Existing Position

Managing Supply Chains Efficiently

.

Inefficient Practices


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Impact of Service Level on Revenue Costs and Profits


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Supply Chain Typology

Order Penetration Point/ Decoupling Point Make to Stock (MTS) Make to Order (MTO) Configure to Order (CTO)

Supply Chain Focus Efficiency Responsiveness


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LtdSupply Chain Typology: Order

Penetration Point/ Decoupling Point


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Push-Pull Boundary of Supply Chains


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LtdMatch Supply Chain Design with

Product Category


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Aspects of demand Functional (predictable Demand)

Innovative (Unpredictable Demand)

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

Contribution margin ( % of sales price)

5% to 20% 20% to 60%

Product variety Low ( 10 to 20 variants per category)

High ( often thousands of 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 markdown

0% 10% to 30%

Functional Versus Innovative Products: Differences in Demand


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LtdSupply Chain Performance Measures:

SCOR Model Internal Facing - Dimensions

Cost Total logistics management cost, Value-added

productivity , Warranty cost Assets

Cash-to-cash cycle time, Inventory days of supply, Asset turns

Customer facing – Dimensions Reliability

Order fulfilment performance ,Perfect order fulfilment Flexibility

Supply-chain response time, Production flexibility


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LtdSuperior Performers Spend Less on

Supply-Chain ManagementBest-in-class companies have an advantage in total supply-chain management cost (5% – 6% less in revenue)

Source: Supply-Chain Council

Total Supply-Chain Management Cost


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Comparative Performance: Best-in-Class Versus Median

Consumer Packaged Goods Focus

81%98%

0%

20%

40%

60%

80%

100%

Median BIC

42.0

8.3

0.0

10.0

20.0

30.0

40.0

50.0

Median BIC

66.6

24.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Median BIC

9.2%

4.9%

0.0%

5.0%

10.0%

Median BIC

Delivery Performance to Request Total Supply-Chain Management Cost

Upside Production Flexibility Cash-to-cash Cycle time

Source: Supply-Chain Council


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LtdEvaluation of Supply Chain Performance in

Competitive Environments

19 turns 12 turns 8 turns2.2 turnsNet asset turns (working capital)

28 days 46 days 80 days A96 days Cash-to-cash cycle time

22 days38 days 55 days 119 days Inventory days of supply

Assets

$ 460k$306k$ 156k$122 kValue added per employee productivity

NANA NANAWarranty cost, returns and allowances

3%8%13%19%Total logistics management costsCost

Internal facing

20 days 25 days 30 days 45 days Production flexibility (days master schedule fixed)

3 days 5 days 7 days 7 days Order fulfillment lead times (customer to customer)

90%85%80%0%Perfect order fulfillment (on time in full)

98%96%94%63%Fill ratesSupply chain reliability

Flexibility and responsiveness

External (customer facing )

Superior

95%

Advantage

90%

Parity

85%

Actual

50%

SCOR level 1 metrics

Delivery performance to commit date

Overview metrics

Performance versus competitive population

Supply chain scorecard v. 3.0


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LtdBenchmarking 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 mngmnt. 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 +AR–AP SWCP = NS / ISWC


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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


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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


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LtdImpact 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


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LtdImpact of Supply Chain on Business

Performance

Supply Chain

Performance

Business Performance

Supply Chain

Initiative


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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


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Supply Chain Analysis

Supply chain

performance

Business performance

Supply chain initiative

Supply chain diagnostics


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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.


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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.

4029 5504 02_strategy_and_performance_measure

Education

Transcript of 4029 5504 02_strategy_and_performance_measure