CHANGES TO WORLD ECONOMY

Globalization of
economy
Entry of Multiple
Supply Chain players.
Shortening of product
Management lifecycles
Corporate mergers
and acquisitions

1 2

In SCM raw material are procured, items are

Need for Supply Chain Management manufacture, move to warehouses for storage
From the traditional approach to Materials Management---- then move to sell.

Purchases Warehousing
Production Distribution Marketing
Vendor Inventory
Scheduling Accounting Customer Sales
Decisions Levels Manufacture
Raw Material Profit/loss Service Goals
Scheduling Re-order
Requirements Inventory Outbound Market
Requirements Quantities
Capital Investments Logistics Research
Compliance Safety stock Procure Moving
Needs Parts Channel Product
Inbound Needs
Quality Picking Service Strategies
Logistics Inventory
Financial Financial
Management
Agreements Agreements
What is SCM?
Functions rather than processes
Does not control more than a few steps Ware
Selling
Duplicating and competing functions housing
Focus on function and assigned completion
Emergence of functional silos

3 4

Supply Chain Management Why need to be managed ?

Increases Profitability
Reduced Costs
Supply Chain Management Increase in service quality
involves the flows between Improvement in Financial performance
and among stages in a Increase in Customer satisfaction
Customer retention
supply chain to maximize
total profitability. (Chopra Exploring supply chain requires a
thorough under standing of
and Meindl, 2001) FUNCTIONING OF SUPPLY CHAIN
5 6
 A GENERIC STRUCTURE OF THE SUPPLY CHAIN
THE SUPPLY CHAIN Suppliers Operations Distributors Retailers

Supply chain is network of various D1

business entities and processes linking S1 R1
Suppliers, Operations and Customers D2
S2 R2
D3
Suppliers Operations Customers S3
R3
Flows Material D4

Information
Objective is to optimize the over all performance
Money
of the entire network
7 8

Supply Chain Activities are Changing

ASSESSMENTS in Supply Chain
TRADITIONAL APPROACH
Independent inventory
management policies
Minimization of firm costs
Short-term focus
Information sharing limited to
current transaction
Corporate philosophies not
relevant
Each to their own success or
failure
Independent actions and
information systems
Traditional procurement vs. Strategic SCM
INTEGRATED APPROACH
Joint reduction of channel
inventories
Adversarial Long-term mutually
Channel-wide cost savings relationship with beneficial supplier
Long-term perspective suppliers relationships
As required for planning and
monitoring Multiple sources Single source
Compatible corporate
philosophies
Item-based Commodity-based
Sharing of risks and rewards
purchasing/ inventory purchasing/inventory
policies policies
Churning of the Long-term contract
supplier base/bid (quality and fair price)
9 mentality

Supply Chain Activities are Changing

Traditional procurement vs. Strategic SCM Mission of the Supply Chain:
Just in case Just in time purchasing
Enhancing the customers experience through
purchasing (build (minimize inventory)
excellence in delivering the right products,
inventory)
services, resources and information seamlessly
Large batch Small batch deliveries
to the right place at the right time!
purchases tied to large batch
and monthly purchases, focused on
deliveries manufacturing timelines
Electronic payment upon
Pay upon match of receipt of goods
invoice, PO and
receiving report Focus on lowest total
Focus on lowest cost of ownership 12
 Values That End Customers Are
Why Improve??? Looking For Today

High product variety

Increased competition puts downward
pressure on prices Customized products
Detailed product information
Increased requirements for mass
customization Choice - opportunity to select
Rapid order fulfillment
Increased demand for better service levels
Excellent service (assumed)
Outsourcing an ever increasing number of
Quality/reliability (assumed)
processes
Low price (assumed)
13 14

External Drivers of Supply Chain Description of SCM

Management
More demanding Shortening of product life
customers cycle
Demand Supply Demand
Planning Planning Fulfillment

Supply Chain
Government Globalization of
Management business
Regulation Develop an accurate, reliable view of market demand by identifying
market trends and predicting changes in customer preferences.

Advanced Information Increased competitive

and communication environment
practices

15

Description of SCM Description of SCM

Demand Supply Demand Demand Supply Demand

Planning Planning Fulfillment Planning Planning Fulfillment

Provide fast, accurate, and reliable delivery commitments to customer

Ensure that the enterprise is prepared to meet the forecasted orders based on planned supply into RESPONSE BUFFERS.
demand by generating a constrained, optimal supply plan into
RESPONSE BUFFERS Monitor and Manage Order commitments in a profitable way.
 Traditional Material Material Flow Integration -
Stage I
Flow System

Procurement Operations Distribution

Procurement Operations Distribution
STAGE I

STAGE I Integration - Physical Distribution

Manufacturing firms had three separate material Management- integration within The Distribution Loop
flow systems Integration of finished goods transportation,
Buffered each system with inventory warehousing, inventory and customer service
function

425 426

Material Flow Integration - Material Flow Integration - Stage

Stage II= Logistics III = Supply Chain Management

Procurement Operations Distribution Vendor Procurement Operations Distribution Retailer

STAGE II = LOGISTICS
STAGE III = SUPPLY CHAIN MANAGEMENT
- Integration of materials across procurement/
operations/distribution sub-systems of the firm Manage inventory flow from vendor through firm all
the way to retailer
- Requires elimination of inventory buffers through Primary Resource Transformation is trading
better information interfaces information for inventory as in EDI, ECR, JIT etc.
Does not require change in organizational structure Focus on BOTH level and velocity of inventory
-
of firm

427
428

Integrated Supply Chain C

U
S
T
Approach O
M
E
R
S
Supply chain is network of various business entities and
Sales processes linking Suppliers, Operations and Customers
S
U
P Distribution
P
L
I
E
Manufacturing Suppliers Operations Customers
R
S
Purchasing
Objective is to optimize the
Looks at the entire chain
Global rather than local focus
over all performance of the
Integrated rather than fragmented approach entire network
 Sample definitions of Supply Chain Cycle View of Supply Chain
Beamon (1999): an integrated process where raw materials are
transformed into final products then delivered to customers.
It defines the processes
Berry (1995): a system whose constituent parts include
material supplies, production facilities, distribution services and involved and the owners
customer linked together by feed forward flow of materials and of each process. It is
feed back flow of information. very useful when
Ganeshan and Harrison (1999): a network of facilities and considering operational
distribution options that performs the functions of procurement decisions, because it
of materials, transformation of these materials into intermediate clearly specifies the roles
and finished products and distribution of products to customers. and responsibilities of
Johnson (1995): a process of strategically managing the each member of the
movement and storage of materials, parts, and finished supply chain and the
inventory from suppliers through the firm and on to the desired outcome for each
customers. process
Kalakota (2000): an integrating process based on flawless
delivery of basic and customized services.

Customer Order Cycle Replenishment Cycle

Customer Customer Retail Order Retail Order

Arrival Order Receiving Trigger Receiving

Customer Customer Retail Order Retail Order

Order Entry Order Fulfilment Entry Fulfilment

Manufacturing Cycle Procurement Cycle

Order Order based on Manufacturers

Receiving Production Schedule Receiving at Manufacturer
Arrival or Suppliers Stocking Needs

Production Manufacturing and Supplier Production Component

Scheduling Shipping Scheduling Manufacturing and Shipping
 Push/Pull View of Supply Chain
Push/Pull view of supply chain process categorizes
processes based on whether they are initiated in Procurement, Customer Order
response to a customer order (pull) or in anticipation of a Manufacturing and Cycle
Replenishment cycles
customer order (push). This view is very useful when
considering strategic decisions relating to supply chain
design PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives

ESSENTIALS OF SCM Views on SCM

SUPPLY MANAGEMENT Academic View

MANUFACTURING MANAGEMENT Industry View

DEMAND MANAGEMENT

KEY ELEMENTS IN SCM STRATEGY

SOURCING Modeling for
Integration

DISTRIBUTION
Distribution,
Implementation

INVENTORY
INTEGRATION
Inventory
Bottom Line

SERVICE
Service Improvement

Functional Domain of a SC
Manager Uncertainty In Supply Chain

 Erroneous forecasts
 Forecasting demand
 Selecting suppliers  Late deliveries
 Ordering materials  Poor quality
 Inventory control  Canceled orders
 Shipping & delivery  Erroneous information
 Information management  Problems in Transportation network
 Quality management  Impact of government policies
 Customer service
 Design of Supply Chain Select Examples of SC in India
Type of Industry Select Examples

Strategic issue Apparel Madura Coats, Reliance

Benchmark to learn what is possible Automobile Maruti, Hero-Honda, Telco, Mahindra &
Mahindra

Work with suppliers & customers to Chemicals/Paints Reliance, Asian Paints, Goodlass Nerolac

achieve goals
Consumer Durables Samsung, LG, Godrej

Control inventory
Fast Moving Consumer Goods Hindustan Lever, Proctor & Gamble,

Manage Distribution network effectively Coca-Cola, Pepsi

Food Godrej, Cadbury, Parle, Amul, Dabur

Meet customer Expectations!!!
Computers Wipro, HCL

Newspaper Bennett Coleman & Co(Times of India,)

HT Media Ltd (Hindustan Times)

Supply Chain Building Blocks Structural Building Blocks

Suppliers
Manufacturing / Assembly Plants
Warehouses
Logical IT / ITEC Distribution Centers
Structural Informational
Retailers / Customers
Logistics Network
Inbound
Outbound
Customers Orders

Logical Building Blocks

Examples of Decisions
Supplier Selection (Tactical)
Plant Location (Strategic)
Product Line Selection (Strat)
STRATEGIC Inventory Control (Tactical)
Production Scheduling (Ops)
Dynamic routing (Ops)
TACTICAL MTO vs MTS vs BTO (Str)

OPERATIONAL

Procurement Logistics Manufacturing Distribution Logistics

 Mathematical Models Information Building Blocks
Optimization Models (LP, ILP, MILP, CO, DP) IT : MRP, ERP, EDI
Stochastic Models (Markov chains, Queuing Internet Technologies
networks, etc.)
Statistical Models
Sensor Networks
Game Theory E-Commerce, E-Markets
Simulation E-CRM
Machine learning Decision Support Software
Auctions and Mechanism Design Standards

Competitive and Supply Chain

Strategy Strategy
A companys competitive strategy defines the set of customer
needs that it seeks to satisfy through its products and services
 Action plan to achieve
A supply chain strategy determines the nature of procurement mission
of raw materials, transportation of materials to and from the  Shows how mission will be
company, manufacture of the product or operation to provide achieved
the service, and distribution of the product to the customer,  Company has a business
along with any follow-up service strategy
Strategic fit means that both the competitive and supply chain
 Functional areas have
strategies
strategies have the same goal

Strategy Process Six Strategic Objectives..1

Company Operational excellence:
Mission
- Improving the efficiency of business
Business operations to achieve higher profitability.
Strategy
E.g. Wal-Mart
Functional Area
Functional Area New products, services and business
Strategies models:
- E.g. Apple Inc. transformed old business
Marketing Operations Finance/Accounting
Decisions SCM/Decisions Decisions
model.
 Six Strategic Objectives..2
Customer & supplier intimacy:
- Make use of IS to satisfy and delight the
customer.
Improved decision making:
- Many managers operate in information fog ;
- Dont have the right information at the right
time to make an informed decision.
- Result is overproduction of goods/services;
misallocation of resources etc.
- Increase in cost and loss of customers.
Porters Classic Model
Porters Classic Model
Customers: Profitable company depends on
its ability to attract and retain customers.
Power of customers grows if they can
easily switch to competitors products and
services.
Suppliers:
- The market power of suppliers can have
significant impact on firms profits.
- The more different suppliers a firm has, the
greater control over suppliers in terms of
price, quality and delivery schedules.
Six Strategic Objectives..3
Competitive advantage:
- Organization achieve competitive advantage
doing things better than competitors;
- Charging less for superior products;
- Responding to customers and suppliers in
real time;
Survival:
- Necessities of doing business;
- Driven by industry level changes;
Porters Classic Model
Develop strategies to confront five
competitive forces:
Competitors: All organizations share
market space with other competitors.
New market entrants: In free economy,
new companies are always entering the
market place.
Substitutes: In every industry, there are
substitutes that customers might use if
prices become high.
Competitive Strategies..1
Five basic competitive strategies to counter the threat of
competitive forces:
Cost leadership strategy: by becoming a low cost
producer of products/ services.
Differentiation strategy: developing ways to
differentiate products/services form competitors.
Flexibility
Reliability
Timeliness
Innovative strategy: involves finding new ways of
doing business; development of unique products or
entry into unique markets/market niches.
 Competitive Strategies..2
Growth strategy: Expanding a companys
capacity to produce goods and services,
expanding into global markets, diversifying
into new products and services.
Alliance strategy: Establishing new business
linkages and alliances with
customers/suppliers, competitors/consultants.
Business Value Chain
Business Value Chain
Support activities-
- Comprises of human resources
(employee hiring, recruiting and training);
technology (improving products and
process); procurement ( purchasing I/P).
At each stage of value chain, how IS can
be used to improve operational
efficiency, customer-supplier intimacy,
value addition etc. can be analyzed.
Competitive Strategies..3
In addition to this, other competitive strategies:
Locking customers/suppliers: By building
valuable relationships, which deters them
from abandoning the org. for its competitors.
Building switching costs: E.g. by use of IT,
Wal-Mart has made customers dependent on
continued use of innovative IS.
Business Value Chain
These activities can be grouped as:
Primary activities-
- mostly related to production and
distribution of goods/services.
-Include inbound logistics, operations,
outbound logistics, sales and marketing.
Support activities-
- make the delivery of primary activities
possible;
Business Value Chain
Firms value chain is linked with value
chain of its suppliers, distributors, and
customers.
Performance depends also on how well
the firm co-ordinates with direct/indirect
suppliers, customers etc.

Why is facility location so important?
Types of Decisions
1. Strategic or long-range decisions
2. Tactical or medium- range decisions
3. Operational planning and control or short-
range decisions
Introduction
Facility location has a long-term impact on the
supply chain & must be part of the firms
strategy.
Companies can locate anywhere in the world
due to increased globalization, technology
infrastructure, transportation,
communications, & open markets,
Location still matters- clusters in many
industries show that innovation & competition
are geographically concentrated.

Facilities Location
Critical Decision long lasting impact on
financial, employment and distribution
patterns.
Factors affecting Location Decision-
Capital Banking facilities , loans etc
Raw Material Availability, suppliers
SOURCING DECISIONS
Labor supply , skills , costs
Competition
Economic aspects Wages to staff, taxes profits
Non economic impacts- Ecological , environmental and
social.
Political Considerations

Why Sourcing important??? Process of Buying

For many organizations Inbound logistics
involves more time as compared to
outbound. Obtaining the right material
Potential area for price reduction In Right quantities
TV supply chain inbound is 68 days With right delivery (time and
Riken (Piston ring manufacturer)- -- 12 place)
TOYOTA plants (Financial times,2007) From the right source
Fire at Philips semiconductor Nokia and
and at the right price
Ericsson ($400 Million loss), (Sloan
Management Review, 2007)
 Type of Sourcing How Many Suppliers to
Use
Reasons Favoring a Reasons Favoring
Single Supplier More than One
a) Single Sourcing: Planned decision to To establish a good Supplier
select one supplier for an item where relationship Need capacity
Less quality variability
several suppliers are available Lower cost
Spread risk of supply
interruption
Transportation economies
Create competition
Proprietary product or
b) Multiple sourcing: More than one process Information
supplier for an item. Volume too small to split Dealing with special
kinds of business

Supplier Selection and evaluation

The process of selecting suppliers, is complex and should

be based on multiple criteria:

Technical ability Order System and

cycle time
Manufacturing
capability Capacity Some Trends : Global
Quality Price
Location
Sourcing
Cost
Reliability Service

OTHER PRACTICAL CONSIDERATIONS

Examples of Global
Management of Suppliers and
Strategies Distributors
Boeing both sales and production are Plans to help achieve
worldwide. company mission
Affect long-term
competitive position
Sony purchases components from Strategic options
suppliers in Thailand, Malaysia, and Few suppliers
around the world. Keiretsu network
Local/Global Suppliers

GM is building four similar plants in

Argentina, Poland, China, and Thailand
 Strategic Alliance and
Supplier Certification B2B example :: www.alibaba.com
Established by Jack Ma, a English teacher (1999)
Programs
Supplier certification programs
Today::
-one way to identify strategic alliance
candidates. is the world's leading B2B e-commerce company

Early supplier involvement Together our marketplaces form a community of more

than 27 million registered users from over 200 countries
(ESI) is perhaps one of the most and regions.
effective supply chain integrative HQ: Hangzhou in eastern China with 5200 fulltime
techniques. employees

Lessons:: Key for successful partnerships Lessons

Managing supply chain is treated as
Building Trust
strategic weapon.
Shared Vision and objectives
Personal Relationships
This era can be referred as a business war
Mutual benefits
between supply chains and supply
Commitment and Top management
chains not between organizations and
Support
organizations
Change Management
Information Sharing
Shared Measurements
Continuous Improvements

Traditional Planning Approach

Characterized by Sequential, Decomposed, Slow

Procurement Manufacturing Sales & Distribution

(Material) (Capacity) (Demand)

Aggregate Production
C
Planning U
S
T
O
M
E
R

Optimize to Optimize to Optimize to

Mfg objectives Logistics obj Sales & Mktg obj
 Overview of Planning Levels
Long-range plans
The integration through information is Product and service design
aimed to address: Location / layout
Flexibility and Variety Long term capacity
Quality Intermediate plans (General levels)
Responsiveness Employment
Low cost Output and inventories
Edging towards agility Subcontracting and backorders
Short-range plans (Detailed plans)
Machine loading
Job assignments
Production lot size and order quantities

Aggregate Plan Aggregate Production Planning

(APP)
Aggregate Plan: A statement of a companys
Determines resource capacity to meet
production rates, workforce levels, and inventory
holding based on estimates of customer demand
requirements and capacity limitations For intermediate time horizon, 6-12 months
Not feasible to build new facility

Service Industry Manufacturing Industry May be feasible to hire/lay off workers,

Staffing Plan Production Plan overtime, or subcontract
Regarding staffs and Regarding production Adjusting capacity OR managing demand
labor related factors rates and inventory

Aggregate Plan Managerial

Aggregate Plan Outputs
Inputs
Operations Distribution and marketing
Current machine capacities Customer needs Aggressive Alternatives
Plans for future capacities Demand forecasts Complementary Competitive
Workforce capacities Competition behavior Products Pricing
Current staffing level

Reactive Alternatives
Materials Accounting and finance Units or dollars
Supplier capabilities Aggregate Cost data Size of Aggregate Of Backlogs,
Storage capacity plan Financial condition Workforce and plan
backorders , or
Materials availability of firm Workforce Adjustment
stockout

Engineering Human resources Inventory

New products Labor-market conditions Levels Production Units or
Product design changes Training capacity per month dollars
Machine standards
(in units or $) subcontracted
Aggregate Planning Strategies Demand Options
Proactive Pricing
Alter demand to match capacity
Reactive Promotion
Alter capacity to match demand
Mixed Back orders
Some of each
Balancing demand and capacity
over the entire planning horizon
New demand

Capacity Options Chase Demand

Hire and layoff workers Demand

Overtime/slack time
Part-time workers Units

Inventories Production

Subcontracting
Time

Chase Approach
Level Production
Advantages Demand
Investment in inventory is low
Production
Units
Labor utilization in high (overtime)
Disadvantages
The cost of adjusting output rates and/or
workforce levels
Time
 Level Approach
Mixed Strategy
Advantages Demand

Stable output rates and workforce

Disadvantages
Units
Greater inventory costs
Production
Increased overtime and idle time
Resource utilizations vary over time
Time

Aggregate Plan to Master

Aggregate Planning Strategies Schedule
Aggregate
Possible Alternatives Possible Alternatives Planning
Strategy during Slack Season during Peak Season

1. Chase #1: vary workforce Layoffs Hiring

level to match demand
2. Chase #2: vary output Layoffs, undertime, Hiring, overtime,
rate to match demand vacations subcontracting Disaggregation
3. Level #1: constant No layoffs, building No hiring, depleting
workforce level anticipation inventory, anticipation inventory,
undertime, vacations overtime, subcontracting,
backorders, stockouts
4. Level #2: constant Layoffs, building antici- Hiring, depleting antici-
output rate pation inventory, pation inventory, over- Master
undertime, vacations time, subcontracting,
backorders, stockouts Schedule

Disaggregating the Aggregate

Disaggregating the Aggregate
Plan
Plan
Master schedule: The result of
disaggregating an aggregate plan; shows
quantity and timing of specific end items for a
scheduled horizon.

Rough-cut capacity planning: Approximate

balancing of capacity and demand to test the
feasibility of a master schedule.
 Lessons
Aggregate production planning is a
powerful tool for resources management
Suitable aggregate production planning
strategy for an organization depends on
various organizational and environmental
factors
CHANGES TO WORLD ECONOMY
Globalization
Accelerated Pace of
Change
Transition to Market
Driven
Rapid Growth of
Knowledge based
service sector
Change in demographic
profile
Why we need inventories
To meet anticipated demand
To smooth production requirements
To protect against stock-outs
To help hedge against price increases
To take advantage of quantity discounts
Management of Inventories
Impact On Business ..?
Intense Competition
Survival of the Fittest
Need To know
Knowledge in Power
Customer in Control
Ability to Change fast
enough to Meet Emerging
Challenges
Customer cant wait if the goods as demanded are not available he will shift
to the competitor
Disadvantages of Inventory
 Higher costs
Item cost (if purchased)
Ordering (or setup) cost
 Costs of forms, clerks wages etc.
Holding (or carrying) cost
 Building lease, insurance, taxes etc.
 Difficult to control
 Hides production problems
Objective of Inventory Control Scope of Inventory
Management
To achieve satisfactory levels of
customer service while keeping Materials Requirement Planning & Control
inventory costs within reasonable Procurement
bounds
Inventory control
Level of customer service Receiving and Inspection (Time and cost)
Costs of ordering and carrying inventory Transportation
Material handling
Customer ??? Internal External or Both Disposal of materials
Value analysis (Gears in watch; Eye drops)

Responsibilities of Inventory
Why control materials ?
Management

Cost Reduction Rs @2% @ 2%

Lakhs saving saving
Optimum Service Level on on
Quality Assurance matl. labour
Low Level of Capital tied up
Materials 70.00 68.60 70.00
Labour 16.00 16.00 15.68
Overhead 26.00 26.00 26.00
Profit 18.00 19.40 18.32
Coordinated Inter-departmental Effort
Total 130.00 130.00 130.00

Typical Costs.. Key Inventory Terms

Costs of purchasing Lead time: time interval between
Packing costs ordering and receiving the order
Transportation costs Holding (carrying) costs: cost to carry
Insurance premium an item in inventory for a length of
Cost of Receiving time, usually a year
Inspection costs
Material Handling costs
Ordering costs: costs of ordering and
Loss caused by scrap, rework receiving inventory
Inventory carrying costs Shortage costs: costs when demand
Cost of Paper work exceeds supply
 What is Inventory? Inventory Classifications
 Stock of materials

 Stored capacity Inventory 194-1994

T/Maker Co.

Process Number Demand

Other
stage & Value Type

Raw Material A Items

Independent Maintenance
1995 Corel Corp. WIP B Items
Dependent Operating
Finished Goods C Items

Inventory:: Demand based Inventory :: Demand based..2

Inventory: a stock or store of goods Independent Demand

Independent demand finished goods,

A Dependent Demand items that are ready to be sold
E.g. a computer
B(4) C(2)

Dependent demand components of

D(2) E(1) D(3) F(2) finished products
E.g. parts that make up the computer

Independent demand is uncertain.

Dependent demand is certain.

Inventories :: Process stage Inventories:: Others

Replacement parts, tools, & supplies
Raw materials & purchased parts
Goods-in-transit to warehouses or
Partially completed goods called customers
work in progress
Finished-goods inventories
(manufacturing firms)
or merchandise
(retail stores)
 Factors contributing to high Selective Inventory Control :Pareto
inventory Analysis or ABC analysis

difficulty in Inability to predict the

standardization
frequent modifications
difficulty in disposing
of items
No scientific policy
upgradation of
technology hence items
become obsolete
consumption pattern Pareto analysis (sometimes referred
to as the 80/20 rule and as ABC
overbuying of items
analysis) is a method of classifying
inability to decide on
critical/non-critical items, events, or activities according
items to their relative importance.
few suppliers sending
items in more than
ABC analysis is used to prioritize the
desired quantities
items.

Classifying Items as ABC Selective Inventory Control

ABC (Based on Price and volume of use)
VED (Vital, Essential, and Desirable)
% Annual Rs Usage Class % Rs % Items FSN (Fast, Slow, and Normal).
100 A 80 15 HML (High, Medium, and Low)
B 15 30 SDE (Scarce, Difficult, and Easy to
80 Obtain)
C 5 55
60 GOLF (Government, Ordinary, Local,
A and Foreign)
40
B
20 C
% of Inventory Items
0
0 50 100

Inventory management : some

mathematical models Assumptions of EOQ Model

Economic order quantity (EOQ) Only one product is involved

model
Annual demand requirements known
The order size that minimizes total
annual cost Demand is even throughout the year
Economic production model Lead time does not vary
Quantity discount model Each order is received in a single
delivery
There are no quantity discounts
 Total Cost Figure 12.4C Cost Minimization Goal
Annual Annual The Total-Cost Curve is U-Shaped
Total cost = carrying + ordering TC =
Q D
H+ S

Annual Cost
cost cost 2 Q

Q + DS
TC = H
2 Q

Ordering Costs

QO (optimal order quantity) Order Quantity

(Q)

JUST IN TIME (JIT)

JIT is a philosophy of continuous improvement

in which non-value-adding activities (or
wastes) are identified and removed for the
purposes of:
Some trends in Inventory Management
Reducing Cost Improving Delivery
Improving Quality Adding Flexibility
Improving Increase
Performance innovativeness

JIT/Lean Production Sources of Waste

Just-in-time (JIT): A highly Overproduction

coordinated processing system in which Waiting time
goods move through the system, and
services are performed, just as they are
Unnecessary transportation
needed, Processing waste
JIT   lean production Inefficient work methods
Product defects
JIT  pull (demand) system
JIT operates with very little fat
 Reducing waste: Increase Problem Visibility
Different Kinds of Waste Lower the Water to Expose the Rocks
Waste from Over-production
Waste of Motion
Transportation waste Missed Due Dates
Too Much
Space
Processing waste
Late
Defective Products Deliveries

Inventory
Too much paperwork
Excess Inventory Scrap & Engineering
Change Orders
Information waste Rework

Energy waste Poor 100% inspection Long queues

Machine
Quality Downtime
Manpower waste

Comparison of JIT and Traditional Select benefits of JIT Systems

Factor Traditional JIT
Reduced inventory levels
Much to offset forecast Minimal necessary to
Inventory errors, late deliveries operate
Flexibility
Deliveries Few, large Many, small

Large Small Reduced lead times

Lot sizes
Setup; Few, long runs Many, short runs Increased productivity
runs
Long-term Partners
Increased equipment utilization
Vendors
relationships are
unusual Reduced space requirements
Workers Necessary to do the Assets
work

Conventional Inventory
Management
 Customer
monitors inventory levels
Vendor Managed Inventory (VMI) places orders

 Vendor
manufactures/purchases product
assembles order
loads vehicles
routes vehicles
makes deliveries
Problems with Conventional Vendor Managed Inventory
Inventory Management
 Customer
 Large variation in demands on production trusts the vendor to manage the inventory

and transportation facilities  Vendor

monitors customers inventory
 workload balancing
 customers call/fax/e-mail
 utilization of resources  remote telemetry units
 set levels to trigger call-in
 unnecessary transportation costs
controls inventory replenishment & decides
 urgent v/s non-urgent orders  when to deliver

 setting priorities  how much to deliver

 how to deliver

VMI.. VMI: Advantages

Popularized in the late 1980s by Wal-Mart Increased customer
and Procter & Gamble, VMI became one of service
the key programs Increased revenues
Lower inventory
Others levels
Campbell Soup Lower cost of
Johnson & Johnson transactions
Barilla (the pasta manufacturer) Reduced supply risk
Indian case:; Praxair India (in collaboration
with Wipro infotech)

Praxairs Business
VMI (Vendor Managed Inventory) Praxair is the largest producer and distributor of atmospheric and
specialty gases in North and South America and one of the largest

players
Inventory is managed by vendor .
WalMart Plants worldwide
Works on the 3PL model to manage their inventories 44 countries

3PL service provider not only maintains the USA 70 plants

inventories at Wal Mart but the same partner South America 20
maintains for its COMPITITOR (K-Mart) plants
Product classes
packaged products
Efficient supply chains rests on the pillars of
bulk products
TRUST (HBR, 2001) lease manufacturing
equipment
Distribution
1/3 of total cost
 Praxairs Business VMI Implementation at Praxair
Bulk products
Convince management and employees of
new methods of doing business
Distribution
750 tanker trucks Convince customers to trust vendor to do
100 rail cars inventory management
1,100 drivers Pressure on vendor to perform - Trust easily
drive 80 million miles per year shaken
Customers Praxair currently manages 80% of bulk
45,000 deliveries/month to 10,000 customers inventories
customers
Demonstrate benefits
Variation
4 deliveries/customer/day to
1 delivery/customer/2 months
Routing varies from day to day

VMI Essentials
VMI Implementation at Praxair
 TRUST
Praxair receives inventory level data via
telephone calls: 1,000 per day Accurate information provided on a timely
fax: 500 per day
remote telemetry units: 5,000 per day
basis
Forecast customer demands based on Inventory levels that meet demands
historical data
customer production schedules Confidential information kept confidential
customer exceptional use events
Logistics planners use decision support tools to plan
whom to deliver to
when to deliver
 TECHNOLOGY
how to combine deliveries into routes Automated electronic messaging systems to
how to combine routes into driver schedules
exchange sales and demand data, shipping
schedules, and invoicing

Framework for Transitioning to

Effective and efficient system of Summary and Lessons
Inventory Management
Management of Inventories in supply
Get top management commitment chain not only leads to increased
Decide which parts need most effort profitability but also helps in achieving
Obtain support of workers customer service and responsiveness

Start by trying to reduce setup times

The management of inventory is complex
Gradually convert operations and no generic model is available for its
Convert suppliers to JIT / VMI management.
Prepare for obstacles
 SUPPLY CHAIN INCLUDES :

MATERIAL FLOWS
Information Management in Supply Chain
INFORMATION FLOWS

FINANCIAL FLOWS

Information Technology : Internal Information Technology : External

Integration Integration

Linking various business functions

Inter-organizational Systems (Extranet)
Purchasing
Manufacturing Link firms systems with external entities
Inventory (Suppliers, distributors, retailers etc.)
Finance Shared data & integrated processes
Marketing
Distribution etc
Shared data & integrated processes

IT for Supply Chain

Agility Benefits due to Integrated Information across SC
Warehouse/
Depot
Integrated view of resources and constraints
Improved channel efficiency by sharing of
Customer Velocity Manufacturing information between suppliers & customers
Reduced inventory levels

Future
Reduced production costs
Trend R. M.
Enhanced Quality
Marketing Planning
Customer driving the entire chain
Past Sales
Record
 Typical IT solutions EDI and business cycle
EDI Information sharing with
suppliers and distributors
ERP Information integrated within the Vendor

organization Customer
Documents ,
Intranet Collaborative working Images, Branch office
Purchase
Internet Global linkage of various entities orders,
queries ,
e-commerce/ Managing the money flow EDI
EDI destinations
Distributors
Order entry, service
e-procurement faster Shipment Network
notice, Transportation
Dataware- Storage of data and tracking of Invoices, etc.

housing/ customers Company s Computer

with EDI software Etc.
Data mining
Bar coding Technology
Smart Cards
RFID EDI provides a function known as store and forward

What is ERP?
Typical Benefits of EDI
ERP stands for: Enterprise Resource
Grater effectiveness/efficiency Planning systems
Competitive advantage
Reduced transaction costs and time ERP attempts to integrate all data and
processes of an organization into a unified
Optimized inventory system.
Reduced costs
Improved decision making A key ingredient of most ERP systems is the
use of a unified database to store data for the
various system modules.

Select ERP solution Providers Select reasons:: ERP Failure

Underestimate the cost of implementation.
Baan
People Soft Improper training on modules.
Jd Edwards
No attention to critical modules that connected
Oracle together processes or were expected to contribute
SAP (Highest market share) to system payback.

Allow shortcuts and offline activity necessary due

to missing modules or lack of training.

Implementation Success
Must be well planned and thought through.
Top down driven, management must take
on two roles:
Disciplinarian to stick to plan.
Compassionate support for stressful issues.
Must have goals and milestones.
These must be achievable.
Bar Coding Technology
Set of bars with varying widths and spaces
between bars
Reading through OCR (Optical Character
Recognition)
Uses photo sensor to convert bar code to
electrical signal. Scanner measures relative
width of bars and spaces. Bar code symbols can
be converted in to codes.
Smart Cards
Looks like credit card with a embedded
computer chip (microprocessor with
internal memory chip).
e.g. RTO License
BPCL used for monitoring and
control of trucks basically for fuel
monitoring.
Advantages of
Intranet: distributing information with
in organization
e.g. Design to manufacturing
Internet: Information exchanges across
web
E-procurement solutions
E- commerce: Commerce (Business) over
web
Blue tooth
M-commerce
Application area: Bar coding
Retails
Book land and ISSN numbering
(International Standard Serial Numbering)
Tradeoff in investing for better information
flow and other inventory reduction
methods.
Saves Time
Improves efficiency and cost reduction
Reduces error
What is RFID?
RFID = Radio Frequency Identification.
An ADC (Automated Data Collection)
technology that:
uses radio-frequency waves to transfer data
between a reader and a movable item to
identify, categorize, track..
does not require physical sight or contact.
Performs the operation using low cost
components.
Attempts to provide unique identification and
Other ADC technologies: Bar codes, OCR.
 RFID tags: Smart labels
RFID system components A paper label
with RFID inside

Ethernet
an antenna,
printed, etched
RFID or stamped ...
Reader
and a chip on a substrate
attached to it e.g. a plastic
foil ...
RFID Tag RF Antenna Network Workstation

Source: www.rfidprivacy.org

Some RFID tags RFID Tags

Tags can be attached to almost anything:
Items, cases or pallets of products, high value goods
vehicles, assets, livestock or personnel
Passive Tags
Do not require power Draws from Interrogator Field
Lower storage capacities (few bits to 1 KB)
Shorter read ranges (4 inches to 15 feet)
Usually Write-Once-Read-Many/Read-Only tags
Cost around 25 cents to few dollars
Active Tags
Battery powered (Cost around 50 to 250 dollars)
Higher storage capacities (512 KB)
Longer read range (300 feet)
Source: www.rfidprivacy.org
Typically can be re-written by RF Interrogators

RFID tag memory Some RFID readers

Read-only tags
Tag ID is assigned at the factory during
manufacturing
Can never be changed
No additional data can be assigned to the tag
Write once, read many (WORM) tags
Data written once, e.g., during packing or
manufacturing
Tag is locked once data is written
Similar to a compact disc or DVD
Read/Write
Tag data can be changed over time
Part or all of the data section can be locked
Source: www.buyrfid.org
 RFID application points RFID applications
Manufacturing and Processing
Inventory and production process monitoring
Warehouse order fulfillment
Supply Chain Management
Inventory tracking systems
Assembly Line Logistics management
Retail
Wireless Inventory control and customer insight
Auto checkout with reverse logistics
 Handheld Applications Security
Access control
Counterfeiting and Theft control/prevention
Bill of Lading Location Tracking
Material Tracking Traffic movement control and parking management
 Shipping Portals
Wildlife/Livestock monitoring and tracking

Smart groceries Smart cabinet

Reader antennas placed under each shelf 1. Tagged item is removed
from or placed in
Add an RFID tag to all Smart Cabinet
items in the grocery. 2. Smart Cabinet
periodically
interrogates to assess
inventory
As the cart leaves the 3. Server/Database is
store, it passes updated to reflect
items disposition
through an RFID
4. Designated individuals
transceiver. are notified regarding
Passive items that need
read/write tags attention (cabinet and
affixed to caps shelf location, action
The cart is rung up in of containers required)

seconds.
Source: How Stuff Works

Smart fridge Smart groceries enhanced

Track products
Recognizes whats been put in it through their entire
Recognizes when things are removed lifetime.

Creates automatic shopping lists

Notifies you when things are past their
expiration

Shows you the recipes that most closely

match what is available
Source: How Stuff Works
 RFID advantages over bar-codes Supply Chain of Petrol
Every time we visit petrol pump, we find that it is available every time,
No line of sight required for reading all the time. For you, and for countless other motorists.

Multiple items can be read with a single scan
Each tag can carry a lot of data (read/write)
Individual items identified and not just the
category
 Think, somebody must have put the petrol into the tank for you to
pump from.
Somebody must have prospected for oil, found it, and then dug the
well to extract it.
Next, somebody must have shipped the oil to a refinery, converted it
into Petrol , and then transported the it to your favorite petrol station.
The supply chain for Petrol is indeed quite
reliable, so much so that most consumers take
it for granted

Passive tags have a virtually unlimited lifetime A) Demand predictions are reliable and effective
B) Distribution system is efficient
Active tags can be read from great distances
Can be combined with barcode technology

Demand pattern:: Analysis..1 Demand assessment: Ordering by retailer

Order Size

Order Size

Customer Customer
Demand Demand

Retailer Orders

Time Time

Demand assessment: Ordering by distributor Demand assessment: Production Plan

Production Plan

Distributor Orders
Distributor Orders
Order Size

Order Size

Customer Customer
Demand Demand

Retailer Orders Retailer Orders

Time Time
 Bullwhip Effect in Supply Chains Bullwhip Effect
The bullwhip effect is a phenomenon observed in supply chains
Forrestor: Industrial Dynamics, HBR, 36:4, wherein the demand variability increases as one moves upstream
from retailers to distributors to manufacturers
1958
BWE describes the increasing amplification of
orders occuring within a SC
Resembles a whip lash

Occurs even if end-item demand is fairly

stable! Retailers
Forrestor studied a simulation model of the simplest tandem Warehouses/
supply chain with four entities: Retailer, DC, W/H, Plant Distributors

Manufacturers

Bullwhip Effect
Bullwhip Effect Example: P&G Diapers

In 2001, Cisco was forced to write down $2.2 billion worth of

obsolete inventory, due to uncertain variations in its demand in its
supply chain.
.

Impacts of Bullwhip
Bullwhip effect - an example
It distorts the order information & amplifies order variability. Chronology of company Xs supply chain
problem.
Impact of Bullwhip Effect:
-- Inventory: More safety stock needed
-- Transportation: Lower utilization of transportation Company X produces SOAPS for sale on
Higher costs
-- Warehousing: More warehouse capacity needed the open market.
-- Manufacturing: Lower capacity utilization Customer demand for Company Xs
-- Customer Service: Lower service level, more likely to cause SOAPS become stagnant
stockouts and lost sales
Retailers offer a sales promotion to boost
sales of Company X widgets
 Example continued
Moral of the story
Retailers fail to notify manufacturers of
sales promotion Distorted information along the supply
Company X recognizes that demand for chain caused inventory levels to
SOAPS have increased. increase along the supply chain which
Company X increases inventory to allow may result in increased inventory costs,
for increased manufacturing of SOAPS
poor customer service, adjusted
Company X notifies part suppliers of capacity and many other problems
increased demand.
associated with the bullwhip effect.
Suppliers increase inventory to meet
demand.

Supply Chain in Equilibrium Supply Chain Disrupted

Customer demand forecast = 10 units Customer Demand forecast = 20 units

Information Information Flow

Suppliers
Products & Products & Products & Producers
Services Services Products & Products & Distributors Products &
Suppliers Producers Distributors Services Retailers Services Services Services Retailers
10 Units 10 Units 10 Units
80 Units 40 Units 20 Units
10 Units 10 Units 10 Units
160 Units 80 Units 40 Units
Cash
Cash Flow
Retailers are selling product at a constant rate and price. Firms along the
supply chain are able to set their inventory to meet demand. As demand increases, the distributor decides to accommodate the forecasted
demand and increase inventory to buffer against unforeseen problems in demand.
Each step along the supply chain increases their inventory (double in this example) to
accommodate demand fluctuations. The top of the supply chain receives the harshest
impact of the whip effect.

Key: = Inventory Levels Key: = Inventory Levels

Bullwhip :: Major causes..1.. Bull whip :: Major causes ..2..

 Demand forecasting updating
Forecasting is often updated based on the
 Neglecting to order in an attempt to reduce order history from immediate customers
inventory
The longer the lead time, the greater the
 No communication up and down the supply fluctuation
chain

 No coordination up and down the supply chain The longer planning horizon, the greater
possibility of scheduling changes and
demand changes
 Delay times for information and material flow
 Remedial measures to counteract
Demand Forecasting Updating
bullwhip effect ..1..
Natural economic behavior
Periodic ordering - the economics of Avoid multiple demand forecast updates
transportation such as full truckload (FTL) Break order batches
and less-than-truckload rates Stabilize prices
Push ordering

Remedial measures to counteract bullwhip effect..2..

Summary and Lessons
 Reduce variability and uncertainty.
1. POS Effective management of demand essentially
2. Sharing information requires::
3. Year round low pricing Correct and timely forecast
 Reduce lead times. Seamless information flow across organization
Effective management of resources
1. EDI
2. Cross Docking
Relationship with channel partners
Commitment towards customer
 Alliance arrangements.
This will lead to productivity and profitability to all
1. Vendor managed inventory channel partners as a whole
2. On-site vendor representative

Essentials for effective distribution

Transportation and Warehousing
system
Transportation
(Accounts for 30-60% of distribution costs)
Distribution inventory
All finished goods inventory at any point of time
and accounts for 25-30% cost of distribution
Warehouses (distribution centers)
Material handling
Protective packaging
Order processing and communication
 Transportation Modes Road Freight (Trucks) Advantages
Road Freight (Trucks) Through movement direct from consignor to
FTL consignee
LTL Flexibility routes and loading routines can be
easily altered, operate day and night
Rail Less capital costs
Air Fast turn-around
Package Carriers Minimum delays
Water
Pipeline
Ropeways
9/29/2008 199

Truckload (TL)
Low fixed and variable costs
Disadvantages
Major Issues Susceptibility to weather and road conditions
Utilization in spite of the best protection
Consistent service Unsuitability for heavy loads rail transport
Less Than Truckload (LTL) more economical for bulk loads
Unsuitability for long distances again the rail
Major issues: telescopic rates are more favourable
Location of consolidation facilities
Utilization
Vehicle routing
Customer service

Advantages of Rail Disadvantages

Economy more so for goods over long Uneconomical for small shipments and
distances short distances
Not suitable for remote stations
Efficiency of energy Costly terminal handling facilities
Inflexible time schedules
Reliability not affected by weather
conditions
 Railways
Air Transport Advantages

Key issues: Faster mode

Reduction in cost particularly inventory
Scheduling to minimize delays / improve Broad service range
service Increasing capabilities
Off-track delays (at pickup and delivery end) Disadvantages:
Yard operations High cost
Variability of delivery times Weather affects flight conditions
Limitations on heavy consignments

Water Transport
Air Transport
Advantages:
Key issues:
Mass movement of bulk
Location/number of hubs
Location of fleet bases/crew bases Lowest freight cost
Schedule optimization Preferred for long haul of low value
Fleet assignment commodities
Crew scheduling
Disadvantages:
Yield management
Not for quick transit
Suitable for certain types on
commodities only

Water Pipeline Movement

Limited to certain geographic areas
Ocean, inland waterway system, coastal
waters
Very large loads at very low cost
Slowest
Dominant in global trade (autos, grain,
apparel, etc.)
Advantages:
Reliable, continuous, all weather transport
Low energy consumption hence low cost
Low maintenance and operating costs
Underground, no space problem
Can traverse difficult terrain
Minimal transit losses
Operation round the clock, safe
Economies of scale double the throughput for only
30% additional cost
Disadvantage is in the high investment cost
 Ropeways
Pipeline
Advantages:
In hilly or inaccessible areas
High fixed cost Long and circuitous routes with streams / deep
valleys
Primarily for crude petroleum, refined For commodities capable of movement in ropeway
petroleum products, natural gas buckets
Best for large and predictable demand Short haulages of less than 50 kms
Areas where other carriers are uneconomical
Would be used for transferring oils Disadvantages:
Heavy investments
Limitations on size and quantity of haul

Package Carriers Sample template chart of Relative Merits

Companies like FedEx, UPS, USPS, that carry
small packages ranging from letters to Parameter Weigh Rail Road Air Water Pipe Rope
tage line way
shipments of about 150 pounds Speed 30 5 6 8 4 3 3
Expensive Versatility 10 6 8 5 6 3 2

Rapid and reliable delivery Reliability 20 6 8 5 5 7 4

Availability 10 7 8 5 6 3 2
Small and time-sensitive shipments
Continuity of 10 6 7 5 5 8 3
Preferred mode for e-businesses (e.g., service
Amazon, Dell, McMaster-Carr) Distribution cost 20 4 5 6 6 7 8
Total score 100 5.4 6.7 6.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6
How to decide on the right carrier?

Trade-offs in Transportation Design Choice of Transportation Mode

Transportation and inventory cost trade-off A manager must account for inventory
costs when selecting a mode of
Choice of transportation mode transportation
Inventory aggregation

A mode with higher transportation costs

can be justified if it results in significantly
Transportation cost and responsiveness lower inventories
trade-off
 Inventory Aggregation: Inventory vs.
Transportation Cost Warehouse
As a result of physical aggregation
Inventory costs decrease The warehouse is Functions of
Inbound transportation cost decreases
where the supply warehousing include:
chain holds or stores
Outbound transportation cost increases
goods. Transportation
Inventory aggregation decreases supply chain consolidation
costs if the product has a high value to weight ratio, Product mixing
high demand uncertainty, or customer orders are Cross-docking
large Service
Inventory aggregation may increase supply chain Protection against
contingencies
costs if the product has a low value to weight ratio,
Smoothing
low demand uncertainty, or customer orders are
small

Ware house Management Objectives Functions

Warehouses

Providing efficient service to users

Material Customer Information Storage
Reduce cost of carrying goods handling service transfer function
Providing correct, updated stock figures
Controlling inventory Receive goods Temporary Permanent
Preventing damage to or obsolescence of Identify goods
Sort goods
materials Dispatch to storage
Hold inventory
Achieve all of the above with good Recall, select goods
Dispatch the shipment
housekeeping Prepare records and
advices

Purpose of Warehousing
Reasons for Warehousing
To provide desired level of customer service at Service related Cost related
the lowest possible total cost
Maintain source of supply Achieve production economies
Support customer service Achieve transportation
It is that part of the firms logistics system that policies economies
stores products (RM, Packing Materials, WIP, FG) Meet changing market Take advantage of Quantity
conditions Purchase discounts and
Overcome time and space forward buys
Stores product between point of origin and point of differentials Least Logistics cost for a desired
consumption and provides info to management on Support JIT programs of level of customer service
the status, condition and disposition of items being suppliers and customers
stored Provide customers with the right
mix of products at all times
Temporary storage of materials to
Distribution warehousing relates mainly to FG be disposed or re-cycled
 Warehouses
Transportation Consolidation
Support manufacturing
Mix products from multiple facilities for
shipment to a single customer
Break-bulk
Aggregate
Used more as a flow-thru point than as
a hoarding point

Materials Handling
Supply and Product Mixing Definition: Efficient short distance
movement in or between buildings and a
transportation agency.
Four dimensions
Movement
Time
Quantity
Space
Coordination

Packaging The Role of Packaging

Interest in packaging is widespread Identify product and provide information
Logistics Improve efficiency in handling and
Warehousing distribution
Transportation
Size
Customer interface
Marketing Protect product
Production
Legal
 Packaging Materials
Reverse Logistics
Considerations
Movement of goods from the market or customer
back to the company
Basic considerations include: The need:
Soft materials Increased awareness of the environment
Stringent legislation
Plastic For some it is part of the business
Environmental issues Profitability of dealing with scrap, surplus
Recycling (reverse logistics) Surplus, obsolescence can result due to:
Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses in
processing or overbuying based on incentives

Summary and lessons

Transportation and warehousing are
TOTAL COST essential backbones of effective
Total Cost
distribution system.
Transportation
Transportation
Cost
Cost Mode of transportation depends on
Cost various parameters including density,
Inventory
weight, fragile nature etc parameters.
Material handling
Packaging
Packaging Cost and inventory tradeoff is subjective
Number of Ware houses
and need to be worked out with individual
cases

Introduction
Companies using performance measurement
are more likely to achieve leadership positions
& twice as likely to handle a major change
successfully.
Performance Measurement Performance measurements vary from
in supply chain company to company.
Adding several tiers of suppliers &
customers complicates performance
measurement.
Performance measures must be visible &
communicated to all members of the SC.
 Performance Measurement Different Levels Need Different
should Provide Direction Measures
Measurements should be hierarchical
By looking at a firms key
measures, one should be able
to determine the firms Upper
Will need 2-4 measures
direction, determine their Management
strategy. Will need 2-4 per area --
Middle Management
not all the same
A firm lacking good, consistent Operational Departments Will need 3-5 per dept or
measures will tend to be going in all process
directions.

Measurement
Mistakes to Avoid Complex Relationships
Customer satisfaction ??? Or Service Quality
Gaps exist where there are no measures
for areas deemed strategically important.
Customer Loyalty????
Examples: Customer satisfaction, employee
involvement,
False Alarms Occur where there are Repurchase Intentions???
detailed measures for areas which are not
strategically important. More business, Competitiveness and
Examples: many efficiency measures Profitability
Vollmann and Schmenner, International Journal of
Operations & Production Management, 1994

Issues in performance measurement Challenges to Performance

system Measurements
How well the organization is doing?
Measure only the right things
Is the organization meeting its goals?
Are the customers happy? Avoid meaningless efforts
Are the processes in control?
If and where improvements are Use the results proactively and
necessary? productively
 Principles of PM system design Characteristics of Effective Metrics
Speed, reliability , and simplicity are the
main criteria for efficient metrics
Independence Linkage with other
Arranging indicators by priority indicators
Appropriateness
Visualizing the function content Objectivity Coherence
Classifying objectives of the function or Regularity Simplicity
team Cumulative
Selecting indicators that deal with quality Realistic
Formatting the metrics effectively

Performance measurement system Performance measurement system

(PMS): Desirable Features (PMS): Desirable Features (contd.)
PMS should have multiple criteria
Transparent Primary purpose should not be to reward or to
Simple punish
Self-regulating Performance-to-schedule measures must use
group, not individual results
Objective
Specific goals must be established and reviewed
Motivating and stimulating to all
PM must be understood by those whose
stakeholders performance is being measured.
PM data must be available for constant review

Other Useful Performance Some operational performance

Guidelines indicators
Delivery performance
Use a balanced approach
The metrics must be Order fulfillment performance
in selecting and
consistent with overall
developing metrics. Fill rate (Make-to-stock)
corporate strategy.
Order fulfillment lead time
Precise cost measurement
focus on customer. Perfect order fulfillment
is an important
Supply-chain response time
Focus upon
Use technology to achieve Production flexibility
processes not
efficient performance
functions.
measurement.
 Financial performance
Some Other indicators .1
indicators
Total supply-chain management cost
Return on inventory investment
Inventory investment/working capital Value-added productivity
Percentage inventory increase(decrease) vs Warranty cost or returns processing cost
percentage increase(decrease) in sales Cash-to-cash cycle time
Percentage inventory increase(decrease) vs Inventory days of supply
percentage increase(decrease) in cost of sales
Asset turns
stock write-offs

Some Other indicators .2 Some Non-financial Measures

Financial : ROI, Turnover ratio

Lead time for customer order delivery
Productivity: Total productivity
Efficiency: Realized prodn/Planned Prodn
Number of Corrections
Customer LT: Time from order to delivery Amount of Time needed to answer a
Prodn LT: Time from order relapse to finished phone
product Number of Complaints
Prodn flexibility: ability to respond efficiently to Conformance Quality
demand variation
Time to Respond to Change Request

The Balanced Scorecard Framework

A Balanced Scorecard Financial Perspective
Internal Business
Perspective
How do we
GOALS MEASURES look to GOALS MEASURES
Customer Perspective shareholders?

What
How do customers see us? must we
excel at?

Internal Perspective
What must we excel at?
Innovation and Learning Perspective
Can we continue to improve and create value?
Customer Perspective Innovation & Learning
Financial Perspective GOALS MEASURES How do
customers
Perspective
GOALS MEASURES
see us?
How do we look to our stakeholders? Can we
continue to
improve and
create
value?
Kaplan and Norton, The Balanced Scorecard, 1996
Supply Chain Performance Framework
Customer Service Operational Metrics
Metrics
Goals Measures
Goals Measures
Waste Reduction Supply chain cost of
ownership
Time Compression Supply chain cycle
efficiency
Unit Cost Reduction % of supply chain target
cost achieved
Operational Metrics Financial Metrics Product/process innovation
Product finalization point
Goals Measures Goals Measures
Inventory turns & days of
Inventory Management inventory
Supplier performance Supplier evaluations

Financial Metrics Customer Service Metrics

Goals Measures Goals Measures
Profit margins Profit margin by supply Flexible response Number of choices &
chain partners
average response time
Cash flows Cash-to-cash cycle on
receivables & payables Product/service Customer contact
innovation points and product
Revenue growth
Customer growth & finalization points
profitability Order fulfillment rate
Return on assets
Return on supply chain Customer satisfaction
asset
Return on equity
Customer value Customer profitability
Return on supply chain Delivery speed &
equity reliability
Delivery performance

Summary and lessons

Performance measures are not Large number of performance measures

generic
Measure depends on business process
They change with time
They change with organization Measures change with time
and the type of business
Various perspectives (customer,
stakeholders and internal need to be
considered for PM
Thank You