Supply Chain Strategy and Performance Measures

Copyright© 2009 Dorling Kindersley India Pvt Ltd
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Supply Chain Strategy and Performance
Measures
Supply Chain Management_Janat Shah

Learning Objectives
❑ What are the key supply chain performance measures?
❑ How does supply chain performance affect financial
performance?
❑ Why is it necessary to ensure a god fit of the business strategy
with the supply chain strategy?
❑ What are the different dimensions of customer service?
❑ What are the ways in which firm can simultaneously reduce
supply chain costs and improve customer service?

Supply Chain Performance Measures:

Cost Versus Service
❑ Cost
❑ Service
✓ Order delivery lead time
✓ Responsiveness
✓ Delivery reliability
✓ Product variety

Supply Chain Performance Measures
Cost of service
Low High
Service Level

Organized Retail Performance

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
An Automobile Company: An

Example
An automaker wrestles with high levels of inventory(83 days)

as unsold vehicles sit on lots.
❑ The automaker not only produced too many cars and trucks but
also made the wrong mix. The automaker pushed feature-laden
vehicles that dealers are hesitant to buy. But the dealers already
have enough cars and trucks on their lots to last 80 to 126 days
❑ The dealers say: "The bean counters said, 'This is the mix you
need to sell to hit targets for profitability.' They ended up with a
huge sales bank of cars, a mix we as dealers wouldn't order”.

Managing Supply Chains

Efficiently
Inefficient Practices
.
Existing Position
Cost
Low High
Service Level

Impact of Service Level on Revenue
Costs and Profits

Supply Chain Typology
❑ Order Penetration Point/ Decoupling Point

✓ Make to Stock
✓ Make to Order
✓ Configure to Order
❑ Supply Chain Focus
✓ Efficiency
✓ Responsiveness

Supply Chain Typology: Order

Penetration Point/ Decoupling Point

Push-Pull Boundary of Supply Chains

Match Supply Chain Design with

Product Category

Functional Versus Innovative Products:
Differences in Demand
Aspects of demand Functional (predictable Innovative (Unpredictable
Demand) Demand)
Product Life cycle More than 2 years 3 months to 1 year
Contribution margin ( % of 5% to 20% 20% to 60%
sales price)
Product variety Low ( 10 to 20 variants per High ( often thousands of
category) 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 0% 10% to 30%
markdown

Supply Chain Performance Measures:

SCOR Model
❑ Internal Facing
✓ Cost
▪ Total logistics management cost, Value-added
productivity , Warranty cost
✓ Assets
▪ Cash-to-cash cycle time, Inventory days of supply, Asset
turns
❑ Customer facing
✓ Reliability
▪ Order fulfilment performance ,Perfect order fulfilment
✓ Flexibility
▪ Supply-chain response time, Production flexibility

Superior Performers Spend Less on
Supply-Chain Management
Best-in-class companies have an advantage in total supply-chain
management cost (5% – 6% less in revenue)
Total Supply-Chain Management Cost
Source: Supply-Chain Council

Comparative Performance:
Best-in-Class Versus Median
Consumer Packaged Goods Focus
Delivery Performance to Request Total Supply-Chain Management
Cost
Upside Production Flexibility Cash-to-cash Cycle time
Source: Supply-Chain Council Supply Chain Management_Janat Shah

Evaluation of Supply Chain Performance in
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)

Benchmarking Supply Chain

Performance Using Financial Data
❑ Total length of the chain: = DRM + DWIP + DFG

❑ DRM = RM * 365/ CRM, DWIP = SFG*365/ CP, DFG = FG * 365 /
CS DRM , DWIP , DFG = Days of RM, WIP and FG Inventory
❑ Supply chain inefficiency ratio:
❑ SCC = DC + INV * ICC & SCI = SCC / NS
SCC = SC mgnt. costs , ICC= Inv. Car. cost SCI = SC inefficiency
ratio
❑ Supply chain working capital productivity:
SWC = SC working capital, SWCP = SC working capital productivity
SWC = INV +AR–AP SWCP = NS / ISWC

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

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

The Strategic Profit Model

Impact 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

Impact of Supply Chain on Business

Performance
Supply
Business
Chain
Performance
Performance
Supply
Chain
Initiative

Enhancing Supply Chain Performance

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 Analysis
Supply
Business
chain
performa
performanc
nce
e
Supply chain Supply

diagnostics chain
initiative

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.

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 Strategy and Performance Measures

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Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Firm Inventory turns

* source: Financial statements

Copyright© 2009 Dorling Kindersley India Pvt Ltd

An automaker wrestles with high levels of inventory(83 days)

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

❑ Order Penetration Point/ Decoupling Point

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Source: Supply-Chain Council

Supply Chain Management_Janat Shah

Upside Production Flexibility Cash-to-cash Cycle time

Source: Supply-Chain Council Supply Chain Management_Janat Shah

Net asset turns (working 2.2 turns 8 turns 12 turns 19 turns

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

❑ Total length of the chain: = DRM + DWIP + DFG

Supply Chain Management_Janat Shah

* Source: Exhibit 2 and 3 Kurlon case, Assumption : ICC=0.2

Supply Chain Management_Janat Shah

2. Apple 2. Procter & Gamble

3. Procter & Gamble 3. IBM

5. Toyota Motor 5. Toyota Motor

6. Wal-Mart 6. Johnson & Johnson

7. Anheuser Busch 7. Samsung

9. Best Buy 9. Tesco

10. Samsung Electronics 10. Johnson Control

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Copyright© 2009 Dorling Kindersley India Pvt Ltd

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply chain Supply

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

Supply Chain Management_Janat Shah

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