Supply Chain Chapter of Supply Chain Drivers & Metrices Chopra Meindl Adaptation

1. Supply Chain Drivers
and metrics
Group 15:
1802073 – Kapil Gavali
1802074 – Gowtham M
1802075 – Lionel Gracias
1802076 – Venkatesh G
1802077 – Harish N

2. Impellers of Supply chain
 Empowered Customer
• Indian buyers during 1960s and 70s waited for 5 to 6 years to get a scooter after
paying the booking amount
• Customers today have access to a plethora of information like availability, variety,
quality, and prices
 Developments in Information Technology tools
• Exponential growth in information technology section major factor in development
and expansion of supply chain
• POS data and its real time availability has been revolutionary
 Globalization
• Manufacturing and sourcing opportunities and widely dispersed
• Developing countries provide low labor costs but underdeveloped logistics
infrastructure can be a challenge

3. Supply chain concepts
 Systems concept
• It emphasizes an interdependence not only between the functions within an
organization but also among multiple organizations that is to connect the
supplier’s supplier with the buyer’s buyer from end to end.
 Total cost concept
• The value delivered to the customer can be maximized only if the total cost
incurred by all the links in the chain or network serving the customer is minimized.
 Trade off concept
• The “trade off” concept enjoins the decision makers to explore the possibilities of
choosing among the alternatives or a combination of alternatives to fulfil a supply
chain objective minimize costs.

4. Financial Measures of performance
 ROE (Return on equity)= Net income / Average Shareholder Equity
 ROA (Return on assets)= Earnings before interest / Average total assets
 APT (Accounts payable turnover) = Cost of goods sold / Accounts payable
 ART (Accounts receivable turnover) = Sales revenue / Accounts receivable
 INVT (Inventory turnover) = Cost of goods sold / Inventory
 PPET (Property plant and equipment turnover) = Sales revenue / PPE
 C2C (Cash to cash) = - Weeks payable + weeks in inventory
+ Weeks receivable

6. Supply chain drivers
 Facilities
 Places where inventory is stored, assembled, or fabricated
 Production sites and storage sites
 Inventory
 Raw materials, WIP, finished goods within a supply chain
 Inventory policies
 Transportation
 Moving inventory from point to point in a supply chain
 Combinations of transportation modes and routes
 Information
 Data and analysis regarding inventory, transportation, facilities throughout the supply chain
 Potentially the biggest driver of supply chain performance
 Sourcing
 Functions a firm performs and functions that are outsourced
 Pricing
 Price associated with goods and services provided by a firm to the supply chain

7. Importance of Data

8. Supply chain decision
making framework
 Logistical drivers – Effective production,
storage & movement of goods
 Cross-functional drivers – Every supply
chain activity
 Right Sourcing  Higher profits
 Differential Pricing  Customers who
value responsiveness
 Example - Walmart
Driver Lever More/Fast Less/Slow
Facility Capacity Responsive Efficient
Inventory Inventory Responsive Efficient
Transportation Time Responsive Efficient
Information Information Responsive
& Efficient
Less of
both

9. Facilities
 Role in the supply chain
 The “where” of the supply chain
 Manufacturing or storage (warehouses)
 Role in the competitive strategy
 Economies of scale (efficiency priority)
 Larger number of smaller facilities (responsiveness priority)
 Example 3.1: Toyota and Honda (Both use facility decisions to
increase responsiveness)
 Toyota – 20% excess capacity at each plant to meet demand
effectively despite any fluctuations in demand / production
delays
 Honda facilities are flexible enough to assemble both SUVs &
cars in the same plant (helped the company during 2008
downturn giving high level of utilization)

10. Components of Facilities
 Capability
 Decision – Flexible, dedicated or combination of both
 Flexible  Many products  More Efficient
 Dedicated  Less products  Less Efficient
 Decision – Product (single product) vs functional (many products) focused
 Decision – Cross-docking Vs Storage
 Location (where a company will locate its facilities)
 Centralize Vs Decentralize
 Centralize  Higher economies of scale
 Decentralize  More responsive
 Parameter – Taxes & tariffs, quality of workers, cost of workers, cost of facility, infrastructure,
proximity to customers, location of other facilities and strategic factors
 Capacity
 A facility’s capacity to perform its intended function or functions
 Excess capacity – responsive, costly
 Little excess capacity – more efficient, less responsive

11. Facility-related metrics
 Capacity
 Utilization
 Processing/setup/down/idle time
 Production cost per unit
 Quality losses
 Theoretical flow/cycle time of production
 Actual average flow/cycle time
 Product Variety
 Volume contribution of top 20% SKUs and customers
 Average production batch size
 Production service level

12. Inventory
 Encompasses all raw materials, work in
process and finished goods with in a
supply chain
 Exists because of mismatch between
supply and demand
 Affects assets held, cost incurred and
responsiveness in supply chain
 Inventory is product of throughput and
material flow time; I=DT

13.  Cycle Inventory
 Average amount of inventory used to satisfy demand between receipts of supplier shipments
 Large batches are preferred to exploit economics of scale & lower cost in production
 Smaller batches are preferred to reduced inventory and associated carrying costs
 Safety Inventory
 Held in case demand exceeds expectations
 Choosing high or low safety inventory involves trade-off between costs of having too much inventory and
costs of losing sales on account of insufficient inventory
 Seasonal Inventory
 Build up to counter predictable seasonal variability in demand
 If volume flexibility in rate of production is expensive it is advisable to maintain smooth production rate
and build up inventory
 Level of Product Availability
 Fraction of demand that is served on time from product held in inventory
 Trade off involves cost of inventory and responsiveness
Inventory decisions

14. Inventory related Metrics
 C2C Cycle Time High level metric that includes inventories, a/c payable, a/c receivables
 Average Inventory Measures average amount of inventory carried in units of financial value and
days of demand
 Inventory turns Ratio of average inventory to sales
 Products with more than a specified number of inventory days To identify products that are
in oversupply or to identify reasons of high inventory such as price discounts / product is a very
slow mover
 Average replenishment batch size Average amount in each replenishment order, measured by
SKU units and days of demand
 Seasonal Inventory Amount by which inflow exceeds sales, built solely to deal with anticipated
spikes in demand
 Fill rate Fraction of orders/demand that is met on time from inventory, averaged over specified
number of units of demand
 Fraction of time out of stock Fraction of time a particular SKU had zero inventory. Used to
estimate lost sales during stockout period
 Obsolete inventory Fraction of inventory older than specified obsolescence date

15. Transportation
 Entails moving inventory from point to
point in supply chain
 Involves choosing from many
combinations of modes and routes
with its own performance
characteristics
 Affects both responsiveness and
efficiency
 For high value items rapid
transportation is required to be
responsive, while for low value items
low cost transportation coupled with
holding inventory close to customer is
advisable

16. Transportation decisions
 Design of transportation network
 Collection of transportation modes, locations and routes along which product can be shipped
 Decisions include whether or not multiple supply or demand points will be included in a single run
 Choice of transportation mode
 Manner in which product is moved from one location to another in supply chain network
 Choice involves speed, size of shipments, cost of shipping and flexibility
 Inbound transportation decisions affect cost of goods sold (COGS), whereas outbound
transportation costs are part of SG&A (Selling, General & Administrative Expenses)

17. Transportation related Metrics
 Average inbound transportation cost Measures cost of bringing product into facility,
often measured as % of sales or COGS
 Average incoming shipment size Measures average number of units or dollars in each
incoming shipment at a facility
 Average inbound transportation cost per shipment Measures average transportation
cost of each incoming delivery, it identifies opportunities for greater economies of scale in
inbound transportation
 Average outbound transportation cost Measures cost of sending product out of facility
to customer
 Average outbound shipment size Number of units or dollars on each outbound shipment
at a facility
 Average outbound transportation cost per shipment  Measures average transportation
cost of each outgoing delivery, it identifies opportunities for greater economies of scale in
outbound transportation
 Fraction transported by mode Transportation (in units or dollars) using each mode of
transportation, to estimate whether certain modes are over used or under used

18. 3.7. Define the key performance metrics for
information and discuss its role in creating
strategic fit between the supply chain strategy
and the competitive strategy.

19. Information
 It consists of data and analysis concerning facilities, inventory, transportation, costs,
prices, and customers throughout supply chain.
 Information has a direct impact on all other drivers of supply chain, hence influence
the overall performance.
 It makes the supply chain more responsive and more efficient.
Example: 7-Eleven’s better match of supply and demand while achieving production
and distribution economies. Which resulted in high level of responsiveness to cx
demand while replenishment costs are lowered.

20. Role of Information in the Supply Chain
Good information can help improve the utilization of supply chain assets and
coordination of supply chain flows to increase responsiveness and reduce costs.
Example:
 7-Eleven Japan uses information to improve product availability and while
decreasing inventories.
 Walmart uses information on shipment from the suppliers to facilitate cross-
docking and lower inventory and transportation expense.
 Airlines uses information to offer the right number of seats at discount prices
leaving sufficient number of seats for business customers.

21. Shortcomings
 Even though the sharing of information helps supply chain better, there is danger
in the assumption that more information is always better.
 More information increases the complexity and the cost of both the required
infrastructure and the follow-up analysis grow exponentially.
 As more information is available the marginal value provided by the additional
information diminishes.
Therefore, the trade-off between the complexity and value is important to consider
when setting the information infrastructure.

22. Components of information decisions
The key components of information that a company must analyse to improve
efficiency and responsiveness within its supply chain.
 Demand Planning
 Coordination and Information sharing
 Sales and Operations Planning

23. Information related metrics
A Manager should track the following information-related metrics that influence
supply chain performance.
 Metrics that influence supply chain performance.
 Forecast horizon.
 Frequency of update.
 Forecast error.
 Variance from plan.
 Ratio of demand variability to order variability.

24. 3.8. Define the key performance metrics for
Sourcing and discuss its role in creating strategic
fit between the supply chain strategy and the
competitive strategy.

25. Sourcing
 The choice of who will perform a particular supply chain activity, such as
production, storage, transportation, or the management of information.
 At the strategic level, these decisions determine what functions a firm performs and
what functions the firm outsources.
 Sourcing affects both the responsiveness and the efficiency of the supply chain.

26. Role in the Supply Chain
 Managers must decide whether each task will be performed by a responsive or
efficient source and then whether the source will be internal to the company or a
third party.
 Sourcing decision should be made to focus on increasing the size of the total
surplus to be shared across the supply-chain.
 Outsourcing to third party is meaningful if it can do a better job at it than the firm
itself.
 Example: Zara,
 For basic products such as white T-shirts, Zara aims of efficiency because the
demand is predictable. Therefore, the products are outsourced from suppliers in
low cost countries.
 For trendy products, the demand is unpredictable. Therefore, Zara sources from
company-owned factories in Europe. These factories are not low cost but flexible
and responsive.

27. Components of Sourcing decisions
Key sourcing decisions that are made within a firm.
 In-House or Outsourcing.
 Supplier Selection
 Procurement

28. Sourcing related metrics
Sourcing decisions has direct impact on the cost of goods sold and account payable.
The performance of the source affects the quality. Inventories. And inbound
transportation cost.
A Manager should track the following Sourcing-related metrics that influence supply
chain performance.
 Days payable outstanding
 Average purchase price
 Range of purchase price
 Average purchase quantity
 Supply quality
 Supply lead time
 Percentage of on-time deliveries
 Supplier reliability

29. Pricing
 Role in the supply chain
• Pricing determines the amount to charge customers for goods and services
• Affects THE supply chain level of responsiveness required and the demand profile
the supply chain attempts to serve
• Pricing strategies can be used to match demand and supply
• Amazon uses pricing to provide responsiveness to those who value it while using
customers who want a low price , thereby improving efficiency

30. Pricing
 Role in the competitive strategy
• Firms can utilize optimal pricing strategies to improve efficiency and
responsiveness
• Pricing strategies vary to meet different customer responsiveness requirements

31. Components of Pricing Decisions
 Pricing and economies of scale
The provider of the activity must decide how to price it appropriately to reflect these
economies of scale
 Everyday low pricing v/s high-low pricing
Different pricing strategies lead to different demand profiles that the supply chain
must serve

32. Components of Pricing Decisions
 Fixed price versus menu pricing
• If marginal supply chain costs or the value to the customer vary significantly along some
attribute, it is often effective to have a pricing menu
• Can lead to customer behaviour that has a negative impact on profits

33. Components of Pricing Decisions
Pricing-related metrics
• Profit margin
• Days sales outstanding
• Incremental fixed cost per order
• Incremental variable cost per unit
• Average sale price
• Average order size
• Range of sale price
• Range of periodic sales

34. Pricing
Overall trade-off: Increase firm profits
• Understand of the cost structure of performing a supply chain activity and the value this
activity brings to the supply chain
• Strategy may support efficiency in the supply chain, lower supply chain costs, defend market
share, or steal market share
• Differential pricing may be used to attract customers with varying needs
• Strategy should help either increase revenues or shrink costs or preferably both

35. Infrastructure
Well developed infrastructure needed to:
• Support the transportation
• Smooth flow of information
• Getting countries integrated into global economies

36. Components of Infrastructure Decision
 Infrastructure orientation
• Existing infrastructure in developing countries due to colonial rule; insufficient today
• Production centres need to be linked to seaports, rail, road, airports; Requires revamping
• India considers create a logistics arm to Indian railways
 Integration with International Infrastructure Design and standards
• Conform to global standards & practices to permit smooth end-to-end flow
• The Southern Corridor of the Trans-Asian Rail would connect Turkey, Iran, Pakistan, India,
Bangladesh, Myanmar & Thailand
• Indian railways is exercising “Unigauge”
 Extent of Penetration
• Physical infrastructure should extend to rural areas due to
• Penetration of IT into rural areas
• Higher disposable income in rural areas
• “Bharat Nirman Yojana” aims to integrate rural parts to mainstream economic activities

37. Infrastructure
 Infrastructure Related Metrics
• Well-defined & widely defined performance indicators are absent
• Traffic Handling Capacity, efficiency of intermodal hubs, turnaround time, agility-including
scalability, level of mechanized & computerized operations considered as performance
drivers
 Components of Infrastructure
• State-provided transportation facilities like seaports, railways, roads, airports, inland water
transport & pipeline
• Communication network
• Judicial system
• Banking services
• Functional Distribution Channel

38. International Logistics
• Backbone of global supply chains
• Perhaps misunderstood for transportation only
• “The process of planning, implementing, and controlling the flow and storage of goods,
services, and related information from a point of origin to a point of consumption in a different
country”
• Required to successfully manage complex networks