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  1. 1. Measures and Trust in SCM Eli Schragenheim [email_address]
  2. 2. The IT Vision for Supply Chains <ul><li>In the future the main competition will be between supply chains </li></ul><ul><li>Every supply chain has to react very fast to the changing trends in the taste of consumers </li></ul><ul><li>The stumbling block to fast reaction throughout the supply chain is lack of information </li></ul><ul><li>Current IT technology is capable of very fast B2B communication that would provide full collaboration throughout the supply chain </li></ul>
  3. 3. A Hole in the IT Vision <ul><li>Suppose that company S identifies a rising demand for product P produced by Vendor V. All the relevant information is communicated to V in no time </li></ul><ul><ul><li>Would Vendor V immediately start to produce according to the forecast by company S? </li></ul></ul><ul><ul><ul><li>Take into account that V is paid so-and-so days after S places an order and gets the delivery </li></ul></ul></ul><ul><ul><ul><li>Does V trust S? Who would suffer if the optimistic forecast does not materialize? </li></ul></ul></ul><ul><li>Is S truly interested in communicating all relevant information to V? </li></ul>
  4. 4. An Inherent Problem in SC <ul><li>The idea behind SCM is that by acting as one big system better results for all the participants can be achieved </li></ul><ul><ul><li>Can it work when some links have not implemented the systemic rules within their own organizations? </li></ul></ul><ul><li>Every organization that is part of a supply chain looks for its own benefit </li></ul><ul><ul><li>Hence, every link must clearly profit from acting within the supply chain rules </li></ul></ul><ul><ul><li>This kind of business relationship is frequently referred to as “collaboration” </li></ul></ul><ul><ul><li>Can it work without a win-win culture? </li></ul></ul><ul><ul><li>And we need to establish trust between all the links </li></ul></ul>
  5. 5. Business Rules in SCM <ul><li>The regular business rule: the vendor receives a concrete order, and is paid some time after delivery </li></ul><ul><ul><li>Being exposed to updated information won’t impact the vendor’s decisions </li></ul></ul><ul><ul><li>The vendor has no say regarding the size of the order </li></ul></ul><ul><ul><ul><li>If it is too small – then sales will be lost </li></ul></ul></ul><ul><ul><ul><li>If it is too high, it will take very long time until the next order is received </li></ul></ul></ul><ul><ul><ul><li>It is not clear the vendor can profit from a faster response </li></ul></ul></ul><ul><ul><ul><ul><li>On one hand the next link might be able to sell more </li></ul></ul></ul></ul><ul><ul><ul><ul><li>On the other hand the next link might order less </li></ul></ul></ul></ul>
  6. 7. Business Rules in SCM <ul><li>Vendor Managed Inventory </li></ul><ul><ul><li>The next link draws from the vendor’s inventory when the need arises and this triggers payment to the vendor </li></ul></ul><ul><ul><li>All the risk is now placed on the vendor </li></ul></ul><ul><ul><ul><li>Now the vendor has a lot to gain from a fast response </li></ul></ul></ul><ul><ul><li>Financial benefits to the vendor would occur, if and only if, sales would go up due to the new rule </li></ul></ul><ul><ul><ul><li>This is possible if it enables the seller to spot new opportunities and then rely on a secure and fast response </li></ul></ul></ul><ul><ul><ul><ul><li>In the former scheme the seller would refrain from holding inventory for such opportunities </li></ul></ul></ul></ul><ul><ul><ul><li>And less sales are lost due to shortages </li></ul></ul></ul>
  7. 8. The TOC Visionary Business Rules <ul><li>The objective: </li></ul><ul><ul><li>Allow the seller to grab any opportunity that is beneficial to all the links in the chain </li></ul></ul><ul><ul><li>Motivate all the links to respond quickly to any market trend </li></ul></ul><ul><ul><li>Institute a win-win culture over the entire chain </li></ul></ul><ul><ul><li>Let those who have the best knowledge and intuition make the decisions </li></ul></ul><ul><ul><li>Each link gets more </li></ul></ul>
  8. 9. The TOC Visionary Business Rules <ul><li>The TOC business rule: </li></ul><ul><ul><li>Each producer in the link manages his finished goods inventory at the next link </li></ul></ul><ul><ul><li>Payment is made immediately following each daily sale by the seller </li></ul></ul><ul><ul><li>Every producer gets: </li></ul></ul><ul><ul><ul><li>The truly variable costs (TVC) invested by the producer </li></ul></ul></ul><ul><ul><ul><li>A percentage of the throughput (T) </li></ul></ul></ul><ul><ul><ul><ul><li>Throughput is the revenues minus the truly variable costs </li></ul></ul></ul></ul><ul><ul><li>It is in everybody’s interest not to cannibalize any sales and not to ignore any optional sale </li></ul></ul>
  9. 10. Supporting the TOC Scheme <ul><li>Every link within the chain should manage its operations based on replenishment to the buffers </li></ul><ul><ul><li>The inventory at the next link is a buffer </li></ul></ul><ul><ul><li>Every producer might maintain its own finished goods buffer when the same product/part goes to different supply chains </li></ul></ul><ul><li>Using buffer management as a sensitive tool to identify changes in the market demand </li></ul><ul><li>Information on each sale should flow immediately to every link in the chain </li></ul><ul><li>But, there is a need to validate that every link in the chain is doing what it should do to allow more business to come in </li></ul>
  10. 11. How to Maintain Trust between Different Organizations? <ul><li>The win-win agreement is not enough to ensure high performance </li></ul><ul><li>We need measurements of the performance of each link to establish an overall control whereby the actions truly support the global chain </li></ul><ul><ul><li>The downstream links need to ensure fast response to any market opportunity </li></ul></ul><ul><ul><li>The upstream links need to validate that sales are generated from what is already in the system </li></ul></ul><ul><li>Note that maintaining trust is needed also for the other business rules </li></ul>
  11. 12. How should a seller measure the performance of the vendor? <ul><li>Criteria </li></ul><ul><ul><li>Every delay in measured, not just being late but also by how many days </li></ul></ul><ul><ul><li>The financial value of the sale should be measured as well </li></ul></ul><ul><li>Throughput-Dollar-Days (TDD) </li></ul><ul><ul><li>Every day a delay is noted the full T value of the order is added to a counter of TDD </li></ul></ul><ul><ul><li>When the order is late by 5 days, its full T value is added to the counter 5 times </li></ul></ul>
  12. 13. How should a seller measure the performance of the vendor? <ul><li>A common problem at the seller’s site </li></ul><ul><ul><li>Orders that cannot be fulfilled may not have been registered, even though the specific sale has been lost </li></ul></ul><ul><ul><li>Hence, the full damage caused by the unavailability of products cannot be directly measured </li></ul></ul>
  13. 14. How should a seller measure the performance of the vendor? <ul><li>The TDD measurement in this case could be directed to the emergency level of the parts </li></ul><ul><ul><li>The emergency level (zone 1 / red-line) is defined in the buffer management methodology </li></ul></ul><ul><ul><li>It is usually a certain percentage of the replenishment buffer </li></ul></ul><ul><ul><li>The emergency zone represents a very high probability of losing sales </li></ul></ul><ul><ul><li>Hence, when the on-hand stock is below the emergency zone – the TDD counter ticks </li></ul></ul>
  14. 15. An example: Product P10 T per unit = $60 Replenishment level = 100 un. Emergency level = 30 un. Seller Inventory ready for immediate sale Producer Fast replenishment On 4/15/2002: On hand stock = 17 un. Additional TDD due to P10: (30-17)*60 = 780 dollar-days On 4/16/2002 the on hand stock went down to 5 units Additional TDD = (30-5)*60 = 1500 dollar days Total TDD due to P10 = 1500 + 780 = 2280 dollar-days
  15. 16. The TDD as a measure of the performance of a vendor to a seller <ul><li>The vendor is responsible for full availability of his products at the seller’s site </li></ul><ul><li>The replenishment and emergency zone levels are agreed between the seller and the vendor </li></ul><ul><li>Whenever the on-hand stock is below the emergency level the TDD counter ticks </li></ul><ul><ul><li>The full throughput value of the parts that are missing is added to the periodical TDD measurement </li></ul></ul><ul><ul><li>When no stock is available at the seller, the full T value of the whole emergency level as added every day </li></ul></ul><ul><ul><li>This measure rises VERY fast when response time drops </li></ul></ul><ul><ul><li>The measure institutes the right priorities given both the financial aspects and the duration of the delay </li></ul></ul>
  16. 17. The TDD measurement for a vendor of a producer <ul><li>The differences between measuring the performance of a vendor to a seller and to a producer </li></ul><ul><ul><li>The producer knows exactly when lack of materials causes a delay in the internal operations </li></ul></ul><ul><ul><li>The financial damage of missing a part is more problematic to measure </li></ul></ul><ul><ul><ul><li>The part might participate in a variety of end-items sold by the supply chain </li></ul></ul></ul><ul><ul><ul><li>Hence, for every part the vendor is responsible for a “typical end-product T” should be defined </li></ul></ul></ul><ul><ul><ul><li>We still assumes that delay in the producer’s operation might cause missing a final sale, even though this is much less straightforward </li></ul></ul></ul>
  17. 18. The TDD as a measure of the performance of a vendor to another producer <ul><li>The vendor is responsible for full availability of his products as raw materials at the producer’s site </li></ul><ul><li>The replenishment and emergency zone levels are agreed between the producer and the vendor </li></ul><ul><li>Whenever the producer needs to release materials to the floor and a specific part is missing the TDD counter ticks </li></ul><ul><ul><li>The exact amount of units missing multiplied by the typical T for the end-products is added every day to the periodical TDD </li></ul></ul>
  18. 19. Link A Link B Link C Inventory A Inventory B Whenever C needs materials and they are not found in Inventory B, the TDD counter in increased by the T of the end items Link C measures B’s performance according to the periodic TDD
  19. 20. Measuring the performance of the seller <ul><li>Every link in the chain that is not the seller likes to judge the performance of the seller </li></ul><ul><ul><li>This is true even for the traditional business rules </li></ul></ul><ul><ul><li>The main focus is how fast products that are stocked at the seller’s site are being sold </li></ul></ul><ul><ul><ul><li>And what products are NOT sold! </li></ul></ul></ul><ul><li>Every producer that is judged according to TDD has to invest capacity and materials in an effort to maintain the TDD and gain from the supply chain sales </li></ul><ul><ul><li>Hence, there is a need to measure the investment </li></ul></ul>
  20. 22. Inventory-Dollar-Days - measuring the flow <ul><li>Every area that contains inventory can be measured according to: </li></ul><ul><ul><li>The value of the item – only the raw material purchasing costs are considered </li></ul></ul><ul><ul><li>The number of days each item remains in the area </li></ul></ul><ul><li>Every item in the measured area carries inventory dollar days equal to its value in dollars multiplied by the number of days it remains in the area </li></ul><ul><li>The IDD is a snapshot: how much money is stuck in the area and for how long </li></ul>
  21. 23. A measured area where inventory items spend some time Basic calculation of the IDD for an area
  22. 24. Using the IDD measurement <ul><li>Each producer should measure the following areas: </li></ul><ul><ul><li>Raw materials from vendors that are not managing their materials </li></ul></ul><ul><ul><li>WIP </li></ul></ul><ul><ul><li>Every finished goods area that is controlled by the producer </li></ul></ul><ul><li>Under the TOC supply chain vision the area that truly measures the performance of all the downstream link is: </li></ul><ul><ul><li>From the completion area in the shop until the supply chain sells it </li></ul></ul>
  23. 25. Link A Link B Link C Inventory A Inventory B TDD measurement TDD measurement Every day link A adds to the IDD measure, the value of all its inventory in the supply chain
  24. 26. IDD and Inventory Turns <ul><li>Inventory turns is the current common measurement of the effectiveness of inventory in the system </li></ul><ul><ul><li>It measures the average of how much inventory waits in a certain area </li></ul></ul><ul><ul><li>The dollar value of the inventory is specified separately </li></ul></ul><ul><ul><li>Being an average, it misses pointing to the problematical area, and it does not give a clue regarding the variability </li></ul></ul><ul><ul><li>The combined effect of time (delays) and money is given only at a very global level </li></ul></ul>
  25. 27. Summary <ul><li>The TOC vision for supply chains provides a new business scheme for real collaboration between the links </li></ul><ul><li>All the current business rules for supply chains should maintain trust among all parties </li></ul><ul><li>Trust needs to be supported by a measurement system that motivates all the parties to do what is good for the chain as a whole </li></ul><ul><li>The measurements need to contain both time and money </li></ul>
  26. 28. Summary <ul><li>Throughput-dollar-days (TDD) measures the performance of the vendors by accumulating the full dollar value of every late order and the length of time it was delayed </li></ul><ul><li>Inventory-dollar-days (IDD) measures the flow through the supply chain by measuring how much inventory-money is being held at each area, thus blocking the flow </li></ul><ul><li>IDD should be used, among other uses, to check how fast products are being sold </li></ul>
  27. 29. Summary <ul><li>Both the TDD and IDD measurements have uses that stretch beyond measuring the performance of the links in the supply chain </li></ul><ul><li>The TDD is an operational performance measurement of the damage caused by failing to meet the market requirements </li></ul><ul><li>The IDD is a measure of effectiveness of the operational policies to achieve as low TDD as possible </li></ul>