UNIT 1 Supply Chain Management (MBA Notes)

UNIT I INTRODUCTION 

Supply Chain – Fundamentals, Evolution, Role in Economy, Importance, Decision Phases, Enablers & Drivers of Supply Chain Performance; Supply chain strategy; Supply Chain Performance Measures.

 WHAT IS A SUPPLY CHAIN?

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. Within each organization, such as a manufacturer, the supply chain includes all functions involved in receiving and filling a customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance, and customer service.

A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages. A typical supply chain may involve a variety of stages, including the following:

• Customers

• Retailers

• Wholesalers/distributors

• Manufacturers

• Component/raw material suppliers

Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary.

2 Evolution of SCM

·         Before the 1950s, logistics was thought of in military terms (Ballou, 1978). It had to do with procurement, maintenance, and transportation of military facilities, materials, and personnel. The study and practice of physical distribution and logistics emerged in the 1960s and 1970s.

·         The logistics era prior to 1950 has been characterized as the “dormant years,” when logistics was not considered a strategic function (Ballou, 1978). Around 1950s changes occurred that could be classified as a first “Transformation.” The importance of logistics increased considerably, when physical distribution management in manufacturing firms was recognized as a separate organizational function (Heskett et al., 1964). The SCM concept was coined in the early 1980s by consultants in logistics (Oliver and Webber, 1992). The authors emphasized that the supply chain must have been viewed as a single entity and that strategic decision-making at the top level was needed to manage the chain in their original formulation.

·         SCM has become one of the most popular concepts within management in general since its introduction in the early 1980s. A number of journals in manufacturing, distribution, marketing, customer management, transportation, integration, etc. published articles on SCM or SCM-related topics.

·         The evolution of SCM continued into the 1990s due to the intense global competition.

·         Drucker (1998) went as far as claiming there was a paradigm shift within the management literature: “One of the most significant changes in paradigm of modern business management is that individual businesses no longer compete as solely autonomous entities, but rather as supply chains. Business management has entered the era of inter-network competition and the ultimate success of a single business will depend on management’s ability to integrate the company’s intricate network of business relationships.”

·         Fernie (1995) adopted SCM in the National Health Service. In fact, it was the first paper of SCM in the service industry.

·         O’Brien and Kenneth (1996) proposed an educational supply chain as a tool for strategic planning in tertiary education. The study was based on a survey among employers and students. Survey findings revealed that integration and coordination among students and employers should have been promoted. Cigolini et al. (2004) explored a framework for SCM based on several service industries including automobile, grocery, computers, book publishing etc. According to the case study conducted at the City University of Hong Kong, Lau (2007) defined educational supply chain as the ‘Student’ and the ‘Research’ supply chain.

India’s supply chain network – Growing regional integration, investor confidence

The supply chain industry has a cascading impact on almost all aspects of trade and retail. As India opens its economy further, financing the improvement of this linkage sector is vital for business growth. A modernized and efficient supply chain improves the ease of doing business, scales down the costs of manufacturing, and accelerates rural and urban consumption growth due to better market access.

Until recently, infrastructural woes had a crippling effect on the supply chain network in India. Suppliers, manufacturers, and retailers had to factor in delays in the movement of goods between state borders due to complicated taxes and transport lines running over capacity, increasing overall costs. With the new reforms coming into play, a gradual resolution of these problems seems imminent.

In the last three years, India’s supply chain sector has seen an influx of capital, both foreign and domestic. Firms like Future Supply Solutions have raised almost US$2 billion (Rs 130 billion) in investments from domestic and foreign channels. The French firm, FM Logistics, recently acquired Pune-based Spearhead Logistics, investing over US$8 million (Rs 500 million) with further plans to invest US$46 million (Rs 3 billion) to set up warehouses all over India.

The Delhi-Mumbai Industrial Corridor and Development Corporation (DMICDC) has awarded companies over US$2.3 billion (Rs 150 billion) in contracts for the development of multimodal logistics hubs in Maharashtra, Gujarat, and the National Capital Region (NCR). They are in the process of granting another US$1.5 billion (Rs 102 billion) in contract packages for construction of the same in the states of Uttar Pradesh and Haryana. The proposed hubs in Maharashtra, Gujarat, and the NCR will provide end-to-end supply chain services, such as small processing facilities (grading and packaging) and final delivery and transport services.

Plans to improve regional connectivity through road, rail, and inland waterways are already ongoing. In fact, India’s 2018 budget saw the highest fiscal allocation for infrastructure spend, at about US$95 billion (Rs 6 trillion). Below we discuss critical components of India’s supply chain infrastructure as it benefits from planned government spending, easier investment rules, and various tax and fiscal incentives.

Port connectivity in India

India’s ports handle 95 percent of the country’s trade by volume, playing a key role in international supply chains. India currently permits 100 percent FDI for the construction and maintenance of ports. The government also allows a tax holiday for 10 years and up to 50 percent financial aid – subject to a maximum of US$3.88 million (Rs 250 million) – for investing companies.

The leading government initiative in this sector is the Sagarmala project, which will modernize existing ports, and will develop new ones at Paradip Outer Harbor (Odhisha state), Cuddalore/Sirkazhi (Tamil Nadustate), Belikeri (Karnataka state), Enayam (Tamil Nadu state), and Vizhinjam (Kerala state).

Cumulatively, these ports will manage almost 100 percent more trade volume by 2025. The Dubai owned DP World recently signed onto a US$3 billion (Rs 195 billion) joint investment platform with India’s National Investment and Infrastructure Fund to construct several sea as well as river ports, among other logistics projects.

Last mile cargo solutions

Challenges in India’s supply and distribution channels are further complicated by lacking roads and railway infrastructure. Railway stations are often unable to cope with the large volume of goods transported. Merchandise at railway stations and factories are often left waiting for transport due to delayed turn-around times.

This sector is thus a key focus of government spending and infrastructure investments:

• National highways: The National Highway Authority of India has a bidding process underway for companies to invest in highways across India. Dubai based investment firms have already bid close to US$9 billion (Rs 585 billion) for nine highways. This implies an increase in accountability for the upkeep of these roads – currently extremely under-maintained – and will reduce road travel times.

• Freight corridors: The country’s freight corridors, covering 15 states all over India, are set to be complete by December 2019. Currently, a train carrying cargo travels at the rate of 25 kmph; on these railway lines, trains will be able to reach speeds between 70 and 100 kmph, and will carry double the quantity of cargo.

The project specifications pertaining to quality and efficiency are at par with freight railway lines in Russia, China, and the U.S.

Foreign and local companies are working contractually with the government to finish the first phase of the Eastern Corridor by mid-2018. More freight corridors are planned, and offer good opportunities for large contractual collaborations.

Warehouse development

India allows 100 percent FDI in the development and maintenance of warehousing and storage facilities. Under the Free Trade Warehousing Zone (FTWZ) Scheme, there are several designated zones in India reserved for warehouse development. Panvel near Mumbai, Khurja near New Delhi, and Siri City in Chennai, are some of the designated FTWZs. The connectivity of these zones with major railways, roads, airways, and ports is well established.

Incentives such as duty free import of building materials and equipment for these zones are attracting investors to this sector. Late last year, the 100 acre FTWZ in Nanguneri in the southern state of Tamil Nadu began operations.

First movers to benefit from supply chain industry reforms

The time is right for first movers to benefit from the changing landscape of India’s supply chain ecosystem. With greater participation from the private sector and increased government spending, opportunities for foreign investors in the country’s supply chain are on the up. This includes the steady transformation of India’s digital infrastructure as well, with federal campaigns like Digital India working to promote the growth of technology startups and enterprises.

For SME’s, possibilities in third party logistics abound, whether in the transportation of goods, new technology-based improvements to make operations lean, or in warehouse management. Multinational firms in construction and related industries can also take advantage of investment opportunities in India’s ports, roads, and warehouse development.

Foreign firms with little knowledge of the Indian landscape can benefit from partnerships with established Indian firms in the sector to make it easier to do business in the country. Koushan Das, Business Intelligence India, Dezan Shira & Associates says, “With the introduction of GST, the logistics sector getting an infrastructure status, and an increase in government spending, the supply chain sector provides significant opportunities for collaboration and private sector investments. Investors and companies will now be able to avail much-needed incentives and remodel their supply chain networks, leading to a more consolidated supply chain ecosystem in the country.”

1.2 THE OBJECTIVE OF A SUPPLY CHAIN

·         The objective of every supply chain should be to maximize the overall value generated.

·         The value (also known as supply chain surplus) a supply chain generates is the difference between what the value of the final product is to the customer and the costs the supply chain incurs in filling the customer’s request.

·         Supply Chain Surplus = Customer Value – Supply Chain Cost

·         The value of the final product may vary for each customer and can be estimated by the maximum amount the customer is willing to pay for it.

·         The difference between the value of the product and its price remains with the customer as consumer surplus.

·         The rest of the supply chain surplus becomes supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain.

 For example, a customer purchasing a wireless router from Best Buy pays $60, which represents the revenue the supply chain receives. Customers who purchase the router clearly value it at or above $60. Thus, part of the supply chain surplus is left with the customer as consumer surplus. The rest stays with the supply chain as profit. Best Buy and other stages of the supply chain incur costs to convey information, produce components, store them, transport them, transfer funds, and so on. The difference between the $60 that the customer paid and the sum of all costs incurred by the supply chain to produce and distribute the router represents the supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages and intermediaries. The higher the supply chain profitability, the more successful is the supply chain.

 

1.3 THE IMPORTANCE OF SUPPLY CHAIN DECISIONS

There is a close connection between the design and management of supply chain flows (product, information, and funds) and the success of a supply chain. Wal-Mart, Amazon, and Seven-Eleven

Japan are examples of companies that have built their success on superior design, planning, and operation of their supply chain. In contrast, the failure of many online businesses such as Webvancan be attributed to weaknesses in their supply chain design and planning. The rise and subsequent fall of the bookstore chain Borders illustrates how a failure to adapt its supply chain to a changing environment and customer expectations hurt its performance. Dell Computer is another example of a company that had to revise its supply chain design in response to changing technology and customer needs.

 

1.4 DECISION PHASES IN A SUPPLY CHAIN

Successful supply chain management requires many decisions relating to the flow of information, product, and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. As a result, each category of decisions must consider uncertainty over the decision horizon.

1.     Supply Chain Strategy or Design: During this phase, a company decides how to structure the supply chain over the next several years. It decides what the

·         chain’s configuration will be,

·         how resources will be allocated, and

·         what processes each stage will perform.

Strategic decisions made by companies include

·         whether to outsource or perform a supply chain function in-house,

·         the location and capacities of production and warehousing facilities,

·         the products to be manufactured or stored at various locations,

·         the modes of transportation to be made available along different shipping legs, and

·         the type of information system to be utilized.

PepsiCo Inc.’s decision in 2009 to purchase two of its largest bottlers is a supply chain design or strategic decision.

Supply chain design decisions are typically made for the long term (a matter of years) and are expensive to alter on short notice. Consequently, when companies make these decisions, they must take into account uncertainty in anticipated market conditions over the next few years.

 

2.      Supply Chain Planning:

For decisions made during this phase, the time frame considered is a quarter to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done.

·         The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints established during the strategic or design phase. Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of demand and other factors such as costs and prices in different markets.

·         Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions

 For example, steel giant ArcelorMittal’s decisions regarding markets supplied by a production facility and target production quantities at each location are classified as planning decisions.

As a result of the planning phase, companies define a set of operating policies that govern short-term operations.

3.    Supply Chain Operation: The time horizon here is weekly or daily. During this phase, companies make decisions regarding individual customer orders. At the operational level, supply chain configuration is considered fixed, and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner.

During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders.

Because operational decisions are being made in the short term (minutes, hours, or days), there is less uncertainty about demand information. Given the constraints established by the configuration and planning policies, the goal during the operation phase is to exploit the reduction of uncertainty and optimize performance.

PROCESS VIEWS OF A SUPPLY CHAIN

A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two ways to view the processes performed in a supply chain.

1. Cycle View: The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain.

2. Push/Pull View: The processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders. Pull processes are initiated by a customer order, whereas push processes are initiated and performed in anticipation of customer orders.

Cycle View of Supply Chain Processes

Given the five stages of a supply chain as shown in Figure 1-2, all supply chain processes can be broken down into the following four process cycles, as shown in Figure 1-3:

• Customer order cycle

• Replenishment cycle

• Manufacturing cycle

• Procurement cycle

Each cycle occurs at the interface between two successive stages of the supply chain. Not every supply chain will have all four cycles clearly separated. For example, a grocery supply chain in which a retailer stocks finished-goods inventories and places replenishment orders with a distributor is likely to have all four cycles separated. Dell, in contrast, bypasses the retailer and distributor when it sells directly to customers.

Each cycle consists of six subprocesses as shown in Figure 1-4. Each cycle starts with the supplier marketing the product to customers. A buyer then places an order that is received by the supplier. The supplier supplies the order, which is received by the buyer. The buyer may return some of the product or other recycled material to the supplier or a third party. The cycle of activities then begins all over again.

Depending on the transaction in question, the subprocesses in Figure 1-4 can be applied to the appropriate cycle

Push/Pull View of Supply Chain Processes (3 differences)

All processes in a supply chain fall into one of two categories depending on the timing of their execution relative to end customer demand.

 With pull processes, execution is initiated in response to a customer order. With push processes, execution is initiated in anticipation of customer orders based on a forecast.

Pull processes may also be referred to as reactive processes because they react to customer demand. Push processes may also be referred to as speculative processes because they respond to speculated (or forecasted) rather than actual demand. The push/pull boundary in a supply chain separates push processes from pull processes as shown in Figure 1-5. Push processes operate in an uncertain environment because customer demand is not yet known. Pull processes operate in an environment in which customer demand is known. They are, however, often constrained by inventory and capacity decisions that were made in the push phase.

2.1 COMPETITIVE AND SUPPLY CHAIN STRATEGIES

A company’s competitive strategy defines, relative to its competitors, the set of customer needs that it seeks to satisfy through its products and services. For example, Wal-Mart aims to provide high availability of a variety of products of reasonable quality at low prices.

 To see the relationship between competitive and supply chain strategies, we start with the value chain for a typical organization, as shown in Figure 2-1.

The value chain begins with new product development, which creates specifications for the product. Marketing and sales generate demand by publicizing the customer priorities that the products and services will satisfy. Marketing also brings customer input back to new product development. Using new product specifications, operations transforms inputs to outputs to create the product. Distribution either takes the product to the customer or brings the customer to the product. Service responds to customer requests during or after the sale. These are core processes or functions that must be performed for a successful sale. Finance, accounting, information technology, and human resources support and facilitate the functioning of the value chain. To execute a company’s competitive strategy, all these functions play a role, and each must develop its own strategy. Here, strategy refers to what each process or function will try to do particularly well.

A product development strategy specifies the portfolio of new products that a company will try to develop. It also dictates whether the development effort will be made internally or outsourced. A marketing and sales strategy specifies how the market will be segmented and how the product will be positioned, priced, and promoted. A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to, the customer, along with any follow-up service and a specification of whether these processes will be performed in-house or outsourced. Supply chain strategy specifies what the operations, distribution, and service functions, whether performed in-house or outsourced, should do particularly well. Because our focus here is on supply chain strategy, we define it in more detail. Supply chain strategy includes a specification of the broad structure of the supply chain and what many traditionally call “supplier strategy,” “operations strategy,” and “logistics strategy.”

2.2 ACHIEVING STRATEGIC FIT

Strategic fit requires that both the competitive and supply chain strategies of a company have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build. For a company to achieve strategic fit, it must accomplish the following:

1. The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal.

2. The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully.

3. The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy.

 

There are three basic steps to achieving this strategic fit, which we outline here and then discuss in more detail:

1. Understanding the Customer and Supply Chain Uncertainty: First, a company must understand the customer needs for each targeted segment and the uncertainty these needs impose on the supply chain. These needs help the company define the desired cost and service requirements. The supply chain uncertainty helps the company identify the extent of the unpredictability of demand, disruption, and delay that the supply chain must be prepared for.

2. Understanding the Supply Chain Capabilities: Each of the many types of supply chains is designed to perform different tasks well. A company must understand what its supply chain is designed to do well.

3. Achieving Strategic Fit: If a mismatch exists between what the supply chain does particularly well and the desired customer needs, the company will either need to restructure the supply chain to support the competitive strategy or alter its competitive strategy.

 

3.2  DRIVERS OF SUPPLY CHAIN PERFORMANCE

To understand how a company can improve supply chain performance in terms of responsiveness and efficiency, we must examine the logistical and cross–functional drivers of supply chain performance: facilities, inventory, transportation, information, sourcing, and pricing. These drivers interact to determine the supply chain’s performance in terms of responsiveness and efficiency.

 

First we define each driver and discuss its impact on the performance of the supply chain.

1.     Facilities are the actual physical locations in the supply chain network where product is stored, assembled, or fabricated. The two major types of facilities are production sites and storage sites. Decisions regarding the role, location, capacity, and flexibility of facilities have a significant impact on the supply chain’s performance. For example, in 2009, Amazon increased the number of warehousing facilities located close to customers to improve its responsiveness. (9)

FACILITY-RELATED METRICS Facility-related decisions impact both the financial performance of the firm and the supply chain’s responsiveness to customers. On the financial side, facilities decisions impact the cost of goods sold and the assets in property plant and equipment. A manager should track the following facility-related metrics that influence supply chain performance:

• Capacity measures the maximum amount a facility can process.

• Utilization measures the fraction of capacity that is currently being used in the facility.

Utilization affects both the unit cost of processing and the associated delays. Unit costs tend to decline (PPET increases) and delays increase with increasing utilization.

• Processing/setup/down/idle time measure the fraction of time that the facility was processing units, being set up to process units, unavailable because it was down, or idle because it had no units to process. Ideally, utilization should be limited by demand and not setup or downtime.

• Production cost per unit measures the average cost to produce a unit of output. These costs may be measured per unit, per case, or per pound depending on the product.

• Quality losses measure the fraction of production lost due to defects. Quality losses hurt both financial performance and responsiveness.

• Theoretical flow/cycle time of production measures the time required to process a unit if there are absolutely no delays at any stage.

• Actual average flow/cycle time measures the average actual time taken for all units processed over a specified duration such as a week or month. The actual flow/cycle time includes the theoretical time and any delays. This metric should be used when setting due dates for orders.

• Flow time efficiency is the ratio of the theoretical flow time to the actual average flow time.

Low values for flow time efficiency indicate that a large fraction of time is spent waiting.

• Product variety measures the number of products/product families processed in a facility.

Processing costs and flow times are likely to increase with product variety.

• Average production batch size measures the average amount produced in each production batch. Large batch sizes will decrease production cost but increase inventories.

• Production service level measures the fraction of production orders completed on time and in full.

2.     Inventory encompasses all raw materials, work in process, and finished goods within a supply chain. The inventory belonging to a firm is reported under assets. Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness. For example, W.W. Grainger makes itself responsive by stocking large amounts of inventory and satisfying customer demand from stock even though the high inventory levels reduce efficiency. Such a practice makes sense for Grainger because its products hold their value for a long time. (8)

INVENTORY-RELATED METRICS Inventory-related decisions affect the cost of goods sold, the cash to- cash cycle, and the assets held by the supply chain and its responsiveness to customers. A manager should track the following inventory-related metrics that influence supply chain performance: (8)

• Cash-to-cash cycle time is a high-level metric that includes inventories, accounts payable, and receivables.

• Average inventory measures the average amount of inventory carried. Average inventory should be measured in units, days of demand, and financial value.

• Inventory turns measure the number of times inventory turns over in a year. It is the ratio of average inventory to either the cost of goods sold or sales.

• Average replenishment batch size measures the average amount in each replenishment order. The batch size should be measured by SKU in terms of both units and days of demand. It can be estimated by averaging over time the difference between the maximum and the minimum inventory (measured in each replenishment cycle) on hand.

• Average safety inventory measures the average amount of inventory on hand when a replenishment order arrives. Average safety inventory should be measured by SKU in both units and days of demand. It can be estimated by averaging over time the minimum inventory on hand in each replenishment cycle.

• Seasonal inventory measures the difference between the inflow of product (beyond cycle and safety inventory) and its sales that is purchased solely to deal with anticipated spikes in demand.

• Fill rate (order/case) measures the fraction of orders/demand that were met on time from inventory. Fill rate should not be averaged over time but over a specified number of units of demand (say, every thousand, million, etc.).

• Fraction of time out of stock measures the fraction of time that a particular SKU had zero inventory. This fraction can be used to estimate the lost sales during the stock out period.

• Obsolete inventory measures the fraction of inventory older than a specified obsolescence date.

3.     Transportation entails moving inventory from point to point in the supply chain. Transportation can take the form of many combinations of modes and routes, each with its own performance characteristics. Transportation choices have a large impact on supply chain responsiveness and efficiency. For example, a mail-order catalog company can use a faster mode of transportation such as FedEx to ship products, thus making its supply chain more responsive, but also less efficient given the high costs associated with using FedEx. (7)

TRANSPORTATION-RELATED METRICS Inbound transportation decisions impact the cost of goods sold while outbound transportation costs are part of the selling, general, and administrative expenses. Thus, transportation costs affect the profit margin. A manager should track the following transportation-related metrics that influence supply chain performance:

• Average inbound transportation cost typically measures the cost of bringing product into a facility as a percentage of sales or cost of goods sold (COGS). Ideally, this cost should be measured per unit brought in, but this can be difficult. The inbound transportation cost is generally included in COGS. It is useful to separate this cost by supplier.

• Average incoming shipment size measures the average number of units or dollars in each incoming shipment at a facility.

• Average inbound transportation cost per shipment measures the average transportation cost of each incoming delivery. Along with the incoming shipment size, this metric identifies opportunities for greater economies of scale in inbound transportation.

• Average outbound transportation cost measures the cost of sending product out of a facility to the customer. Ideally, this cost should be measured per unit shipped, but it is often measured as a percentage of sales. It is useful to separate this metric by customer.

• Average outbound shipment size measures the average number of units or dollars on each outbound shipment at a facility.

• Average outbound transportation cost per shipment measures the average transportation cost of each outgoing delivery. Along with the outgoing shipment size, this metric identifies opportunities for greater economies of scale in outbound transportation.

• Fraction transported by mode measures the fraction of transportation (in units or dollars) using each mode of transportation. This metric can be used to estimate if certain modes are overused or underutilized.

4.     Information consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout the supply chain. Information is potentially the biggest driver of performance in the supply chain because it directly affects each of the other drivers. Information presents management with the opportunity to make supply chains more responsive and more efficient. For example, Seven-Eleven Japan has used information to better match supply and demand while achieving production and distribution economies. The result is a high level of responsiveness to customer demand while production and replenishment costs are lowered.(6)

INFORMATION-RELATED METRICS A manager should track the following information-related metrics that influence supply chain performance:

                • Forecast horizon identifies how far in advance of the actual event a forecast is made. The forecast horizon must                 be greater than or equal to the lead time of the decision that is driven by the forecast.

• Frequency of update identifies how frequently each forecast is updated. The forecast should be updated somewhat more frequently than a decision will be revisited, so that large changes can be flagged and corrective action taken.

• Forecast error measures the difference between the forecast and actual demand. The forecast error is a measure of uncertainty and drives all responses to uncertainty such as safety inventory or excess capacity.

• Seasonal factors measure the extent to which the average demand in a season is above or below the average in the year.

• Variance from plan identifies the difference between the planned production/inventories and the actual values. These variances can be used to raise flags that identify shortages and surpluses.

• Ratio of demand variability to order variability measures the standard deviation of incoming demand and supply orders placed. A ratio less than one potentially indicates the existence of the bullwhip effect.

5.     Sourcing is 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 decisions affect both the responsiveness and efficiency of a supply chain. After Motorola outsourced much of its production to contract manufacturers in China, it saw its efficiency improve but its responsiveness suffer because of the long distances. To make up for the drop in responsiveness, Motorola started flying in some of its cell phones from China even though this choice increased transportation cost.(7)

SOURCING-RELATED METRICS Sourcing decisions directly impact the cost of goods sold and accounts payable. The performance of the source also impacts quality, inventories, and inbound transportation costs. A manager should track the following sourcing-related metrics that influence supply chain performance:

•  Average purchase price measures the average price at which a good or service was purchased during the year. The average price should be weighted by the quantity purchased at each price.

• Range of purchase price measures the fluctuation in purchase price during a specified period. The goal is to identify if the quantity purchased correlated with the price.

• Average purchase quantity measures the average amount purchased per order. The goal is to identify whether a sufficient level of aggregation is occurring across locations when placing an order.

• Supply quality measures the quality of product supplied.

• Supply lead time measures the average time between when an order is placed and when the product arrives. Long lead times reduce responsiveness and add to the inventory the supply chain must carry.

• Fraction of on-time deliveries measures the fraction of deliveries from the supplier that were on time.

• Supplier reliability measures the variability of the supplier’s lead time as well as the delivered quantity relative to plan. Poor supplier reliability hurts responsiveness and adds to the amount of inventory the supply chain must carry.

 

6.     Pricing determines how much a firm will charge for the goods and services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain performance. For example, if a transportation company varies its charges based on the lead time provided by the customers, it is likely that customers who value efficiency will order early and customers who value responsiveness will be willing to wait and order just before they need a product transported. (7)

PRICING-RELATED METRICS Pricing directly affects revenues but can also affect production costs and inventories depending upon its impact on consumer demand. A manager should track the following pricing-related metrics. With menu pricing, each metric should be tracked separately for each segment in the menu:

• Profit margin measures profit as a percentage of revenue. A firm needs to examine a wide variety of profit margin metrics to optimize its pricing, including dimensions such as type of margin (gross, net, etc.), scope (SKU, product line, division, firm), customer type, and others.

• Days sales outstanding measures the average time between when a sale is made and when the cash is collected.

• Incremental fixed cost per order measures the incremental costs that are independent of the size of the order. These include changeover costs at a manufacturing plant or order processing or transportation costs that are incurred independent of shipment size at a mail-order firm.

• Incremental variable cost per unit measures the incremental costs that vary with the size of the order. These include picking costs at a mail-order firm or variable production costs at a manufacturing plant.

• Average sale price measures the average price at which a supply chain activity was performed in a given period. The average should be obtained by weighting the price with the quantity sold at that price.

• Average order size measures the average quantity per order. The average sale price, order size, incremental fixed cost per order, and incremental variable cost per unit help estimate the contribution from performing the supply chain activity.

• Range of sale price measures the maximum and the minimum of sale price per unit over a specified time horizon.