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detailed description about managing your supply chain
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Supply Chain Management_Janat Shah
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Supply Chain Strategy and Performance Measures
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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?
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tdSupply Chain Performance Measures: Cost Versus Service
Cost Service
Order delivery lead time Responsiveness Delivery reliability Product variety
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Supply Chain Performance MeasuresC
ost o
f ser
vice
Service LevelLow High
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tdOrganized Retail Performance comparisons : Inventory Turns
Firm Inventory turns
Pantaloon Retail (India) Ltd.* 3 to 4
Trent Ltd.* 4 to 6
Subhiksha Trading** 20 to 25
* source: Financial statements** Source: Subhiksha case study
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tdAn 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”.
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Cos
t
Service LevelLow High
Existing Position
Managing Supply Chains Efficiently
.
Inefficient Practices
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tdImpact of Service Level on Revenue Costs and Profits
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tdSuperior 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)
Source: Supply-Chain Council
Total Supply-Chain Management Cost
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td Comparative Performance: Best-in-Class Versus Median
Consumer Packaged Goods Focus
81%98%
0%
20%
40%
60%
80%
100%
Median BIC
42.0
8.3
0.0
10.0
20.0
30.0
40.0
50.0
Median BIC
66.6
24.7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Median BIC
9.2%
4.9%
0.0%
5.0%
10.0%
Median BIC
Delivery Performance to Request Total Supply-Chain Management Cost
Upside Production Flexibility Cash-to-cash Cycle time
Source: Supply-Chain Council
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tdBenchmarking 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
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tdIllustration: 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
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tdBenchmarking 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
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The Strategic Profit Model
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tdImpact of supply Chain Initiative 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
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tdImpact of Supply Chain on Business Performance
Supply Chain
Performance
Business Performance
Supply Chain
Initiative
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Enhancing Supply Chain Performance
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The SCOR Model
The Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations 800 world-wide members Multi-industry
SCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivity
Promotes research and thought leadership in the supply chain management area
Adoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration
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Supply Chain Operations Reference (SCOR) Model
Developed by the Supply-Chain Council for SCM diagnostic benchmarking, & process improvement. The SCOR model separates supply chain operations into 5 process categories:
PlanSourceMakeDeliverReturn
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SCOR Model Processes
04/08/2310-20
PlanDevelop a course of action that best meets sourcing, production and delivery requirements
SourceProcure goodsand services tomeet plannedor actualdemand
MakeTransformproduct to a finished state to meet planned or actualdemand
DeliverProvide products to meet demand, including ordermanagement, transportation and distribution
ReturnReturnproducts,post-deliverycustomersupport
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SCOR Model (Cont.)
04/08/2321
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Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results
Benchmarking
Characterize the management practices and software solutions that result in “best-in-class” performance
Best Practices Analysis
Process Reference Model
Capture the “as-is” state of a process and derive the desired “to-be” future state
Business Process Reengineering
Capture the “as-is” state of a process and derive the desired “to-be” future state
Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results
Characterize the management practices and software solutions that result in “best-in-class” performance
Process Reference Models Process reference models integrate the well-known concepts of business
process reengineering, benchmarking, and process measurement into a cross-functional framework
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SCOR Structure
Supplier
Plan
Customer Customer’sCustomer
Suppliers’Supplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
SCORSCOR ModelModel
Return Return Return Return Return Return Return Return
Building Block Approach
Processes Metrics
Best Practice Technology
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Cus
tom
ers
Cus
tom
ers
Supp
liers
Supp
liers
P1 Plan Supply ChainP1 Plan Supply ChainPlanPlan
P2 Plan SourceP2 Plan Source P3 Plan MakeP3 Plan Make P4 Plan DeliverP4 Plan Deliver
SourceSource MakeMake DeliverDeliverS1 Source Stocked ProductsS1 Source Stocked Products M1 Make-to-StockM1 Make-to-Stock
M2 Make-to-OrderM2 Make-to-Order
M3 Engineer-to-OrderM3 Engineer-to-Order
D1 Deliver Stocked ProductsD1 Deliver Stocked Products
D2 Deliver MTO ProductsD2 Deliver MTO Products
D3 Deliver ETO ProductsD3 Deliver ETO Products
S2 Source MTO ProductsS2 Source MTO Products
S3 Source ETO ProductsS3 Source ETO Products
Return Return SourceSource
P5 Plan ReturnsP5 Plan Returns
Return Return DeliverDeliver
EnableEnable
D4 Deliver Retail ProductsD4 Deliver Retail Products
SCOR 7.0 Model Structure
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Material FlowMaterial Flow
SCOR Level 1
Operations Operations StrategyStrategy
Analyze Basisof
Competition
SCOR Level 2Configure
supply chain
AlignPerformance
Levels, Practices, and
Systems
Implementsupply chain
Processes and Systems
SCOR Implementation Roadmap•Competitive Performance Requirements•Performance Metrics•Supply Chain Scorecard•Scorecard Gap Analysis•Project Plan
•AS IS Geographic Map•AS IS Thread Diagram•Design Specifications•TO BE Thread Diagram•TO BE Geographic Map
InformationInformationand Work Flowand Work Flow
•AS IS Level 2, 3, and 4 Maps•Disconnects•Design Specifications•TO BE Level 2, 3, and 4 Maps
Develop, Develop, Test, and Roll Test, and Roll
OutOut
•Organization•Technology•Process•People
SCOR Level 3
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Consumer Foods Project Time (Start to Finish) – 3 months Investment - $50,000 1st Year Return - $4,300,000
Electronics Project Time (Start to Finish) – 6 months Investment - $3-5 Million Projected Return on Investment - $ 230 Million
Software and Planning SAP bases APO key performance indicators (KPIs) on SCOR Model
Aerospace and Defense SCOR Benchmarking and use of SCOR metrics to specify performance
criteria and provide basis for contracts / purchase orders
Examples of SCOR Adoptions
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SCOR Model
Supplier
Plan
CustomerCustomer’sCustomerSuppliers’
Supplier
MakeDeliverSource Make
DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
Return Return Return Return Return ReturnReturn Return
Segment Analysis, Marketing Planning
Marketing Data
Suppliers
Pharmacies, Hospitals,
Doctors
Marketing and Sales Functions
Doctors, Hospitals
Patients
Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model
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The SCOR Model (contd)
Supplier
Plan
CustomerCustomer’sCustomerSuppliers’
Supplier
MakeDeliverSource Make
DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
Return Return Return Return Return ReturnReturn Return
Two interrelated “supply chains” work together to deliver drugs to market: The Marketing and Sales “supply chain” which is principally information-based The Logistics supply chain which is principally product-based
Supplier
Plan
CustomerCustomer’sCustomerSuppliers’
Supplier
MakeDeliverSource Make
DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
Return Return Return Return Return Return Return Return
Sales
Manufacturing&
Distribution
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SCOR Model (Cont.)Additions have been made to the SCOR model
Original SCOR model did not address sales & marketing processes, some aspects of service, & support processes (i.e., HR & technology development).
Customer Chain Operations Reference model (CCOR)Defines the customer part of the SC as the integration of Plan,
Relate, Sell, Contract, Service, & Enable processes.Design Chain Operations Reference model (DCOR)
Defines the design portion of the SC as the integration of Plan, Research, Design, Integrate, Amend, & Enable processes.
04/08/2329
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Performance measurement systems must: Link SC trading partners to achieve breakthrough
performance in satisfying the end users. Overlay the entire supply chain to assure that all
contribute to supply chain strategy.
In a successful chain, members jointly agree on a SC performance measurement system.Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace
SC Performance Measurement Systems
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Environmental sustainability- Addressing the need for protecting the environment & reducing
greenhouse gas emissions as well business & consumer needs
Green supply chain management (GSCM)- Sharing of environmental responsibility along the SC such that sound
environmental practices predominate, & adverse global environmental effects are minimized.
Carbon footprint- Supply chains evaluate design configurations and various options for
reducing total carbon emissions
SC Performance Measurement Systems (Cont.)
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Measuring Supply Chain Performance Key performance indicators
inventory turnover cost of annual sales per inventory unit
inventory days of supply total value of all items being held in inventory
fill rate fraction of orders filled by a distribution center
within a specific time period
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SC Performance Meas. Systems (Cont.)
Supply Chain Performance Measures1. Total SCM costs: cost to process orders; purchase & manage
inventories; & information systems.2. SC cash-to-cash cycle time: Avg. # of days between paying for
materials & getting paid by SC partners.3. SC production flexibility: avg. time required to provide an unplanned
20% increase in production.4. SC delivery performance: avg. % of orders filled by requested delivery
date.5. SC perfect order fulfillment performance: average % of orders that
arrive on time, complete, & undamaged.6. Supply chain e-business performance: avg. % of electronic orders
received for all SC members.7. Supply chain environmental performance: % of SC w/ISO 14000
partners; avg. % env. goals met.
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Number of days to achieve an unplanned 20% change in orders without a cost penalty
Production flexibility
Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty
Supply chain response time
Supply Chain Flexibility
Number of days from order receipt to customer delivery
Order fulfillment lead time
Supply Chain Responsiveness
Percentage of orders delivered on time and in full, perfectly matched with order with no errors
Perfect order fulfillment
Percentage of orders shipped within24 hours of order receipt
Fill rate
Percentage of orders delivered on time and in full to the customer
Delivery performance
Supply Chain Delivery Reliability
DefinitionPerformance Metric
Performance Attribute
SCOR: Customer FacingSCOR: Customer Facing
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DefinitionPerformance Metric
Performance Attribute
SCOR: Internal FacingSCOR: Internal Facing
Revenue divided by total assets including working capital and fixed assets
Asset turns
Number of days that cash is tied up as inventoryInventory days of supply
Number of days that cash is tied up as working capital
Cash-to-cash cycle time
Supply Chain Asset Management Efficiency
Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory
Warranty/returns processing cost
Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee
Value-added productivity
Direct cost of material and labor to produce a product or service
Cost of goods sold
Direct and indirect cost to plan, source and deliver products and services
Supply chain management cost
Supply Chain Cost
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tdSupply 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
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tdEvaluation of Supply Chain Performance in Competitive Environments
19 turns 12 turns 8 turns2.2 turnsNet asset turns (working capital)
28 days 46 days 80 days A96 days Cash-to-cash cycle time
22 days38 days 55 days 119 days Inventory days of supplyAssets
$ 460k$306k$ 156k$122 kValue added per employee productivity
NANA NANAWarranty cost, returns and allowances
3%8%13%19%Total logistics management costsCost
Internal
20 days 25 days 30 days 45 days Production flexibility (days master schedule fixed)
3 days 5 days 7 days 7 days Order fulfillment lead times (customer to customer)
90%85%80%0%Perfect order fulfillment (on time in full)
98%96%94%63%Fill ratesSupply chain reliability
Flexibility and responsiveness
External
Superior95%
Advantage90%
Parity85%
Actual50%
SCOR level 1 metricsDelivery performance to commit date
Overview metrics
Performance versus competitive population
Supply chain scorecard v. 3.0
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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
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Supply Chain Analysis
Supply chain
performance
Business performance
Supply chain initiative
Supply chain diagnostics
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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.
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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.
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