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Supply Chain Drivers and Metrics (Source: Supply Chain Management, Strategy, Planning and Operation, By Sunil Chopra,

Peter Meindl, D. V. KalraPearson) For academic purpose and private circulation only

Financial Measures Of Performance

From a shareholder perspective, return on equity (ROE) is the main summary measure of a firms performance

Financial Measures of Performance

Return on assets (ROA) measures the return earned

on each dollar invested by the firm in assets

Earnings before interest ROA Average total assets

Net income Interest expense (1 Tax rate) Average total assets

Financial Measures Of Performance

An important ratio that defines financial leverage is

accounts payable turnover (APT)

Cost of goods sold APT Accounts payable

Financial Measures Of Performance

Key component of asset turnover are: 1. ART = Accounts receivable turnover = Sales Revenue / Accounts Receivable

2. INVT =Inventory turnover= Cost of Goods Sold /

Inventories 3. PPET = Property Plan and equipment turnover = Sales Revenue / PP & E (Property , Plant & Equipment )

Financial Measures Of Performance

ROA can be written as the product of two ratios

profit margin and asset turnover

ROA Earnings before interest (Profit margin) Sales revenue Sales revenue (Asset turn over) Total assets

Financial Measures of Performance

Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash enters the process as cost to when it returns as collected revenue C2C = days payable (1/APT) + days in inventory (1/INVT) + days receivable (1/ART)

Drivers of Supply Chain Performance

To achieve strategic fit requires companys supply chain to achieve a balance between responsiveness and efficiency that best supports the companys competitive strategy.

Responsiveness and efficiency defines the supply

chain performance. There are six drivers of supply chain performance:

3 logistical drivers 3 cross functional drivers

A Framework for Structuring Drivers

Drivers of Supply Chain Performance

1. Facilities

The physical locations in the supply chain network where product is stored, assembled, or fabricated.

Two major types of facilities are production and storage sites







flexibility of facilities have a significant impact on supply chain performance.


In the financial statements facilities costs show up under property, plant and equipment if facilities are owned by the firm and under selling, general and administrative if they are leased.

E.g. Amazon increased nos. of warehousing facilities to improve supply chain responsiveness.


Role in the supply chain
The where of the supply chain (locations from which the

inventory is transported)
Within a facility inventory is either transformed to another state (Manufacturing) or it is stored (warehouses)

Role in the competitive strategy

Firms can gain economies of scale if product is manufactured or stored in only one location i.e. increased

efficiency. However, cost reduction is at the expense of

responsiveness. Larger number of smaller facilities close to customer increases responsiveness but decreases efficiency.


Components of facilities decisions Role

Whether flexible, dedicated, or a combination of the two
Whether product focus or a functional focus (e.g. fabrication or assembly)

For warehouses, whether cross-docking facilities or storage type


Where a company will locate its facilities Centralize/decentralize, centralization for gaining economies of


Other factors also considered in location decisions are: macroeconomic factors, quality of workers, cost of workers and facility, availability of infrastructure, proximity to customers,

location of other facilities, tax effects


A facilitys capacity to perform its intended function or functions

Excess capacity gives responsiveness but is costly Little excess capacity is more efficient, high utilisation but less responsive in face of demand fluctuations

Firm need to make tradeoff and decide right amount of capacity at a given facility.

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

Overall trade-off: Responsiveness versus efficiency Tradeoff is between cost of the number, location, capacity, and type of facilities (efficiency) and the level of responsiveness these facilities provide. Increasing the number of facilities increases facility and inventory costs but decreases transportation costs and reduces response time. Increasing the flexibility or capacity of a facility increases facility costs but decreases response time

Drivers of Supply Chain Performance

2. Inventory

All raw materials, work in process, and finished goods within a supply chain. Exists because of mismatch between supply and demand In the financial statements inventory belonging to firm is reported under assets. Changing inventory policies can alter supply chain responsiveness and efficiency.

High level of inventory may increase responsiveness. Low level of inventory increases efficiency but can lead to

decrease in responsiveness and increase in lost sales.

Inventory level also effects material flow time in a supply

Material flow time is the time that elapses between the

point at which material enters the supply chain to the point it exists.

Throughput is output per time period. For a supply chain

it is the rate at which sales occur. Littles law

I = DT

where, I = Inventory, T = Flow time, D = throughput

Throughput is often determined by the customer demand

and can be considered fixed. Thus inventory and flow time are synonymous in supply chain.

Role in competitive strategy
Form, location, and quantity of inventory allow a supply chain to range from being very low cost to very

Objective is to have right form, location, and quantity of

inventory that provides the right level of responsiveness

at the lowest possible cost


Cycle inventory
Average amount of inventory used to satisfy demand between shipments

Function of lot size decisions

Safety inventory Inventory held in case demand exceeds expectations

Seasonal inventory
Inventory built up to counter predictable variability in demand

Level of product availability The fraction of demand that is served on time from product held in inventory







responsiveness but decreases efficiency due to increased inventory levels.

Trade off between cost of inventory to increase product

availability and loss from not serving customers on time.

Inventory-related metrics Cash-to-cash cycle time Average inventory Inventory turns Products with more than a specified number of days of inventory Average replenishment batch size Average safety inventory

Seasonal inventory Fill rate Fraction of time out of stock Obsolete inventory


Overall trade-off: Responsiveness versus efficiency
Increasing inventory generally makes the supply chain more responsive. A higher level of inventory facilitates a reduction in production and transportation costs because of

improved economies of scale.

Inventory holding costs increase

Drivers of Supply Chain Performance

3. Transportation

Moving inventory from point to point in the supply chain. It can take form of many combinations and routes each with its own performance characteristics. Transportation choices have huge impact supply chain responsiveness and efficiency. In the financial statements, outbound transportation

costs of shipping to the customers are typically included

in selling, general and administrative expense while inbound transportation costs are typically included in

costs of goods sold.


Role in the supply chain
Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

Also affects inventory and facilities


Role in the competitive strategy Allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency

Components of transportation decisions Design of transportation network Modes, locations, and routes Direct or with intermediate consolidation points One or multiple supply or demand points in a single run

Choice of transportation mode
Air, truck, rail, sea, and pipeline Information goods via the Internet

Different speed, size of shipments, cost of shipping, and



Transportation-related metrics
Average inbound transportation cost Average income shipment size

Average inbound transportation cost per shipment

Average outbound transportation cost Average outbound shipment size

Average outbound transportation cost per shipment

Fraction transported by mode


Overall trade-off: Responsiveness versus efficiency
The cost of transporting a given product (affects efficiency) and the speed with which that product is

transported (affects responsiveness)

Using fast modes of transport raises responsiveness and transportation cost but lowers the inventory holding cost


Drivers of Supply Chain Performance

4. Information

Consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout the supply chain.

Biggest driver of supply chain performance as it directly affects each of the other drivers. Information presents management with opportunity to make supply chains more responsive and more efficient.

In the financial statements, information technology related costs are included either under selling, general

and administrative expense or under assets.

Role in the supply chain Improve the utilization of supply chain assets and the coordination of supply chain flows to increase responsiveness and reduce cost. Information is a key driver that can be used to provide higher responsiveness while simultaneously improving efficiency.

Role in the competitive strategy Right information can help a supply chain better meet customer needs at lower cost

Improves visibility of transactions and coordination of

decisions across the supply chain Share the minimum amount of information required to

achieve coordination

Enabling technologies Electronic data interchange (EDI) The Internet Enterprise resource planning (ERP) systems Supply chain management (SCM) software Radio frequency identification (RFID)

Information-related metrics
Forecast horizon

Frequency update
Forecast error Seasonal factors

Variance from plan

Ratio of demand variability to order variability

Overall trade-off: Complexity versus value

Good information helps a firm improve both efficiency

and responsiveness More information is not always better

More information increases complexity and cost of both

infrastructure and analysis exponentially while marginal value diminishes







accomplish the desired objectives

Drivers of Supply Chain Performance

5. Sourcing

Who will perform a particular supply chain activity such

as production, storage, transportation or management

of information.

Sourcing decisions determine what functions a firm performs and what function a firm outsources. These decisions affect both responsiveness and

efficiency of supply chain.

In the financial statements, sourcing costs are shown under costs of goods sold and monies owed to suppliers under account payable.

Role in the supply Chain

Set of business processes required to purchase goods and

services Will tasks be performed by a source internal to the

company, or a third party

Globalization creates many more sourcing options with both considerable opportunity and potential risk

Role in the competitive strategy

Sourcing decisions are crucial because they affect the

level of efficiency and responsiveness in a supply chain Outsource to responsive third parties if it is too

expensive to develop their own

Keep responsive process in-house to maintain control

Components of Sourcing Decisions

In-house or outsource
Perform a task in-house or outsource it to a third party

Supplier selection
Number of suppliers, evaluation and selection criteria, direct negotiations or auction

Procurement The supplier sends product in response to customer


Sourcing-related metrics Days payable outstanding Average purchase price Range of purchase price Average purchase quantity Supply quality Supply lead time Fraction of on-time deliveries Supplier reliability

Overall trade-off: Increase the supply chain surplus

Increase the size of the total surplus to be shared across

the supply chain Impact of sourcing on sales, service, production costs,

inventory costs, transportation costs, and information

cost Outsource if it raises the supply chain surplus more than

the firm can on its own

Keep function in-house if the third party cannot increase the supply chain surplus or if the outsourcing risk is


Drivers of Supply Chain Performance

6. Pricing

Determines how much a firm will charge for the goods

and services that it makes available in the supply chain. Pricing affect the behavior of buyer of good and service , hence affecting supply chain performance. Differential pricing provides responsiveness to customer who value it and low cost to customers who do not value responsiveness as much.


Drivers of Supply Chain Performance

These six drivers of supply chain performance do not act

independently but interact to determine the overall supply chain performance.

Good supply chain design and operation recognise the

interaction and make the appropriate tradeoff to deliver the desired level of responsiveness at lowest possible cost.
Idea is to structure supply chain drivers appropriately to

provide desire
This helps in reducing markdowns and lost sales and

better matching of demand and supply.


Drivers of Supply Chain Performance

E.g. Wal-Mart
Competitive strategy : To be reliable, low cost retailer

for wide variety of mass communication goods

Supply Chain Strategy: Emphasis on efficiency but also

maintain adequate level of responsiveness in terms of product availability.


Drivers Inventory

Pioneered cross-docking

w.r.t. inventory, Wal-Mart favours efficiency over responsiveness. Results in efficient Supply Chain



Information Technology

Products are stocked only at stores and not at This significantly lower inventory. both stores and warehouses/DC. Maintains low levels of inventory Runs own fleet Makes supply chain more responsive. Costs are increased but benefit of reduced inventory and increased product availability. Uses centrally located DCs within its network of This increases efficiency at each DC. stores tp decrease nos. of facilities Builds retail stores only where demand is This also increases efficiency of transportation sufficient to justify having several of them supported by a DC. Invested significantly in information This allow sharing demand information with suppliers Technology. who manufacture only what is demanded. Increases responsiveness and decreases inventory costs. Identifies efficient sources of suppliers for each Increased efficiency product it sells. Gives large orders Allow suppliers to exploit economies of scale Practices EDLP for its product. This reduces fluctuations in demand because of price variations


Thus entire supply chain focuses to meet demand in an efficient manner and achieve right balance 4-46 between responsiveness and efficiency. Competitive and supply chain strategy are in harmony.