 Introduction

 Evolution

 Decisions

 Importance

 Customer service & cost trade off

 Sc’s Responsiveness

 Delivery reliability

 SC performance measures

 Drivers of SC performance
 SCM is also called the art of management of providing the
Right Product, At the Right Time, Right Place and at the
Right Cost to the Customer.
 All activities involved in the transformation of goods from
the raw material stage to the final stage, when the goods and
services reach the end customer.

 Supply chain management involves planning, design and control

of
 Flow of material,
 Flow of information
 Flow of finance along the supply chain to deliver superior value to
the end customer in an effective and efficient manner.
 There have been three major revolutions in the field of supply chain
management.

 The First Revolution(1910-1920): The Ford Supply Chain

 The Second Revolution(1960-1970): The Toyota Supply Chain

 The Third Revolution(1995-2000): The Dell Supply Chain

 Tight integrated chain.

 FORD manage the journey from the iron ore mine to the finished automobile in 81 hours.

 Famous saying about FORD’s SC:

 The Ford supply chain would offer any colour, as long as it was black;

 & any model, as long as it was Model T.

 Ford innovated and managed to build a highly efficient, but inflexible supply chain that

could not handle a wide product variety and was not sustainable in the long run.

 General Motors, on the other hand, understood the demands of the market place and

offered a wider variety in terms of automobile models and colours.

 Allowed the final assembly and manufacturing of key
components to be done in-house.
 The bulk of the components was sourced from a large
number of suppliers who were part of the Keiretsu
system.
 Keiretsu refers to a set of companies with interlocking
business relationships and shareholdings.
 Long-term relationships with all the suppliers.
 Customization
 Dell did not believe in long-term relationships with suppliers.
 Working with world-class suppliers with technology and cost
leadership.
 Medium-term relationships with suppliers.
 At Dell, the trigger for supplier orders was the actual orders by
customers, and not forecasts.
 This helped Dell in reducing the inventory significantly, allowing
them to respond to any changes in the market place.
 Classified into:
Design decisions
Operations decisions.
 Supply chain design (Network design) or strategic decisions involve
the following critical issues:
 What activities should be carried out by the nodal firm and what
should be outsourced?
 How to select entities/partners to perform outsourced activities.
 what should be the nature of the relationship with those entities?
 Should the relationship be transactional in nature or should it be a
long—term partnership?

 Decisions pertaining to the capacity and location of the various

facilities.
 Both tactical and operations decisions involve the following
areas:
 Demand forecasting
 Procurement planning and control
 Production planning and control
 Distribution planning and control
 Inventory management
 Transportation management
 Customer order processing
 Relationship management with partners in the chain
 Proliferation in product lines
 Shorter product life cycle
 Higher level of outsourcing
 Shift in power structure in the chain
 Globalization of manufacturing
 Improvement in Communication and IT
 Entry of Third-party Logistics Providers
 Enhanced Inter-firm Coordination Capabilities
Challenging Factors are
 inventory management and low cost logistics
 economic environment
 taxation structure and also
 the geography of India
 Managing Availability in the Complex Distribution Set up
 Working with Smaller Pack Sizes
 Entry of National Players in the Traditional Fresh Products
Sector –ITC-atta, Nestle-Yoghurt
 Dealing with a Complex Taxation Structure – Pharma
industry in himasal pradesh, aircondioners in Silvasa
 Dealing with Counterfeit Goods-vicks vaporub (54%)
 Opportunistic Games Played by the Distribution Channel
 Infrastructure-ice cream
 Emergence of Third-party Logistics Provider
 Emergence of Modern Retail Chains
 Reservation for Small-scale Sector
 1.6 million retailers- < 2% represent organised
retailers
 95% of retailers – grocery stores ( < 300 square
meters)
 35 million consumer packs per month sold to 1000
distributors
 Bought by 18 million Indian households
 Harry Potter the final book in series of novels
 Released in 93 countries
 Penguin India, distributor of books in India
 Delivered it to 300 destinations
 A firm must ensure a smooth fit between its
business strategy and supply chain strategy
 Well managed firms identify and develop
external market opportunities and internal
supply chain capabilities
 To determine the revenue and
contribution potential of increased customer
service, company will need to conduct market
research.
 From a supply chain perspective, customer
service consists of the following four
dimensions:
 Order delivery lead time
 Responsiveness
 Delivery reliability
 Product variety
 Order Penetration Point/ Decoupling Point
◦ Make to Stock
◦ Make to Order
◦ Configure to Order
 Supply Chain Focus
◦ Efficiency
◦ Responsiveness
 Order delivery time is the time taken by
the supply chain to complete all the activities
from order to delivery.
 A critical characteristic of the supply chain
is the customer order penetration point or
decoupling point. Three types characterised by
customer order penetration point.
 Order delivery lead time also can be used for
drawing a push-pull boundary of the supply
chain.
 All the process in SC are divided into two
categories with respect to customer order
point.
 Responsive Supply Chains: respond quickly
as new products are introduced and as
demand changes.

 Efficient Supply Chains: focus on operating

efficiently to minimize costs.
 Types of Supply Chains -- Continued

Exhibit 5.5:
Responsive vs. Efficient Supply Chains
Responsive Supply chain for Efficient Supply chains for
innovative product functional products
•Closely integrated in production planning •Use traditional criteria for evaluating
and control, quality management, service, suppliers.
after-sales support. •Place high value on integrity, commitment,
•Track work-in-process and finished goods reliability, and consistency.
inventory. •Value suppliers for ability to provide cost
•Share more information. savings, reduce downtime, and reduce
•Use system wide measures of end-use- inventory.
customer satisfaction.
•Suppliers are evaluated based on product
development time, geographic proximity,
lead time, and cycle time.
 Functional Versus Innovative
Products: Differences in Demand
Aspects of demand Functional (predictable Innovative (Unpredictable
Demand) Demand)

Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of 5% to 20% 20% to 60%
sales price)

Product variety Low ( 10 to 20 variants per High ( often thousands of

category) variants per category)

Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%
End-of-season mark 0% 10% to 30%
markdown
Achieving Strategic Fit: Wishes vs. Capabilities

Responsive
(high cost)
supply chain Gourmet dinner
<High margin>

Responsivenes
spectrum

Lunch buffet
Efficient <Low margin>
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
 Delivery reliability- safe express
 Identified 88 gateways and 44 hubs to ensure
time definite service all over India

 Product Variety-99 colour campaign by TVS

Motors
 Stocks unpainted panels at the retail outlet.
 Sent to Asian paints dealers
 Within 48 hours, delivery is assured
 Supply Chain Performance Measures:
SCOR Model
(Supply chain operations reference)
• 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
 Superior 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)
Total Supply-Chain Management Cost

Source: Supply-Chain Council

 Comparative Performance:
Best-in-Class Versus Median
Consumer Packaged Goods Focus
Delivery Performance to Total Supply-Chain
100% Request 98% Management Cost
81% 10.0% 9.2%
80%

60%
4.9%
5.0%
40%

20%

0% 0.0%
Median BIC Median BIC

Upside Production Flexibility Cash-to-cash Cycle time

50.0
70.0 66.6
42.0
40.0 60.0
50.0
30.0
40.0

20.0 30.0 24.7

20.0
10.0 8.3
10.0

0.0 0.0
Median BIC Median BIC

Source: Supply-Chain Council

Evaluation of Supply Chain Performance in
Competitive Environments
Supply chain scorecard v. 3.0 Performance versus competitive
population
Overview SCOR level 1 metrics Actual Parity Advantage Superior
metrics Delivery performance to 50% 85% 90% 95%
commit date
Supply chain Fill rates 63% 94% 96% 98%
reliability
Perfect order fulfillment 0% 80% 85% 90%
(on time in full)
External
Order fulfillment lead 7 days 7 days 5 days 3 days
times (cust. to customer)
Flexibility and
Production flexibility 45 days 30 days 25 days 20 days
responsivenes
s
Total logistics 19% 13% 8% 3%
Cost management costs
Warranty cost, returns NA NA NA NA
Internal and allowances
Value added per 122 k 156k 306k 460k
employee productivity
Inventory days of supply 119 55 days 38 days 22 days
Assets days
Cash-to-cash cycle time 96 days 80 days 46 days 28 days

Net asset turns (working 2.2 8 turns 12 turns 19 turns

capital) turns
 How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
 Inventory plays a significant role in a supply chain's ability to
support a firm's competitive strategy. If a firm's competitive
strategy requires a very high level of responsiveness, a
company can achieve this responsiveness by locating large
amounts of inventory close to the customer.
 The trade-off implicit in the inventory driver is between the
responsiveness that results from more inventory and the
efficiency that results from less inventory.
 Components-Cycle inventory is the average amount of
inventory used to satisfy demand between receipts of supplier
shipments.
 Safety inventory is inventory held in case demand exceeds
expectation; it is held to counter uncertainty.
 Seasonal inventory is built up to counter predictable
variability in demand.
 Average inventory measures the average amount of inventory carried.
Average inventory should be measured in units, days of demand, and
financial value.
 Products with more than a specified number of days of inventory identifies
the products for which the firm is carrying a high level of inventory.
 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
 Average safety inventory measures the average amount of inventory on hand
when a replenishment order arrives.
 Seasonal inventory measures the amount of both cycle and safety inventory
that is purchased solely due to seasonal changes in demand.
 Fill rate measures the fraction of orders/demand that were met on time from
inventory.
 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 demand
during the stock out period.
 Transportation moves product between different stages
in a supply chain.
 The role of transportation in a company's competitive
strategy figures prominently in the company's
consideration of the target customer's needs.
 If a firm's competitive strategy targets a customer who
demands a very high level of responsiveness, and that
customer is willing to pay for this responsiveness, then
a firm can use transportation as one driver for making
the supply chain more responsive.
 Components: Design of Transportation Network
 Choice of Transportation Mode
 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).
 Average incoming shipment size measures the average number of
units or rupees in each incoming shipment at a facility.
 Average inbound transportation cost per shipment measures the
average transportation cost of each incoming delivery.
 Average outbound transportation cost measures the cost of sending
product out of a facility to the customer.
 Average outbound shipment size measures the average number of
units or rupees on each outbound shipment at a facility.
 Average outbound transportation cost per shipment measures the
average transportation cost of each outgoing delivery.
 Fraction transported by mode measures the fraction of
transportation (in units or rupees) using each mode of
transportation.
 Role in the supply chain
◦ The connection between the various stages in the supply chain
◦ Crucial to daily operation of each stage in a supply chain
 E.g., production scheduling, inventory levels
 Role in the competitive strategy
◦ Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a trade-off)
◦ Components-Push Versus Pull, Coordination and Information
Sharing
◦ Example:
 Andersen Windows
 Wood window manufacturer, whose customers can choose
from a library of 50,000 designs or create their own.
Customer orders automatically sent to the factory
 Forecast horizon identifies how far in advance of the
actual event a forecast is made.
 Frequency of update identifies how frequently each
forecast is updated
 Forecast error measures the difference between the
forecast and actual demand.
 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.
 Ratio of demand variability to order variability measures
the standard deviation of incoming demand and supply
orders placed.
 Facilities are a key driver of supply chain
performance in terms of responsiveness and
efficiency.
 Locating facilities close to customers
increases the number of facilities needed and
consequently reduces efficiency.
 Production facility and capacity: Receiving,
Prepackaging, Storing, Picking, Packaging,
Sorting, Accumulating, Shipping
◦ Crossdocking: Wal-Mart
 Capacity measures the maximum amount a
facility can process.
 Utilization measures the fraction of capacity
that is currently being used in the facility.
 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.
 Flow time efficiency is the ratio of the theoretical flow time to
the actual average flow time.
 Product variety measures the number of products/product
families processed in a facility.
 Volume contribution of top 20 percent SKUs and customers
measures the fraction of total volume processed by a facility
that comes from the top 20 percent SKUs or customers.
 Processing/setup/down/idle time
 Average production batch size measures the average amount
produced in each production batch
 Production service level measures the fraction of production
orders completed on time and in full.
 Role in the supply chain
◦ Set of processes required to purchase goods and services in a
supply chain
◦ Supplier selection, single vs. multiple suppliers, contract
negotiation
 Role in the competitive strategy
◦ Sourcing is crucial. It affects efficiency and responsiveness in a
supply chain
◦ In-house vs. outsource decisions- improving efficiency and
responsiveness
 TI: More than half of the revenue spent for sourcing.
 Cisco sources: Low-end products (e.g. home routers) from China.
 Components of sourcing decisions
◦ In-house versus outsource decisions
◦ Supplier evaluation and selection
◦ Procurement process:
 Days payable outstanding measures the number of days
between when a supplier performed a supply chain task and
when it was paid.
 Average purchase price measures the average price at which a
good or service was purchased during the year
 Range of purchase price measures the fluctuation in purchase
price during a specified period
 Average purchase quantity measures the average amount
purchased per order.
 Fraction on-time deliveries measures the fraction of deliveries
from the supplier that were on time.
 Supply quality measures the quality of product supplied.
 Supply lead time measures the average time between when an
order is placed and the product arrives.
 Role in the supply chain
◦ Pricing determines the amount to charge customers in a supply
chain
◦ Pricing strategies can be used to match demand and supply
 Role in the competitive strategy
◦ Use pricing strategies to improve efficiency and responsiveness
◦ Low price and low product availability; vary prices by response
times
 Amazon: Faster delivery is more expensive
 Components of pricing decisions
◦ Pricing and economies of scale
◦ Everyday low pricing versus high-low pricing
◦ Fixed price versus menu pricing, depending on the product and
services
 Profit margin measures profit as a percentage of revenue.
 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.
 Incremental variable cost per unit measures the incremental costs
that vary with the size of the order.
 Average sale price measures the average price at which a supply
chain activity was performed in a given period.
 Average order size measures the average quantity per order.
 Range of sale price measures the maximum and the minimum of
sale price per unit over a specified time horizon.
 Range of periodic sales measures the maximum and minimum of the
quantity sold per period (day/week/month) during a specified time
horizon
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

 Lack of relevant SCM metrics: How to measure
responsiveness?
 How to measure efficiency, costs, worker performance, etc?
 Poor inventory status information
 Theft: Major problem for furniture retailers.
 Transaction errors: Retailers with inaccurate inventory
records for 65% of SKUs
 Information delays, dated information, incompatible info.
systems
 Misplaced inventory: 16% of items cannot be found at a
major retailer
 Spoilage: active ingredients in the products are losing their
properties
 Product quality and yield
 Lack of visibility in SCs
 Poor delivery status information
 Not knowing the order status
 Poor IT design
 Unreliable, duplicate data
 Security problems: too much or too little
 Ignoring uncertainties
 Internal customer discrimination
 Giving lower priority to internal customers than external customers
 Poor integration
 Elusive inventory costs
 Accounting systems do not capture opportunity costs
 SC-insensitive product design