Supply Chain Design & Management Unit IV
Contents
• Organizational process and performance metric design
• Supply chain organization design
• Supply chain metric design
Supply Chain Performance
• Supply chain management is a key strategic factor for increasing
organizational effectiveness and for achieving organizational goals such
as improved competitiveness, better customer care, and increased
profitability.
• A supply chain is vital in business management, it is important to
monitor and measure the performance of supply chain.
Objectives of SCM Performance Measurement
• There are a number of operational aspects of supply chain, such as movement of goods,
storage efficiency, facility operations, inventory parameters, supplier efficiency, and so on.
• There is a need to track performance against operating plans and to identify opportunities
for enhanced efficiency and effectiveness.
• A number of alerts must be set to raise alarm in operating deficiencies so that timely
action could be taken to avoid jamming of production processes.
• Supply chain performance measurement system must facilitate benchmarking across
peers, best of the industry, and across industries.
• Thus, The objectives of supply chain performance measure require a
welldesigned management information system for monitoring and
controlling operations, plans and strategies, and directing resources for
the optimization of skills and facilities in supply chain.
Bullwhip Effect
Time Time
A lot of retailers each with little variability …can lead to greater …can lead to even variability for a fewer greater variability number of for a single
in their orders…. wholesalers, and… manufacturer.
The Bullwhip Effect
• Farther away from the customer, the quality of information gets worse & worse as supply chain members base their guesses
on the bad guesses of their partners.
• The result is increasingly inefficient inventory management, manufacturing, & logistics
Short-Circuit the Bullwhip
• Make information transparent:
– Use Electronic Data Interchange (EDI) to support
Just-In-Time supplier replenishment
– Use bar codes & electronic scanning to capture & share point-of-sale data
Supply Chain Measures
Common practice is to measure within a function:
Supplier Plant Distribution Center Customer
Price Cost Inventory
Efficiency Output Stock Rotation
Space
Cost
Quality
Speed
Flexibility
Measure Across Supply Chain Nodes
Supplier Plant
Distribution Customer Center
Cycle Time Cycle Time Cycle Time
On-time Delivery Delivery Reliability Order Completion
Vendor Managed
Inventory Product Availability Performance
Traditional Approach to Performance
Measures
• 1. Productivity- measured as a ration of output to input
• 2. Quality- reflected in adherence to standards, percentage of returns and rejects, damages
• 3. Customer service parameters- product availability, reliability, time, fill rate can be classified as:
• Marketing- Logistics interface, which would include product, pricing, promotions, and other facets of marketing
• Customer service and retention, leading to repeat purchases and upgrades.
• 4. Cost factors- which include total amount spent on each logistical and cross functional drivers to fulfill customer orders
• 5. Asset management- which covers the productivity of capital investments, and current assets including inventory and management of current liabilities
1. Productivity Measure
• Units shipped per employee- i.e In a regional distribution center, the productivity of an employee gains performance with respect to meeting peak demand.
• Units to labor cost- The difference b/w productivity per employee and employee cost efficiency is that while the former is the number of units produced or served
per employee, the latter is a measure of productivity vis-a-vis employee costs, which include salaries, rentals, and running costs.
• Equipment downtime- Loss of time due to m/c breakdown or the failure of a component
• Capacity utilization- This highlights the importance of measuring and controlling capacity utilization, which directly affects the speed of response to customer’s
demand.
• Order per sales person- another employee productivity measure that measures the productivity of order
management team.
• Order entry efficiency- this is a measure of both productivity and quality. It is the ability to capture a
customer order quickly and delight the customer on order capture.
2. Quality Measures
• Number of faultless notes invoiced- an invoice shows the delivery date, time, and the condition under which goods were
received
• Order entry accuracy- This is an important measure for order management at the warehouse level. A wrong entry triggers a
whole range of unwanted activities across the supply chain
• Picking /shipping accuracy
• Number of customer returns
• Damage frequency
• No of credit claims- the number of credit claims is a surrogate indicator of lost sales
3. Customer Service Measures
• Order lead time- The total order cycle time, which is also called order lead time that elapses b/w the receipt of the customer’s order and the delivery of the goods.
• Total order cycle time= Order entry time+ order planning time(design + communication + scheduling) +order sourcing + Finished goods delivery time
• The order entry method- determines the way and the extent to which the customer specifications are converted into useful information, and are passed down along the supply chain.
• The customer order path- The path that the orders traverse is yet another important measure whereby the time spent in different routes and non value adding activities can be identified
and suitable steps can be taken to eliminate them.
• Delivery metrics- This refers to the flexibility of delivery system to meet particular customer needs
• Item fill rate = No. of items delivered to customer/ No. of items ordered by customer
• Customer service and satisfaction metrics • The customer query time
• Measuring customer perception of servicesThis is done primarily through direct interview with customers.
What are their needs ? What is the service level they receive versus their expectations ?
4. Cost Measures
• Total inventory cost-
• Opportunity cost consisting of warehousing, capital and storage.
• WIP cost
• Service costs of stock management and insurance
• Cost held up as finished goods in transit
• Risk costs, consisting of cost associated with deterioration, and damage.
• Cost associated with scrap and rework
• Total Distribution Cost- The distribution cost include :
• Inbound cost
• Outbound cost
• Cost of managing regional distribution centres, which include wages and salaries, rent, insurance, and so
on
• Stock holding cost, which is inventory holding cost
• Finance and logistics cost- The financial performance of a supply chain can be assessed by determining the
total logistics cost. This includes the cost of goods returned, wastages, and lost sales- which is an
opportunity lost.
• Asset Measure- Supply chain assets include plant, equipment, and current assets such as account
receivable and inventories
• Inventory turnover= Units sold during a time period/ Average units inventory during the time period
• Inventory levels and number of days supply :
Average inventory/average sales per day
• Many firms are looking for continuous improvement as a tool to enhance their core competitiveness using Supply Chain Management
(SCM). Experts believed Supply Chain that key factor to reduce cost and inventory, reduce delivery time, improve flexibility, and fast
introduction of new product.
• Many companies have not succeeded in maximizing their supply chain’s potential because they have often failed to develop the
performance measures and metrics needed to fully integrate their supply chain to maximize effectiveness and efficiency.
• Supply Chain Performance Measurement System (SCPMS) is necessary for firms to successful implement SCM.
Supply chain perspective on design, development process
• Design for Supply Chain is the process of optimizing the fit between supply chain capabilities and product designs. It creates
product configurations that address infrastructure limitations and use supply chain capabilities as they evolve throughout
the life of the product.
• Supply chain design is the process by which a company structures and manages the supply chain in order to identify the
right balance between inventory, transportation, and manufacturing cost.
Factors That Influence Supply Chain Design Decisions:
• 1. Location and Distance:
• Distance between the different locations of the supply chain and the locations themselves are important factors to be considered. The location of the supply chain network includes
customers, suppliers manufacturing abilities, airports, ports, and so on.
• 2. Current and Future Demand:
• The current and future demands of the company are taken into account as well and should be grouped appropriately.
• 3. Service Requirements:
• The maximum allowable transit time and distance are used to determine the location of the warehouses to be added to the supply chain.
• 4. Size and Frequency of Shipment:
• The size and frequency of the shipment are essential factors for determining the costs – the higher the frequency, the greater the cost; the smaller the shipment, the higher the cost.
• 5. Warehousing and Labour Costs:
• Warehousing costs are fixed costs and are factored into the decision-making process. The labor costs are not fixed, and they
play a role as well.
• 6. Trucking Costs:
• The cost and type of trucking are of considerable importance.
• 7. Mode of Transportation:
• Which mode of transportation is used in the running of the supply chain matters as well.
Creating and deploying the supply chain model
• Compile relevant data: Look for good data, not perfect data (which, in any case, might not ever be available). Transactional data like demand history and sales orders
are probably in decent shape, but your customer master data may not be. Deploy resources quickly to address issues in your datasets.
• Monitor dynamic inputs: Especially during a crisis, managers may receive incomplete or conflicting information, so be sure to carefully evaluate input data to assess
and account for their possible dynamic nature. And don’t treat these inputs as static, which they seldom are.
• Get a working baseline: Quickly establish a baseline model that captures your existing situation as accurately as possible. Anything within a range of 90-95% accuracy
is considered the gold standard.
• Test different scenarios: The recovery scenarios for COVID-19, as polled by the World Economic Forum,
find an increasing number of characters used to represent it, including a “V,” “U,” “L,” “W,” and even a
“swoosh.” Don’t wait to have a perfect baseline before developing the scenarios and/or hypotheses you
want to test. There is much more value in modeling as many scenarios as possible based on a 95%-
accurate benchmark than modeling one or two scenarios on one that’s 97% accurate but took much longer
to achieve. (And that 97% accuracy is just an estimate anyway!)
• Sensitize, sensitize, sensitize: You can further improve your analysis and outcomes by sensitizing your critical inputs. Let’s say your estimated demand levels don’t materialize. You can
compensate for data that remains unknown by defining sensitivities for those inputs and then reviewing the effects on the output. For example, your post-pandemic distribution network
may be insensitive to demand/forecast within ±35%. In this scenario, a small change in transportation rates over your expected levels may suggest changes to your future network.
Sensitization will show you what actions you need to prioritize.
• Implement your design: At this point, you should have generated the executive confidence and buy-in necessary to choose your go-forward path. To implement your design, start by
creating a project roadmap based on delivered value vs. effort. Over time, and depending on the value/effort trade-offs you’re willing to make, you’ll realize results ranging from quick wins
and tactical changes to strategic transformations as part of your optimized roadmap.
Organizational role in supply chain management
• A business or organisation's sole purpose is to meet customers' needs. Supply Chain Management manages customer
service to ensure demands are met. When a call is placed to your organisation about a product, customer service reaches
out to SCM to ask or investigate what customers want.
• Supply Chain Management is part of an organisation's business or initiative that ensures goods, services, or products
deliver to customers easily.
• Supply chain roles and responsibilities include the assurance that the companies never produce extra or insufficient
products.
• More organizations are seeking new approaches to compete through a competitive supply chain strategy. Many of these
strategies involve the following elements:
• Development of a centrally led supply chain organization that is not fragmented and aligned with corporate strategic
initiatives, with the authority to collaboratively lead the behavioral and cultural changes required across business units.
• Conscious development and modification of supply chain structures to meet business requirements
• Leveraging of corporate spend
• Building of cross-functional teams that reach across organizational boundaries to manage the supply chains to achieve strategic goals and provide exceptional value to
stakeholders.
• Integration of key suppliers into cross functional teams to leverage suppliers skills, knowledge and capabilities for each organizations mutual benefit
• A disciplined focus on logistics excellence through the use of standard processes, practices, technology and sharing of information to ensure supply chains are
effective, efficient and continuously striving for the next step in performance improvement
• Being a Customer of Choice through rapid payment, equitable and ethical treatment of our suppliers
• Recent research validates the fact that supply chain improvements are achieved when organizations recognize the
importance of SCM at a senior level. Specifically, successful organizations are characterized by:
• A Senior executive responsible for SCM who reports to the CEO
• A corporate committee that is actively involved in providing direction to the implementation of SCM strategies
• Coordination of strategic initiatives accomplished centrally with the active involvement of business units
• Ownership for operational aspects of SCM remaining with operational business units
• The focus of SCM operational aspects moving from transaction execution to coordination and
synchronization
• Common services centralized for improved efficiency and control over strategic initiatives and coordinated
process planning across all business units.
Supply chain metric design
• Supply chain metrics or KPIs are performance indicators used by businesses to assess and optimize the efficiency and productivity of
various supply chain processes. This visual information can be used to manage inventory, sales, shipping, suppliers, and more.
• Concerning the continual growth, evolution, development, and success of your company’s supply, fulfillment, and delivery efforts,
supply chain performance indicators are the most invaluable tools available at your fingertips. By collecting, curating, and analyzing key
supply chain metrics (SCM) you will be able to spot inefficiencies within your ecosystem while capitalizing on your current strengths and
establishing goals that will help your supply chain scale with the success of your company.
Supply chain metric design key indicator
• 1. Cash-to-Cash Time Cycle-This priceless supply chain metric will help you calculate the length of time required to transform your resources into bonafide cash flows.
• 2. Freight Bill Accuracy-Shipping and freighting your items from supplier to warehouse or warehouse to the consumer is vital to the success of your entire operation,
and any issue or error can prove harmful with time and investments being wasted.
• 3. Perfect Order Rate-This particular insight is one of the most critical supply chain KPIs for businesses operating in a multitude of sectors. The perfect order rate
measures the success of your ability to deliver orders incident-free, which will ultimately help you iron out issues such as inaccuracies, damages, delays, and inventory
losses. The higher the perfect order rate, the better, because this KPI has a direct impact on your customer retention and loyalty levels.
• 4. Days Sales Outstanding (DSO)-The days sales outstanding (DSO) KPI measures how swiftly you are able to collect or generate revenue from your customers.
• 5. Inventory Turnover-One of the most superbly helpful supply chain KPI available today focuses on logistics KPIs and helps a business understand the number of times its entire inventory has been sold over a
certain time frame: an incredible indicator of efficient production planning, process strategy, fulfillment abilities, and marketing and sales management. By calculating your on-time shipping rate and comparing it to
other competitors within your industry, you will be able to create a clear management reporting practice, see where you stand, and take the appropriate action to improve it over time.
• 6. Gross Margin Return On Investment (GMROI)-Every company, regardless of service, product, or sector strives to achieve the best return on investment (ROI) for each and every commercial activity it undertakes.
Maintaining a consistently solid ROI is the bread and butter of ongoing eCommerce success.
• 7. Warehousing Costs-We continue our list of supply chain metrics (SCMs) with the warehousing costs. The cost distribution and the management of the time and space of your inventory are critical in establishing a
healthy supply chain. While such expenses vary from warehouse to warehouse, it's important to measure this indicator and review it regularly in order to identify opportunities and decrease unwanted costs. The
management of the warehouse facility includes various costs such as labor costs, warehouse rent, utility bills, equipment outgoings, material, and information-handling systems as well as costs related to supplies,
ordering, and storing the goods.
• 8. Supply Chain Costs
• Costs are one of the supply chain KPIs that shows relevant costs that are associated with supply chain management. These outgoings can include planning, managing teams, sourcing, delivering, etc., and it will show
how efficient parts of the company are. It's critical for any organization to increase its profit and reducing costs is one of the strategies that is often applied. That way, the company can identify if there is any space
for improvement without the need to increase sales in the process.
• 9. Supply Chain Costs vs. Sales-Our list of supply chain KPIs continues with additional cost analysis, connected to sales. This indicator basically calculates your supply
chain costs as a portion of sales and, in essence, it will give you an indication of how much you are spending relative to a whole. By calculating such supply chain
management metrics, you will be able to perform a healthy spending analysis and establish processes for potential savings.
• 10. On-Time Shipping-Created with a professional KPI tool, the ontime shipping is an excellent indicator of how long you may need to ship a particular type of order to
a client, customer, or partner, this visual will allow you to set a benchmark shipping time relative to each product which, in turn, will allow you to optimize your
shipping and delivery processes, reducing turnover time, and boosting customer satisfaction levels.
• 11. Delivery Time- Delivery time is an indicator for the supply chain that focuses on improving service: it measures the amount of time needed from the moment the
order is shipped to the delivery on the customers' doorstep. The order needs to be correctly prepared and the destination reached within a reasonable time frame.
Otherwise, the general service may be affected and the impression you leave on your customers: no one likes to wait for 9 months to get their delivered goods.
• 12. Inventory To Sales Ratio-One of the key supply chain metrics on our list, the inventory-to-sales ratio, is critical to track since inventory is one of the most
important instruments in your supply chain. This metric measures the amount of inventory for sale in comparison to the actual quantity that is sold, expressed as a
ratio. It will help you to adjust your stock in order to ensure high margins and tell you how well your company is dealing with unexpected situations.
• 13. Fill Rate
• The next on the list of supply chain management metrics is fill rate. An essential addition to any valuable supply chain report, this important metric will give you a clear-cut indication of
the proportion or percentage of your customers’ orders that are successfully fulfilled the first time around (or during the first shipment).
• 14. Delivered on Time -Based on factors such as whether the right product was delivered to the agreed quality standards, fulfilled in the right quantities, and delivered to the agreed
destination, this KPI will help you consistently optimize your outcomes.
• 15. Freight Cost per Unit- Metrics in supply chain management are critical for making sustainable improvements, and freight cost per unit is a testament to that notion. One of the most
important supply chain KPIs for any scaling business, freight cost per unit will provide you with a solid insight into how economically you can ship your products.
• 16. Supply Chain Cycle Time- As one of the key supply chain metrics for any scaling business, this supply chain cycle time is incredibly
telling when it comes to tracking your end-to-end efficiency. Essentially, this powerful visual information presents insights into how long
it would take to fulfill a customer's order if your inventory levels were at zero.
• 17. Damage-Free Delivery- Whatever goods or products you deal in, a certain level of product loss damage is inevitable. But when the
situation starts spiraling out of control, budgets and customer relationships can become strained. To keep tabs on your delivery
processes and keep in-transit product damage to a minimum, working with the right information is critical.
