Lecture 03. Supply Chain
Drivers and Metrics
IE 7200
Supply Chain Engineering
Prof. Paul Pei
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Supply Chain Drivers and Metrics
1. What are supply chain performance metrics and
drivers?
2. What are the roles and interactions among
drivers?
3. What decisions need to be made in supply
chain drivers?
4. What impacts of chosen decisions on supply
chain performance?
such as Walmart and Zara have achieved strong financial performance in large part because
their supply chains allow a better matching of supply and demand, thereby reducing markdowns and lost sales.
Selected Financial Metrics Across
Industries,
2000–2012
TABLE 3-2 Selected
Financial Metrics Across
Industries, 2000–2012
Average
Operating
Margin
Average
C2C
Cycle
Average
Inventory
Turns
Average
SG&A Cost/
Revenue
Pharmaceutical
0.25
190.3
2.0
0.31
Medical device manufacturers
0.18
211.6
2.2
0.36
Consumer packaged goods
0.17
28.3
5.6
0.31
Food
0.16
37.4
6.2
0.23
Consumer electronics
0.12
9.3
43.8
0.14
Apparel
0.10
127.7
3.2
0.35
Chemical
0.09
78.1
5.3
0.09
Automotive
0.04
75.9
9.9
0.13
Industry
Source:
(2000–2012).”
Supply Chain
report, November(C2C)
11, 2013.
Cash-to-cash
Operating
margin
is a Insights LLC
measure of profitability. It
indicates how much of
each dollar of revenues is
left over after both costs of
goods sold
and operating expenses
are considered.
cycle measures the
average amount of
time from when cash
enters the process
as cost to when it
returns as collected
revenue.
Inventory turns
is a ratio that
measures the
number of
times inventory is
sold or consumed
in a given time
period
Selling, General
and
Administrative
Expenses
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Drivers of Supply Chain Performance
1. Facilities
– The physical locations in the
supply chain network where
product is stored, assembled, or
fabricated
2. Inventory
– All raw materials, work in
process, and finished goods
within a supply chain
3. Transportation
– Moving inventory from point to
point in the supply chain
4. Information
– Data and analysis concerning
facilities, inventory,
transportation, costs, prices, and
customers throughout the supply
chain
5. Sourcing
– Who will perform a particular
supply chain activity
6. Pricing
– How much a firm will charge for
the goods and services that it
makes available in the supply
chain
Framework for Structuring Drivers
Questions?
• What are the roles of facilities, inventory, and
transportation in your supply chain?
• Is there any interaction and/or relationship among
these?
• What are decisions that needs to be made about
facilities, inventory, and transportation in your
supply chain?
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Facility Types
• Facilities in the supply chain:
– Manufacturing
– Storage
– Distribution
– Retail
Components of Facility Decisions
• Role
– Product vs. function focus, storage or no storage
• Location
– Centralization vs. decentralization
– Other local factors
• Capacity
– Size and utilization
Inventory
Inventory results from a mismatch between supply and demand:
Demand waits for supply
inventory = waiting customers
Supply waits for demand
inventory = goods or resources
Mismatch reflects fact that capacity often more rigid than demand
If processes were instantaneous and had unlimited capacity, then
supply would always be able to meet demand
Types of Inventory
• Cycle inventory
– Average amount of inventory used to satisfy demand between supplier shipments
– Function of lot size decisions
• Safety inventory
– Inventory held in case demand exceeds expectations
– Costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– Inventory built up to counter predictable variability in demand
– Cost of carrying additional inventory versus cost of flexible production
Inventory
– Material flow time (T):
• Time elapsed between when material enters supply chain
(stage) to when exits
– Throughput (D):
• Rate at which sales to end consumers occur, output rate
– Little’s Law:
• Inventory = I = D x T
• Throughput often fixed (by demand rate), so inventory and
flow time are equivalent
Inventory
• Suppose flow time for automotive assembly
process is 12 hours and the throughput is 10
units per hour
• What is the inventory in the process?
• If we could reduce inventory to 60 units, by how
much would the flow time decrease?
Components of Inventory Decisions
• Types of inventory:
– Cycle inventory, safety stock, anticipation inventory, etc.
• How much inventory to hold
– Amount of safety stock to protect against forecast error
• Where to hold inventory
– Finished goods vs. work-in-process vs. raw materials
Inventory Related Metrics
• Average inventory
– Weeks of supply
• Inventory turns
– COGS
– Sales
• Average batch /
replenishment size
• Average safety
inventory
• Fill rate
• Fraction of time out of
stock (service level)
Inventory Measures of Supply Chain Performance
• Average inventory is the total average value of all items
held in inventory for a firm.
AINV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+…
• Weeks of supply: The average inventory divided by
sales\COGS per week.
Weeks of supply =
Average inventory
Weekly sales (at cost)
• Inventory turnover is annual sales at cost divided
by the average inventory maintained for the year.
Inventory turnover =
Annual sales at (cost)
Average inventory
Calculating Inventory Measures Example
The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods
sold was $10 million. The best inventory turnover in the industry is six turns per year. If the
company has 52 business weeks per year, how many weeks of supply were held in inventory?
What was the inventory turnover? What should the company do?
Weeks of supply =
$2 mil/($10 mil)(52 wks.) =
10.4 weeks
Inventory turns =
$10 mil./$2 mil. = 5
turns/yr
Adapted from Pearson Education 2007
Transportation
• Role in the Supply Chain
– Moves the product between stages in the supply chain
– Affects responsiveness and efficiency
– Faster transportation allows greater responsiveness
but lower efficiency
– Also affects inventory and facilities
– 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
• Mode of transportation:
– Air, truck, rail, ship, pipeline, electronic
– Vary by cost, speed, size of shipment, flexibility
• Route and network selection
– Route: path along which a product is shipped
– Network: collection of locations and routes
• In-house or outsource
Transportation
• Overall trade-off: Responsiveness versus
efficiency
– The cost of transporting a given product
(efficiency) and the speed with which that
product is transported (responsiveness)
– Using fast modes of transport raises
responsiveness and transportation cost but
lowers the inventory holding cost
What are the roles of facilities, inventory, and
transportation in your supply chain?
• Facilities: Increase responsiveness by increasing the number
of facilities, making them more flexible, or increasing capacity.
• Inventory: Mismatch between supply and demand, Exploit
economies of scale, Improve product availability, Affects
assets, costs, responsiveness, material flow time
• Transportation: Moves the product between stages in the
supply chain, Affects responsiveness and efficiency, Faster
transportation allows greater responsiveness but lower
efficiency, Also affects (or is affected by) inventory and
facilities, Allows a firm to adjust the location of its facilities and
inventory to find the right balance between responsiveness
and efficiency
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There are lots of interactions
For example,
• Increasing the number of facilities,
– Increases responsiveness J
– Decreases efficiencies L
– Increases inventory costs L
– Decreases transportation costs J
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There are lots of interactions
Another example,
• Increasing the flexibility (capabilities) of
facilities,
– Increases facility costs L
– Increases responsiveness J
– Decreases inventory costs J
– Decreases transportation costs J
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What are decisions that needs to be made
about facilities, inventory, and transportation in
your supply chain?
• Facilities decisions:
– What role should each facility have?
• Flexible or dedicated, Product focus or functional focus
– How many and where should a company locate its facilities?
• Centralized (economies of scale)
• Decentralized (responsiveness)
– How much capacity should a facility have?
• Extra – responsiveness, costly
• No extra – more efficient, but remember the nonlinear relationship of
utilization and congestion
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What are decisions that needs to be made about
facilities, inventory, and transportation in your
supply chain?
• Inventory decisions:
– How much of each product at each location?
– When should the deliveries be made (how frequently)?
• Transportation decisions: design of
transportation network
• Modes (truck, train, air), locations, and routes
• Hub-and-Spoke Network, versus point-to-point
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Questions?
• What are the roles of information, sourcing, and
pricing in your supply chain?
• Is there any interaction and/or relationship among
these?
• What are decisions that needs to be made about
information, sourcing, and pricing in your supply
chain?
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Information
• Role in supply chain:
– Connects various stages in the supply chain,
allows coordination between stages
– Crucial to daily operation of each stage in
supply chain, e.g., production scheduling,
inventory levels
– Information is a key driver that can be used to
provide higher responsiveness while
simultaneously improving efficiency
Components of Information
Decisions
• S &O P: Forecasting and aggregate planning
• Push versus pull control
– Different information requirements and uses
• Coordination and information sharing
• Selection of technologies
– EDI, Internet, ERP, SCM software, RFID
Components of Information
Decisions
• Information-related metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability
Sourcing
• 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
– Increase the size of the total surplus to be
shared across the supply chain
Sourcing
• 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
– 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 significant
Components of Sourcing Decisions
• Supplier selection
– Number of suppliers, criteria for evaluation and
selection
• Procurement
– Obtain goods and service within a supply chain
– Goal is to increase supply chain surplus
Components of Sourcing Decisions
• 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
Pricing
• Pricing strategies can be used to help
match demand and supply
• Firms can utilize optimal pricing strategies
to improve efficiency and responsiveness
– Vary prices by response times, product
availability, degree of customization or
flexibility, etc.
Components of Pricing Decisions
• Pricing and economies of scale
– Quantity discounts
• Everyday low pricing versus high-low pricing
– lead to different demand profiles that the supply chain
must serve
• Fixed price versus menu pricing
– lead to different customer behavior that might have a
negative impact on profits
What are the roles of information, sourcing,
and pricing in your supply chain?
•
Information: 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
Sourcing: Will tasks be performed by a source internal to the company
or a third party;
–
Outsource to responsive third parties if it is too expensive to develop their own
–
Keep responsive process in-house to maintain control
Pricing: Pricing determines the amount to charge customers for goods
and services
–
Affects the supply chain level of responsiveness required and the demand profile the supply chain
attempts to serve
–
Pricing strategies can be used to match demand and supply
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Relationship Example
• For Example, deciding to have everyday
low pricing (versus high-low pricing)
– Leads to “smoother” demand
• Easier to forecast
–Leads to better information
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What are decisions that needs to be made
about information, sourcing, and pricing in
your supply chain?
• Information
– Supply chain coordination (requires sharing information)
• Sourcing
– Which tasks to be performed internally versus sourced?
– Supplier selection (number of suppliers, criteria for evaluation)
• Pricing
– What price should be set? Should it be fixed or dynamic? Based
on volume?
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