Chapter 2: Supply Chain Drivers and Metrics Key Financial Measures ROE (Return on Equity) πππ‘ πΌπππππ π΄π£πππππ πβπππβπππππ πΈππ’ππ‘π¦ ROA (Return on Assets) πΈπππππππ ππππππ πππ‘ππππ π‘ π΄π£πππππ πππ‘ππ π΄π π ππ‘π Or Profit x Asset Turnover ROFL (Return on Financial Leverage) APT (Account Payable Turnover) ART (Account Receivables Turnover) INVT (Inventory Turnover) PPET (Property, Plant and equipment turnover) C2C (Cash-to-cash cycle) Markdowns Lost Sales ROE-ROA πΆππ π‘ ππ πΊππππ ππππ π΄ππππ’ππ‘ πππ¦πππππ πππππ π ππ£ππ’π π΄ππππ’ππ‘ π πππππ£πππππ πΆππ π‘ ππ πΊππππ ππππ πΌππ£πππ‘πππππ πππππ π ππ£ππ’π ππ & πΈ Week receivables (1/ART) + Weeks of inventory (1/INVT) – Weeks Payable (1/APT) Discounts required to convince customers to buy access inventory Customer sales that did not materialize because of the absence of products the customer wanted to buy Notes: ROE – How much money is return to your equity ROA – How good you are in generating profit from your assets ROFL – The difference between ROE and ROA is the debt (it is a reflection on your leverage) APT – How quickly you pay off your account payable C2C – Number 1 supply chain indicator. How fast are you at turning your cash (sometimes you need to consider from the balance sheet perspective, payment terms, depreciation, inventory and etc.) How businesses finance money? ο· To get it from the bank or the shareholders ο· ο· ο· Financing cost has to be included into the cost of the product to ensure the company profits. (e.g. strategic location of the distributor from the production centre is essential as the nearer it is, the lesser cost incurred from transportation) Payment terms is important for supply chain managers as well as they have to take inconsideration of how they’re going to finance it As a SC Manager you want to keep inventory low while having high inventory turnover (lesser cost for holding inventory, more goods sold, higher INVT) Others - ART = higher the better, this means that customers pay the business very quickly AR = lower the better, less money owed by customers APT = the lower the better, this means that the business is taking longer to pay its supplier allowing them to have more $$ on hand to finance their business NWC = negative NWC is favorable Good SCM 1. Reduce inventory 2. Increase inventory turnover 3. Lengthen payment terms with supplier 4. Shorten the collection of payment from customer Drivers of Supply Chain Performance Logistical Drivers ο· ο· ο· Facilities – Places where inventory is stored, assembled or fabricated Inventory – Raw materials, WIP, finished goods within a supply chain Transportation – Moving inventory from point to point in a supply chain (anything related to the transportation within the supply chain flow) Cross Functional Drivers ο· ο· ο· Information – Data and analysis regarding inventory, transportation, facilities throughout the supply chain (information is sufficient till a point where it incurs more cost than benefits) Sourcing – Functions a firm performs and functions that are outsourced Pricing – Price associated with goods and services provided by a firm to the supply chain Supply Chain Decision-Making Framework Walmart Examples Competitive strategy – reliable, low-cost retailer with large product variety Supply chain strategy – efficient but responsive in terms of product availability Logistical drivers: 1. Facilities – centrally located DCs within a network of stores, increases efficiency 2. Inventory – low level with cross-docking at stores (cross-docking have minimal or no storage time) 3. Transportation – runs own fleet, increases costs but improves responsiveness Cross-functional drivers: 1. Information – large investment for high responsiveness, decrease inventory investment 2. Sourcing – large orders to efficient sources for economies of scale 3. Pricing – “Everyday Low Price” ensures steady customer demand without fluctuation Facilities as a Driver (Logistical Drivers) Role in the Supply Chain - The “where” of the supply chain Manufacturing (factories) or storage (warehouses) Role in the Competitive Strategy - Economies of scale (efficiency priority) Large number of smaller facilities (responsiveness priority) Facilities Places where inventory is stored, assembled or fabricated ο· E.g. production sites, storage sites, warehouses, factories, distribution centres Decisions Roles: level of flexibility ο· Flexible capacity: used for multiple products ο· Dedicated capacity: used for limited products ο· Combination of the two Location ο· Risks in the located area ο· Closer to customer, decentralised ο· Centralised Capacity ο· Large excess capacity ο· Little excess capacity Facility-related - Capacity metrics - Utilisation: the fraction of capacity that is being used - Production cost per unit - Theoretical flow/ cycle time: the time required to process a unit if there are absolutely no delay at any stage - Actual average flow/ cycle time - Flow efficiency = theoretical flow time/ actual average flow time - Product variety - Volume contribution of top 20 percent SKUs and customers: Fraction of total volume that comes from the top 20 SKUs or customers - Processing/ set-up/ downtime/ idle time - Quality losses: the fraction of production lost as a result of defects - Average production batch size - Production service level: the fraction of production orders completed on time and in full Trade-off: Responsiveness VS Efficiency: (Facilities as a Driver) ο· ο· ο· Cost of the number, location, capacity, and type of facilities (efficiency) and the level of responsiveness Increasing the number of facilities increases facility and inventory cost but decreases transportation costs and reduces response time Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and response time Inventory as a Driver (Logistical Drivers) Role in Supply Chain ο· ο· ο· ο· Mismatch between supply and demand Satisfy demand Exploit economies of scale Impacts assets, costs, responsiveness, material flow Role in the Competitive Strategy ο· ο· Form, location, and quantity of inventory allow a supply chain to range from being very low cost to very responsive Objective is to have right form, location, and quantity of inventory that provides the right level of responsiveness at the lowest possible cost Inventory Decisions All raw materials, work in progress, and finished goods within a supply chain Cycle Inventory ο· Average amount of inventory used to satisfy demand between receipts of supplier shipments ο· Trade-off: The cost of holding large lots of inventory vs the cost of ordering more frequently Safety inventory ο· Inventory held in case demand exceeds expectations ο· Trade-off: The cost of carrying too much inventory vs the cost of losing sales Seasonal inventory ο· Inventory built up to counter predictable seasonal viability in demand ο· Trade-off: The cost of carrying additional inventory vs the cost of flexible production Level of product availability ο· The fraction of demand that is served on time from product held in inventory ο· Trade-off between customer service and cost Inventory-related metrics - C2C 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: measures the fraction of orders/ demand that were met on time from inventory Fraction of time out of stock Obsolete inventory Trade-off: Responsiveness VS Efficiency: (Inventory as a Driver) ο· ο· ο· 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 Transportation as a Driver Role in the Supply Chain ο· ο· ο· ο· 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 ο· Allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency Transportation Decisions Transportation moves the product between stages in the supply chain Design of transportation network ο· Modes, locations, and routes ο· Direct or with intermediate consolidation points ο· One or multiple supply or demand points in a single run Choices of transportation mode ο· Air, truck, rail, sea, and pipeline ο· Information goods via the internet ο· Transportationrelated metrics - - - Different speed, size of shipments, cost of shipping, and flexibility Average inbound transportation cost: measured as a percentage of COGS, and measured separately for each supplier Average inbound shipment size Average inbound transportation cost per shipment Average outbound transportation cost: measured as a percentage of sales, and measured separately for each customer Average outbound shipment size Average outbound transportation cost per shipment Fraction transported by mode Trade-off: Responsiveness VS Efficiency: (Transportation as a Driver) ο· ο· 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 Information as a Driver (Cross-functional Driver) Role in Supply Chain ο· ο· Improve the utilisation 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 Competitive Strategy ο· ο· ο· 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 Information Decisions Improve the utilisation of supply chain assets and the coordination of supply chain flows to increase responsiveness and reduce cost Push vs Pull ο· Different information requirements and uses Coordination and information sharing ο· Supply chain coordination occurs when all stages of a supply chain work toward the objective of maximising total supply chain profitability based on shared information Sales and operating planning (S & OP) ο· The process of creating an overall supply plan (production and inventories) to meet the anticipated level of demand (sales) Enabling technologies ο· Electronic data interchange (EDI) ο· The internet ο· Enterprise resource planning (ERP) systems ο· Supply chain management (SCM) software ο· Radio frequency identification (RFID) Information-related - Forecast horizon metrics - Frequency of update - Forecast error - Seasonal factor - Variance from plan - Ratio of demand variability to order variability Trade-off: Responsiveness VS Efficiency: (Information as a Driver) ο· ο· ο· ο· 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 Evaluate the minimum information required to accomplish the desired objectives Sourcing as a Driver (Cross-functional Driver) Role in the Supply Chain ο· ο· ο· Set of business process required to purchase goods and services Will tasks be performed by a source internal to the company or a third party? Globalisation creates many more sourcing options with both considerable opportunity and potential risk Role in the Competitive Strategy ο· ο· 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 ο· Share the minimum amount of information required to achieve coordination Sourcing Decisions Sourcing-related metrics Set of business processes required to purchase goods and services In-house or outsource ο· Perform a task in-house or outsource it to a third party ο· Outsourcing all tasks, or only the responsive part, or only the efficient part Supplier selection ο· Number of suppliers, evaluation and selection criteria, direct negotiation or auction Procurement ο· Must structure procurement with a goal of increasing supply chain surplus - Days payable outstanding - Average purchase price - Range of purchase price - Average purchase quantity - Supply quality - Supply lead time - Percentage of on-time deliveries - Supplier reliability: The variability of the supplier’s lead time as well as the delivered quantity relative to plan Sourcing as a driver: Target: Increase the supply chain surplus: ο· ο· ο· ο· 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 significant Pricing as a Driver (Cross-functional Driver) Role in the supply chain ο· ο· ο· 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 Role in the competitive strategy ο· ο· Firms can utilise optimal pricing strategies to improve efficiency and responsiveness Pricing strategies vary to meet different customer responsiveness requirements Pricing Decisions Pricing-related metrics Pricing determines the amount to charge customers for goods and services Pricing and economies of scale ο· The provider of the activity must decide how to price it appropriately to reflect these economies of scale Everyday low pricing versus high-low pricing ο· Different pricing strategies lead to different demand profiles that the supply chain must serve Fixed pricing versus menu pricing ο· If marginal supply chain costs or the value to the customer vary significantly along some attribute, it is often effective to have a pricing menu ο· Can lead to customer behaviour that has a negative impact on profits - Profit margin - Days sales outstanding - Incremental fixed cost per order - Incremental variable cost per unit - Average sales price - Average order size - Range of sale price - Range of periodic sales: the maximum and minimum of quantity sold per period during a specific time horizon Pricing as a driver: Target: Increase firm profits ο· ο· ο· ο· Understand the cost structure of performing a supply chain activity and the value this activity brings to the supply chain Strategy such as EDLP (everyday low pricing) may support efficiency in the supply chain, lower supply chain costs, defend market share, or steal market share Differential pricing may be used to attract customers with varying needs Strategy should help either increase revenues or shrink costs or preferably both Drivers & Metrics: Summary 1. Supply chain metrics related decisions determine the overall performance of the supply chain 2. These drivers interact with each other to achieve a balance between efficiency and responsiveness of the supply chain 3. Numerous metrics or performance measures are used to gauge the performance of these drivers
