Supply Chain Drivers and Metrics

[Music] we'll start with the financial measures of company performance and then later on we'll connect this to supply chain performance so we'll make use of two companies amazon.com and not storm in corporation we will use their financial data to do some calculations we can calculate our o e so we divide net income by average shareholder equity so these two numbers are given here so ro he measures return on investment made by forms shareholders basically tells us that each dollar invested in Amazon earns about two point eight one percent whereas each dollar invested in Nordstrom earns about thirty two point zero four percent another financial measure is return on assets return on assets measures for each dollar invested in assets how much returns are obtained if we take the difference of the two we can calculate what is called return on financial leverage so it captures amount of our o e that can be attributed to financial leverage another important financial measure is accounts payable turnover smaller value of apt for Amazon means that they were able to use the money they owed to suppliers to finance a considerable part of their operations if we do fifty two divided by two point four eight we get twenty point nine seven weeks which means that Amazon was able to finance its operations for about twenty point nine seven weeks using suppliers money similarly we can also calculate profit margin and similarly asset turnover can be calculated we can also see that not storm had much better profit margin compared to Amazon although they had a lower asset turnover and that's why they had a better ROI we can improve profit margins either by getting better prices for our products or by reducing the expenses so this much higher profit margin for Nordstrom basically indicates that customers are ready to pay slightly higher prices for their products because the company provides very good responsiveness and good supply chain management also helps the company to decrease their expenses to serve the customers for Amazon most of the cost incurred was mainly shipping cost so if Amazon can improve their shipping processes and reduce their shipping cost they will be able to significantly improve their profit margins another financial measure is account receivable turnover so Amazon was able to collect money from sales within about three point three three weeks so it took much longer for Nordstrom to collect money from sales and then we have inventory turnover which basically means that inventory sat with Amazon for about 7.11 weeks whereas for Nordstrom it was there for about nine point five two weeks and then we have property plant and equipment turnover so we can say that Amazon achieved higher asset turnover because they were able to turn over their inventory faster and therefore they were able to have higher revenue per dollar that they invested in property plant and equipment so the formula that were used for calculating these numbers you can find in the next few slides another important financial metric is cash to cash cycle so if we calculate this for Amazon we will get negative ten point five three Amazon was able to collect money from the sale of product more than ten weeks in advance compared to the time they have to pay their suppliers it may be very interesting to see this figure for various industries which so you can see for consumer electronics it takes on an average about nine point three weeks which is much better than many of the other industries and in fact for medical device manufacturers it is as high as two hundred and eleven plus average inventory turns the number for consumer electronics stands out so there are two important measures that you may not say in the financial statements which are markdowns and loss sales when companies have excess inventory which they are not able to sell so they try to sell them with a big discount that is called markdowns financial statements only show how much revenue was generated not how much revenue could have been generated one example is a General Motors which had a lot of difficulty during previous recession and things became so bad that they had to declare bankruptcy who of their main problems was discounts that were to be given to dealers to move excess inventory so by 2010 when they made a good comeback they were able to do that by being able to sell cars at much lower discount and loss sales happen when customer is looking for a product but it is not available so both of these have big impact on company's net income and they in fact represent the biggest impact of supply chain on financial performance of a company if you look at examples of Walmart and Zara so these two companies are able to have very strong financial performances mainly because they have supply chains that are able to match supply with demand more effectively and therefore they are able to reduce markdowns and loss sales so supply chain performance in terms of responsiveness and efficiency is impacted by following six drivers so we can categorize these into two major categories first three logistical and next three as cross-functional drivers so facilities is actual physical location in the supply chain network where we can store the products assemble them or fabricate or manufacture them two major type of facilities that you may come across are either manufacturing facilities or storage type of facilities so when a company is doing well and if they want to improve their responsiveness they are likely to increase number of facilities they have for example Apple to improve their responsiveness globally from time to time we hear that they are opening new stores in different countries on the other hand if a company or a business is not doing well they try to reduce their number of facilities to be more efficient but at the cost of responsiveness so one example is Best Buy in 2013 so due to stiff competition from Amazon they had to shut down many retail facilities recently Macy's announced that they will be closing many retail facilities another driver of supply performance is inventory so inventory can be any type of raw material that the company uses or it may be work in progress for example in manufacturing a raw material may undergo various type of processing so at each machine there could be an inventory which is basically work-in-progress and once everything is completed those products have to wait before they can be shipped to warehouses or retail outlets so various businesses use inventory policies to have impact on their supply chain performance depending on what their objectives and goals are so for example IKEA they stole a lot of inventory of finished good items at their stores so that they are able to service customers from their inventory they are able to do that because those products in the inventory can hold their value for a longer time but if we have products whose value decreases over time then it is difficult to have large inventory and one such example is fashion retailers like Macy's or Zara it will not be a good idea to have a very huge inventory of fashion clothing so transportation as you know is moving inventory from one point to another choice of means of transportation obviously can have big impact on efficiency or responsiveness so information consists of data and analysis related to facilities inventory transportation etc as a driver information is really important because it affects every other driver of supply chain performance sourcing basically means choosing who is going to perform a particular supply chain activity so for example who will perform production whether it will be done in-house or it will be done by another company other sourcing decisions could involve where to keep the storage how transportation will be handled and so on pricing is basically how much your company will charge for whatever products or services they offer in the supply chain pricing can obviously have impact on demand and supply so one thing you will realize these drivers do not act independently but they interact a lot to have impact on the supply chain performance so while designing an effective supply chain it is very important to take into account interactions among these drivers in one of the research papers published in 2010 Doheny and others have observed that supply chain performance impacts about 35 percent of the financial performance for clothing retailers although this number may vary from one type of industry to other type of industry but one thing is sure that supply chain performance through these six drivers have significant impact on financial performance [Music] a company starts by making a competitive strategy and then they have to make decision about what their supply chain strategy should be and the idea is to balance efficiency and responsiveness so basically supply chain then uses these six drivers that would help to maximize supply chain profits although one may look at this framework top down starting with competitive strategy and then reaching the drivers one can also look at it bottom-up so one may study these are six drivers and that may go as an input for supply chain strategy let's look at one example Walmart's strategy is to be a reliable and low-cost retailer low cost suggest that they should emphasize on efficiency but they also need to be very responsive when it comes to products that they offer so when a customer comes looking for some item in Walmart Walmart needs to make sure that they are able to find it because if there is a stock out a customer may go to some other retailer Walmart's strategy is to keep low inventory which will help them to reduce cost so what they do is from manufacturer the items are shipped to a distribution center where this inventory stays for a very short time and then it quickly goes to Walmart stores so they do not make use of warehouse inbound trucks come from the suppliers to the distribution center and then there are outbound trucks that go from the distribution center to the stores so because the inventory is stored only at the Walmart stores not at warehouses they achieve much lower level of inventory clearly when it comes to inventory they prefer efficiency over responsiveness but if you look at transportation as a driver of supply chain performance they run their own fleet with the aim to have high responsiveness so although it increases the transportation cost but that is offset by the lower level of inventory that they are able to manage and also improved product availability similarly if you look at facilities Walmart makes use of a centrally located distribution centers within their network of stores to help reduce number of facilities at the same time improve efficiency at each distribution center and they also open a Walmart store only in those locations where the demand is sufficiently high that will be supported by a distribution center so this has a positive impact on both efficiency and transportation when it comes to cross-functional drivers like information so Walmart is one of the leading companies which has invested very heavily in the latest technologies for example Walmart is known for using RFID chips to track their inventory levels accurately and quickly and also they are able to share information with their suppliers quickly so this information driver is able to help them to be more responsive and also be able to reduce their inventory costs Walmart carefully chooses efficient sources for each product that they sell through their stores and usually Walmart will give them big orders so that the suppliers are also able to be efficient and finally if you look at rising lower prices at Walmart helps them to have strong customer demand which does not too much fluctuate with price variations and then the entire supply chain makes sure that the demand is met in efficient manner so overall walmart is able to create a good balance between efficiency and responsiveness with the help of these six drivers of supply chain performance now we will look at each of the six drivers of supply chain performance a company can improve or increase their responsiveness by increasing number of facilities they have or they can make these facilities more flexible or they may increase the capacity so each of these actions can help to improve responsiveness but these actions come at a cost so if number of facilities are increased that will also increase inventory cost but it can also help to reduce the transportation cost and also it will reduce response time so there's no one rule that can be applied to all businesses different businesses choose the roles of facilities in the way it helps them to be more profitable so for example IKEA has few stores but each of these stores are quite large on the other hand if you look at 7/11 Japan each of these facilities may be much smaller compared to IKEA but they are very large in numbers so components of facility decisions include role location and capacity so when making a decision regarding what will be the role of the facilities the company may have to make a decision where the facilities for production will be flexible dedicated or a combination of two so when a facility is a flexible then several types of products can be processed there but when it is dedicated then may be very few variety of products can be processed when the production facility is flexible obviously it increases the cost but improves responsiveness on the other hand when production facilities are dedicated they bring down the cost but then they are less responsive businesses may also have to decide whether they will have product focus or functional focus so product or focused facilities carry out all the functions that are needed for a product whereas functional focus are basically those facilities which carry out a given type of functions for example there could be a machining shop which only carries out machining activities similarly there could be a facility that specializes in welding they may be able to do variety of welding operations similarly when deciding about the role in relation to being a warehouse or a distribution center decisions may involve whether it will be cross docking facility or storage facility so in a cross docking facility what happens is the inbound trucks that come from various suppliers so those trucks are unloaded and the is broken into smaller Lots and then outbound trucks carry those products to various Walmart stores or they can be warehouses where products can be stored one example of decision related to facilities is Toyota and Honda both of them use facility decisions which helps them to be more responsive to their customers so the open manufacturing facilities in each major market and this brings them several benefits they are able to address currency fluctuations trade barriers and improve their responsiveness specially in a global setting location decisions could involve various factors that we include supply of skilled workers cost of hiring workers cost of facilities infrastructure how close they are to the customers and so on similarly when making decisions related to capacity businesses need to make sure that there is a good balance because if there is excess capacity that will mean that utilization rates of those facility will not be very high and many times the facility may be idle but if the capacity is less than the demand so that can again create a problem because if the customers demands are not fulfilled they may go to the competitors so there are various facilities related matrix capacity measures what is the maximum that can be processed at a given facility utilization is how often the facility is being utilized if utilization is 80 percent it is idle 20 percent of the time so processing means how often facility is being used for processing how much time goes into setup making the process ready how often it is down maybe because of breakdown or it may need maintenance how often it is idle production cost per unit is another metric so if quality losses are high it harms the financial performance as well as responsiveness theoretical flow is when everything goes well but in reality there could be some delays and that is captured by actual average flow or cycle time when we divide theoretical flow time by actual flow time we get flow time efficient see product variety is another metric so this is very important for focusing on most important products and customers 80/20 rule says 20% of the sk use bring 80% of the profits similarly 20% of the customers may bring 80% of the orders so it is important to focus on them average production batch size is important and production service level measures fraction of production orders that are completed on time the reason for existence of inventory is that demand and supply are never equal so this mismatch is by design because if you take an example of a retail store where customer wants to buy a t-shirt it will not be practical that the retail store orders a t-shirt from the manufacturer because it may take some time before that order arrives and meanwhile customer may go elsewhere so what retailers do is they keep our inventory of lot of items so that they can fulfill the demand although carrying inventory increases cost but it also improves availability so when inventory levels are high it also poses some risk that there could be items with which they may not be able to sell for example especially in garment industry some clothes can go out of fashion and if a store keeps lot of inventory of of a particular design of clothes then they may have to markdown to clear that inventory so this will definitely have an impact on the profit margins of a business so having extra inventory helps in keeping production costs down and also transportation cost down however it will increase the inventory carrying cost on the other hand if inventory levels are low that will definitely reduce inventory carrying cost but it can also result in lost sales related to inventory there is a popular littles law which is AI equals D times T country clearly has impact on flow time of material let's take an example of Amazon so suppose a Amazon warehouse carries the inventory of 100,000 items and suppose they are able to sell thousand items every day using littles law we have flow time equals I divided by D which means that on an average item will spend about 100 days in inventory so if Amazon warehouse is able to reduce this flow time from 100 days to only 50 days and if throughput remains same then they will be able to reduce their inventory from one hundred thousand to fifty thousand this can help to bring down the cost significantly so here is an example of how Amazon manages their inventory for books they keep fast selling books at warehouses which are closer to the customers to improve responsiveness but those books which do not sell fast they are kept at warehouses that will help to reduce the overall cost and sometimes they don't even keep it in the inventory so once there is a customer order they may print it and then ship to the customer so cycle inventory is average level of inventory that is used for satisfying demand between supplier shipments key questions that a manager need to answer or how much to order each time an order is placed with the supplier and what should be the large size of that order so for example if Amazon orders 100,000 items from a supplier every month one extreme could be that they order all 100,000 items once so there will be only one order and size of the order will be hundred thousand or they may order 50,000 in first two weeks and 50,000 in next two weeks so clearly they have to create a balance between the two because if the number of orders goes down and the size of the order increases so that will increase the inventory carrying cost although it is going to decrease the ordering cost on the other hand if they order four times a week so ordering cost is going to go up but the inventory related costs will come down in a hypothetical situation where there is no uncertainty then the only inventory will be cycle inventory but in reality the demand is very uncertain and that's where we need safety inventory so the key decision here is how much safety inventory to keep so for example businesses may have to keep high safety levels during holiday seasons because the demand is relatively high whereas in other times they may not have to keep very high level of safety inventory so it will help to reduce talk out situation and therefore help reduce lost sales so seasonal inventory related decisions are to be made because demand very often is seasonal and specially during holiday seasons demand may be higher compared to other seasons so what companies do is when the demand is low that time the capacity is used to stock up inventory and then make use of it when the demand increases so one key decision here is the manager may have to decide how much inventory to build up level of product availability is proportion of demand that can be fulfilled from the inventory if this is high that will lead to high responsiveness because large percentage of demand can be fulfilled from the inventory but obviously it will increase the inventory carrying cost when the level of product availability is low that will definitely reduce inventory holding cost but then there could be a large percentage of customers will not be able to be served from the inventory c2c cycle time captures not only inventory levels but also accounts payable in receivables average inventory is average inventory carried by a business inventory turns is how many times inventory turns during one year so average replenishment batch size is another metric products with more than a specified number of days of inventory so basically it helps to identify products for which the company is carrying high level of inventory it can also help to figure out fast moving products and slow moving products average safety inventory so fill rate is proportional for orders or demand that are met on time from the inventory fraction of time out of stock obsolete inventory let's take example of Blue Nile Blue Nile is in diamond business and they are online retailers customers can go to their website and place an order for diamond they like Blue Nile uses faster means of transportation such as FedEx to ship customers in US Canada and several European countries since the value of diamonds is quite high they offer free shipping for or denied deliveries because they achieve high responsiveness with the help of transportation they centralize their inventories and save a lot of money by not having facilities such as stores so although their costs for transportation is quite high the other savings such as not having too many facilities obviously helps them to be very very profitable design of transportation network so this includes what mode of transportation is used location and what transportation routes are used businesses may have to make a decision whether a product will be shipped directly from manufacturer to a customer or it will go to warehouses or distribution centers on the way so especially for a business that competes globally in different countries they may have to choose whether they should use air truck rail or c-average inbound transportation cost so this captures the cost of bringing product into a facility and managers should monitor this separately for each supplier a related metric is average incoming shipment size and average inbound transportation cost per shipment and when you look at outbound so average outbound transportation cost captures the cost of sending product out of a facility to the customer and related metrics are the shipment size and also transportation cost per shipment out of the total transportation which mode of transportation contributes how much this will also help to monitor which modes of transportation are overused or underused [Music] you [Music] so businesses that are able to share good information across the supply chain are generally very very successful one example is Walmart so they make use of information on shipments from suppliers to help with cross docking and this helps them to reduce inventory and transportation cost significantly when designing processes manager should understand what type of system they have whether they have push or pull system push system starts with a demand forecast which is used for making master production schedules and then it is used for suppliers to make decisions regarding part types quantities and delivery dates but the pull system requires information about actual demand and this information has to travel very quickly to the entire supply chain so that the production and distribution of the products can reflect the real demand accurately so supply chain coordination involves sharing information in such a way that the total profitability of the supply chain is maximized if there is a lack of coordination and information sharing among the players of a supply chain so that can create a lot of difficulties and reduce supply chain profits significantly so one example is if there is a design change and the suppliers related to that particular product they need to know this information quickly so if they know this information then they'll be able to stop production with all design and move on to produce products with the latest design if they produce components with the older design so those components may have to be reworked or they may have to be scrapped if rework is not possible so supply chain coordination and sharing of information obviously can help avoid these kind of situations so Sales and Operations planning is process of creating overall supply plan to meet anticipated demand levels generally marketing and sales people they communicate their needs to the supply chain and then the supply chain people will send back information to sales in mark getting whether their needs can be met final goal is to come up with agreed-upon sales production and inventory plans that can be used for planning supply chain needs so sales and operations plan is a very critical piece of information because it effects companies suppliers as well as customers for sharing and analyzing information there are several enabling technologies that are used so electronic data exchange is one such enabling technology this was developed in 1970s and it helped to make transactions faster and paperless and also more accurate so Internet has become a very important media for communication and there are so many internet related technologies that help businesses to share information quickly among various supply chain players ERP is enterprise resource planning it enables real-time information sharing and because of that supply chains are able to improve the quality of their decisions there are various supply chain management software's that helps to do some analytics using the information and provide very useful insights that help in making sound decisions another technology that is very popular is radio frequency identification so it has a several uses it can make receiving of a truck that has all kinds of products much quicker and also very cheap using RFID manual counting can be eliminated so forecast horizon is how far into the future demand forecast is made then generally forecast horizon should be greater than or at least equal to the lead time of the decision that is driven by the forecast frequency of update monitors how frequently a forecast is updated so sometimes a forecasting method or model may be used so that model may be a crate for a certain period of time but once that model starts giving lot of forecasting errors that means it's time to really come out with a new model seasonal factors variance from the plan so this could be production plan or plan inventory levels so it can help in identifying shortages or surplus ratio of demand variability to order variability so this measures the standard deviation of incoming demand and supply orders placed so if this ratio is less than one so that will indicate there is a presence of what is known as bullwhip effect in later chapters we will see what is this bullwhip effect sourcing is a set of business processes which are needed for purchasing goods and services so managers in a supply chain they need to make a decision whether each task will be performed by a responsive or efficient source and whether the source will be internal to the company or it will be somebody from the outside the idea is to increase supply chain surplus if you look at example of Apple most of their products are manufactured in China at a company called Foxconn when they decided to do it at this company they must have taken into account they'll be able to do so in such a way that it increases the supply chain surplus if you look at Apple again most of their products are sold with the help of various retailers but when they launched Apple watch they decided that they will sell it only through Apple store initially because they wanted to provide exclusive or customer experience so whether something should be done in-house or outsourced so that is a very critical decision regarding sourcing another critical decision involves supplier selection not only choosing a good supplier but also how many suppliers is part of the decision so managers also need to identify how performance of these suppliers will be evaluated procurement is the process of obtaining goods and services within a supply chain days payable outstanding captures number of days between a supplier performing a particular activity versus when they were paid also what was the average purchase price and range of purchase price captures fluctuations that may occur during a given period of time and also it is very important to monitor quality of the supply supply lead time is difference between the time when order is placed versus when it is received if the supply lead time is high it has negative impact on responsiveness and also may cause businesses to keep higher levels of inventory that will increase the cost how often suppliers provide on-time deliveries is another critical metric so apply reliability captures both variability in supply as lead time as well as variability in quantities rising is a process by which a company decides how much they should charge customers for their products or services surprising has an impact on customer segments that buy that product or service as well as it influences customer expectations pricing can be used as a tool to match supply with the demand by providing discounts and reducing the price surplus can be removed if you take example of Amazon if you want to buy something and you choose the item and then proceed to the checkout the website is likely to offer menu pricing if you are ready to wait for five to eight business days then the shipping is going to be free if you are ready to wait for four to five business days then it will be standard shipping but if you want to get it in two days then obviously the cost is going to be the highest so this way Amazon is able to provide responsiveness to those customers who value it and customers who want low cost so for them Amazon is able to work efficiently to reduce cost most of the supply chain activities they display economies of scale when things are done in bulk it is usually less expensive compared to other situations for example when a fully loaded truck has to deliver at one location it will be much cheaper compared to when it has to deliver at let's say 10 locations so basically a provider of supply chain activities has to make a decision regarding pricing keeping in mind economies of scale and one common approach that is used is giving quantity discounts so one example of everyday low prices is Costco so they try to keep our prices steady over a period of time so as a result what they get is a very stable demand but those businesses that go for high-low pricing may have a situation where the demand Peaks when discounts are offered and then it significantly reduces these are two different approaches obviously lead to two different demand profiles that a supply chain has to take into account fixed price versus menu pricing is another example of decisions involving pricing one example of menu pricing is one that is followed by Amazon at the time of shipping pricing has a direct impact on revenues and since it also impacts demand profile it has impact on production and inventory cost so some of the metrics that a manager need to track include profit margin which is basically profit as a percentage of revenue new days sales outstanding which captures average time between when a cell is made and when cash is collected average sale price average order size range of sale price so range of periodic order captures what is the minimum and what is the maximum quantity that is sold over a period of time where a period could be daily weekly or may be monthly so the idea is to understand correlation between sales and price and see if any opportunity exists to shift sales by changing price over time so all these are six drivers of supply chain performance that we have seen play a very important role in supply chain performance [Music]

Channel: Dr. Bharatendra Rai

Views: 31,177

Keywords: supply chain, network design

Id: jx7zUXb0l78

Length: 40min 47sec (2447 seconds)

Published: Mon Jan 09 2017