Supply Chain Drivers and Metrics

Dr. Sreerengan V R, CHRIST (Deemed to be University)

Drivers of Supply Chain Performance

1. Facilitie
The physical locations in the supply chain network where product is stored,
assembled, or fabricate
2. Inventor
All raw materials, work in process, and nished goods within a supply chai
3. Transportatio
Moving inventory from point to point in the supply chain
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Drivers of Supply Chain Performance

3. Information
Data and analysis concerning facilities, inventory, transportation, costs, prices,
and customers throughout the supply chai
4. Sourcin
Who will perform a particular supply chain activit
5. Pricin
How much a rm will charge for the goods and services that it makes
available in the supply chain
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Drivers of Supply Chain Performance

Facilties

•Role in the supply chai

–Production sites and storage site
–Increase responsiveness by increasing the number of facilities,
making them more exible, or increasing capacity
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Drivers of Supply Chain Performance

Facilties

–Tradeoffs between facility, inventory, and transportation cost

!Increasing number of facilities increases facility and inventory
costs, decreases transportation costs and reduces response tim
!Increasing the exibility or capacity of a facility increases
facility costs but decreases inventory costs and response time
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Drivers of Supply Chain Performance

Facilties
•Components of facilities decision
–Capability
!Flexible, dedicated, or a combination of the tw
!Product focus or a functional focu
–Location
!Where a company will locate its facilitie
!Centralise for economies of scale, decentralize for responsivenes
!Consider macroeconomic factors, quality of workers, cost of workers
and facility, availability of infrastructure, proximity to customers,
location of other facilities, tax effects
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Drivers of Supply Chain Performance

Facilties

•Components of facilities decision

–Capacity
!A facility’s capacity to perform its intended function or function
!Excess capacity – responsive, costl
!Little excess capacity – more ef cient, less responsiv
–Demand Allocation
!Markets each facility will serv
!Revisited as conditions chang
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 Drivers of Supply Chain Performance

Facilties
–Facility-Related Metrics
!Capacity - measures the maximum amount a facility can process.
!Utilisation - measures the fraction of capacity that is currently being used in the facility.
!Processing/setup/down/idle time - measure the fraction of time that the facility was
processing units, being set up to process units, unavailable because it was down, or idle
!Quality losses - measure the fraction of production lost due to defects. Quality losses hurt
both nancial performance and responsiveness.
!Production cost per unit - measures the average cost to produce a unit of output. These
costs may be measured per unit, per case, or per pound depending on the product.
!Theoretical ow/cycle time of production measures the time required to process a unit if
there are absolutely no delays at any stage.
!Actual average ow/cycle time measures the average actual time taken for all units
processed over a speci ed duration such as a week or month.
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Drivers of Supply Chain Performance
Facilties
–Facility-Related Metrics
!Product variety measures the number of products/product families processed in a
facility. Processing costs and ow times are likely to increase with product variety.
!Volume contribution of top 20 percent S K U ' s and customers measures the
fraction of total volume processed by a facility that comes from the top 20 percent SKUs
(Stock keeping Unit) or customers. An 80/20 outcome in which the top 20 percent
contribute 80 percent of volume indicates likely bene ts from focusing the facility where
separate processes are used to process the top 20 percent and the remaining 80 percent.
!Average production batch size measures the average amount produced in each
production batch. Large batch sizes will decrease production cost but increase
inventories.
!Production service level measures the fraction of production orders completed on time
and in full.

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Drivers of Supply Chain Performance
Inventory

•Role in the Supply Chain

–Mismatch between supply and deman
–Exploit economies of scal
–Reduce cost
–Improve product availabilit
–Affects assets, costs, responsiveness, material ow time
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Drivers of Supply Chain Performance

Inventory

•Overall Trade-Off
–Increasing inventory generally makes the supply chain more
responsiv
–A higher level of inventory facilitates a reduction in production and
transportation costs because of improved economies of scal
–Inventory holding costs increase
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Drivers of Supply Chain Performance

Inventory
Little’s Law is a theorem that determines the
average number of items in a stationary
queuing system, based on the average waiting
time of an item within a system and the
average number of items arriving at the system
per unit of time.
The long-term average number L of customers
in a stationary system is equal to the long-term
average effective arrival rate λ multiplied by the
average time W that a customer spends in the
system
L = λ W
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 Drivers of Supply Chain Performance

Inventory
–Material ow time, the time that elapses between the point at which
material enters the supply chain to the point at which it exit
–Throughput, the rate at which sales occu
–Little’s la
I=DT
wher
I = ow time, T = throughput, D = deman
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Drivers of Supply Chain Performance

Inventory
Problem:-
If the ow time of an auto assembly process is 10 hours and the
throughput is 60 units an hour what is the inventory
Little’s law tells us that the inventory is 60 x 10 = 600 units.
If we were able to reduce inventory to 300 units while holding
throughput constant, What is the ow time
we would reduce our ow time to 5 hours (300/60).
We note that in this relationship, inventory and throughput must have
consistent units.
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 Drivers of Supply Chain Performance

Inventory
Amazon attempts to provide a wide variety of books (among other products) to its
customers.
Best-selling books are stocked in many regional warehouses close to customers
for high responsiveness.
Slower moving books are stocked at fewer warehouses to lower the cost of
inventory at the expense of some responsiveness.
Some of the slowest moving books are not held in inventory but are obtained
from the publisher/distributor or printed on demand when requested by a
customer.
Amazon changes the form, location, and quantity of inventory it holds by the
level of sales of a book to provide the right balance of responsiveness and
ef ciency.
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Drivers of Supply Chain Performance

Components of Inventory Decisions
•Cycle Inventory
–Average amount of inventory used to satisfy demand between
supplier shipments. The size of the cycle inventory is a result of the
production, transportation, or purchase of material in large lots
–Companies produce or purchase in large lots to exploit economies of
scale in the production, transportation, or purchasing process. With the
increase in lot size, however, comes an increase in carrying costs.
•Safety Inventory
–Inventory held in case demand exceeds expectation
–Costs of carrying too much inventory versus cost of losing sales

Drivers of Supply Chain Performance

Components of Inventory Decisions

•Seasonal Inventory
–Inventory built up to counter predictable variability in deman
–Cost of carrying additional inventory versus cost of exible
productio
•Level of Product Availability
–The fraction of demand that is served on time from product held in
inventor
–Trade off between customer service and cost
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Drivers of Supply Chain Performance

Inventory-Related Metrics
• Cash-to-cash cycle time is a high-level metric that includes inventories,
accounts payable, and receivables.
• Average inventory measures the average amount of inventory carried. Average
inventory should be measured in units, days of demand, and nancial value.
• Inventory turns measure the number of times inventory turns over in a year. It
is the ratio of average inventory to either the cost of goods sold or sales.
• Products with more than a speci ed number of days of inventory identi es
the products for which the rm is carrying a high level of inventory. This
metric can be used to identify products that are in oversupply or to identify
reasons that justify the high inventory, such as price discounts or being a very
slow mover.
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Drivers of Supply Chain Performance

Inventory-Related Metrics
• 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. It can be estimated by averaging over time the
difference between the maximum and the minimum inventory (measured in each
replenishment cycle) on hand.
• Average safety inventory measures the average amount of inventory on hand
when a replenishment order arrives. Average safety inventory should be measured
by SKU in both units and days of demand. It can be estimated by averaging over
time the minimum inventory on hand in each replenishment cycle.
• Seasonal inventory measures the difference between the in ow of product
(beyond cycle and safety inventory) and its sales that is purchased solely to deal
with anticipated spikes in demand.

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Drivers of Supply Chain Performance

Inventory-Related Metrics
• Fill rate (order/case) measures the fraction of orders/demand that were
met on time from inventory. Fill rate should not be averaged over time
but over a speci ed number of units of demand (say, every thousand,
million, etc.).

• 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 lost sales during the stock out period.

• Obsolete inventory measures the fraction of inventory older than a

speci ed obsolescence date.
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 Drivers of Supply Chain Performance

Transportation

•Role in the Supply Chain

–Moves inventory between stages in the supply chai
–Affects responsiveness and ef cienc
–Faster transportation allows greater responsiveness but lower
ef cienc
–Also affects inventory and facilitie
–Allows a rm to adjust the location of its facilities and inventory to
•
nd the right balance between responsiveness and ef ciency
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Drivers of Supply Chain Performance

Transportation

•Components of Transportation Decisions

–Design of transportation network
!Modes, locations, and route
!Direct or with intermediate consolidation point
!One or multiple supply or demand points in a single ru
•
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Drivers of Supply Chain Performance

Transportation

•Components of Transportation Decisions

–Design of transportation network
–Choice of transportation mode
!Air, truck, rail, marine, and pipelin
!Information goods via the Interne
!Different speed, size of shipments, cost of shipping, and exibility
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Drivers of Supply Chain Performance
Transportation
Blue Nile is an online retailer of diamonds that has used responsive transportation
with FedEx to ship diamonds to customers in the United States, Canada, and
several countries in Europe and Asia.
Given the high value of diamonds, Blue Nile offers free shipping for the
overnight delivery.
Responsive shipping, however, allows Blue Nile to centralise its inventory of
diamonds and also eliminate the need for expensive storefronts.
In spite of the high transportation costs, Blue Nile has very low costs compared to
bricks-and-mortar retailers because of the low facility and inven- tory expenses.
Blue Nile is thus able to offer signi cantly lower prices than its bricks-and-mortar
competition.

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Drivers of Supply Chain Performance

Transportation related metrics
• 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). Ideally, this cost should be measured per unit brought in,
but this can be dif cult. The inbound transportation cost is generally
included in COGS. It is useful to separate this cost by supplier.
• Average incoming shipment size measures the average number of units
or dollars in each incoming shipment at a facility.
• Average inbound transportation cost per shipment measures the
average transportation cost of each incoming delivery. Along with the
incoming shipment size, this metric identi es opportunities for greater
economies of scale in inbound transportation.
•
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Drivers of Supply Chain Performance

Transportation related metrics
• Average outbound transportation cost measures the cost of sending product out of a
facility to the customer. Ideally, this cost should be measured per unit shipped, but it is
often measured as a percentage of sales. It is useful to separate this metric by
customer.
Average outbound shipment size measures the average number of units or dollars on
each outbound shipment at a facility.
• Average outbound transportation cost per shipment measures the average
transporta- tion cost of each outgoing delivery. Along with the outgoing shipment size,
this metric identi es opportunities for greater economies of scale in outbound
transportation.
• Fraction transported by mode measures the fraction of transportation (in units or
dollars) using each mode of transportation. This metric can be used to estimate if
certain modes are overused or underutilized.
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Drivers of Supply Chain Performance

Transportation Trade- off

•Overall Trade-off: Responsiveness Versus Ef ciency

–The cost of transporting a given product (ef ciency) 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

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Drivers of Supply Chain Performance

Information

• Information consists of data and analysis concerning:-

facilities,
inventory,
transportation,
costs,
prices, and
customers throughout the supply chain.

• Information technology related expenses are typically

included under operating expense or assets.
• Amazon included $4.54 billion in technology expense under operating expense
and another $454 million under fixed assets to be depreciated.

Drivers of Supply Chain Performance

Information
•Role in the Supply Chain
Improve the utilization of supply chain assets and the coordination
of supply chain ows to increase responsiveness and reduce cost
Information is a key driver that can be used to provide higher
responsiveness while simultaneously improving ef ciency
7-Eleven Japan uses information to improve product availability while decreasing
inventories.
Walmart uses information on shipments from suppliers to facilitate cross-docking and
lower inventory and transportation expense.
Li & Fung, a global trading group supplying time-sensitive consumer goods such as
apparel, uses information on its third-party manufacturers to source each order from the
most appropriate supplier.

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Drivers of Supply Chain Performance

Information
•Role in the Competitive Strategy
Improves visibility of transactions and coordination of decisions
across the supply chai
Right information can help a supply chain better meet customer
needs at lower cos
More information increases complexity and cost of both
infrastructure and analysis exponentially while marginal value
diminishe
Share the minimum amount of information required to achieve
coordination
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Drivers of Supply Chain Performance

Information
•Role in the Competitive Strateg
• Cisco is well known for outsourcing most of its manufacturing activities. Despite the
fact that the company had no production facilities of its own and built most nal
products to order, the company had to write off $2.2 billion worth of raw material and
work in process inventory in 2001 because demand and supply information was not
coordinated across the supply chain.
• Since then the company has invested in a cloud based platform to ensure that there is
a single source of truth for data that is visible across the entire supply chain.
• Besides forecast and order information, the company has incorporated information on
the introduction of new products and the phase-out of old products to improve the
matching of supply and demand across the supply chain
• Outsourcing issues in Boein
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Drivers of Supply Chain Performance
Information
•Components of Information Decisions
Demand Planning
• Best estimate of future deman
• Include estimation of forecast erro
Coordination and Information Sharing
Supply chain coordination, all stages of a supply chain work toward the objective
of maximizing total supply chain pro tability based on shared informatio
Critical for succes
Sales and Operations Planning (S & O P
The process of creating an overall supply plan (production and inventories) to
meet the anticipated level of demand (sales
Can be used to plan supply chain needs and project revenues and pro ts
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Drivers of Supply Chain Performance

Information
Information-Related Metrics

Forecast horizon identi es how far in advance of the actual event a

forecast is made
Frequency of update identi es how frequently each forecast is updated
Forecast error measures the difference between the forecast and actual
demand
Variance from plan identi es 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.
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Drivers of Supply Chain Performance

Sourcing

• Sourcing is the choice of who will perform a particular supply chain

activity, such as production, storage, transportation, or the
management of information
• Functions of Nodal rm and outsourced functions
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Drivers of Supply Chain Performance

Sourcing

Role in the Supply Chain

Set of business processes required to purchase goods and service
Will tasks be performed by a source internal to the company or a
third part
Should increase the size of the total surplus to be shared across the
supply chai
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 Drivers of Supply Chain Performance

Sourcing

Role in the Competitive Strategy

Sourcing decisions are crucial because they affect the level of
ef ciency and responsiveness in a supply chai
Outsource to responsive third parties if it is too expensive to
develop their ow
Keep responsive process in-house to maintain control
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Drivers of Supply Chain Performance

Sourcing

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 rm
can on its own
Keep function in-house if the third party cannot increase the supply
chain surplus or if the outsourcing risk is signi cant.
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Drivers of Supply Chain Performance
Sourcing

Components of Sourcing Decisions

Supplier Selection
Number of suppliers, criteria for evaluation and selectio
Procurement
Obtain goods and service within a supply chai
Goal is to decrease total cost of ownership and increase supply chain
surplus

Drivers of Supply Chain Performance

Sourcing
Sourcing-Related Metrics
Days payable outstanding measures the number of days between when a
supplier performed a supply chain task and when it was paid for that task
Average purchase price measures the average price at which a good or
service was purchased during the year. The average should be obtained by
weighting each price by the quantity purchased at that price
Range of purchase price measures the uctuation in purchase price
during a speci ed period
Average purchase quantity measures the average amount purchased per
order. The goal is to identify whether a suf cient level of aggregation is
occurring across locations when placing an order.
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 Drivers of Supply Chain Performance

Sourcing
Sourcing-Related Metrics
Supply quality measures the quality of product supplied.
Supply lead time measures the average time between when an
order is placed and when the product arrives. Long lead times
reduce responsiveness and add to the inventory the supply chain
must carry
Percentage of on-time deliveries measures the fraction of
deliveries from the supplier that were on time
Supplier reliability measures the variability of the supplier’s lead
time as well as the delivered quantity relative to plan.
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 Drivers of Supply Chain Performance

Pricing

Pricing determines how much a rm will charge for the goods and
services that it makes available in the supply chain

V alue ef cient
alue responsiveness
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 Drivers of Supply Chain Performance

Pricing
Role in the Supply Chain
Pricing determines the amount to charge customers for goods and
service
Affects the supply chain level of responsiveness required and the
demand pro le the supply chain attempts to serv
Pricing strategies can be used to match demand and suppl
Objective should be to increase rm pro
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 Drivers of Supply Chain Performance

Pricing
Pricing in Retail
Bene ts given to the customers by the retailers:
Locatio
Quantit
Ambianc
See and try out merchandis
Other facilitie
• In exchange for these bene ts, customers pay money for the merchandise and
services provided by retailers.
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 Drivers of Supply Chain Performance

Pricing
Price Elas city
A commonly used measure of price sensi vity is price elas city, or the
percentage change in quan ty sold divided by the percentage change
in price:
Elas city = Percentage change in quan ty sold
Percentage change in price
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 Drivers of Supply Chain Performance
Pricing
Problem
Assume that a retailer originally priced a private-label DVD player at Rs. 90 and then raised
the price to Rs. 100. Before raising the price, the retailer was selling 1,500 units a week.
When the price increased, sales dropped to 1,100 units per week. Calculate price elasticity

Elasticity  = Percentage change in quantity sold

  Percentage change in pric
= (New quantity sold - Old quantity sold) ÷ (Old quantity sold)
  (New price - Old price) ÷ (Old price
  =   (1100- 1500) ÷ (1500)
      (100- 90) ÷ (90
  =  -2.400
Because the quantity sold usually decreases when prices increase, price elasticity is a
negative number.

 Drivers of Supply Chain Performance

Pricing
Problem
For products with price elasticities less than -1, the price that
maximises pro ts can be determined by the following formula
Pro t-maximising price =   Price elasticity x Cost
       Price elasticity +
So, if the private-label DVD player described in the preceding example
costs Rs. 50, the pro t-maximizing price would be
Pro t-maximizing price  =  -2.4005 x 50
   -2.4005 +
  =  85.70
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 Drivers of Supply Chain Performance

Pricing
Airlines use yield management to
adjust prices in response to
demand.

Due to the intangibility of services, it is

often dif cult for customers to assess
service quality, especially when other
information is not available. most
!Retailers maximize their pro ts by consumers have limited information about
se ng prices on the basis of the price lawyers and the quality of legal advice they
sensi vity of customers and the cost offer. They may, therefore, base their
of merchandise. assessment of the quality of legal services
offered on the fees they charge
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 Drivers of Supply Chain Performance

Pricing

•Pricing and Economies of Scale

–The provider of the activity must decide how to price it appropriately
to re ect economies of scal
•Everyday Low Pricing Versus High-Low Pricing
–Different pricing strategies lead to different demand pro les that the
supply chain must serv
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 Drivers of Supply Chain Performance

Pricing
Fixed Price Versus Menu Pricing
If marginal supply chain costs or the value to the customer vary
signi cantly along some attribute, it is often effective to have a
pricing men
Can lead to customer behavior that has a negative impact on
pro ts
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 Drivers of Supply Chain Performance

Pricing
Costco, a membership-based wholesaler in the United States, has a
policy that prices are kept steady but low. The steady prices ensure
that demand stays relatively stable. The Costco supply chain
exploits the relative stability of demand to be ef cient.
In contrast, some manufacturing and transportation rms use
pricing that varies with the response time desired by the customer.
Through their pricing, these rms are targeting a broader set of
customers, some of whom need responsiveness while others need
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ef ciency.
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 Drivers of Supply Chain Performance

Pricing

Amazona offered to a person purchasing two books worth $40

could use standard shipping (3 to 5 business days) at a cost of
$4.98, two-day shipping at a cost of $14.97, one-day shipping at a
cost of $24.97, or free shipping (5 to 8 business days). The pricing
menu allows Amazon to attract customers with varying levels of
]
desired responsiveness
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 Drivers of Supply Chain Performance

Pricing

Amazona offered to a person purchasing two books worth $40

could use standard shipping (3 to 5 business days) at a cost of
$4.98, two-day shipping at a cost of $14.97, one-day shipping at a
cost of $24.97, or free shipping (5 to 8 business days). The pricing
menu allows Amazon to attract customers with varying levels of
]
desired responsiveness
.

 Drivers of Supply Chain Performance

Pricing

•Pricing-Related Metri
• Pro t margin measures pro t as a percentage of revenue. A rm
needs to examine a wide variety of pro t margin metrics to
optimize its pricing, including dimensions such as type of
margin (gross, net), scope (SKU, product line, division, rm),
and customer type
• Days sales outstanding measures the average time between
when a sale is made and when the cash is collected
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 Drivers of Supply Chain Performance
Pricing

•Pricing-Related Metri
• Incremental xed cost per order measures the incremental
costs that are independent of the size of the order. These include
changeover costs at a manufacturing plant or order processing or
transportation costs that are incurred independent of shipment
size at a mail-order rm
• Incremental variable cost per unit measures the incremental
costs that vary with the size of the order
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 Drivers of Supply Chain Performance

Pricing
•Pricing-Related Metri
• 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 speci ed time horizon
• Range of periodic sales measures the maximum and minimum
of the quantity sold per period (day/week/month) during a
speci ed time horizon.
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