Chapter 5 Summery

MATRICS OF MEASURING SUPPLY CHAIN PERFORMANCE

 Useful model of markets and their supply chain

A supply chain exists to support the market that it serves market have 2
most basic components, supply and demand.

A market is characterize by its combination of supply and demand and

the market model have four basic kinds of market

1st supply and demand for its product are low and unpredictable
(developing market)

2nd supply is low and demand is high (growth market)

3rd both supply and demand are high(steady market)

4th supply is high and demand is low(mature market)

 In developing market: usually new market that are emerging and

high cost of sale and low inventories
 In growth market: cost of sales and low and high inventories yield.
It also provide a high level of customer service as measured by
order fill rate and on time deliveries
 In steady market: in this market supply and demand are well
balanced and companies should focus on minimizing inventory
and cost of sales
  In mature market demand is reasonably stable or falling because
of the fierce competition due to oversupply and inventories
should be minimized and cost of sales are somewhat higher to the
expense of attracting customers.

Market performance categories

Market in each quadrant have their own mix of opportunity for the
supply chain that support them. If the company exploit the
opportunities it can gain highest profit but if it unable to respond to
the opportunities as effective will fall behind

 Supply chain performance can be measured in 4 categories

I. Customer service: measure the ability of the supply chain
to meet the expectation of its customers
II. Internal efficiency: measure the ability of company or the
supply chain to operate in such a way as to generate an
appropriate level of profitability
III. Demand flexibility : measure the ability of the supply chain
or the company to respond uncertainty in the level of
product demand
IV. Product development: measure the company and the
supply chain ability to continue to evolve along with the
market they serve.

A framework for performance measurement

A framework performance measurement describes the mix of
performance required from companies and supply chain that serve 4
different market quadrant. Market in developing market requires
supply chain to excel in product development and customer service.

Market in growth market requires very high level of customer service

measured by order fill rate and on time delivery

Market in steady market quadrant requires internal efficiency as well as

broader scope of customer service

Market in mature market quadrant requires all internal efficiency and

customer service and also highest level of demand flexibility

Customer service metrics

There are two sets of customer service metrics depending on whether
the company or supply chain is in a build for stock or build-to-order
situation

o Build-to-stock situation consists complete order fill rate, on time

delivery , value to total back orders frequency and duration of
back orders and line item return rate
o Build-to-order situation consists quoted customer responds
time and on time completion rate, on time delivery rate, number
of late order, frequency and duration of late order, number of
warranty and repairs.
o Build to stock situation is one where a common commodity
product are supplied to a larger market
o Build to order situation is one where a customized product is
ordered by a customer, a product is built based on a specific
customer order to meet customer requirement
Internal efficiency metrics
 Internal efficiency refers to the ability of a company or supply
chain to use their asset as profitably as possible. The most
popular measures of internal efficiency
 Inventory value
 Inventory turn
 Return on sales
 Cash-to-cash cycle
 Inventory value: the major asset involved in a supply chain is
inventory contained throughout the length of the chain
 Inventory turn: measure the profitability of inventory by
tracking the speed with which is sold or turned during a give
year. This measure known as ”turn and earn”
 Return on sales: measure of how well an operation is being
run
 Cash-to-cash cycle time: when a company pay its suppliers for
materials to when it gets paid by its customer
Demand flexibility metrics
Demand flexibility metrics describe company’s ability to be responsive
to new demand in the quantity and range of product and to act quickly.
Measures of flexibilities are active cycle time, upside flexibility, outside
flexibility and activity cycle time.

Product development metrics measure a company ability to design,

build and deliver new products to serve their market over period of
time.

Operation that enable supply chain performance

Operation that enable supply chain performance are plan source, make
and deliver.

A company needs to build a business intelligence system that present

data at strategic level, tactical level and operational level.

Strategic data consists of data from outside the company such as

market size and growth rates, demographics and economic indication
such as GNP, inflation and interest rates

Tactical data consists of actual plan and historical numbers in the

4perormance categories displayed at the branch office level of detail
and monitor the plan, source, make and deliver operation that every
company in a supply chain must perform.

Operational data consist complexity measures, configuration measures

and practical measures. These measures help people who are changed
with getting a job done to understand what is happening and to make
improvement

Strategic data used by upper management to asses market and set

objective

Tactical data used by middle management to do planning and allocation

of resource and line or lower management use operational data to
solve problems and get things done

The Data warehouse

A data warehouse is composed of a black base software package and
automated connection to other system needed to collect the relevant
data on a regular and timely
The data base software is a software that allows for the creation of
standard predefined reports and graphics display which people can use
to monitor operations.

When designing and building a data warehouse it is best to start quickly

with something that is simple and on a smaller scale

The most important component in any data warehouse system is not

the technology or the data but the people who use the system and
their ability to use the system effectively to learn from the data and
become more efficient

A data warehouse can also be the foundation for collaboration with

other companies in the supply chain

Spotlighting problems and finding opportunities

The point of collecting performance data is to help monitor and control
daily, weekly and monthly operations.

The people in a company need access to a one-page display of the key

operating or financial measures that they are responsible for achieving.
The one-page display are known as ”dash boards” because they show a
person at a glance of data that is most important to them

Senior management sets company performance target and they need

access to a dashboard report that show them the company’s current
performance against these target.

Middle manager are responsible for managing their operation to

achieve one or more of the company’s performance targets. Their
dashboards need to show them the plan and actual data on company
performance targets they are responsible for
Staff people in various department need dashboard that track and
illuminate the specific business operations that are responsible for
purchasing, credit, IM… etc

Very few companies work in stable and slow-moving markets anymore,

there is a great need to learn to use data effectively to make decision
and act because speed is a major competitive advantage

Market migrate from one quadrant to another

Market migrates from one quadrant to another during the course of
their life cycle. Companies in the supply chain that a market must be
able to adjust their operations overtime in order to remain competitive

Example: In growth market supply chain that do the best and have
highest level of customer service as measured by order fill rate and on
time delivery will move to steady market.

Adaptability also important to survive and be successful in 4

performance categories

 The company needs to know its markets will change. the company
will have to add skills in the area of demand flexibility as some of
its market mature. It may ever need de-emphasize some of its
performance in product development and company need to know
when to shift its emphasize from one mix of performance to
another

Sharing data across the supply chain

As market migrate from one quadrant to another there are greater
demand placed on the supply chain that support them
The bullwhip effect results in the production of large quantities of
inventory which can then outstrip the real demand in the market and
this will pushes a market out of the steady quadrant into the mature
quadrant

The cure for the bullwhip effect is better sharing of data among all the
companies in the supply chain. Companies need to work through their
concern of sharing data.

If each company had demand information from the other company in

its supply chain, it would help everyone to move the best decision
about how much manufacturing capacity to build and how much
inventories to hold and it need to share decision they make. Because if
the company could be unaware of decision made by one of its
customer or one of its customers customer that will have a big impact
on product demand.

Companies need to know each other how well they are doing in the
performance of their supply chain activates

Companies are much less likely to share their decision or performance

metrics because they are afraid that if this information gets out it could
go to their competitors and be used against them but companies that
can work together to create efficient supply chain are going to be the
ones that do the best over the long term.
BAHIR DAR UNIVERSITY