Drivers & Metrics

of
Supply Chain
Performance
 Drivers of Supply Chain
Performance
• Logistical drivers
– Facilities
– Inventory
– Transportation
• Cross functional drivers
– Information
– Sourcing
– Pricing

2
Framework for Structuring
Drivers
Competitive strategy

Supply chain strategy

Efficiency Responsiveness

Supply chain structure

Inventory
Facilities Transportation

Logistical Drivers
Information Sourcing Pricing
3
Cross functional Drivers
 Facilities
• Role in the supply chain
– “where” of the supply chain
– manufacturing or storage (warehouses)

• Role in the competitive strategy

– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)

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Components of Facilities
Decisions
• Role
– Operations methodology
– Warehousing methodology
• Location

• Capacity

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 Role of Facilities
• Operations Methodology
– Product focused vs. process focused
– Flexible vs. dedicated capacity

• Warehousing Methodology
– SKU storage
– Job lot storage
– Cross-docking

6
 Fit of Process, Volume, and Variety
Low-Volume Repetitive Process High-Volume
(Intermittent) (Modular) (Continuous)

High Variety
Process focus Mass Customization
One or few units per run, projects, job shop, (difficult to achieve,
high variety (print, carpentry) but huge rewards)
(allows customization) Standard Register Dell Computer Co.,
Levis Jeans
Changes in modules Repetitive
Modest runs, standardized (autos, motorcycles)
modules Harley Davidson
Low Variety; Changes in Product focus
attributes (such as (commercial baked
grade, quality, size,
goods, steel, glass)
thickness, etc.)
Long runs only Steel, Cement
 Process-Focused
Strategy
 Facilities are organized by process
 Similar processes are together
 Example: All drill presses are together
 Low volume, high variety products
 ‘Jumbled’ flow Product A
Operation
 Other names
1 2 3
 Job shop
Product B
Process-Focused Example
Custom Woodworking Shop
Cutting Planing Shaping Assembly Sanding Finishing
1 2 5 6 7

Job A 2 3

Job B 3 4

1 4 5 6

Drilling Turning
Process Focus - Pros & Cons
• Advantages
– Greater product flexibility
– More general purpose equipment – equipments
not dedicated to one product

• Disadvantages
– High production cost per unit
– More difficult production planning & control
– Low equipment utilization (5% to 25%)
Process-Focus Examples

Bank

Hospital

Machine
Shop
 Repetitive Focused
Strategy
• Facilities often organized by assembly
lines
• Characterized by modules
– Parts & assemblies made in modules

• Modules combined for many output options

• Other names
– Assembly line
– Production line
– E.g. auto-manufacturing, pc’s, house-hold appliances, etc
 Assembly Line Example
Raw Material Components
2 4

Assemblies Fin. Goods

1 3 5 7
Raw Material Components Subassem.

Product/Material Flow
Production Operation
Repetitive Focus - Considerations

• Product focused process that uses modules

• More structured than process-focused, less
structured than product focused
• Enables semi-customization
• Using modules, it enjoys economic advantage
of continuous process, and custom advantage
of low-volume, moderately high-variety model
Repetitive Focus - Examples
Fast
Clothes
Food
Dryer
McDonald’s
over 95 billion served

Truck
Repetitive Focus
Product-Focused Strategy
 Facilities are organized by product
 High volume, low variety
 Conversion or further processing of undifferentiated
materials such as petroleum, chemicals, or food processing
 Follows a predetermined sequence of steps, but flow is
continuous rather than discrete – highly standardized
 Other names
 Line flow production
 Continuous production
Production Process at
NUCOR Steel
Product Focus - Pros & Cons
• Advantages
– Lower production cost per unit
– Lower but more specialized labor skills
– Easier production planning and control
– Higher equipment utilization (70% to 90%)
• Disadvantages
– Lower product flexibility
– More specialized equipment
 Product-Focused
Examples

Soft Drinks
(Continuous,
then Discrete)

Paper (Continuous)
 Mass Customization
• Using technology and imagination to rapidly
mass-produce products that cater to
unique customer desires
• Under mass customization the three
process models become so flexible that
distinctions between them blur, making
variety and volume issues less significant
 Location
• Basic tradeoff: Centralization (efficiency)
vs. decentralization (responsiveness)
• Quality & cost of workers
• Cost of facility
• Infrastructure
• Proximity to customers & rest of network
• Tax benefits

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 Capacity
• Excess capacity
– Flexible (responsive) but less efficient

• High utilization
– Efficient

23
 Facility related metrics
• Capacity
• Utilization
• Processing/Setup/Down/Idle time
• Production cost/ unit
• Quality losses
• Theoretical Flow/ Cycle Time
• Actual Average Flow/ Cycle Time
• Flow Time Efficiency
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 Facility related metrics
• Product variety
• Volume contribution of top 20%
SKUs & customers
• Processing/ Setup/ Down/ Idle Time
• Average Production batch size
• Production service level

25
 Inventory
• Role in the supply chain
– the “what” of the supply chain
– exists because of a mismatch between
supply and demand
– Source of cost and influence
responsiveness
• Impacts
– material flow time (T)
– Throughput (D)
Little’s Law
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I = DT
 Inventory
• Role in the competitive strategy
– Locate large amount close to customer
(responsiveness priority)

– Centralized stocking (efficiency

priority)

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Components of Inventory
Decisions
• Cycle inventory
• Safety inventory
• Seasonal inventory
• Level of product availability
• Overall trade-off: Responsiveness versus
efficiency

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 Level Production
Demand

Production
Units

Time

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 Chase Demand
Demand

Production
Units

Time

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 Inventory related
metrics
• Average inventory
– Units
– Days of demand
– Financial value
• Products with more than a specified
number of days inventory
• Average replenishment batch size
– Units & days of demand of each SKU

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 Inventory related
metrics
• Average safety inventory
• Seasonal inventory
• Fill rate
• Fraction of time out of stock
• Obsolete inventory

32
 Transportation
• Role in the Supply Chain
– Moves the product between stages in
the supply chain
– Speed & amount transported impact
responsiveness and efficiency
– Affects inventory and facilities

33
 Transportation
• Role in the Competitive Strategy
– Faster transportation modes
(responsiveness) to customers willing to
pay for it

– Slower transportation modes for

customers whose priority is price (cost)

– Find the right balance between

inventory and transportation
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 Components of
Transportation Decisions
• Mode of transportation:
– Air truck, rail, ship, pipeline, electronic
transportation
– Vary in cost, speed, size of shipment,
flexibility

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 Components of
Transportation Decisions
• Route and network selection
– route: path along which a product is
shipped
– network: collection of locations and
routes

• In-house or outsource

36
 Transportation related
metrics
• Average inbound transport cost
• Average outbound transport cost
• Average incoming shipment size
• Average outgoing shipment size
• Average inbound transport cost per shipment
• Average outbound transport cost per shipment
• Fraction transported by mode

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 Information
• Role in the Supply Chain
– Connection between the various stages
in the supply chain – allows coordination
between stages
– Crucial to daily operation of each stage
in a supply chain – e.g., production
scheduling, warehouse management

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 Information
• Role in the Competitive Strategy
– Allows supply chain to become more
efficient and more responsive at the
same time (reduces the need for a
trade-off)
– Information technology
– What information is most valuable?

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 Components of
Information Decisions
• Push (MRP) versus pull
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
– RFID

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 Information related
metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Seasonal factors
• Variance from plan
• Ratio of demand variability to order
variability

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 Sourcing
• Role in the SC
– Set of business processes required to
purchase goods and services
– Which tasks to outsource
– Single/ multiple suppliers
– Criteria to select suppliers & measure
their performance

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 Sourcing
• Role in the SC
– Negotiate contracts
• Define role of each supply source
– Procurement processes
• Placement and delivery of orders

• Role in competitive strategy

– Affect efficiency and responsiveness
– Compare in-house/ outsource costs

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Sourcing related metrics
• Days payable outstanding
• Average purchase price
• Range of purchase price
• Average purchase quantity
• Fraction on-time deliveries
• Supply quality
• Supply lead time

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 Pricing
• How much to charge customers for
goods & services
• Role in SC
– Affects customer segments &
expectations
– Demand profile SC attempts to serve &
level of responsiveness required
– Lever to match supply & demand

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 Components of Pricing
decisions
• Pricing & economies of scale
– Quantity discounts
• EDLP vs. High-low pricing
• Fixed price vs. menu pricing
– Yield/ revenue management

46
 Pricing related metrics
• Profit margin
– Profit as % of revenue
– Metrics
• Type of margin (gross, net)
• Scope (SKU, product line, division, firm)
• Customer type
• Days of sales outstanding

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 Pricing related metrics
• Incremental fixed cost per order
• Incremental variable cost per unit
• Average sale price
• Average order size
• Range of sale price
• Range of periodic sales

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 Supply Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Cross functional What is best suited for each objective
drivers

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 Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain
ownership
• Globalization
• Difficulty executing new strategies

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 Both responsiveness
& efficiency
• Higher responsiveness at given cost
Or
• Same responsiveness at lower cost
• Asian Paints
– Dealer tinting systems based on
• postponement
• mass customization

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