Unit 8C Revised

GITAM INSTITUTE OF INTERNATIONAL BUSINESS
Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD
LSM-306 Supply Chain Management 623.925- Logistics Systems Engineering
Synopsis

Performance measurements and metrics in SCM Supply Chain Performance Measurement Systems Measuring Supply Chain Performance
Integrated Performance Measurement
Performance Metrics For Supply Chain Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Obstacles to achieving fit
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Performance measurements and metrics in SCM

The metrics and measures are discussed in the context of the following supply chain activities/processes:

(1) plan (2) source (3) make/assemble (4) delivery/customer (Stewart, 1995; Gunasekaran et al., 2001).
SC Performance Measurement Systems

Performance measurement systems must:

Link SC trading partners to achieve breakthrough performance in satisfying the end users Overlay the entire SC to assure that all contribute to SC strategy
In a successful chain, members jointly agree on a SC performance measurement system.
SC Performance Meas. Systems (2)

Specific Supply Chain Performance Measures
Total SCM costs: cost to process orders; purchase & manage inventories & information systems. SC cash-to-cash cycle time: Average # of days between paying for materials and getting paid by SC partners. SC production flexibility: average time required to provide an unplanned 20 % increase in production. SC delivery performance: average % of orders filled by requested delivery date. SC perfect order fulfillment performance: average % of orders that arrive on time, complete, and damage free. Supply chain e-business performance: average % of electronic orders received for all supply chain members.
Measuring Supply Chain Performance


Strategic decision-making, development of action plans and operations improvement relies on the development of performance measurement systems It monitors current and past states and enable projections into the future. Also stops considering financial accounting measures as the basis for performance measurement R.G. Eccles (1991) According to Neely (1995)

The nature of the work is changing, cost allocation techniques outdated. Increased levels of competition create pressure to reduce costs and increase value generated by products Specific actions geared towards operations improvement / meeting quality standards require specific measures to assess the impact on performance External demands require firms to be more adaptable
Performance measurement systems need to focus simultaneouly on resource efficiency, effective output and flexibility (Beamon, 1998)
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Balanced Scorecard (Kaplan e Norton, 1996)
The BSC translates the firm strategy into a set of metrics that track performance along four inter-related perspectives: Financial Perspective Customer Perspective Internal process Perspective Learning and Growth Perspective Show causal relationships between metrics associated with the different perspectives. Build a cohesive and integrative view of the firm strategy. Four key themes are value creation, customer value, operational excellence and comunity relationships.
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Strategic Maps (Kaplan e Norton)


The Performance prism (Neely e Kennerley, 2002)
Satisfy stakeholders and internal strategic objectives: Satisfaction of stakeholders Stakeholderscontribution Strategy Processes Competencies
Performance Metrics For SC

Propose a set of metrics for supply chain management following the background literature on performance measurement systems. A few specific concerns were identified:
Balancing metrics Internal Vs external metrics; Financial Vs non-financial; Functional Vs cross-functional; Current performance Vs learning and innovation. Identifying key performance areas Key performance areas are related to value creation. Identifying key processes in the supply chain
Drivers of Supply Chain Performance
Facilities

places where inventory is stored, assembled, or fabricated production sites and storage sites raw materials, WIP, finished goods within a supply chain inventory policies moving inventory from point to point in a supply chain combinations of transportation modes and routes data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance
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Inventory

Transportation

Information

A Framework for Structuring Drivers

Efficiency
Responsiveness Supply chain structure
Facilities
Transportation
Inventory
Information
Drivers
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Supply Chain Decisions: Structuring Drivers

Strategy (Design) Planning Operation
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Facilities
Role in the supply chain

the where of the supply chain manufacturing or storage (warehouses) economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority)
Role in the competitive strategy

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Components of Facilities Decisions
Location

centralization (efficiency) vs. decentralization (responsiveness) other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency
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Inventory

Role in the supply chain Role in the competitive strategy Components of inventory decisions
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Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Impact on

material flow time: time elapsed from: material entry in the supply chain to its exit from the supply chain throughput

rate at which sales to end consumers occur Inventory and throughput are synonymous in a supply chain
If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient . Trade-off
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Components of Inventory Decisions

Cycle inventory

Average amount of inventory used to satisfy demand between shipments Depends on lot size inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness
Safety inventory

Seasonal inventory

Overall trade-off: Responsiveness versus efficiency

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Transportation

Role in the supply chain Role in the competitive strategy Components of transportation decisions
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Transportation: Role in the Supply Chain

Moves the product/people between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities
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Transportation: Role in the Competitive Strategy

If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance
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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 route: path along which a product is shipped network: collection of locations and routes
Route and network selection

In-house or outsource Overall trade-off: Responsiveness versus efficiency
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Information

Role in the supply chain Role in the competitive strategy Components of information decisions
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Information: Role in the Supply Chain


The 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, inventory levels
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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 (demand information transmitted quickly throughout the supply chain) Coordination and information sharing Forecasting and aggregate planning Enabling technologies

EDI Internet ERP systems Supply Chain Management software
Overall trade-off: Responsiveness versus efficiency
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Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information
Efficiency
Cost of holding Consolidation Consolidation / Dedicated
Responsiveness
Availability Speed Proximity / Flexibility
What information is best suited for each objective
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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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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain
Local optimization and lack of global fit
Increasing product variety / shrinking life cycles / customer fragmentation
Increasing implied uncertainty

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Summary
What are the major drivers of supply chain performance? What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)? What are the major obstacles to achieving strategic fit?
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Role of Information Technology in a Supply Chain

Information is the driver that serves as the glue to create a coordinated supply chain Information must have the following characteristics to be useful: Accurate Accessible in a timely manner Information must be of the right kind Information provides the basis for supply chain management decisions Inventory Transportation Facility
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Characteristics of Useful Supply Chain Information


Accurate Accessible in a timely manner The right kind Provides supply chain visibility
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Use of Information in a Supply Chain


Information used at all phases of decision making: strategic, planning, operational Examples:

Strategic: location decisions Operational: what products will be produced during today s production run
Inventory: demand patterns, carrying costs, stockout costs, ordering costs Transportation: costs, customer locations, shipment sizes Facility: location, capacity, schedules of a facility; need information about trade-offs between flexibility and efficiency, demand, exchange rates, taxes, etc.
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Role of Information Technology in a Supply Chain

Information technology (IT)

Hardware and software used throughout the supply chain to gather and analyze information Captures and delivers information needed to make good decisions
Effective use of IT in the supply chain can have a significant impact on supply chain performance The Importance of Information in a Supply Chain
Relevant information available throughout the supply chain allows managers to make decisions that take into account all stages of the supply chain Allows performance to be optimized for the entire supply chain, not just for one stage leads to higher performance for each individual firm in the supply chain
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Role of Information Technology in a Supply Chain (2)
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Business Processes Mapped to an IT Solution

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Enterprise Applications along the Value Chain

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Information and Technology: Application of SCM


In the development and maintenance of Supply chain's information systems both software and hardware must be addressed. Software includes the entire system and application programme used for processing transactions management control, decision-making and strategic planning. Recent development in Supply chain management are:

Electronic Commerce Electronic Data Interchange (EDI) Bar coding and Scanner Data warehouse Enterprise Resource planning (ERP) tools
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The Future of IT in the Supply Chain


At the highest level, the three SCM macro processes will continue to drive the evolution of enterprise software Software focused on the macro processes will become a larger share of the total enterprise software market and the firms producing this software will become more successful Functionality, the ability to integrate across macro processes, and the strength of their ecosystems, will be keys to success
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Analytical Applications for SCM
Demand/Supply Match

Sales values Inventory Order lead times Issues/Receipts
Forwarding Agent Efficiency

Total transportation lead time Carrier efficiency Transportation time Transportation waiting time
Forwarding Agent Requirement Analysis

Shipment values Time efficiency Shipment weights and volumes
Global Capacity Utilization

Global capacity utilization Capacity utilization by plant and week Capacity details - comparison
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Analytical Applications for SCM (2)
Global Inventory View

Inventory per product (pieces) Inventory details per selected product Inventory value per product Days of supply per selected product Inventory per selected product
Order Analytics

Order status Existing orders versus sales target by customer Existing orders versus sales target by sales organization Existing orders by customer (pieces) Existing orders by key account (pieces)
Supplier Rating Monitor

Top 10 suppliers by order volume Supplier rating by product for selected supplier Supplier alerts Alerts for selected product
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Analytical Applications for SCM (3)

Warehouse Workload Historical View

Quantities delivered Outbound deliveries by line item Delivery detail Stocks Total receipts/issues by month Receipts/issues variance
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Supply Chain Information Technology in Practice


Select an IT system that addresses the companys key success factors Take incremental steps and measure value Align the level of sophistication with the need for sophistication Use IT systems to support decision making, not to make decisions Think about the future
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Transactional vs. Analytical IT

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What are Enterprise Systems?

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Integrated Enterprise
Organization Processes Technology INFORMATION
Information is a Key Enabler!

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Enterprise Resources Planning (ERP) Definition

Enterprise Resource Planning
A method for the effective planning and controlling of ALL these sources needed to take, make, ship and account for customer orders in a manufacturing, distribution or service company Typical MRP II Functions Quality Functions Sales Force Automation Field Service Functions Engineering Function / PDM Complete Financial Functions Advance Manufacturing Function Human Resources Functions Distribution / Logistics Functions Management Reporting
It Includes:

ERP is a System for the Entire Company A Global Tightly Integrated Closed-Loop System
Source: APICS Complex Industries Special Interest Group
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ERP Functionality
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Typical ERP Functionality


System Wide Elements Project Management & Project Costing (EVM) Executive Management Information System Work Flow Management Multi-Company Multi-Currency Multi-Lingual Multi-Mode EDI / Electronic Commerce Web Enabled / Internet Communications Imaging & Multi Media
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Typical ERP Technology

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Why ERP ?
There are several reasons why a company will consider the Implementation of a New Backbone Business System:

To improve the profitability of the company To solve problems of legacy systems (year 2000) To be able to cope with new production requirements To provide the architectural anchor for rationalization of acquisitions To provide interoperability of its organizations To provide the means for Supply Chain Management
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Why ERP ? (2)

Reduce Costs How will ERP Help?
Enable Reduced Resource Requirements due to:

Fully integrated systems where everyone has instant access to the latest accurate information One data base, date is added only once and used by All The system allows interoperability of the internal and external supply chain On line (vs Batch) systems elements data is there automatically Work flow is managed efficiently through system action messages and routing of decisions Paperless systems allow efficient on-line approvals
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ERP Systems View of Functionality

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Supply Chain Management and the Internet

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Internet-based supply chain management applications

Two main categories

Supply chain planning systems Supply chain execution systems Demand planning Order planning Advanced scheduling and manufacturing planning Distribution planning Transportation planning Manage flow of products through distribution centers and warehouses to ensure products delivered to right locations in most efficient manner

Supply chain planning systems

Supply chain execution systems
Order commitments Final production Replenishment Distribution management Reverse distribution 55
The Future Internet-Driven Supply Chain

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Unit 8C Revised

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

LSM-306 Supply Chain Management 623.925- Logistics Systems Engineering

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Integrated Performance Measurement

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Performance measurements and metrics in SCM

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

SC Performance Measurement Systems

Performance measurement systems must:

In a successful chain, members jointly agree on a SC performance measurement system.

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

SC Performance Meas. Systems (2)

Specific Supply Chain Performance Measures

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Measuring Supply Chain Performance

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Integrated Performance Measurement

Balanced Scorecard (Kaplan e Norton, 1996)

Strategic Maps (Kaplan e Norton)

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Integrated Performance Measurement

The Performance prism (Neely e Kennerley, 2002)

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Performance Metrics For SC

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Drivers of Supply Chain Performance

LSM-306 Supply Chain Management 623.925- Logistics Systems Engineering

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

A Framework for Structuring Drivers

Responsiveness Supply chain structure

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Supply Chain Decisions: Structuring Drivers

Strategy (Design) Planning Operation

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Role in the supply chain

Role in the competitive strategy

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Components of Facilities Decisions

LSM-306 Supply Chain Management 623.925- Logistics Systems Engineering

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Inventory: Role in the Supply Chain

LSM-306 Supply Chain Management 623.925- Logistics Systems Engineering

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor Dr. P.R.S SARMA M.B.A & Ph.D. - IITD

Components of Inventory Decisions

Overall trade-off: Responsiveness versus efficiency

GITAM INSTITUTE OF INTERNATIONAL BUSINESS