Supply Chain Drivers and Metrics

1. Supply Chain Drivers and Metrics Wike Agustin Prima Dania, STP,M.Eng

2. Drivers of Supply Chain Performance • To understand how company can improve supply chain performance in terms of responsiveness and efficiency, it must examine the logistical and cross functional drivers of the SC. • These driver interact with each other to determine the SC performance in terms of responsiveness and efficiency. • The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost. • There are 7 drivers in the SC: • Facilities • Inventory • Transportation • Information • Sourcing • Pricing

3. Competitive Strategy Strategic Fit Supply Chain Strategy Efficiency Responsiveness Supply Chain Structure Facilities Inv & trans. Sourcing&Pricing Info system Drivers Supply chain decision making framework

4. Facilities (1) • Actual physical location in the SC network where product is stored, assembled, or fabricated  production sites and storage sites. • Components of Facilities Decision: • Role For Production Facilities: Must decide whether they will be flexible, dedicated or a combination of the two. Must decide whether product focus or functional focus. For Warehouses and DCs Must decide whether will be primarily cross-docking facilities or storage facilities. • Capacity A large amount of excess capacity allows the facility to be very flexible and respond to wide range of demand  less efficient Little excess capacity will more efficient per unit product it produces than one with a lot of unused capacity. High utilization facility will have difficulty responding to demand fluctuations  NEED TRADE OFF TO DETERMINE THE RIGHT AMOUNT OF CAPACITY

5. Facilities (2) • Location Decide where the company will locate its facilities. Must consider a host of issues related to the various characteristics of the local area in which the facility is located: - Macroeconomic factor - Quality of worker - Cost of workers - Cost of facility - Availability of infrastructure - Proximity to customers - The location of that firm’s other facilities - Tax effect

6. Facilities (3) • Facility Related Metrics: • Capacity • Utilization • Production cost per unit • Theoretical flow/cycle time of production • Actual average flow/cycle time • Flow time efficiency • Product variety • Volume contribution of top 20% SKUs and customers • Processing/setup/down/idle time • Quality losses • Average production batch size • Production service level

7. Inventory (1) • Encompasses all raw materials, WIP, and finished goods within a supply chain • Components of Inventory Decision: • Cycle Inventory Average amount of inventory used to satisfy demand between receipts of supplier shipments. The size of cycle inventory is a result of production, transportation, or purchase of material. • Safety Inventory Inventory held in case demand exceeds expectation  to counter uncertainty. • Seasonal Inventory Built up to counter predictable variability in demand. Company using seasonal inventory in periods of low demand and store it for periods of high demand. • Level of Product Availability Fraction of demand that is served on time from product held in inventory. High level of product availability provides a high level of responsiveness but increases cost. Low level of product availability lower holding cost but result in a higher fraction of customers who are not served on time.

8. Inventory (2) • Inventory Related Metrics: • Cash-to-cash cycle time • Average inventory • Inventory turns • Product with more than a specified number of days of inventory • Average replenishment batch size • Average safety inventory • Seasonal inventory • Fill rate • Fraction of time out of stock • Obsolete inventory

9. Transportation • Moving inventory from point to point in the SC • Components of Transportation Decisions: • Design of the transportation network Transportation network is the collection of transportation modes, location, and routes along which product can be shipped. Company must decide whether transportation from supply source will be direct to demand point or go through intermediate consolidation point, whether multi supply or demand point will be included in a single run or not. • Choice of transportation mode Companies can choose between air, rail, sea, and pipeline. Each mode has different characteristics (speed, size, cost, flexibility • Transportation Related Metrics: • Average inbound and outbound transportation cost • Average incoming and outbound shipment size • Average inbound and outbound transportation cost per shipment • Fraction transported by mode

10. Information (1) • Consist of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout the SC. • Component of Information Decisions: • Push vs Pull Push system require information in the form of elaborate MRP system to take the MPS and roll it back, creating schedules for suppliers with part types, quantities, and delivery dates. Pull system require information on actual demand to be transmitted extremely quickly throughout the entire chain so that production and distribution of product may reflect the real demand accurately. • Coordination and Information Sharing SC coordination occurs when all stages of a SC work toward the objectives of maximizing total SC profitability based on shared information. Lack of coordination can result in significant loss of SC surplus. • Forecasting and Aggregate Supply Planning Companies often use forecasts both on tactical level to schedule production and on strategic level to determine whether to build new plants or even whether to enter a new market.

11. Information (2) • Forecasting and Aggregate Supply Planning Companies often use forecasts both on tactical level to schedule production and on strategic level to determine whether to build new plants or even whether to enter a new market. Aggregate supply planning transforms forecasts into plan of activity to satisfy the projected demand. • Enabling Technology • Electronic Data Interchange (EDI): instant, paperless purchase orders with the supplier, time decreased, more accurate. • The internet has critical advantages over EDI with respect to information sharing: more information, more visibility than EDI. • Enterprise Resource Planning (ERP): provide transactional tracking and global visibility of information from within a company and across its SC. • SCM software uses the information in ERP systems to provide analytical decision support in addition to the visibility of information. • Radio Frequency Identification (RFID) consists of an active or passive radio frequency (RF) tag applied to the item being tracked and an RF (reader/emitter).

12. Information (3) • Information Related Metrics: • Forecast horizon • Frequency of update • Forecast error • Seasonal factors • Variance from plan • Ratio of demand variability to order variability

13. Sourcing (1) • The choice of who will perform a particular SC activity such as production, storage, transportation, or the management of information. • Components of Sourcing Decisions • In house or outsource It is best to outsource if the growth in total SC surplus is significant with little additional risk. • Supplier Selection deciding the number of suppliers and criteria of suppliers. • Procurement Deciding the structure of procurement of direct and indirect materials.

14. Sourcing (2) • Sourcing Related Metrics • Days payable outstanding • Average of purchase price • Range of purchase price • Average purchase quantity • Fraction of on time deliveries • Supply quality • Supply lead time • Supplier reliability

15. Pricing (1) • Determines how much a firm will charge for goods and services that it makes available in the SC. • Components of Pricing Decisions • Pricing and Economies of Scale Small production runs more expensive per unit than large production runs. Loading and unloading costs make it cheaper to deliver a truckload to one location than four. • Everyday low pricing vs high low pricing The high low pricing strategy results in a peak during the discount week, often followed by a steep drop in demand during the following weeks. Everyday low pricing is keeping price steady over time. • Fixed price vs menu pricing If marginal SC costs or the value to the customer vary significantly along some attribute, it is often effective to have a pricing menu.

16. Pricing (2) • Pricing Related Metrics: • Profit margin • Days sales outstanding • Incremental fixed cost per order • Incremental variable cost per unit • Average sale price • Average order size • Range of sale price • Range of periodic sales