Supply Chain Management by Sheikh Irfan

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Drivers of Supply Chain Performance
LOGISTICAL DRIVERS
• Facilities
- places where inventory is stored, assembled, or fabricated
-Two Major Types- production sites and storage sites-Add: Cross
Docking Sites
• Inventory
- raw materials, WIP, finished goods within a supply chain
- inventory policies-Large Inventory vs. small Inventory
• Transportation
- moving inventory from point to point in a supply chain
- combinations of transportation modes and routes

Supply Chain Management by Sheikh Irfan

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 Drivers of Supply Chain Performance
CROSS-FUNCTIONAL DRIVERS
• Information
- data and analysis regarding inventory, transportation,
facilities throughout the supply chain
- potentially the biggest driver of supply chain performance
- Makes SC Responsive And Efficient both.
• Sourcing
- A Set of business processed required to purchase goods/Services
- functions a firm performs and functions that are outsourced
- Functions like production, storage, transport, etc..
• Pricing
- Price associated with goods and services provided by a firm
to the supply chain
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 Importance/Role of Facilities

• Facilities are physical locations where Inventories are Stores,

processed or value added.
• Production Facilities may be flexible of dedicated (Less vs. more
efficient) or a combination of the two.
• Production facilities may be product focused or functional focused.
• Warehouses and DCs may be cross docking or storage and/or Value
adding locations
• Facilities may be Centralized vs. decentralized
• Facilities locations may be decided based on factors like Quality of
Workers, Cost of Workers, Cost of Facilities, availability of
infrastructure, Proximity to Customers, Tax, etc.
• Facilities’ Capacity (Excess vs little excess capacity) would determine
Supply Chains responsiveness and efficiency.

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 Facilities Related Metrics
1. Capacity measure the maximum a facility can produce/process
2. Utilization measures the fraction of capacity currently being used
3. Cycle Time of Production-theoretical measures the time required to
process a unit if there are absolutely no delays
4. Cycle Time of Production-Actual measures the average actual time taken
to process units over a specified duration
5. Flow time Efficiency ratio of 3 and 4 above
6. Product Variety measures the number of products/families a facility can process
7. Volume Contribution of top 20% SKUs/Customers measures the
fraction of total volume processed by a facility that come from top 20% SKUs
8. Processing/Setup/Down/Idle Time measures the fraction of time that a
facility was processing units/being set up to process units/unavailable because it was
down/Idle because it had no units to process
9. Average Production Batch Size measures average size/amount in each batch
10.Production Service Level measures fraction of Orders completed in time/full
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 Importance/Role of Inventory

• Inventory exists because of a mismatch between supply and demand

which may be intentional or unintentional.
• Inventory is of many types – RM, WIP, FG, MRO.
• Within FG Inventory, different components are
• Cycle Inventory, Safety Inventory and Seasonal Inventory
• Inventory is a source of recurring costs.
• Inventory affects responsiveness and efficiency. If responsiveness is
required, larger amount of inventory is stored closer to customer.
• If efficiency is required, inventory should be reduced.
• A trade-off is therefore required.

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 Inventory Related Metrics
1. Average Inventory measures average amount/units of Inventory carried
2. Products with more than a specified no. of days of Inv.
Identifies products for which the firm is carrying a high level of Inventory
3. Average Replenishment Batch Size measures average amount/size of
each replenishment Order
4. Average Safety Inventory measures average inventory in hand when a
replenishment order arrives
5. Seasonal Inventory measures inventory that is purchased solely due to
seasonal changes in Demand
6. Fill Rate measures the fraction of orders met on time from Inventory
7. Fraction of time out of Stock measures fraction of time a particular SKU
had zero Inventory

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 Importance/Role of Transportation

• Transportation Moves the Inventory between stages in Supply Chain.

• This also affects responsiveness and efficiency. Faster transportation
allows greater responsiveness but higher cost (lower efficiency).
• Also affects Inventory and Facilities.
• For price conscious customer, slower transportation can be used and
vice versa.
• Modes of transportation available are Air, Road, Rail, Ship and
Pipeline. Electronic Transportation is available for information goods.
• Decision required about in-house or outsourced transportation.
• Decisions required about routes and network of transportation.

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 Transport Related Metrics
1. Average Inbound Transportation Cost measures in bound cost as a
percentage of Sales or Cost of Goods Sold
2. Average incoming Shipment Size measures average number of units
or value in each incoming shipment
3. Average inbound transportation cost per shipment
measures average transportation cost of each incoming delivery
4. Average outbound transportation cost same as 1 above for
outbound shipments
5. Average outbound transportation cost per shipment
same as 3 above for outbound shipments
6. Average outbound shipment size same as 2 above for outbound
shipments
7. Fraction transported by mode measures fraction of transportation
using each mode of transport (road, air, rail, etc.)
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 Importance/Role of Information

• Information is the intangible connection among various stages in

Supply Chain.
• Crucial to daily operation of each stage in SC.
• Crucial for Management Decisions at Strategic Levels.
• Allows Supply Chain to be more efficient and more responsive at the
same time.
• Makes use of ever-changing information Technology.
• Decision required about the level of information technology used and
investment required.
• EDI, Internet, ERP System, RFID, SCM Softwares and other tools of
information are available to choose from.

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 Information Related Metrics
Information related Metrics will depend upon the software
being used and the purpose for which it is being used.

1. Seasonal Factors measures the extent to which average demand in a season is

above or below the average in a year.
2. Variance from Plan measures difference between planned and actual
production

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 Importance/Role of Sourcing

• Sourcing is a set of business processes required to purchase goods

and services.
• Sourcing represents the biggest cost of Supply chain.
• It requires decision on in-house vs. outsourced activities.
• It requires decisions on SOPs related to Procurement.
• Requires supplier base and supplier management decisions.
• Sourcing decisions may increase supply chain profits in comparison to
associated risks.

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 Sourcing Related Metrics
1. Days payable outstanding measures number of days Accounts Payable is
outstanding
2. Average Purchase price measures average price at which a good or service
is purchased during a period of time
3. Range of Purchase price measures fluctuation of purchase price during a
specified period
4. Average purchase Quantity measures average quantity purchased per
order.
5. Fraction on-time delivery measures fraction of on-time deliveries from
suppliers
6. Supply Quality measures the quality of products supplied during a time period
7. Supply Lead time measures the average time between placement of order and
its delivery

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 Importance/Role of Pricing

• Pricing determines the amount to charge Customers in a Supply

Chain.
• Pricing determines customer segment as well as customer
expectations.
• Pricing Strategies can be used to match demand and supply.
• Short term discounts may eliminate supply surplus.
• Increase in price may shift some of the demand forward.
• Pricing can also be used to improve efficiency and responsiveness.
• Low product variety can accompany lower cost. High prices may
accompany quicker delivery.

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 Pricing Related Metrics
1. Profit margin measures Profit as a percentage of Revenue
2. Days Sales outstanding measures average Accounts Receivable outstanding
3. Average Sale Price measures the average price at which a product is sold during
a given period
4. Average Order Size measures average quantity per order of Sales
5. Range of Sale Price measures the maximum and minimum of sales price per
unit over a specified time horizon

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