Agenda. Supply Chain Performance. Motivation. SCM and Performance Measurement. Traditional Performance Measures. Motivation (cont.) Business strategy

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1 Agenda Motivation for Performance Measurement Supply Chain Performance Lecture 12 TIØ 4285 Production- and network economics Traditional Performance Measurements Different Perspectives on Supply Chain Management and Performance Measures Supply Chain Performance Measures Latest Developments in Performance Measurement Systems 1 2 SCM and Performance Measurement Motivation The purpose of Supply Chain Management is improving the long term performance of individual companies and of the supply chain as a whole! SCM provides member organizations with an opportunity to optimize logistics performance at the highest level, which is the interorganizational level Business strategy Supply chain strategy Supply chain capabilities and combinations Supply chain performance Overall cost leadership Operational excellence Low logistics costs, availability, coverage, etc Cost and productivity versus customer service and proactive quality 3 4 Motivation (cont.) Traditional Performance Measures A system of supply chain metrics can be used to: Increase the chances for success by aligning processes across multiple firms Targeting the most profitable market segments Obtaining a competitive advantage through differentiated services and lower costs Supply-focused performance Logistic costs Productivity Demand-focused performance Customer service Quality 5 6

2 Importance of Performance Measures Examples of Performance Measures The following slides will display importance of different performance measurements for supply chain success The study of these measurements are based on a survey of approximately 1500 US and Canadian firms Including 111 companies regarded as exhibiting world class best practices in supply chain management and logistics Determined by an expert panel See: Edward A. Morash Supply Chain Strategies, Capabilities, and Performance, Transportation Journal, Vol. 41, Iss. 1, Fall 2001 Customer service measures (sorted by importance) 1. Stockouts 2. Fill rate 3. On-time deliveries 4. Overall satisfaction 5. Customer complaints Less important: Backorders Cycle time Complete orders Sales force complaints Response time to inquiries Response accuracy 7 8 Examples of Performance Measures Examples of Performance Measures Quality measures (sorted by importance): 1. Picking/ shipping accuracy 2. Overall reliability 3. Delivery consistency 4. Document/ invoicing accuracy 5. Shipping errors Less important: Number of customer returns Number of customer returns Number of credit claims Damage frequency Order entry accuracy Cost measures (sorted by importance): 1. Total cost 2. Cost trend analysis 3. Outbound freight cost 4. Cost per unit 5. Comparison of actual versus budget Less important: Administrative cost Cost of backorder Cost of damage carrying cost Cost of returned goods Cost of service failures 9 10 Examples of Performance Measures Conclusion from the Study Productivity measures (sorted by importance): 1. Total productivity index 2. Warehouse labor productivity 3. Units shipped per employee 4. Comparison to historical std. 5. Order entry productivity Less important: Orders per salesperson Units per labor dollar Equipment downtime Transport labor productivity Supply chain strategy, capability and performance must be congruent, i. e. focusing either on the demand side or the supply side Choose capabilities and performance measures according to the focus Demand-side capabilities are related to customer closeness strategies, whereas supply-side capabilities are related to operational excellence strategies Demand-side measures (Customer service and quality ) are viewed by the top third firms as more important than supply-side measures (logistical cost and productivity) 11 12

3 Traditional Supply Chain Metrics Different Perspectives on Supply Chain Management Many traditional supply chain metrics are primarily internally focused logistics measures Single-company performance is not translated into supply chain performance and vice versa These metrics fail to capture how the overall supply chain has performed Fail to identify where opportunities exist to increase competitiveness, customer value and shareholder value for each firm in the supply chain System Dynamics Operations research Logistics Marketing Organization Strategy Short Description of the Different Companies One of the world s biggest automotive suppliers Develops and manufactures electronic systems, e. g. ABS-systems An Example from the Automotive Industry The Supply Chain: Manufacturing cars for the more exclusive market segment, i. e. highpriced cars Producing in-house with one exception: a supplier for electronics Offical importer for s cars to Norway Selling Ødi s to end-customers all over the country Information Funds Goods System Dynamics Views the supply chain as a chain of consecutive, sequentially interdependent local transaction systems Each local system optimizes the conversion of customer orders into material requirements and finished products The systems are connected bilaterally through the exchange of orders The goal of SCM is to equate customer demand with product supply, thereby balancing the conflicting goals of customer service, stock levels and manufacturing costs System Dynamics Distortion of demand pattern Uncoordinated ordering behavior Uncoordinated demand planning and demand forecasting Poor inventory visibility Uncoordinated manufacturing control Eliminate local system/ reduce complexity Demand transparency flow of information Collaborative demand planning Pipeline transparency (inventory visibility) Re-ordering discipline Collaborative production Collaborative capacity planning 17 18

4 The System-Dynamics Perspective Operations Research / IT Models the supply chain as a configurable and flow-programmable resource network Moving material objects from the sources of production to end customers Adhering to various restrictions (constraints) Capacity Utilization Cumulative Levels Stock-Outs Time Lags Time to Adapt Phantom Ordering Elements within the optimization scope include Plants Distribution centers s Customers Orders Products, etc OR/IT Manufacturing Number of plants, degree of integration, etc. Distribution/ transportation Spare parts The OR/IT Perspective IT-based identification of the optimal algorithm Heuristics to adapt to the real-life problems Logistics Cost per Unit Service Level Time to Deliver Logistics Analyzing the supply chain from a conceptual base Views the chain as a set of business processes, which for management purposes are compared to generic business process models 4 generic processes are suggested: idea to market prospect to sale order to payment record to plans Logistics Interfaces Internal and external Shape of the internal supply chain Cycle time Sequential integration Vertical integration Horizontal integration Order penetration point 23 24

5 The Logistics Perspective Integration Lead Times Order Cycle Times Level Flexibility Marketing Seeing the supply chain as a pipeline connecting products and customers Segment customers and connect them with the right channel A marketing channel is the result of the process of connecting independent institutions between a point of origin and a point of consumption Outputs of the supply chain from a marketing perspective are primarily costs and customer service Marketing Marketing strategy Determining customer service Balancing the order cycle time and lead time gap Segmentation of customers and differentiation Product characteristics Internal and external interface management Do not segment the markets Undifferentiated approach Do segment the markets Differentiated approach The Marketing Perspective Customer Satisfaction Distribution Cost per Unit Market Share / Channel Cost Organization Perceiving the chain as a set of inter-organizational relationships Doing business in an open system requires relationships between a company and its environment The relations may be manifold (chain, vertical, horizontal) Vertical relations dominate the analysis SCM defined as relationship-management (upstream and downstream) Organization Integration, density and interlocks Structures of control Conflict management Quality check of the relationships Identify the complexity of the relationship Replace power by trust Seen as management approach to overcome functional barriers and to coordinate inter-organizational relationships 29 30

6 The Organization Perspective Strategy Perceiving the supply chain as an arrangement of competencies and profits Transaction Costs Time to Network Flexibility Density of Relationships Strategies answer 2 fundamental questions: 1. In which fields of the market should we act? What is our domain? 2. Given the domain, how should we act? Very often, SCM is seen as dealing with the How, but not with Where, e. g. success through integration, optimization of the whole chain close collaboration with customers and suppliers etc Strategy Different opportunities in time to market Moving target anticipation of profitable locations Supply chain flexibility The Strategy Perspective Virtual vertical integration Vertical hedging Flexibility, re-configuration Product design Time to Network Time to Market ROI of Focal Organizations Problems with these Metrics Example Single-company metrics, supply chain as a whole is not really analyzed Managers can only determine whether they have met their corporate goals after the fact, by diagnosing financial results or when they lose a key customer Metrics from different approaches can be competing, Service Level Level The complexity of supply chain management is not captured Consider inventory turn in this value chain Normal traditional performance measure Does not qualify as a supply chain metric As inventory moves closer to the point of consumption, it increases in value If opportunity cost of money and the inventory turns are similar, inventory carrying costs are much higher at the retail level Improvements in inventory turns at the end of the supply chain will thus improve performance more than changes at the beginning (or better: inventory ownership) should be moved backwards in the supply chain 35 36

7 Example Variable cost Variable cost of material: $10 Variable cost of of product: $5 Acquisition cost: $1 material: $60 Full manufactured Other variable costs: $14 Acquisition cost: $2 cost: $ 7 Total variable cost Total variable cost of product: $ 25 of product: $ 62 Full manufactured cost: $40 Selling price: $ 10 Selling price: $60 Selling price: $80 Comparing Carrying Costs (ICC) Cash value of inventory carrying costs % ICC/unit with 1 turn 2 turns 3 turns 4 turns 5 turns 6 turns 7 turns 8 turns 9 turns $5 36% $1.80 $0.90 $0.60 $0.45 $0.36 $0.30 $0.26 $0.23 $0.20 $25 36% $9.00 $4.50 $3.00 $2.25 $1.80 $1.50 $1.29 $1.13 $1.00 $62 36% $22.32 $11.16 $7.44 $5.58 $4.46 $3.72 $3.19 $2.79 $ Evaluating Turns The Need for Supply Chain Metrics Assuming the same number of inventory turns at every level in the supply chain, the biggest potential lies at the end of the supply chain What if the number of inventory turns is not equal, but already increasing towards the end of the supply chain? Assume that the manufacturer has 7 inventory turns whereas the supplier has only 2 An increase in inventory turns at the manufacturer level results then only in an improvement of $0.16 per unit, whereas an improvement at supplier level level will result in $0.30 per unit lower ICC The requirement to go beyond internal metrics and take a supply chain perspective The requirement to align activities and share joint performance measurement information to implement strategy that achieves supply chain objectives The desire to expand the line of sight within the supply chain The requirement to allocate benefits and burdens resulting from functional shifts within the supply chain The need to differentiate the supply chain to obtain a competitive advantage The goal of encouraging cooperative behavior across corporate functions and across firms in the supply chain Short Repetition: The Bullwhip Effect Possible Causes Increasing variability of orders up the supply chain Promotional sales Volume and Transportation discounts Batching Inflated orders Demand Forecast Long cycle times Lack of Visibility to demand information 41 42

8 Possible Ways to Cope with the Problem Reduce Variability and Uncertainty POS Sharing Information Year-round low pricing Reduce Lead Times EDI Cross Docking Alliance Arrangements Vendor managed inventory On-site vendor representatives The Bullwhip Effect and Performance Measurement What would be the requirements to a performance measurement system that helps avoiding the Bullwhip effect? Based on inventory levels, sales, lead times, Information about the performance indicator must be available to all partners Consequences to the single-company due to changes in the performance indicator must be shown Managers must be able to derive actions from the information provided by the perfmance indicator Supply Chain Performance and Single-Company Performance Supply Chain Level How to Select Indicators Indicators have to be SMART: Supply Chain Performance Indicators and Single-Company Indicators have to be connected Indicators have to be choosen such that they induce congruent actions among the member organizations Customer Competitive Requirements Priorities Single Company Level Customer Competitive Requirements Priorities Management Priorities Management Priorities Specific: Specific and targeted to the area being measured Measurable: Accurate and complete data is collected and correlated against a standard Actionable: Allowing for corrective or mainting actions Relevant: A common downfall is to measure everything, which produces many meaningless measures Timely: Timely metrics are those for which data is available when it is needed Supply Chain Performance Measurement: State-of-the-art Graphical Support to the User Multi-dimensional KPI (Key Perfomance Indicator) dashboard Controlling the process performance towards the set objectives requires attention towards several indicators simultaneously PI dashboard: The following issues have to be considered Which graphical representation is more efficient? How should it look like to facilitate non-expert users? Which indicators have to be shown at the same time Should different users have different dashboards based on the indicators they need to use? 47 48

9 Conclusions I Conclusions II THE performance indicator does not exist Single performance indicators fail to capture the complexity of supply chain performance Satisfying customer requirements must be an important component in performance measurement systems The performance measurement system and all necessary information must be shared along the supply chain Supply Chain Performance Measurement is still under development, but metrics integrating perfomance measurement across multiple companies are emerging There some attemps in the field of Logistics to develop Supply Chain Performance Measurement Systems TOPP AMBITE ENAPS SCOR (Supply Chain Operations Reference model) Unanswered Questions Who determines the right performance measure? How does one determine the right actions to improve performance? What if profits resulting from one supply chain member s actions end up with a different member? 51

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