Supply Chain & Logistics Management

UNIT – II Notes

Supply Chain Management (SCM) can be defined as the management of flow of products and
services, which begins from the origin of products and ends at the product’s consumption. It also
comprises movement and storage of raw materials that are involved in work in progress,
inventory and fully furnished goods.

Networks of manufacturers and service providers that work together to move goods from the
raw material stage through to the end-user. Linked through physical, information and
monetary flows.

Supply Chain Management includes managing supply and demand, sourcing raw materials
and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and
order management, distribution across all channels, and delivery to the customer.
(The Supply Chain Council, U.S.A.)

Supply Chain Management deals with the management of materials, information, and
financial flows in a network consisting of suppliers, manufacturers, distributors and
customers. (Stanford Supply Chain Forum).

Logistics involves “managing the flow of items, information, cash and ideas through the
coordination of supply chain processes and through the strategic addition of place, period
and pattern values. (MIT Center for Transportation and Logistics).

In general, SCM can be defined as:

All stages involved, directly or indirectly, in fulfilling a customer request Includes
manufacturers, suppliers, transporters, warehouses, retailers, and customers Within each
company, the supply chain includes all functions involved in fulfilling a customer request
(product development, marketing, operations, distribution, finance, customer service)

Dr. Ramesh K.T., Asst. Professor, Dept. of IEM, BMSCE, Bengaluru - 19 Page 1
 Supply Chain & Logistics Management

Supply chain example:

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Stages of an Automotive Supply Chain

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What is Supply Chain Management (SCM)?

Pla Sourc Mak Deliv Bu

n e e er y

A set of approaches used to efficiently integrate

 Suppliers
 Manufacturers
 Warehouses
 Distribution centers
So that the product is produced and distributed
 In the right quantities
 To the right locations
 And at the right time
System-wide costs are minimized and
Service level requirements are satisfied
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Supply Chain Objectives

The main objective of supply chain management is to monitor and relate the production,
distribution, and shipment of products and services. This can be done by companies with a very
good and tight hold over internal inventories, production, distribution, internal productions and
sales. Also,
 To maximize the overall value created.
 Supply Chain Surplus = Customer Value − Supply Chain Cost
 Supply chain value: The difference between what the final products are worth to the
customer and the effort the supply chain expends in filling the customer’s request.
 Value is correlated to supply chain profitability (the difference between the revenue
generated from the customer and the overall cost across the supply chain).
 Example: Dell receives 30000/- from a customer for a computer (revenue)
 Supply chain incurs costs (information, storage, transportation, components, assembly,
etc.)
 Difference between 30000/- and the sum of all of these costs is the supply chain profit
 Supply chain profitability is total profit to be shared across all stages of the supply
chain
 Supply chain success should be measured by total supply chain profitability, not
profits at an individual stage.
 Sources of supply chain revenue: the customer
 Sources of supply chain cost: flows of information, products, or funds between stages
of the supply chain.
 Supply chain management is the management of flows between and among supply
chain stages to maximize total supply chain profitability
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Supply Chain Management – Advantages

In this era of globalization where companies compete to provide the best quality products to
the customers and satisfy all their demands, supply chain management plays a very
important role. All the companies are highly dependent on effective supply chain process.
Let’s take a look at the major advantages of the supply chain. The key benefits of supply
chain management are as follows −
 Develops better customer relationship and service.
 Creates better delivery mechanisms for products and services in demand with
minimum delay.
 Improvises productivity and business functions.
 Minimizes warehouse and transportation costs.
 Minimizes direct and indirect costs.
 Assists in achieving the shipping of the right products to the right place at the right
time.
 Enhances inventory management, supporting the successful execution of just-in-time
stock models.
 Assists companies in adapting to the challenges of globalization, economic upheaval,
expanding consumer expectations, and related differences.
 Assists companies in minimizing waste, driving out costs, and achieving efficiencies
throughout the supply chain process.

Supply Chain Management - Goals

Every firm strives to match supply with demand in a timely fashion with the most efficient use
of resources. Here are some of the important goals of supply chain management −
 Supply chain partners work collaboratively at different levels to maximize resource
productivity, construct standardized processes, remove duplicate efforts and
minimize inventory levels.
 Minimization of supply chain expenses is very essential, especially when there are
economic uncertainties in companies regarding their wish to conserve capital.
 Cost-efficient and cheap products are necessary, but supply chain managers need to
concentrate on value creation for their customers.
 Exceeding the customers’ expectations regularly is the best way to satisfy them.
 Increased expectations of clients for higher product variety, customized goods, off-
season availability of inventory and rapid fulfillment at a cost comparable to in-store
offerings should be matched.
 To meet consumer expectations, merchants need to leverage inventory as a shared
resource and utilize the distributed order management technology to complete orders
from the optimal node in the supply chain.

Lastly, supply chain management aims at contributing to the financial success of an

enterprise. In addition to all the points highlighted above, it aims at leading enterprises using
the supply chain to improve differentiation, increase sales, and penetrate new markets. The

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 Supply Chain & Logistics Management
objective is to drive competitive benefits and shareholder value.

Supply Chain Management -Process

Supply chain management is a process used by companies to ensure that their supply chain
is efficient and cost-effective. A supply chain is the collection of steps that a company
takes to transform raw materials into a final product. The five basic components of supply
chain management are discussed below :

Plan
The initial stage of the supply chain process is the planning stage. We need to develop a plan
or strategy to address how the products and services will satisfy the demands and necessities
of the customers. In this stage, the planning should mainly focus on designing a strategy that
yields maximum profit.
Develop(Source)
After planning, the next step involves developing or sourcing. In this stage, we mainly
concentrate on building a strong relationship with suppliers of the raw materials required for
production. This involves not only identifying dependable suppliers but also determining
different planning methods for shipping, delivery, and payment of the product. So in this
stage, the supply chain managers need to construct a set of pricing, delivery and payment
processes with suppliers and also create the metrics for controlling and improving the
relationships.
Make
The third step in the supply chain management process is the manufacturing or making of
products that were demanded by the customer. In this stage, the products are designed,
produced, tested, packaged, and synchronized for delivery. Here, the task of the supply chain
manager is to schedule all the activities required for manufacturing, testing, packaging, and
preparation for delivery. This stage is considered as the most metric-intensive unit of the
supply chain, where firms can gauge the quality levels, production output and worker
productivity.
Deliver
The fourth stage is the delivery stage. Here the products are delivered to the customer at the
destined location by the supplier. This stage is the logistics phase, where customer orders are
accepted and delivery of the goods is planned. The delivery stage is often referred to as
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network of warehouses, pick carriers to deliver products to customers and set up an
invoicing system to receive payments.
Return
The last and final stage of supply chain management is referred to as the return. In the stage,
defective or damaged goods are returned to the supplier by the customer. Here, the
companies need to deal with customer queries and respond to their complaints, etc.
This stage often tends to be a problematic section of the supply chain for many companies.
The planners of the supply chain need to discover a responsive and flexible network for
accepting damaged, defective and extra products back from their customers and facilitating
the return process for customers who have issues with delivered products

Supply Chain Management -Process Flow

Supply chain management can be defined as a systematic flow of materials, goods, and
related information among suppliers, companies, retailers, and consumers.
There are three different types of flow in supply chain management −
 Material flow
 Information/Data flow
 Money flow
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Material Flow: -Material flow includes a smooth flow of an item from the producer to the
consumer. This is possible through various warehouses among distributors, dealers and
retailers. The main challenge we face is in ensuring that the material flows as inventory
quickly without any stoppage through different points in the chain. The quicker it moves, the
better it is for the enterprise, as it minimizes the cash cycle. The item can also flow from the
consumer to the producer for any kind of repairs, or exchange for an end of life material.
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Fig: Materials Flow

Information Flow: - Information/data flow comprises the request for quotation, purchase
order, monthly schedules, engineering change requests, quality complaints and reports on
supplier performance from the customer side to the supplier.
From the producer’s side to the consumer’s side, the information flow consists of the
presentation of the company, offer confirmation of purchase order, reports on action taken
on deviation, dispatch details, report on inventory, invoices, etc.
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Fig: Order and Money flow

Money Flow:- On the basis of the invoice raised by the producer, the clients examine the
order for correctness. If the claims are correct, money flows from the clients to the
respective producer. The flow of money is also observed from the producer side to the
clients in the form of debit notes.
In short, to achieve an efficient and effective supply chain, it is essential to manage all three
flows properly with minimal efforts. It is a difficult task for a supply chain manager to
identify which information is critical for decision-making. Therefore, he or she would prefer
to have the visibility of all flows on the click of a button.

Supply Chain Management -Flow Components

After understanding the basic flows involved in supply chain management, we need to
consider the different elements present in this flow. Thus, the different components of the
flow of the supply chain are described below:

Transportation
Transportation or shipment is necessary for an uninterrupted and seamless supply. The factors
that have an impact on shipment are economic uncertainty and instability, varying fuel prices,
customers’ expectations, globalization, improvised technologies, changing transportation
industry and labor laws.
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The major elements that influence transportation should be considered, as it is completely

dependent on these factors for order completion as well as for ensuring that all the flows work
properly.

The major factors are:

Long-term Decisions: Transportation managers should acknowledge the supply freight

flow and accordingly design the network layout. Now, when we say long term decisions,
we mean that the transportation manager has to select what should be the primary mode
of transportation. The manager has to understand the product flows, volume, frequency,
seasonality, physical features of products and special handlings necessities, if any. In
addition to this, the manager has to make decisions as to the extent of outsourcing to be
done for every product. While considering all these factors, he should carefully consider
the fact that the networks need not be constant.

Lane Operation Decisions: These functional decisions stress on daily freight operations.
Here, the transportation managers work on real-time information on products’ requirements
at different system nodes and must collaborate every move of the product that is both
inbound and outbound shipping lanes to satisfy the demands of their service at the minimal
possible cost. Managers who make good decisions easily handle information and utilize the
opportunities for their profit and assure that the product is moved to them immediately,
whenever it is demanded, that too in the right quantity. At the same time, they are saving
costs on transportation also.

Choice and Mode of Carrier: A very important decision to be made is to choose the mode
of transportation. With the improvement in the means of transportation, modes of transport
that were not available in the traditional transportation modes in the past can now be a
preferred choice. For example, rail container service may offer a package that is cost-efficient
and effective as compared to motor transport. While making a decision, the manager has to
consider the service criteria that need to be met, like the delivery time, date special handling
requirements, while also taking into consideration the element of cost, which would be an
important factor.
Dock Level Operations: This involves the last level of decision-making. This comprises
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planning, routing and scheduling. For example, if a carriage is being loaded with different
customers’ orders, the function of the dock-level managers is to assure that the driver is
informed of the most efficient route and that loads are placed in the order of the planned
stops.

Warehousing

Warehousing plays a vital role in the supply chain process. In today’s industry, the demands
and expectations of the customers are undergoing a tremendous change. We want everything
at our doorstep – that too with efficient price. We can say that the management of
warehousing functions demands a distinct merging of engineering, IT, human resources and
supply chain skills.

Sourcing and Procurement

Sourcing and procurement are a vital part of the supply chain management. The company
decides if it wants to perform all the exercises internally or if it desires to get it done by any
other independent firm. This is commonly referred to as the make vs buy decision

Returns Management

A cost-effective reverse logistics program links the available supply of returns with the
product information and demand for repairable items or re-captured materials. We have three
pillars that support returns management processes. These are as follows :
 Speed − It is a must to have quick and easy returns management and automate
decisions regarding whether to produce return material authorizations (RMAs) and if
so, how to process them. The tools of speed return processing include automated
workflows, labels & attachments and user profiles.

 Visibility − For improving the visibility and predictability, information needs to be

captured initially in the process, ideally before delivering the return to the receiving
dock. The most effective and easily implementable approaches for obtaining visibility
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are web-based portals, carrier integration and bar-coded identifiers.

 Control − In the case of returns management, synchronizing material movements is

a common issue that needs to be handled. The producers need to be very cautious
and pay close attention to receipts and reconciliation and update the stakeholders of
impending quality issues. In this case, reconciliation activates visibility and control
all over the enterprise. The key control points in this process are regulatory
compliance, reconciliation and final disposition and quality assurance.

Post -Sales Service

Now that the ordered shipment is over, what is the next step? The post-sales service in the
supply chain tends to be an increasingly essential factor as businesses offer solutions instead of
products. The post-sales services comprise selling spare parts, installing upgrades, performing
inspection, maintenance and repairs, offering training & education and consulting.
Presently, with the growing demands of the clients, a high volume of after-sales service
proves to be a profitable business. Here, the services are heterogeneous and the value-added
services are different from those provided before sales service.

Supply Chain Management -Decision Phases

Decision phases can be defined as the different stages involved in supply chain
management for taking an action or decision related to some product or services.
Successful supply chain management requires decisions on the flow of information,
product, and funds that fall into three decision phases.

The three main decision phases involved in the entire process of the supply chain are as
follows:
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Supply Chain Strategy

In this phase, the most of the decision is taken by the management. The decision to be made
considered in this sections include long term prediction and also involves in the pricing of
goods that are very expensive if it goes wrong. Also, It is very important to study the market
conditions at this stage.
These decisions consider the prevailing and future conditions of the market. They comprise
the structural layout of the supply chain. After the layout is prepared, the tasks and duties of
each is laid out. All the strategic decisions are taken by the higher authority or the senior
management. These decisions include deciding to manufacture the material, factory location,
which should be easy for transporters to load material and to dispatch at their mentioned
location, location of warehouses for storage of completed product or goods and many more.

Supply Chain Planning

Defined as a set of policies that govern short-term operations.

• Fixed by the supply configuration from previous phase.
• Starts with a forecast of demand in the coming year.

Supply chain planning should be done according to the demand and supply view. To
understand customers’ demands, market research should be done. The second thing to consider
is awareness and updated information about the competitors and strategies used by them to
satisfy their customer demands and requirements. As we know, different markets have
different demands and should be dealt with a different approach.
This phase includes it all, starting from predicting the market demand to which the market will
be provided the finished goods to which plant is planned in this stage. All the participants or
employees involved with the company should make efforts to make the entire process as
flexible as they can. In short we can summarize supply chain planning Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand uncertainty, exchange rates,
competition over the time horizon.

Supply Chain Operations

The third and last decision phase consists of the various functional decisions that are to be
made instantly within minutes, hours or days. The objective of this decisional phase is
minimizing uncertainty and performance optimization. Starting from handling the customer

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order to supplying the customer with that product, everything is included in this phase.
For example, imagine a customer demanding an item manufactured by your company.
Initially, the marketing department is responsible for taking the order and forwarding it to the
production department and inventory department. The production department then responds
to the customer demand by sending the demanded item to the warehouse through a proper
medium and the distributor sends it to the customer within a time frame. All the departments
engaged in this process need to work to improve the performance and minimizing
uncertainty.
We can summarize supply chain operations as :
Time horizon is weekly or daily.
• Decisions regarding individual customer orders.
• Supply chain configuration is fixed and operating policies are determined.
• Goal is to implement the operating policies as effectively as possible.
• Allocate orders to inventory or production, set order due dates, generate
pick lists at a warehouse, allocate an order to a particular shipment, set
delivery schedules, place replenishment orders.
• Much less uncertainty (short time horizon).

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories :
Strategic and Operational. As the term implies, strategic decisions are made typically
over a longer time horizon. These are closely linked to the corporate strategy and guide
supply chain policies from a design perspective.

On the other hand, operational decisions are short term and focus on activities over a day-
to-day basis. The effort in these types of decisions is to effectively and efficiently manage
the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2) production, 3)
inventory, and 4) transportation (distribution), and there are both strategic and operational
elements in each of these decision areas.

Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is the
natural first step in creating a supply chain. The location of facilities involves a commitment of
resources to a long-term plan. Once the size, number, and location of these are determined, so
are the possible paths by which the product flows through to the final customer. These
decisions are of great significance to a firm since they represent the basic strategy for
accessing customer markets, and will have a considerable impact on revenue, cost, and level of
service. These decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs,
production limitations, etc. Although location decisions are primarily strategic, they also have

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implications on an operational level.

Production Decisions

The strategic decisions include what products to produce, and which plants to produce them
in, allocation of suppliers to plants, plants to Distribution centers, and distribution centers to
customer markets. As before, these decisions have a big impact on the revenues, costs and
customer service levels of the firm. These decisions assume the existence of the facilities but
determine the exact path(s) through which a product flows to and from these facilities.
Another critical issue is the capacity of the manufacturing facilities--and this largely depends
on the degree of vertical integration within the firm. Operational decisions focus on detailed
production scheduling. These decisions include the construction of the master production
schedules, scheduling production on machines, and equipment maintenance. Other
considerations include workload balancing and quality control measures at a production
facility.

Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of
the supply chain as either raw materials, semi-finished or finished goods. They can also be
in-process between locations. Their primary purpose to buffer against any uncertainty that
might exist in the supply chain. Since holding of inventories can cost anywhere between 20
to 40 percent of their value, their efficient management is critical in supply chain
operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of inventory from an
operational perspective. These include deployment strategies (push versus pull), control
policies, the determination of the optimal levels of order quantities and reorder points, and
setting safety stock levels, at each stocking location. These levels are critical since they are
primary determinants of customer service levels.

Transportation Decisions

The mode choice aspect of these decisions is the more strategic ones. These are closely
linked to the inventory decisions since the best choice of model is often found by trading-off
the cost of using the particular mode of transport with the indirect cost of inventory
associated with that mode.
While air shipments may be fast, reliable, and warrant lesser safety stocks, they are
expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate
holding relatively large amounts of inventory to buffer against the inherent uncertainty
associated with them.
Therefore customer service levels, and geographic location play vital roles in such
decisions. Since transportation is more than 30 percent of the logistics costs, operating
efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments

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versus Lot-for-Lot), routing and scheduling of equipment are key ineffective management
of the firm's transport strategy.

Process View of a Supply Chain

1. Cycle View: The processes in a supply chain are divided into a series of cycles,
each performed at the interface between two successive stages of the supply chain.

2. Push/Pull View: The processes in a supply chain are divided into two categories,
depending on whether they are executed in response to a customer order or in
anticipation of customer orders. Pull processes are initiated by a customer order,
whereas push processes are initiated and performed in anticipation of customer
orders.

Cycle View of Supply Chain Processes:

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• The supply chain is a concatenation of cycles with each cycle at the interface of two
successive stages in the supply chain. Each cycle involves the customer stage
placing an order and receiving it after it has been supplied by the supplier stage.
• One difference is in size of order. Second difference is in predictability of orders -
orders in the procurement cycle are predictable once manufacturing planning has
been done.
• This is the predominant view for ERP systems. It is a transaction level view and
clearly defines each process and its owner.

Figure: Sub processes in Each Supply Chain Process Cycle

Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two categories depending on the timing of
their execution relative to customer demand
• Pull: execution is initiated in response to a customer order (reactive)
• Push: execution is initiated in anticipation of customer orders (speculative)
• Push/pull boundary separates push processes from pull processes
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Figure: Push/Pull View of Supply Chains

• In this view processes are divided based on their timing relative to the timing of a
customer order. Define push and pull processes.
• They key difference is the uncertainty during the two phases.
• Give examples at Amazon and Borders to illustrate the two views

Push/Pull View – L . L. Bean supply chain:

Five Supply Chain Drivers

Supply chain drivers are factors which help supply chain to be efficient or responsive.
Supply chain capabilities are guided by the decisions you make regarding the five supply
chain drivers.
The five drivers provide a useful framework for thinking about supply chain capabilities.
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and efficiency a supply chain is capable of achieving. The five drivers are illustrated in the
diagram below:

Fig: A module showing the flow between the working components of a supply chain.

1. PRODUCTION – This driver can be made very responsive by building factories that have
a lot of excess capacity and use flexible manufacturing techniques to produce a wide range
of items. To be even more responsive, a company could do their production in many smaller
plants that are close to major groups of customers so delivery times would be shorter. If
efficiency is desirable, then a company can build factories with very little excess capacity
and have those factories optimized for producing a limited range of items. Further efficiency
can also be gained by centralizing production in large central plants to get better economies
of scale, even though delivery times might be longer.

2. INVENTORY – Responsiveness can be had by stocking high levels of inventory for a

wide range of products. Additional responsiveness can be gained by stocking products at
many locations to have the inventory close to customers and available to them immediately.
Efficiency in inventory management would call for reducing inventory levels of all items
and especially of items that do not sell as frequently. Also, economies of scale and cost
savings can be gotten by stocking inventory in only a few central locations such as regional
distribution centers (DC’s).

3. LOCATION – A location decision that emphasizes responsiveness would be one where a

company establishes many locations that are close to its customer base. For example, fast-
food chains use location to be very responsive to their customers by opening up lots of stores
in high volume markets. Efficiency can be achieved by operating from only a few locations
and centralizing activities in common locations. An example of this is the way e-commerce
retailers serve large geographical markets from only a few central locations that perform a
wide range of activities.

4. TRANSPORTATION – Responsiveness can be achieved by a transportation mode that is

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fast and flexible such as trucks and airplanes. Many companies that sell products through
catalogs or on the Internet can provide high levels of responsiveness by using transportation
to deliver their products often within 48 hours or less. FedEx and UPS are two companies
that can provide very responsive transportation services. And now Amazon is expanding and
operating its transportation services in high volume markets to be more responsive to
customer desires. Efficiency can be emphasized by transporting products in larger batches
and doing it less often. The use of transportation modes such as ships, railroads, and
pipelines can be very efficient.
Transportation can also be made more efficient if it is originated out of a central hub
facility or distribution center (DC) instead of from many separate branch locations.

5. INFORMATION – The power of this driver grows stronger every year as the
technology for collecting and sharing information becomes more widespread, easier to use, and
less expensive. Information, much like money, is a very useful commodity because it can be
applied directly to enhance the performance of the other four supply chain drivers. High levels of
responsiveness can be achieved when companies collect and share accurate and timely data
generated by the operations of the other four drivers.

An example of this is the supply chains that serve the electronics market; they are some of
the most responsive in the world. Companies in these supply chains, the manufacturers,
distributors, and the big retailers all collect and share data about customer demand,
production schedules, and inventory levels. This enables companies in these supply chains
to respond quickly to situations and new market demands in the high-change and
unpredictable world of electronic devices (smartphones, sensors, home entertainment, and
video game equipment, etc.).

Table: five supply chain drivers toward responsiveness or efficiency.

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Over the long run, the cost of one driver — Information — continues to drop while the cost of
the other four drivers continues to rise. Companies that make effective use of information to
increase coordination internally and externally with their supply chain partners will gain the
most customers and be the most profitable. The table below summarizes what can be done to
guide the five supply chain drivers toward responsiveness or efficiency. Companies and supply
chains continually adjust their mix of responsiveness and efficiency as situations change.

Also Drivers of Supply chain can also be defined by

1. Facilities
2. Inventory
3. Transportation
4. Pricing
5. Information
6. Sourcing

1) Facilities

Role - Manufacturing, warehouse, cross docking, retail

Location – Cost effective ( for efficient supply chain), Close to customer (for responsive supply
chain)
Size - Whether consolidation or not.

2) Inventory

How much to stock?

Tradeoff between service level and cost of holding the inventory

3) Transportation

Inbound - More Economies of Scale

Outbound – Less economies of Scale
Tradeoff – cost Vs responsiveness

4) Pricing

 Use pricing to distribute demand over lean periods in case of efficient supply chains.
E.g. concept of happy hours in restaurants
 Use high margin pricing in responsive supply chains.

5) Information

Better Information network helps in achieving responsiveness and efficiency

simultaneously. E.g. Wall-Mart.

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6) Sourcing

Strategic sourcing
– Multiple sources- fear of competition help customer
– Single sourcing – strength of source helps customer to gain competitive advantage.

SCM -Performance Measures

Supply chain performance measures can be defined as an approach to judge the

performance of the supply chain system. Supply chain performance measures can broadly
be classified into two
categories:

 Qualitative measures − For example, customer satisfaction, and product quality.

 Quantitative measures − For example, order-to-delivery lead time, supply
chain response time, flexibility, resource utilization, delivery
performance.

Here, we will be considering the quantitative performance measures only. The

performance of a supply chain can be improvised by using a multi-dimensional strategy,
which addresses how the company needs to provide services to diverse customer
demands.

Quantitative Measures

Mostly the measures taken for measuring the performance may be somewhat similar to
each other, but the objective behind each segment is very different from the other.
Quantitative measures are the assessments used to measure the performance and compare
or track the performance or products. We can further divide the quantitative measures of
supply chain performance into two types.

They are:
 Non-financial measures
 Financial measures

Non - Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level,
inventory levels, resource utilization ability to perform, flexibility, and quality. In this
section, we will discuss the first four dimensions of the metrics:
Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a
business process. For supply chains, cycle time can be defined as the business processes of
interest, supply chain process and the order-to-delivery process. In the cycle time, we should

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learn about two types of lead times. They are as follows :
 The order-to-delivery lead time: can be defined as the time of delay in the middle of the
placement of the order by a customer and the delivery of products to the customer. In case
the item is in stock, it would be similar to the distribution lead time and order management
time. If the ordered item needs to be produced, it would be the summation of supplier lead
time, manufacturing lead time, distribution lead time and order management time.
 The supply chain process lead time: can be defined as the time taken by the supply chain to
transform the raw materials into final products along with the time required to reach the
products to the customer’s destination address. Hence it comprises supplier lead time,
manufacturing lead time, distribution lead time and the logistics lead time for transport of
raw materials from suppliers to plants and shipment of semi-finished/finished products in
and out of intermediate storage points.

Lead time in supply chains is governed by the halts in the interface because of the interfaces
between suppliers and manufacturing plants, between plants and warehouses, between
distributors and retailers and many more.

Lead time compression is a crucial topic to discuss due to the time-based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.

Customer Service Level:

The customer service level in a supply chain is marked as an operation of multiple unique
Performance indices. Here we have three measures to gauge performance. They are as follows:

 Order fill rate − The order fill rate is the portion of customer demands that can be easily
satisfied with the stock available. For this portion of customer demands, there is no
need to consider the supplier lead time and the manufacturing lead time. The order fill
rate could be concerning a central warehouse or a field warehouse or stock at any level
in the system.
 Stockout rate − It is the reverse of the order fill rate and marks the portion of orders
lost because of a stockout.
 Backorder level − This is yet another measure, which is the gauge of thetotal number of orders
waiting to be filled.
 Probability of on-time delivery − It is the portion of customer orders that are completed on-
time, i.e., within the agreed-upon due date.
To maximize the customer service level, it is important to maximize the order fill rate,
minimize stockout rate, and minimize backorder levels.

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Inventory Levels

As the inventory-carrying costs increase the total costs significantly, it is essential to carry
sufficient inventory to meet customer demands. In a supply chain system, inventories can be
further divided into four categories.
 Raw materials
 Work-in-process, i.e., unfinished and semi-finished
sections Finished goods inventory
 Spare parts
Every inventory is held for a different reason. It’s a must to maintain optimal levels of each
type of inventory. Hence gauging the actual inventory levels will supply a better scenario of
system efficiency.

Resource Utilization

In a supply chain network, a huge variety of resources is used. These different types of
resources available for different applications are mentioned below:
 Manufacturing resources − Include the machines, material handlers, tools, etc.
 Storage resources − Comprise warehouses, automated storage, and retrieval
systems. Logistics resources − Engage trucks, rail transport, air-cargo carriers,
etc.
 Human resources − Consist of labor, scientific and technical personnel.
Financial resources − Include working capital, stocks, etc.
In the resource utilization paradigm, the main motto is to utilize all the assets or resources
efficiently to maximize customer service levels, reduce lead times and optimize inventory
levels.

Financial Measures

The measures taken for gauging different fixed and operational costs related to a supply chain
are considered the financial measures. Finally, the key objective to be achieved is to maximize
the revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations,
technology, materials, and labor. Generally, the financial performance of a supply chain is
assessed by considering the following items :
 Cost of raw materials.
 Revenue from goods sold.
 Activity-based costs like material handling, manufacturing,
assembling rates, etc. Inventory holding costs.
 Transportation costs.
 Cost of expired perishable goods.
 Penalties for incorrectly filled or late orders delivered to customers.
 Credits for incorrectly filled or late deliveries from suppliers.
 Cost of goods returned by customers.
 Credits for goods returned to suppliers.

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 Supply Chain & Logistics Management
In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity-based costing, inventory costing, transportation costing, and inter-
company financial transactions.

17 Key Metrics For Supply Chain Management:

 Perfect Order Measurement

 The percentage of error-free orders.
 ((total orders – error orders) / total orders) * 100
 Cash to Cash Cycle Time
 The number of days between paying for materials and getting paid for the
product.
 materials payment date – customer order payment date
 Customer Order Cycle Time
 Measures how long it takes to deliver a customer order after the purchase order
(PO) is received.
 actual delivery date – purchase order creation date
 Fill Rate
 The percentage of a customer’s order is filled on the first shipment. This can be
represented as the percentage of items, SKUs or order value that is included with
the first shipment.
 (1 – ((total items – shipped items) / total items)) * 100

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 Supply Chain & Logistics Management
 Supply Chain Cycle Time
 The time it would take to fill a customer order if inventory levels were zero.
 Sum of the longest lead times for each stage of the cycle
 Inventory Days of Supply
 The number of days it would take to run out of supply if it was not replenished.
 inventory on hand / average daily usage
 Freight bill accuracy
 The percentage of error-free freight bills.
 (error-free freight bills / total freight bills) * 100
 Freight cost per unit
 Usually measured as the cost of freight per item or SKU.
 total freight cost /number of items
 Inventory Turnover
 The number of times that a company’s inventory cycles per year.
 cost of goods sold / average inventory
 Days Sales Outstanding
 A measure of how quickly revenue can be collected from customers.
 (Receivables/Sales) * Days in Period
 Average Payment Period for Production Materials
 The average time from receipt of materials and payment for those materials.
 (Materials Payables/Total Cost of Materials) * Days in Period
 On-Time Shipping Rate
 The percentage of items, SKUs or order value that arrives on or before the requested
ship date.
 (Number of On-Time Items / Total Items) * 100
 Inventory Turnover Ratio (ITR)
 ITR helps us to measure the number of times we sell or turn our average
inventory kept in the warehouse. It is calculated by dividing the Cost of
Goods (COGs) sold by the average inventory investment.
 ITR: COGs / [(Opening Stock-Closing Stock)/2]
 Turn-Earn Index (TEI)
 TEI helps us to combine the gross margin and turnover.
 A logic behind TEI is to keep high ITR for SKUs or brands generating low
margins and to satisfy with medium- or low-level ITR for SKUs or brands
generating high margins.
TEI: (ITR) x (Gross Profit %) x 100
 Gross Margin Return on Investment (GMROI)
 A gross margin return on investment (GMROI) is an inventory profitability
evaluation ratio that analyzes a firm's ability to turn inventory into cash above
the cost of the inventory.
 It is calculated by dividing gross profit by the average inventory investment.
Tracking GMROI every month provides a significant clue in terms of having a
clear understanding of which SKU or brand produce more gross profit in the
inventory.
 GMROI: [Gross Profit] / [(Opening Stock-Closing Stock) / 2] X 100

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 Supply Chain & Logistics Management

 Days of Supply (DOS)

 DOS is the most common KPI used by managers in measuring the efficiency
in the supply chain.
 It is calculated by dividing the average inventory on hand (as value) by the
average monthly demand (as value) and then multiplying it by thirty when
measuring every month.
 DOS: Average Inventory / Monthly Demand x 30
 Inventory Velocity (IV)
 IV is the percentage of inventory we are projecting to be consumed within the
next period.
 It helps the managers to understand how well the inventory on hand matched
the demand. It is calculated by dividing the opening stock by the sales forecast
of the following period.
 Tracking IV every month will provide significant clues in terms of aligning
inventory level to the optimal level for matching supply-demand, and
preventing excessive stock in the warehouse.

ACHIEVING STRATEGIC FIT AND SCOPE

To ensure that “what the supply chain does well is consistent with target customer’s needs”.

Competitive and Supply Chain Strategies:-

 Competitive strategy (of an organization) : Defines the set of customer needs a firm
seeks to satisfy through its products and services, relative to its competitor.
Example: Wal-Mart and One dollar store
• High availability of variety of products of reasonable quality
• Low price
Functional strategies:
Product development strategy
 Specifies the portfolio of new products that the company will try to develop Marketing
and sales strategy
 Specifies how the market will be segmented and product positioned, priced, and
promoted.

Supply chain strategy

 Determines the nature of material procurement, transportation of materials,
manufacture of product or creation of service, distribution of product, Supplier
strategy, operations strategy, logistics strategy.
 Consistency and support between supply chain strategy, competitive strategy, and other
functional strategies is important.

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 Supply Chain & Logistics Management

ACHIEVING STRATEGIC FIT

Strategic fit
 Consistency between customer priorities of competitive strategy and supply
chain capabilities specified by the supply chain strategy
 Competitive and supply chain strategies have the same goals
 A company may fail because of a lack of strategic fit. e.g., Dell’s competitive strategy
before and after 2007.

Strategic fit is achieved with three steps, namely:

 Step 1: Understanding the customer and supply chain uncertainty
 Step 2: Understanding the supply chain
 Step 3: Achieving strategic fit

How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chain uncertainty
 Identify the needs of the customer segment being served
 Quantity of product needed in each lot
 Response time customers will tolerate
 Variety of products needed
 Service level required
 Price of the product
 Desired rate of innovation in the product
 Understanding the customer
 Demand uncertainty: uncertainty of customer demand for a product
 Implied demand uncertainty: resulting uncertainty for the supply chain given the
portion of the demand the supply chain must handle and attributes the customer desires.

Impact of customer needs on implied demand uncertainty

Customer Need Causes implied demand uncertainty to increase because Less
time to react to orders
Range of quantity Wider range of quantity required implies greater variance in
required increases demand

Lead time decreases Demand per product becomes more disaggregated

Variety of products required Total customer demand is now disaggregated over more
increases Channels
Number of channels through New products tend to have more uncertain demand
which product may be
acquired increases
Rate of innovation increases Firm now has to handle unusual surges in demand
Required service level Firm now has to handle unusual surges in demand
increases

 Supply uncertainty: Uncertainty resulting from the capability of the supply chain
 Impact of supply source capability on supply uncertainty.
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 Supply Chain & Logistics Management

Supply Source Capability Causes Supply Uncertainty to ...

Frequent breakdown Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

Step 2: Understanding the supply chain

 How does the firm best meet demand in an uncertain environment?
 Dimension describing the supply chain is supply chain responsiveness
 Supply chain responsiveness -- ability to
 Respond to fluctuations in demand
 Meet short lead times
 Handle a large variety of products
 Build highly innovative products
 Meet a very high service level
 Handle supply uncertainty
 There is a cost to achieving responsiveness!
 Supply chain efficiency
 Cost of making and delivering the product to the customer
 Increasing responsiveness results in higher costs that lower efficiency
 Cost-responsiveness efficient frontier

 Responsiveness spectrum • e.g., Seven-Eleven Japan, Sam’s Club

 Supply Chain & Logistics Management

Step 3: Achieving strategic fit

 Match supply chain responsiveness with implied uncertainty

 Different roles and allocations of implied uncertainty

• One stage more responsive to other stages more efficient

 Supply Chain & Logistics Management

 Comparison of efficient and responsive supply chain

Examples of Efficient & Responsive Supply chain

 It sounds easy, but in reality quite difficult!

 There is no supply chain strategy that is always right
 There is a right supply chain strategy for a given competitive strategy.
 Commitment by top executives!
 Without proper communication between groups and coordination by
high-level management, strategies are not likely to achieve strategic fit.
 Supply Chain & Logistics Management

OBSTACLES TO ACHIEVING STRATEGIC FIT

Achieving strategic fit is a company’s ability to find a balance between responsiveness and
efficiency that matches the needs of its target customers.
1. The increasing variety of products: - Customers demanding ever more customized
products.
2. Decreasing product life cycles: -Today there are products whose life cycles can be measured
in months, compared to the old standard of years.
3. Increasingly demanding customers: - Customers are constantly demanding improvements in
delivery lead times, cost and product performance.
4. Fragmentation of supply chain ownership: - Most firms have become less vertically
integrated. as companies have shed noncore functions, they have been able to take
advantage of suppliers & customer competencies that they did not have.
5. Globalization:- Adds stress to the chain, because facilities within the chain are farther apart,
making coordination much more difficult.
6. Difficulty in executing new strategies:-Once the good strategy is formulated, the execution
of the strategy can be more difficult.

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