Supply Chain Management

Force or Farce?
K.L.Bhaskaran

External Environment

Global competition
Evolution of Info.Technology
Shorter product life cycle
Impatient customers
Product variety
Changing customer
requirements
Customer expectations
Quality
Price
Delivery
After Sales service

Reliability, Responsiveness and Agility have become key drivers

Global Business
A Canadian meets his Indonesian counterpart
in a French restaurant, located in London,
owned by an Indian.
One is dressed in an Italian suit, wearing a
Brazilian pair of shoes while other wears
Hong Kong suit and Thai shoes.
Shirts are made of Egyptian Cotton.
Business is discussed over a cup of coffee
from Ivory Coast accompanied by Syrian
pastries and ends with a Cuban cigar.
4

Fluffy, white idlis- Theres more to it than

rice

Name of the company: Rice Land Agro Food Pvt.Ltd

Business: Processing of Paddy into Rice
Location: Manachanallur,near Trichy
Labourers : Bihar
Milling Machine: Brazil
Driers: Thailand
SoRtex Z+ : From London,based on German Technolgy

Quality is controlled on line from London

5

Born Local

Business Global
6

Why is this happening?

Indian economy has opened up
Developed country markets have
saturated
Customer expectations are high
Customer segmentation is more refined

Too many manufacturers

Chasing limited customers

Brand?

Quality is no more a differentiator

Niche
Product?
Price?
Delivery?
Service?
Availability?
10

What does customer want?

Niche Product

Quick After Sales

Service

Brand?

State of the Art

Products

Easy Availability?

Good Payment terms

11

Customer Needs
Right product, at the right quality, at
the right time, with the right packing, at
the right price , backed up by right
service.

12

A supply chain is designed

to address these requirements

13

Basic Supply Chain

Supplier
Supplier

Raw Materials
Components
Supply Items
Electricity
Janitorial Services

Manufacturer
Manufacturer

Manufacturer of
Products
Service providers

Customer
Customer

Retailer
Wholesaler
Distributor
End Customer
(Consumer)

14

Expanded Supply Chain

Tier 2
Supplier
Raw Materials
Tier 2
Supplier
Components

Retailer

Tier 1
Supplier

Retailer

Tier 2
Supplier
Services

Tier 2
Supplier

Manufacturer
Tier 1
Supplier
Retailer
Distributor

Tier 2
Supplier

Tier 2
Supplier

Distributor

Tier 1
Supplier

Retailer
15

Primary Cash Flow

Primary Product Flow

Supplier
Supplier

Manufacturer
Manufacturer
Orient towards
customer

Customer
Customer

Information Flow
Reverse
Logistics Flow
16

Primary Product Flow

Raw
Rawmaterials,
materials,components,
components,subassemblies,
subassemblies,ininplant
plant
components,
finished
products,
services,
supply
components, finished products, services, supply
items
items

Information Flow
Raw
RawMaterial,
Material, Component
ComponentSupply
Supplystatus,
status,
Production
Status,
Delivery
status,
Order
Production Status, Delivery status, Orderstatus,
status,
sales
literature,
invoice,
etc
sales literature, invoice, etc

Primary Cash Flow

Payments
Paymentstotosuppliers,
suppliers,payments
paymentsfrom
fromcustomers,
customers,
Return
of
cash
against
customer
returns,
Return of cash against customer returns,Receipt
Receipt
ofofpayments
from
suppliers
against
rejections
payments from suppliers against rejections

Reverse Product Flow

Returns
Returnsfor
forrepair,
repair,replacement,
replacement,recycling,
recycling,disposal,
disposal,
return
of
rejected
items
to
suppliers
return of rejected items to suppliers

17

An example
A Restaurant
Suppliers
Supplier

Supplier

Gas Suppliers
Gas Manufacturer
Utilities
Agriculturists
Milk Supplier
Manufacturers Provision Suppliers

Producer

chef

Retailer

Waiters

Consumer

Consumers

Utilities

18

Beware!!!
A Supply Chain is NOT
Manufacturing
Logistics
Purchasing
Supplies
Or
any combination of the above
19

Identifying Supply Chains

Summing up
Supply chains
Stretch from raw materials to consumers
Include various entities and processes
Run in reverse as well as toward end user
Contain cash, product, and information
flows
Connect to outside stakeholders.
20

A simple definition
Supply Chain begins with the Customer
[order placement ] and ends with the
customer [ delivery ]
In some cases, after sales service is a
part of supply chain

21

DEFINITION OF SCM
It is a process orientated, integrated
approach to procuring, producing and
delivering products and services to the
customers. Integrated SCM has a broad
scope and and it includes sub-suppliers,
suppliers,
internal
operations,
trade
customers, retail customers, and end users. It
covers management of material, information
and funds flows.
22

What Is Supply Chain Management?

Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while satisfying
service level requirements.
23

Two Other Formal Definitions

The design and management of seamless, value-added
process across organizational boundaries to meet the real
needs of the end customer
Institute for Supply Management
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
24

SC Management includes

Forecasting
Demand driven Sourcing and Procurement
Production Scheduling
Order Processing
Inventory Management
Transportation
Warehousing
Customer Service
Collection of money
Location
A proper information system

25

SCM DRIVERS

Cost
Inventory
Logistics
Information
Cycle Time
After Sales Service
Responsiveness
Reliability
26

Successful SCM excels in

Cost Reduction
Improving reliability
Improving responsiveness
Improving agility
Improving asset utilization

27

SUPPLY CHAIN

A well designed supply chain addresses

- Cycle time
- Cost Control
- Lead time at all levels
- Inventory Planning, build up and disposal
- Information across the chain
- Products and material flow
- Process considerations
- Logistics
- Cash Flow
28

Evolution of Supply Chain Management

Stages of SCM evolution
1: Baseline

2: Functional
Integration

Unplanned
activity
Pep talks,
threats
No teamwork
Little
information
exchange

Mostly manual ops

Efficiency improvement
in owned facilities
New low-price
purchasing strategies
Some hard-skills
training, job
enhancement
Enhanced marketing
and forecasting
No coordination of
initiatives

3: Internal
Integration
New focus on
process
Internal process
integration
ERP
Intranets, etc.,
across functions
Design teams
Enhanced
warehousing,
logistics,
forecasting, etc.

4: External
Integration
Process integration
across entity
boundaries
Eventual electronic
information
connections among
multiple partners
ERP-to-ERP links
E-commerce
Supply chain vs.
supply chain
competition
29

Supplier

Producer

customer

Stakeholder
Value

Who are the stakeholders?

30

Stakeholders Value
Firm

Profitability, Growth, Market Share, Image

End
customer

Quality, Affordability, Availability and Service

Investors

Return on investment, timely communication, growth

Lenders

Interest Stability and return of Principal

Society

Job creation, Clean Environment, Development

Government

Tax, Environment, Job creation, Abiding by Law

Employees

Career Path, Security, Salary,

good working condition

Competition

Makes or mars your business

31

Creating Value through SC Management

Supply chain values
Financial value

Customer value
Social value (for community,
environment, etc.)

32

Creating Value through SC Management

Financial value
Potentially self-defeating tradeoffs (e.g.,
cost cutting without net gain)
It takes money to make money (such as
investments in upgrades)
Distribution of net gains (with all
stakeholders in mind)

33

Creating Value through SC Management

Customer value
Quality

Affordability Availability

Service

Most resources are invested in creating the

value of greatest importance to the market.
34

Creating Value through SC Management

Social value
Making
positive
contributions

Social/cultural
implications
Public and military
impact
Effects on jobs,
taxes, economy

Avoiding
negative
effects

Environmental impacts of
extraction, logistics,
distribution, etc.
Impact of laws and regulations
Reduce, reuse, recycle
(reverse supply chain)
35

Creating Value through SC Management

Discussion question
Which of the following is most likely to increase longterm net financial value for a supply chain firm?
a. Reinvesting profits in research and infrastructure
upgrades
b. Channeling SC cost savings into end-user
discounts
c. Use of market leverage to force down supplier
costs
d. Large-scale layoffs and plant closings

Answer: a
36

Five Vs of Supply Chain

Velocity

Increase Speed

Visibility

Wider Visibility

Variability

Better Control over operations

Variety

Tune to the Market Demand

Volume

Tune to the Market Demand

37

Transformation to Best Practices

Domestic
Standard Products
Work Orders
Vertical Integration
Disconnected
Forecast Driven

Global Operations
Mass Customization
Flow Production
Outsourcing
Networked
Customer Response
38

Business Transformation
From
Inward Centric
Push to
Inventory
Transactions
From Functions
Stand Alone

To
Customer Centric
Pull
Information
Relationship
Processes
Network
39

Risks
Unknown

Uncontrollable
Natural disasters
Political Risks
Epidemics
Terrorism
Fuel Price
Currency Fluctuation
Port delays
Market Changes
Supplier Performance
Execution Issues

Known

40

Controllable

Functional and Process Perspective

SUPPLY CHAIN PROCESS

ORDER - TO - DELIVERY PROCESS

Procurement

Manufacturing

Distribution

Logistics

41

Processes
Discrete Processes

P1

Suppliers

P2

Purchase

P3

Mfg

P4

Pn

Sales

Customers

42

Processes
Supply chain processes
P1
Raw
Materials

P2

Suppliers

P3

Producers

P4

Pn

P5

Distributors

Retailers

End
Users

43

SCOR Processes
Five SCOR processes
Plan

Demand/Supply Planning and Management

Source

Sourcing Stocked, Make-to-Order, and Engineer-to-Order

Product

Make

Make-to-Stock, Make-to-Order, and Engineer-to-Order

Product Execution

Deliver

Order, Warehouse, Transportation, and Installation

Management for Stocked, Make-to-Order, and Engineerto-Order Product

Return

Return of Raw Materials and Receipt of Returns of

Finished Goods
44

Scope of SCOR Processes

PLAN

Balance resources with requirements and

establish and communicate plans for the
whole supply chain, including return and
the execution processes of Source, make
and deliver
Management of business rules, SC
performance, Data collection, inventory,
capital assets,transportation,planning
configuration, regulatory requirements
and compliance and supply chain risk
Align the supply chain plan with finance
plan

45

Scope of SCOR Processes

SOURCE

Schedule deliveries, receive, verify

and transfer product. Authorize
supplier payment
Identify and select supplier
sources
Manage business rules, assess
supplier performance and maintain
data
Manage inventory, capital assets,
incoming product, supplier
network, import/export
requirements, supplier agreements
and supply chain risks
46

Scope of Processes

MAKE

Schedule production activities, issue

product, produce and test,
package,stage product and release
product to deliver. Waste disposal
processes
Finalize engineering for Engineer to
order products
Manage rules, performance, data, in
process inventory, equipment and
facilities, transportation, production
network, regulatory compliance for
production. And SCM risk

47

Scope of SCOR Processes

DELIVER

All order management steps from

processing customer inquiries and
quotes to routing shipments and
selecting carriers
Warehouse management from
receiving and picking products to load
and ship products
Invoicing customer
Manage delivery business
rules,performance, information,
finished product inventories, capital
assets,transportation,PLM, Impex
requirements, and SCM risks

48

Scope of Processes

RETURN

All return Defective product steps from

source-Identify product
condition,disposition product, request
product return authorization, schedule
product shipment and return defective
product and deliver etc.
Same for all returns for maintenance and
excess supply returns
Manage return business rules,performance,
data collection, return inventory,capital
assets,transportation,network
configuration,regulatory requirements and
compliance and supply chain return risk.

49

SCOR Process Reference Model

Standard Descriptions of management
processes
A framework of relations among standard
processes
Standard metrics to measure performance
Management practices that produce the best in
class performance
Standard alignment to features and functionality
50

SCOR Processes
Capture the complex management process
in standard process reference model
Can be implemented purposefully
Described unambiguously
Measured, managed and controlled
Tuned and retuned to a specific purpose

51

Why Measure?
To determine how effectively and efficiently the
process or service satisfies the customer.
To identify improvement opportunities.
To make decisions based on FACT and

DATA

If you dont know where youre going,

youre probably not going to get
there.
52

Wisdom
Knowledge
Information

Data
53

What is Metrics?
Measure
Everything
That
Results
In
Customer
Satisfaction

Metrics

54

What do you measure?

Individual Performance
Departments Performance
Companys performance
Based on Customer Expectations and
Internal Requirements

55

Objectives of Metrics Design

To check the deviation from the goals and
analyzing the same.
To identify strong and weak areas and take
corrective action.
To revisit the goals based on performance.
For performance evaluation of individuals.
To provide guidance for future investments.
To see if trends exist and take proactive action.
To act as an enabler for process review and
organizational restructuring.
To evaluate quality of processes
56

S.M.A.R.T Goals
S- Specific
M- Measurable
A- Agreed upon, Attainable
R Relevant
T - Timely
57

Supply Chain Metrics

Cannot improve what cant be
measured
Cant measure all possible objectives
Choose reasonable number of KPIs

58

Supply Chain Metrics

Key Performance Indicators
KPIs for Product
Introductions

KPIs Manufacturing

KPIs for
Replenishment

Internal failure rate

Productivity

Order fill rate

External failure rate

Wastage Control

On-time delivery

Introduction lead
time

Cost Control

Order fulfillment
lead time

*Apply KPIs only to processes and activities based on corporate and supply chain strategies .
59

Supply Chain Performance Metrics

Level 1 SCOR metrics

Supply-Chain Council (SCC) model
NOT tied to plan, source, make, deliver,
return processes
Cross-industry standard for SCM
Formulas included for each attribute
Dozens of firms contribute to metrics
60

Supply Chain Performance Metrics

Balanced scorecard
Customer
Perspective
Goals

Measures

Customer Perspective
On-time delivery,
satisfaction, etc.

Innovation and
Learning Perspective
Goals

Measures

Measures current
performance

Goals

Measures

Business Process
Perspective
Prospecting calls,
productivity, etc.
Also flexibility, waste
reduction, other SC goals

Formal staff training,

management training, etc.
Product or process
innovations (including BSC
adoption)

Can predict future

prospects
Business Process
Perspective

Innovation and Learning

Perspective

Financial
Perspective
Goals

Measures

Financial Perspective
Traditional
Cash-to-cash, ROI, etc.
Retrospective only
Must always be present

61

Balanced Scorecard (BSC)

Customer Perspective

Innovation & Learning Perspective

Goal

Measure

Target

Actual

Goal

Measure

Meet
delivery
promises.

Supplier XYZ
delivery
performance

99%

98%

XYZ can
Downside SC
survive
adaptability
downturn.

Target

Actual

20%
fewer
orders

15%
fewer
orders

Present performance, future prospects

Training and product development

Business Process Perspective

Financial Perspective

Goal

Measure

Target

Actual

Goal

Measure

Target

Actual

Supplier
sustainability.

Supplier XYZ
sustainability
conformance

100%

100%

Supplier
financial
stability.

XYZs debt-tototal assets

ratio

0.35

0.40

Productivity, prospecting, flexibility, etc.

Traditional, historical only, necessary

62

Key Elements in a Balanced

Scorecard (BSC) Initiative

63

Strategic SCM Objectives

Customer Facing
- Reliability
- Responsiveness
- Agility
Internal Facing
- Costs
- Assets Management
64

Performance Measurement

Description

Customer Facing
Reliability
Perfect Order Fulfillment
Cycle Time

Responsiveness

Internal Facing
Agility

Costs

Assets

Upside SC Flexibility

Downside SC Flexibility

Downside SC Adaptability

SCM Cost

COGS

Cash to Cash Cycle time

Return on SC Fixed
Assets

Inventory Performance

65

Performance Attribute-Reliability

Definition :SC performance in delivering right

product to right place at right time in right
condition in right packaging in right quantity with
right documentation to right customer
Metric: Perfect Order Fulfillment
Calculation: Percentage of orders meeting delivery
performance with complete and accurate documentation
and no delivery damage
Formula
Total number of Perfect Orders
Total No of orders
66

Performance Attribute- Responsiveness

Definition: Speed at which SC provides products to
customer
Metric : Average Order Fulfillment Cycle Time
Calculation: Average speed at which the supply chain
delivers products to customers. Customer Order to
Customer Receipt Time
Formula:
Sum of all actual cycle times or all delivered orders
Total No of Orders Delivered

67

Performance Attribute- Agility

Metric

Definition

Calculation

Upside SC
flexibility

Number of days an organization

requires to achieve an unplanned
sustainable 20% increase in
quantities delivered

Least amount of time required to

achieve the increase considering
source, make, and deliver
components

Upside SC
adaptability

Amount of increased production an

organization can achieve and
sustain in 30 days

Least sustainable quantity

increase considering source,
make, and deliver components

Downside SC
adaptability

Reduction in quantities ordered

sustainable at 30 days prior to
delivery with no inventory/penalties

Least sustainable quantity

decrease considering source,
make, and deliver components

68

Supply Chain Performance Metrics

Supply chain costs
SC Metric

Definition

Formula

Costs of Goods Sold

Direct Costs of
Manufacture

Cost of Goods Sold =

Direct Material + Direct
Labor + Overhead

Supply chain
management cost

All direct and indirect

expenses associated
with operating SCOR
business processes
across the supply chain

Cost to Plan +Cost to

Source+ Costs to
Deliver+ Costs to Return

69

Performance Attribute- Asset Management

Definition: Effectiveness of organization in managing
assets to support demand satisfaction, including
management of all assets: fixed and working capital
Metric: cash to cash cycle time
Calculation :Time required for an investment in raw
materials to flow back in an organization
Formula
= Inventory days of supply+ Accounts receivable - Accounts
Payable

70

Performance Attribute- Asset Management

Definition: Effectiveness of organization in
managing assets to support demand satisfaction,
including management of all assets: fixed and
working capital

Metric:Return on supply chain fixed assets

Calculation: Return an organization receives on
capital invested in supply chain fixed assets used in
plan, source, make, deliver, and return activities

Formula
Revenue- COGS- Supply Chain Costs
Fixed Assets
71

Performance Attribute-Asset Management

Definition: A measure of how well the
inventory is managed.
Metric: Inventory Turnover Ratio
Calculation: Calculates how fast the
inventory is converted into sales
Formula:
Cost of Goods Sold
Average Inventory
72

Supply Chain Asset Management

Definition: Magnitude of an investment relative to a
companys working capital position versus the
revenue generated from an SC

Metric: Return on working capital

Calculation: Profit on working capital used

Formula:
(SC Revenue COGS SC Management Costs)
(Inventory + A/R A/P)

73

Customer-Focused Metrics
Attribute

Metric

Definition

Availability

Stockout frequency

Probability of inventory not being

available to meet customer demand

Fill rate

Impact of stockouts over time, e.g., want

100 items, 92 in = 92% fill rate

Orders shipped complete All items ordered are in shipment

Time
needed to
deliver
customer
order

Backorders

Unfilled order or commitment

Speed of performance

Elapsed time from order to ready to use

Delivery consistency

Cycle frequency meeting planned time

Flexibility

Ability to accommodate unusual requests

Malfunction recovery

Contingency plans; alternate source

74

Customer-Focused Metrics (continued)

Attribute

Metric

Definition

Product
support

Response time to
inquiries

Number of days it takes for customer to

receive a response to an inquiry

Response accuracy

Measures if response is on target and

customer doesnt require follow-up

Customer complaints

Number of complaints or amount of

negative feedback in given period

Repeat purchases

Measure of customer completing

another purchase from same seller

Referrals to other
potential customers

Number of names provided

Overall
satisfaction

75

Customer Relationship Management

A manufacturer or a retailer that

responds to changes in sales in hours
instead of weeks is no longer at heart a
product company, but a service
company that has a product offering

- Bill Gates
76

Movement
From qualitative targets to quantitative ones.
From descriptive passages to crisp
statements
Other aspects are also reviewed.
- Attendance
- Team work
- Willingness to take additional responsibilities
77

Acquisition of Data

Incremental data volume improvement

Partial data better than no data
Capture data at the source
Automatic better than manual capture
Capture ancillary data when possible
Data Mining
78

Second Level of Metrics-Example

Responsiveness: Speed at which the products are delivered to the
customer.
Sub items:
a.Order Entry Time
b.Pick time from inventory
c.Packing Time
d.Documentation time
e.Loading time
f.Transportation Time
g.Unloading Time

Activity Based

79

Second Level of Metrics-Example

Definition :SC performance in delivering correct product to correct place at
correct time in correct condition and packaging in correct quantity with
correct documentation to correct customer.
Sub items:
a. Correct Picking of Items
b. Correct documentation
c. Adequate Documentation
d. Correct Packaging

Activity Based

e. Timely Preparation of documents.

f. Delivery by the correct mode.
g. Correct Delivery by the chosen mode.
h. Proper handling across the Logistics Chain

80

Example
A company involved in turnkey jobs, where
the company would procure all required
materials , deliver to the customers and install
them.
The procurement was back to back. There
was no inventory kept.
The target cycle time was 50 days.
The actual was
100 days!!
81

Customer Order
Date

Elapsed
Time

25
Receipt at
SCM Centre
30
Receipt of goods
in
Warehouse

35
Shipment
10
Receipt at
Customer
Site

100

Total

82

Analysis
Analysis revealed that the time from customer
order to SCM receiving the order was too
high. The reasons were gone into and
corrective action was taken.
From receipt into the warehouse till shipment
was too high. Analysis revealed that in most
cases, the customer was not ready to receive
the equipment. The sites were simply not
ready. Corrective action was taken.
83

Characteristics of Effective Metrics

Each metrics should measure a parameter.

The performance indicator should adequately cover the
parameter to be measured.
Should be objective and quantified as much as possible.
Measurement should be periodic and not sporadic.
Periodicity should be adequate and not too spaced apart.
Parameter definition should be constant.
Keep it simple.
Cover all sub activities through selection of parameters.
The parameters should be linked so that no sub activity is
omitted.

84

Seven Deadly Sins in Performance

Measurement
Vanity- Fixing standards that are easily achievable.
(Fixing promised date of shipment than required date)

Provincialism ( Silos )- Organization boundaries and

concerns and dictate measures.(Freight Cost Reduction)
Narcissism- Measuring from organizational point of
view (Warehouse measure)
Laziness Not giving adequate attention ( Date of
shipment vs. date of customer receipt)

Pettiness- Measuring only a small component ( Mfg

Cost Vs total profitability)

Inanity- Not looking at the consequences of metrics on

human behaviour
Frivolity- Taking metrics lightly
85

How do we overcome?

Find out what the customer wants. Do not assume.

Set customer satisfaction goals
Design Supply Chain to address the same
Select correct performance measures accordingly
Measure correctly
Embed these into a process for performance
improvement. Treatment and not post mortem
Do not use metrics as threats or something to be
feared. Use them for continuous improvement.
The emphasis is on end to end business processes and
a focus on drivers of the enterprise results.
86

Revenue Recognition

Manufacture, Supply and Installation

Goods
Leave the
Warehouse

Company A

Goods Reach
customer site

Company B

Goods are
installed

Company C

87

88