8332_SCM-2013-Performance Measures for Supply Chain

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    Performance Measures for Supply Chain

    W S William

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    The saying goes,

    You get what you measure.

    Knowing precisely what to measure is sometimes

    complicated.

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    Let us look at some of the traditional functional

    performance measures.

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    Manufacturing Sales & Marketing Engineering/

    R&D

    Unit cost

    Labor cost

    Labor productivity

    Quality, scrap rate

    Plant utilization

    Plan vs. actual

    production

    Market share

    Revenue

    Sales growth

    New hot products

    Customer satisfaction

    Function/features

    Labor & material

    cost

    Time-to-market

    Award-winning

    designs

    Design for

    manufacturabilityassembly, etc.

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    Supplier/Manufacturer Distributor/Retailer

    Plant utilization

    CostQuality, scrap rate

    Safety

    Labor productivity

    Plan vs. actual production

    Inventory levels

    Supplier/manufacturer profit

    New hot: products

    Gross margin ($)Fill rate

    Stock-out rate

    Retailer/distributor profit

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    Aligning Metrics and Business Strategy (Value Proposition)

    The value proposition answer the question :

    Why do customers buy from us ?

    The business strategy answer the question:

    How can we ensure that customers will continue to

    buy from us ?

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    Examples of Metrics that are Mis-aligned

    Dell

    Initially thought that customers are interested in buying fastest

    processor available.

    Later found that customers wanted a consistent and common

    platform across all users. Consistency was counted becausethat would make technical support much simpler.

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    Dell Latitude notebook features:

    Component stability, consistency and backward-compatibility

    Dell Inspiron notebook features:

    Fastest available processor speed and high-end graphiccomponent

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    General Electric Aircraft Engines (GEAE)Formerly measured the performance of their aircraft engine

    overhaul shops by turnaround time, or TAT

    Faster this time, the less time their customers wait for that

    engine.

    But GEAE found that the airlines were more interested in ametric called W2W (Wing-to-Wing)

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    W2W is the time from the moment an engine is removed from

    the wing of an airplane to the time the repaired (or a

    replacement) engine has been mounted.

    This represents the total amount of time an expensive airplane isout of service due to engine maintenance or swapping.

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    Removal from

    wing

    Re-installation

    on wingTAT (Overhaul) Time

    W2WTime Time

    TAT vs. W2W

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    How would you improve W2W time, as opposed to simply

    improving TAT ?

    GEAE added more engine overhaul sites around the world so

    that the transport time to an overhaul centre was shorter.

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    Call Centers (mis-aligned metrics)

    Many call centers are evaluated on the basis ofcall center

    productivity ie number of calls handled per operator perhour

    It is easy to measure but could encourage poor service.

    Many companies are using two-dimensional metric includingboth productivity and quality of experience as rated by the

    customer.

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    Major Classes of Metric for Supply Chains

    Service Metrics

    how you meet customer needs

    Inventory Metrics

    how much inventory you have

    Time/Speed/Flexibility Metrics

    how quickly can you respond to new developments

    Financial Metricshow supply chain management affects your bottom line

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    Service Metric under Build-to-Stock

    Fill Rates : means how many of our customer

    requests were met without delay

    Order Fill Rate : measures the percentage ofcomplete orders met without delay

    Line Item Fill Rate : takes an order for multiple SKUs

    and treats each line of the order as a separaterequest , measuring the percentage of line items

    within each order that are met without delay.

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    Unit Fill Rate : measures the percentage of units ordered that

    are filled without delay

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    Example

    Suppose you sell coloured pens, and you receive the following orders:

    Item Quantity

    Red Pen 10

    Blue Pen 1

    Green Pen 2

    Suppose you were stocked out of red pens temporarily, but had

    sufficient blue and green pens to meet the remainder of the order.

    What is your line item fill rate ? [2/3 or 66.7%]

    What is your order fill rate ? [ 0%]

    What is your unit fill rate ? [3/13]

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    Order Fill Rate vs Line Item Fill Rate

    If you have 95% average line item fill rates,

    Probability of complete order fill for 2-line order = 0.95x0.95 =0.9025 or 90.25%

    Probability of complete order fill rate for 14-line order = (0.95) to

    the power 14 = 0.4877 or 48.77%

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    If we receive an order for 100 different SKUs,

    Probability of filling that order completely would be near zero ie

    0.95 to the power 100 = .0059 or 0.59%

    So an order fill rate metric may not reflect your business need.

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    Fill rate measure the successes

    What happens to unfilled requests of failures ?It is an important question in SCM

    Backorders vs. Lost sales

    Lost sales metric (difficult to measure in many situations)(If order for specific items are defined and fill rates are known,lost sales metric can be tracked)

    Time to fill the backorders

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    Different fill-rates for different items can be a wise

    idea !

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    Service Metric under Build-to-Order

    Promised Response Time or Lead Time

    % Completed on Time

    Aging of Late Orders ie how long it took to fill a late order

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    Inventory Metrics

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    There are two issues; Inventory and Service level

    In your organization, two different groups are

    responsible for these or a single group is responsible

    for both.

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    Three major inventory metrics used in SCM are:

    Inventory Value

    Inventory Turns

    Inventory as a Time Supply (e.g. , days of Inventory)

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    Speed and Flexibility Metrics

    Promised lead times to customers

    Lead time at a node

    Complete supply chain lead time

    Cash-to-cash cycle

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    The Cash-to-Cash Cycle

    AcquireMaterial

    Pay forMaterial

    SellOutput

    ReceivePayment

    Inventory

    Accounts

    Payable

    Accounts

    Receivable

    Cash-to-cash cycle

    Time

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    CCC = DIO + DSO DPOCCC (Cash Conversion Cycle)

    DIO (Days of Inventory Outstanding)

    DSO (Days of Sales Outstanding)DPO (Days of Payable Outstanding)

    DIO = Average Inventory / COGS per day

    DSO = Average Accounts Receivable (AR) / Revenue per day

    DPO = Average Accounts Payable (AP) / COGS per day

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    Financial Metrics

    ROI (Return on Investment)

    = Net Income/ Investment

    EVA (Economic Value Added)

    = Net Profit minus charge for invested capital

    NB : All figures are in Rs. Crores

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    Item Year 2013 Year 2012

    Revenue 5103.0 Not needed

    COGS 3533 Not needed

    Inventory 1314.0 1274.6

    A/R 99.1 91.5

    A/P 828.9 745.1

    Average Inventory (1314.0 + 1274.6) / 2 = 1294.3

    Average AR (99.1 + 91.5 ) / 2 = 95.3

    Average AP (828.8 + 745.1 ) / 2 = 787.0

    g

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    Bullwhip Metric

    Metric to assess wildly fluctuating orders in upstream portion of

    the supply chain.

    Bullwhip Metric = Standard Deviation of Weekly Orders /

    Standard Deviation of Weekly Sales

    = 229 / 65 = 3.52 [for example]If there were no bullwhip effect, we would expect this ratio to be

    approximately 1.0

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    Bad Metrics

    Plant or equipment utilization

    If the decision does not affect the cost,then the cost should not

    affect the decision.

    SingleFactor Productivity Metrics

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    Metric for the Entire Supply Chain

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    A solid theoritical idea runs into many practical problems when

    one considers real-world supply chains.

    How do we proceed , given this real-world complexities ?

    Just keep in mind the entire supply chain when assessing

    changes.

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    Roadblocks to Chain-Wide Metrics

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    Thank you