SCM Performance

CII Institute of Logistics SCM Performance Measurement

SCM Performance Measurement

SCOR Model


Suppliers’

Supplier

Suppliers

Organization Customers

Customers’

Customer

Production

Marketing

Raw Materials

Raw Materials

Semi Finished Goods

Finished Goods

Finished Goods

Finished Goods

Material Handling

Distribution

Inbound Logistics Outbound Logistics

LOGISTICS

SUPPLY CHAIN

Scope of Logistics & Supply Chain


Scope of Supply Chain


Value Creation

• SCM is all about creating value to customer through efficient internal processes– Source

– Make

– Deliver


CII Institute of Logistics SCM Performance MeasurementCII – Institute of Logistics

To develop an efficient Customer Relationship Management

Increase Satisfaction

To increaseSUPPY CHAIN

Responsiveness

Integrated Supply Chain (Organization/Informatio

n / Technology integration)

To increase the Supply Chain

Flexibility

Increase the Supply Chain Delivery Reliability Performance

Optimise Supply Chain Cost

To be competitive in product price

To increase Supply Chain Asset Management Efficiency

To increase the productivity

To develop an efficient and effective financial

process

Increase revenue from current customers

THE VISION Supply Chain Strategy


Achieving Strategic Fit

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum

?

THE DEGREE OF SUPPLY CHAIN RESPONSIVENESS

MUST BE CONSISTENT WITH THE IMPLIED DEMAND

UNCERTAINTY

Source: Chopra & Meindl / Logistics Strategy


Achieving Strategic Fit




Certain demand

Uncertain demand

Responsiveness spectrum Zone of

Strategic Fit


Changes in Supply Chain Strategy (over the PLC)




Certain demand

Uncertain demand

Responsiveness spectrum Zone of

Strategic Fit

As products mature, the supply chain strategy should, in general, move from being responsive to being efficient.


The Responsiveness Spectrum

Highly Efficient

Somewhat Efficient

Somewhat responsive

Highly Responsive

Integrated Steel Mills: Production scheduled weeks or months in advance with little variety or flexibility

Traditional make-to-stock manufacturer

with production lead time of

several weeks

Most automotive production

Dell: Custom

made PCs and

servers in a few days

7-ELEVEN JAPAN REPLENISHES ITS STORES WITH BREAKFAST ITEMS IN THE MORNING, LUNCH ITEMS IN THE AFTERNOON , AND DINNER ITEMS AT NIGHT. A

HIGHLY RESPONSIVE SUPPLY CHAIN


Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers of Supply Chain Performance


Inventory TurnsCycle TimesDPMO Rate-Defects per Million

OpportunitiesSCM -as strong as its weak linkMonitor key areasMake corrective action/not measureUse correct metrics to suit business

SCM Metrics


Functions Covered:FinanceCustomerInternal BusinessTraining

Areas covered:ProcurementProductionDistributionWarehousingInventoryTransportationCustomer Service

SCM Metrics


Effects of Interdependence on Supply Chain Relationships

Org

an

iza

tio

n’s

D

ep

end

en

ce

High

Low

Partner’s DependenceLow High

Partner Relatively Powerful

Organization Relatively Powerful

High Level of Interdependence

Effective Relationship

Low Level of Interdependence








How Does Your Supply Chain Score ?

• Have we reduced our total cycle time (order to shipment) by atleast 50% over the past three years ?

• Have total Inventories decreased by atleast 50% over the past three years ?

• Do 98% or more of our orders reach customers on time?

• Has our supplier base been reduced by 2/3 over the past five years?


• Have our supplier lead times been reduced by 50% or more over the past three years?

• Have we reduced scrap, rework and warranty costs by at least 50% over the past three years?

• Has our cost to produce decreased by 20% or more over the past three years?

• Have we reduced our cost of Quality by at least 50% over the past three years?



• Have we reduced the direct materials cost by atleast 10% over the past three years?

• Have we reduced our product development cycle time by atleast 50% over the past three years?

• Have we reduced the stock out complaints by 50% in last two years?

• Do we conduct vendor evaluation and appraisal once in a year?



• The level of adaptation of Technology in Product visibility & traceability is satisfactory?

• Have our Inventory accuracy checking periodicity based on logical categorization of items?



Delivery performance

1) the percentage of order that are fulfilled on or before the customer requested date

2) the percentage of order that are fulfilled on or before the original scheduled or committed date

• In most cases a customer will request for a date at which the product or service has to be delivered. This is the "customer requested date".

• In response to that your company will either commit a delivery date to the customer, or provide an indication when the customer can expect the delivery to take place. This is the "original scheduled or committed date".

• This date is not necessarily the same as the customer requested date, as it is possible that due to backlog or other reasons your company cannot meet the customer requested date (or more positively, your company can deliver earlier which the customer is willing to accept).


Example calculation

• delivery performance to customer requested date:– [890-45] / 1000 = 84.5%

• delivery performance to committed date:– [920-50] / 1000 = 87 %

-1000 customer orders placed

-890 orders delivered by customer requested date (110 too late)

-of these 890 orders, 45 were delivered as partial shipments

-920 orders delivered by committed delivery date (80 too late)

-of these 920 orders, 50 were delivered as partial shipments.

-1000 customer orders placed

-890 orders delivered by customer requested date (110 too late)

-of these 890 orders, 45 were delivered as partial shipments

-920 orders delivered by committed delivery date (80 too late)

-of these 920 orders, 50 were delivered as partial shipments.


Fill rate

• Used when the product is shipped from stock to the customer.

• Fill rate represents the percentage of orders that can be shipped from stock within 24 hours of the order receipt.

• This shows how quickly your company can respond to customer orders in the situation where your company has decided to produce in a make-to-stock environment.


Example calculation

• Fill rate• [5000] / [6000] = 83 %

-Total number of orders delivered to customers = 10.000

-Total number of orders with products delivered from stock = 6.000

-Total number of orders shipped within 24 hours of order receipt = 5.000


-Total number of orders with products delivered from stock = 6.000

-Total number of orders shipped within 24 hours of order receipt = 5.000


Order fulfillment lead time

• used when the product is made to order.

• Order fulfillment lead time represents the average order lead time that can consistently be achieved to fulfill customer orders.

• This shows how quickly your company can respond to customer orders in the situation where your company has decided to produce in a make-to-order environment

Customerauthorization

Orderreceipt

Orderentry

Orderrelease

Startmake

Deemedshippableby Make

Ready forshipment

Customerreceipt

Installationcomplete

Order fulfillment lead time

Make cycle time Total transportation

time


Example calculation

• Order fulfillment lead time– [30+29+33+31+27……] / [4000] = 30 days


-Total number of orders with products delivered make-to-order = 4.000

-The actual order lead time for each order was 30 days, 29 days, 33 days, 31 days, 27 days etc.


-Total number of orders with products delivered make-to-order = 4.000

-The actual order lead time for each order was 30 days, 29 days, 33 days, 31 days, 27 days etc.


Perfect order fulfillment• This metric is the most comprehensive top level metric to

assess your company's delivery performance.• The metric covers whether your company delivers on

time, in full, with complete and accurate documentation and without shipping damage.

• For this reason it should be no surprise if your company has initially quite a low score, as the following example shows how difficult it is to achieve the 100% score. – When your customer places one order with you for 5 different products,

each with different quantities with a total of 4000 items, at a certain requested delivery date, and your company manages to deliver the 4000 items on time, in full, without shipping damage, but there is a small mistake in the invoice, this whole order will not be counted as being perfect.


Example calculation

• Perfect order fulfillment– [9500 – 1000 – 50] / [10.000] = 84.5 %

--Total number of orders received from customer = 10.000


-Total number of orders delivered in full = 9.950

-Total orders delivered on time to customer requested date = 9.500

-total orders with faulty documentation = 1.000

-total orders with shipping damage = 50

--Total number of orders received from customer = 10.000


-Total number of orders delivered in full = 9.950

-Total orders delivered on time to customer requested date = 9.500

-total orders with faulty documentation = 1.000

-total orders with shipping damage = 50


Supply Chain Response time• calculation represents the time it takes the integrated supply chain

to respond to an abnormal (significant) change in demand, either an increase or decrease in demand.

• A significant change in demand means that the change in demand is not just a one-off peak demand or downturn situation.

• Therefore using up any slack in capacity, issuing over time (or keeping temp-staff at home) or subcontracting will not consistently solve the situation.

• Apart from that, the inventory of raw materials and WIP will not be able to cover this increase in demand or will become too high for the downturn in demand as well, so additional arrangements with your suppliers will have to be made.

• The change in demand needs to be such that a longer term solution has to be implemented by your company.


Supply Chain Response time

• Metrics 1

• Average time consistently achieved between the identification of the need for materials until the purchasing process starts.

• In most companies the identification of the need for materials is triggered either manually by a materials or purchasing planner, or by an IT system (MRP for example). It may then take a certain time to plan the ordering of the materials, get approvals etc. before the purchasing process starts.

2 31

Identification ofneed for materials

Prepare order for supplier

Start supplier cycle time

Receipt of materials from supplier

Receipt of materials at production facility

Source cycle time

Supplier cycle time


Supply Chain Response time

• Metrics 2– Average time consistently achieved to purchase an item from a supplier.

– This could be considered as your company’s purchasing cycle time, the time it takes whoever is responsible in your company for preparing purchase orders including all necessary activities as supplier selection, supplier scheduling etc. until the purchase order is sent to the supplier.

• Metrics 3- Average time consistently achieved between receiving materials from a

supplier until issuing these materials to the production facility.

– This time frame consists of your company’s receiving process, inbound logistics process, possibly storing in the warehouse first, and issuing the material to production, including all administrative activities involved. Remember that the average time it takes is needed, not the time that can be achieved for “rush orders”.


Example calculation

• Supply Chain Response time[1 + 3 + 60 + 2] = 66 days + Order fulfillment lead time = 66 + 30 days = 96 days

-Average time for metric 1 = 1 day

-Average time for metric 2 = 3 days


-Dollar value of total annually purchased materials = 20.000

-20 suppliers in total

-12 suppliers represent 95% of 20.000

-longest supplier cycle time among these 12 suppliers = 2 months

-Average time for metric 1 = 1 day



-Dollar value of total annually purchased materials = 20.000

-20 suppliers in total

-12 suppliers represent 95% of 20.000

-longest supplier cycle time among these 12 suppliers = 2 months


Production flexibility

• measures the flexibility and responsiveness of the production facilities within your company to a change in demand.

• This can be both a significant increase or decrease in demand.

• This metric consists of two parts: – upside flexibility and

– downside flexibility


Production flexibility• Upside flexibility is the ability of your company to respond to an unplanned 20%

sustainable increase in production. Similarly to supply chain response time, this is about a significant change in demand that cannot be solved by temporary measures like overtime and subcontracting.

• Downside flexibility is the ability of your company to respond to a reduction in orders from your customers where your company would not incur any cost or inventory penalties. Obviously, if the orders are cancelled too late for your company to be able to respond, your company will already have build the finished goods and incur inventory and perhaps obsolescence costs.

• Calculation• upside flexibility

• [number of days required to achieve an unplanned sustainable 20% increase in production] result = time (in days)

• downside flexibility

• [percentage of order reduction sustainable at 30 days prior to delivery with no inventory or cost penalties] result = percentage


Example calculation-Current production capacity utilisation is 90%

-It will take 3 months to finish a new factory and buy the necessary equipment to increase the capacity by at least 10% (because management had planned for a new factory 6 months ago).

-Hiring of new personnel will take 2 months

-95% of suppliers are able to increase their output by 20% in 3 months

-2 suppliers are not able to increase their output by 20%

-Sourcing for alternative suppliers takes 2 months, the supplier cycle time of the new suppliers is 2 months, so it takes 4 months before the additional 20% will arrive at the company

-It takes 2 months to increase the transportation capacity by the necessary 15 % (5% capacity left with the current utilisation rate).

-5% of all orders is in finished goods stock 30 days prior to delivery

-None of these products can be used for other customers

-90% of all orders is being produced 30 days prior to delivery

-From this 90%, 10% can be used for other customers

-5% of all orders is not in production yet 30 days prior to delivery

-The raw materials have been purchased for 70% of all orders 30 days prior to delivery


-From the other 30% that has not been purchased 30 days prior to delivery, 40% can be cancelled with the supplier without cost penalty

-Current production capacity utilisation is 90%

-It will take 3 months to finish a new factory and buy the necessary equipment to increase the capacity by at least 10% (because management had planned for a new factory 6 months ago).

-Hiring of new personnel will take 2 months

-95% of suppliers are able to increase their output by 20% in 3 months

-2 suppliers are not able to increase their output by 20%

-Sourcing for alternative suppliers takes 2 months, the supplier cycle time of the new suppliers is 2 months, so it takes 4 months before the additional 20% will arrive at the company

-It takes 2 months to increase the transportation capacity by the necessary 15 % (5% capacity left with the current utilisation rate).

-5% of all orders is in finished goods stock 30 days prior to delivery

-None of these products can be used for other customers

-90% of all orders is being produced 30 days prior to delivery


-5% of all orders is not in production yet 30 days prior to delivery

-The raw materials have been purchased for 70% of all orders 30 days prior to delivery


-From the other 30% that has not been purchased 30 days prior to delivery, 40% can be cancelled with the supplier without cost penalty


Example calculation

• upside flexibility– The longest time it takes to follow the 20%

increase in demand is the sourcing for new suppliers. This is the bottleneck and takes 4 months. (Production capacity can be increased in 3 months, extra staff can be hired in 2 months and transportation capacity can be extended in 2 months)

– [120 days]


Example calculation• downside flexibility

– For 5% of the orders, the finished goods have been produced already and they cannot be re-used without cost penalties.

– For 90% of the orders, production has started so there is WIP. Of this WIP, 10% can be re-used without cost penalties so this represents 9% (10% of 90%) of all orders.

– For 5% of the orders, production has not started yet so there is no WIP. Assuming the ratio of 70% materials purchased 30 days prior to delivery also applies to this 5% orders, 17.5% of this (70% * 25%) can be used for other customers. Another 12% (30% * 40%) can be cancelled with the suppliers, so in total 29.5 % (17.5+12) of these orders will not incur cost penalties. This represents 1.5% of the total orders (29.5 % * 5%).

– Thus in total 10.5% (0%+9%+1.5%) of the orders can be cancelled without incurring cost penalties.

– [10.5%]


Total SCM Cost• represents the sum of all costs your company incurs to run your integrated

supply chain.

• It is the sum of supply chain related costs for MIS, finance, planning, inventory carrying, material acquisition and order management

• The difficulty in calculating this high level metric is in finding the right data to be able to calculate the separate components of which it consists. In many companies, the total cost for MIS in a certain year will be known, but which part can be attributed to supply chain related activities and which part is attributed to other activities can be difficult. Similarly for finance and planning costs.


Example calculation

total revenues = 14.000.0001 MIS costs

-Total MIS costs were 100.000-40% of these MIS costs can be attributed to non-SCM related activities,

2 Finance costs-total finance costs are 200.000.-25% of these finance costs can be attributed to the mentioned SCM-related activities.

3 Planning costs-5 employees are responsible for supply chain activities-they spend 60% of their time on supply/demand planning-labour cost per employee is 10.000 per year-other overhead & consumables is 12.000 per year

4 Inventory carrying costs-annual inventory carrying costs for raw materials, WIP and finished goods = 100.000

total revenues = 14.000.0001 MIS costs

-Total MIS costs were 100.000-40% of these MIS costs can be attributed to non-SCM related activities,

2 Finance costs-total finance costs are 200.000.-25% of these finance costs can be attributed to the mentioned SCM-related activities.

3 Planning costs-5 employees are responsible for supply chain activities-they spend 60% of their time on supply/demand planning-labour cost per employee is 10.000 per year-other overhead & consumables is 12.000 per year

4 Inventory carrying costs-annual inventory carrying costs for raw materials, WIP and finished goods = 100.000


Example calculation5 Material acquisition costs-3 employees are responsible for materials management and planning-80% of their time is spent on supply chain activities-total inbound and freight duties = 50.000-10 employees work in the warehouse department-4 of them are responsible for inbound materials receiving and storing-they spend 90% of their time to the mentioned SCM-related activities-total overhead (for warehouse, material handling equipment etc.) is 100.000 per year.-40% of the overhead is attributed to inbound activities (20% to internal, 40% to outbound)-2 employees are responsible for incoming inspections, full time-2 persons in the engineering department and 3 persons in quality department are responsible for material process engineering activities-They spend 80% of their time on the mentioned SCM-related activities-Their consumables and overhead is 5.000

5 Material acquisition costs-3 employees are responsible for materials management and planning-80% of their time is spent on supply chain activities-total inbound and freight duties = 50.000-10 employees work in the warehouse department-4 of them are responsible for inbound materials receiving and storing-they spend 90% of their time to the mentioned SCM-related activities-total overhead (for warehouse, material handling equipment etc.) is 100.000 per year.-40% of the overhead is attributed to inbound activities (20% to internal, 40% to outbound)-2 employees are responsible for incoming inspections, full time-2 persons in the engineering department and 3 persons in quality department are responsible for material process engineering activities-They spend 80% of their time on the mentioned SCM-related activities-Their consumables and overhead is 5.000


Example calculation6 Order management costs

-5 employees in sales are responsible for creating customer orders and order entry, full time-total overhead & consumables of sales is 100.000 of which 2% can be attributed to creating customer orders-2 employees from sales and 2 employees from logistics department are responsible for order status tracking and shipping-they spend 80% of their time on the mentioned SCM-related order fulfillment activities-4 employees from the warehouse department are responsible for distribution and transportation-40% of the warehouse department overhead of 100.000 is attributed to these activities-total outbound freight and duties is 50.000-there is no installation required at the customer site-3 employees in finance are responsible for invoicing and accounts receivable, full time.-5% of the finance department overhead of 80.000 can be attributed to them

6 Order management costs-5 employees in sales are responsible for creating customer orders and order entry, full time-total overhead & consumables of sales is 100.000 of which 2% can be attributed to creating customer orders-2 employees from sales and 2 employees from logistics department are responsible for order status tracking and shipping-they spend 80% of their time on the mentioned SCM-related order fulfillment activities-4 employees from the warehouse department are responsible for distribution and transportation-40% of the warehouse department overhead of 100.000 is attributed to these activities-total outbound freight and duties is 50.000-there is no installation required at the customer site-3 employees in finance are responsible for invoicing and accounts receivable, full time.-5% of the finance department overhead of 80.000 can be attributed to them


The calculation

• MIS costs– [60% * 100.000] = 60.000

• Supply chain finance costs– [25% * 200.000] = 50.000

• Supply/demand planning costs– [60% * 3 *10.000 + 12.000] = 30.000

• Inventory carrying costs– 100.000


The calculation • Material acquisition costs

– [(80% * 3 * 10.000) + 50.000 + (90% * 4 *10.000 + 40% * 100.000) + (100% * 2 * 10.000) + (80% * 5 * 10.000 + 5.000)] = 215.000

• Order management costs– [(100% * 5 * 10.000 + 2% * 100.000) + (80% * 4 *

10.000) + (100% * 4 * 10.000 + 40% * 100.000) + 50.000 + (100% * 3 * 10.000 + 5% * 80.000)] = 248.000

• Total supply chain management costs:– [60.000 + 50.000 + 30.000 + 100.000 + 215.000

+ 248.000] / [14.000.000] = 5 %


Value-added productivity

• Value-Added Productivity is defined as the measurement of cost and productivity performance required to realize product revenue objectives.

• A higher number indicates a better use of resources in your company’s supply chain processes.

• Calculation

• [total gross annual sales - total annual material purchases] / total employment (in FTE) result = value (in $).

Documents

SCM Performance