DRIVERS OF SUPPLY CHAIN PERFORMANCE

Prepared By: Group 2

Supply Chain

A system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.

Supply Chain Drivers

Logistical1. Inventory2. Transportation3. Facilities

Cross functional1. Information2. Sourcing3. Pricing

Framework for structuring drivers

a• Company strategy

b• Supply chain strategy

c• Drivers

Supply chain strategy & Drivers

Responsiveness Efficiency

INVENTORY

INVENTORY

WHAT -Raw materials, work in process, finished goods, and supplies required for creation of a company's goods and services. The number of units and/or value of the stock of goods held by a company.

WHY- Exists because of mismatch in demand and supply and to support a firm’s competitive strategy.

IMPACT – On material flow time.

Inventory : Role in Supply Chain

Trade off ??? Responsiveness Vs Efficiency as a

strategic competitive priority. inventory responsiveness cost

inventory cost

responsiveness

Role in competitive strategy If responsiveness is a strategic

competitive priority –locate larger amount of inventory closer to customers.

If cost is more important , inventory can be reduced to gain efficiency .

Inventory in different DomainsManufacturing : From Financial

perspective: The largest asset

often seen on manufacturer’s sheet. Management

emphasis – Keep inventories down so that cost is not much consumed.

Wholesale : Accurate records are

needed to evaluate product

popularity

Retail : Keep the track of

“turns”.

Components of inventory Decisions

Transit Stock / Pipeline inventory Cycle stock Safety Stock Anticipation Inventory Hedge inventory Seasonal Inventory

Inventory Drivers

Why Do we need Drivers for Inventory ??? Inventory drivers are consequences of

certain supply & demand characteristics like :

Product desirability Responsiveness Supplying complete & accurate information Customer collaboration Getting visibility as much as we can from

our customers Defining drivers brings to light

optimism to improve processes and offer savings potential.

Drivers…

Demand Variation/ forecast accuracy/demand planning

Supply Planning Demand & Supply synchronization Service levels capacity Lot sizes/order sizes Lead times Speculation Customer service level segmentation Network Design Data Accuracy

Inventory Related Metrics Average inventory Products with more than a specified no

of days of inventory Average replenishment batch size Average safety inventory Seasonal inventory Fill rate Fraction of time out of stock

TRANSPORTATION

TRANSPORTATION

Transportation moves the product between different locations in a supply chain

Transportation is prominent in a company's competitive strategy

Faster transportation makes supply chain more responsive

Role in the competitive strategy If company targets a customer who demands

a very high level of responsiveness and that customer is willing to pay for this responsiveness, then company can make transportation as one driver to make supply chain more responsive.

Opposite holds true as well. If the customers are concerned only with money not responsiveness then company can lower the cost of product. Both depend on company’s competitive strategy.

Components of transport decisions

Design of transportation network Choice of mode of transportation Load Factor

Metrics

Average inbound transportation cost: cost of bringing product into a facility as percentage of sales or cost of goods sold.

Average incoming shipment size: average number of units or dollars in each incoming shipment at a facility.

Average inbound transportation cost per shipment: average transportation cost of each incoming delivery.

Average outbound transportation cost: average number of units or dollars in each outbound shipment at a facility.

Fraction transported by mode: measures fraction of transportation using each mode of transportation. This enables analysis on which all modes are overused and underused.

Leveraging Transport Costs Load Factor Fuel Equipment Drivers Distributed Systems and Network

Responsiveness v/s Efficiency

The fundamental trade-off for transportation is cost (efficiency) versus speed (responsiveness). A transportation cost analysis must consider the effects of speed on inventory required.

Use of fast modes of transport raises responsiveness and transportation cost but lowers inventory holding cost.

FACILITIES

FACILITIES

Facilities include all locations in the supply chain to store, assemble, or fabricate inventory.

Two major types of Facilities are:

Manufacture/Repair SitesStorage (warehouse, distribution) Sites

Role in Supply Chain

If we think of inventory as what is being passed along the supply chain and transportation is how it is passed along, then facilities are the where of the supply chain.

Facilities include all locations in the supply chain to store, assemble, or fabricate inventory.

Role in Competitive Strategy Facilities are a key driver of supply

chain performance.

Factors such as location, capacity, manufacture/repair methodology, and warehousing methodology also affect supply chain performance by way of the facilities component.

Components of facilities decisions Decisions regarding facilities are crucial

part of supply chain.. The components that the companies

must analyze are:RoleLocationCapacity

Facility Related Metrics

Following are some facility related metrics: Capacity Utilization Theoretical flow/cycle time of production Actual average flow/cycle time Flow time efficiency Product Variety Volume Contribution of top 20% SKU’s and

customers Processing/setup/down/idle time Average production batch size Production service level

Responsiveness vs. Efficiency

The fundamental trade off that managers face when making facilities decisions is between the cost of the number, location and type of facility & the level of responsiveness they provide to the company’s customers.

Facilities Driver

INFORMATION

INFORMATION

It consists of data and analysis concerning facilities, inventory and transportation.

It is the biggest driver of performance. Presents management with the

opportunity to make supply chain more responsive and efficient.

Role in the supply chain

Deeply affects every part of supply chain.

Serves as a connection between different stages of supply chain.

Also crucial to daily operations of each stage in a supply chain.

Role in competitive strategy

Impact of IT in Supply Chain Management.

Helps in taking key decisions which help in reducing cost and improving responsiveness.

Components of Information Decisions

Push versus Pull

Coordination and Information Sharing

Forecast and aggregate planning

Information related metrics Forecast horizon Frequency of update Forecast Error Seasonal factors Variance from plan Ratio of demand variability to order

availability

Trade Off: Responsiveness VS

efficiency Improves Responsiveness and

efficiency. Improves performance of other

drivers. Accurate information can help a firm

improve efficiency by decreasing inventory and transportation costs.

Improves responsiveness by matching supply and demand.

Impact on E-commerce

Cost Efficiency Changes in the distribution system Customer orientation Shipment Tracking Shipping Notice Shipping Documentation and labeling Online Shipping inquiry

CASE STUDY

"People think we got big by putting big stores in small towns. Really, we got big by replacing inventory with information."

Sam Walton, Founder of Wal-Mart

BACKGROUNDSam Walton founded the company in 1962

• First store opened in Rogers, Arkansas

Walmart is the largest grocery retailer in U.S.• It is headquartered in Bentonville,

Arkansas(U.S.)In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business.• The company employs 2.2 million

associates worldwide and serves 200 million customers each week at more than 10,000 stores in 27 countries.

Traditional Supply Chain Model

Walmart’s simplified Supply Chain

Key Factors• Pricing• Logistics

• Inventory• Transportation• Facilities• Cross Docking

• Information

Pricing

Walmart practices every day low pricing (EDLP) for its products.

Customer demand stays steady and does not fluctuate with price variations.

Inventory

Walmart set up its own satellite communication system in 1983.

Allows the management to monitor each and every activity at any point of day.

Allows stores to manage their own stock. The order management and store

replenishment of goods are entirely executed with the help of computers through the Point-of-Sales (POS) system.

Transportation

Involves fast and responsive transportation system.

More than 7000 company owned trucks services the distribution centers.

Shipping of goods to stores within 2 days.

Use idea of Back-Hauling

Facilities

There are 140 Walmart distribution centres within US.

Walmart’s distribution centers by Facility type:

Regional General Merchandise Distribution Centers

Import/Redistribution Centers Fashion Distribution Centers Full line Grocery and perishables Food

Distribution Centers Speciality Distribution Centers Sam’s Club Distribution Centers

Cross Docking

Finished goods are directly picked up from the manufacturing site of supplier, sorted out and directly supplied to the customers.

Reduces handling and storage of finished goods

System shifted from “supply chain” to “demand chain”

Information

Use of bar codes and RFID to label different products, shelves and bins in the center.

Use of handheld computer (Magic Wand)

Use of computers to track movement of goods and stock levels.

Order management and store replenishment of goods is entirely executed with the help of computers through Point of Sale (POS) system.

Use of centralized Inventory database

Case Study: Tata Nano

Tata Nano

Tata Nano

Tata Nano

Tata Nano

The secret of designing the Tata Nano is a concept called Target Pricing or Target Costing.

Once the features and functions are finalized target costs are assigned to each and every component/system – transmission system, instruments, engine, body, interiors, electrical systems. The sub-teams then design the components/systems within the target cost. They look at every bolt and nut and keep driving cost out of the components/ system.

Tata Nano

Cost and waste is driven out of supply chains by reducing inventory, eliminating waiting times and delays, increasing utilization of warehouse and trucks, optimizing location of warehouses and plants, drawing up the optimum transportation network, utilizing backhauls etc.

Reducing inventory reduces the working capital cost , reduces warehousing costs and obsolescence costs. To reduce inventory, demand fluctuation will have to be reduced, reliability of inventory replenishment will have to increased, Inventory Record Accuracy will have to be above ~95% and supply chain length will have to be reduced.

Reducing supply chain times reduces inventory and increases responsiveness. To eliminate waiting times and delays the complete supply chain process will have to be mapped. For this a lead time map is used. Delays like waiting for loading or unloading and waiting for documents can be minimized. Transit times can be reduced [ not by fast and rash driving ] but by using AC cabins and double-drivers. Also, backhauls are a way to reduce costs.

Tata Nano

Truck utilization can be improved by using truck optimization softwares. Similarly, warehouse space can be utilized more efficiently by increasing storage height- by increasing the rack heights or having a mezzanine.

On a strategic level, Supply Chain Network Design - locating plants, contract manufacturers, Distribution Centres and warehouses- is important because 70% of the cost of a supply chain is fixed at the design stage.

So while Tata Nano has created a breakthrough in car manufacture by reducing the cost of a car significantly, it has led me to think about doing a Tata Nano with my supply chain.

Conclusion

Lower product costs Reduced inventory carrying costs Improved in-store variety and selection Highly competitive pricing for the

consumer

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