SUPPLY CHAIN

MANAGEMENT

SUPPLY CHAIN
INTEGRATION

DRIVERS OF
PERFORMANCE

2023 | 2
1. A Framework for Structuring the Drivers.
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 QUESTIONS
1. What changed for General Mills compared to their normal
operations of 2019?
2. Do they have to modify their logistics strategy? Their
overall strategy?
3. Why did they have to absorb the costs?
4. Specify the metric that is related to logistics and
transportation that helps explaining the issues presented.
.
4
 STRATEGIC FIT​
Strategic fit
Competitive and supply chain strategies have aligned goals​

• A company may fail because of a lack of strategic fit or because

its processes and resources do not provide the capabilities to
execute the desired strategy.
 HOW IS STRATEGIC FIT ACHIEVED?
• Understanding the customer and supply chain uncertainty​

• Understanding the supply chain​

• Achieving strategic fit

A FRAMEWORK FOR STRUCTURING DRIVERS

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 WALMART
1. Competitive Strategy: Reliable, low-cost provider for a wide
variety of products.
2. Towards efficiency rather than responsiveness.

E R E

R E E
E 8
DRIVERS OF SUPPLY CHAIN PERFORMANCE

Facilities Inventory Transportation

The physical All raw materials, Moving inventory
locations in the work in process, from point to
supply chain and finished point in the
network where goods within a supply chain
product is stored, supply chain
assembled, or
fabricated
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DRIVERS OF SUPPLY CHAIN PERFORMANCE

Information Sourcing Pricing

Data and analysis Who will perform a How much a firm
concerning particular supply will charge for the
facilities, inventory, chain activity goods and services
transportation, that it makes
costs, prices, and available in the
customers supply chain
throughout the
supply chain
2. The role of each driver in creating strategic fit
Drivers of supply chain performance - Facilities.
 FACILITIES

Role in the supply Role in the

chain competitive strategy
• The “where” of the • Economies of scale
supply chain (efficiency priority)
• Manufacturing or • Larger number of
storage smaller facilities
(warehouses) (responsiveness
priority)

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 FACILITIES
• Components of facilities decisions
– Location
• Where a company will locate its facilities
• Centralize/decentralize, macroeconomic
factors, quality of workers, cost of workers
and facility, availability of infrastructure,
proximity to customers, location of other
facilities, tax effects
– Role
• Flexible, dedicated, or a combination
(Products)
• Product focus or a functional focus
(Fabrication, Assembly)
• Warehouses & DC (Storage or Cross-
docking)
 FACILITIES
• Components of facilities decisions
– Capacity
• A facility’s capacity to perform its intended function or functions
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less responsive
 FACILITIES
• Components of facilities decisions
– Facility-related metrics
• Capacity (Maximum amount that can process)
• Utilization (Fraction currently used)
• Processing/setup/down/idle time (Fraction of time)
• Production cost per unit
• Quality losses (Fraction of production lost)
• Theoretical flow/cycle time of production (Time to process a unit)
• Actual average flow/cycle time (Average actual time required to process)
 FACILITIES
• Overall trade-off: Responsiveness versus efficiency
– Increasing the number of facilities increases facility and inventory
costs but decreases transportation costs and reduces response time
– Increasing the flexibility or capacity of a facility increases facility costs
but decreases inventory costs and response time.

• What does it imply efficiency decisions?

Drivers of supply chain performance - Inventory.
 INVENTORY
• Role in the Supply Chain
– Mismatch between supply and demand
• Retail Store
• Steel Manufacturer
– Impacts assets, costs, responsiveness, material flow time
 INVENTORY
1. Material flow time, the time that elapses between the
point at which material enters the supply chain to the point
at which it exits
2. Throughput, the rate at which sales occur = D
3. Little’s law
I = DT
where
I = Inventory, T = Flow time, D = Throughput
 INVENTORY
• Amazon Warehouse: 100 000 books. (I) Inventory
• Sells 1000 units per day. (D) Throughput
• Flaw time (T) T = I / D
• T = 100000 / 1000 = 100 days.
 INVENTORY
• Role in Competitive Strategy
– Form, location, and quantity of inventory allow a supply chain to range from
being very low cost to very responsive
– Objective is to have right form, location, and quantity of inventory that provides
the right level of responsiveness at the lowest possible cost
 COMPONENTS OF INVENTORY DECISIONS
1. Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Function of lot size decisions
– How much and how often
– 10 Truckloads per Month vs 1 Truckload per 3 days
2. Safety inventory
– Inventory held in case demand exceeds expectations
– Costs of carrying too much inventory versus cost of losing sales

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 COMPONENTS OF INVENTORY DECISIONS
3. Seasonal inventory
– Inventory built up to counter predictable variability
in demand
– Cost of carrying additional inventory versus cost of
flexible production.
4. Level of product availability
– The fraction of demand that is served on time from
product held in inventory
– Trade off between customer service and cost
 COMPONENTS OF INVENTORY DECISIONS
• Inventory-related metrics
– Cash-to-cash cycle time. ( Average time for cash from cost to
revenue)
– Average inventory (Average amount of inventory)
– Inventory turns (AvInv / COGS or Sales)
– Products with more than a specified number of days of inventor
(Oversupply or very slow movers)
– Average replenishment batch size (Amount per Replenishment
Order)
 COMPONENTS OF INVENTORY DECISIONS
• Inventory-related metrics
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory
 INVENTORY
• Overall trade-off: Responsiveness versus efficiency
– Increasing inventory generally makes the supply chain more
responsive
– A higher level of inventory facilitates a reduction in production and
transportation costs because of improved economies of scale
– Inventory holding costs increase
Drivers of supply chain performance - Transportation.
 TRANSPORTATION
• Role in the Supply Chain
– Moves the product between stages in
the supply chain
– Faster transportation allows greater
responsiveness but lower efficiency
– Also affects inventory and facilities
 TRANSPORTATION
• Role in the Competitive Strategy
– Allows a firm to adjust the location of its facilities and inventory to find the right
balance between responsiveness and efficiency
 TRANSPORTATION
• Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes
• From a supply source direct or with intermediate consolidation points.
• One or multiple supply or demand points in a single run
 TRANSPORTATION
• Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping, and flexibility
 TRANSPORTATION
• Transportation-related metrics
• Average inbound transportation cost (Cost as % of Sales or COGS)
• Average income shipment size (Units or US$ per shipment)
• Average inbound transportation cost per shipment (Tx Cost per of each incoming delivery)
• Average outbound transportation cost (Cost as a % of Sales of sending product to a
customer)
• Average outbound shipment size (Units or US$ per shipment)
• Average outbound transportation cost per shipment (Cost of each outgoing delivery)
• Fraction transported by mode (Fraction of transportation using each mode of
transportation)
 TRANSPORTATION
• Overall trade-off: Responsiveness versus efficiency
– The cost of transporting a given product (efficiency) and the speed with
which that product is transported (responsiveness)
– Using fast modes of transport raises responsiveness and transportation
cost but lowers the inventory holding cost
Drivers of supply chain performance - Information.
 INFORMATION
• Role in the Supply Chain
– Improve the utilization of supply
chain assets and the coordination
of supply chain flows to increase
responsiveness and reduce cost
– Information is a key driver that can
be used to provide higher
responsiveness while
simultaneously improving efficiency
 INFORMATION
• Role in the Competitive Strategy
– Right information can help a supply
chain better meet customer needs at
lower cost
– Improves visibility of transactions and
coordination of decisions across the
supply chain
– Share the minimum amount of
information required to achieve
coordination
 COMPONENTS OF INFORMATION DECISIONS
1. Push versus Pull
– Different information requirements and uses. Push systems start with
forecast. Pull Systems start with actual demand.
2. Coordination and information sharing
– Supply chain coordination, all stages of a supply chain work toward
the objective of maximizing total supply chain profitability based on
shared information.
3. Sales and operations planning (S&OP)
– The process of creating an overall supply plan (production and
inventories) to meet the anticipated level of demand (sales)
 COMPONENTS OF INFORMATION DECISIONS
• Enabling technologies
– Electronic data interchange (EDI)
– The Internet
– Enterprise resource planning (ERP) systems
– Supply chain management (SCM) software
– Radio frequency identification (RFID)
 COMPONENTS OF INFORMATION DECISIONS
• Information-related metrics
– Forecast horizon
– Frequency update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability.
 INFORMATION
• Overall trade-off: Complexity versus value
– Good information helps a firm improve both efficiency and
responsiveness
– More information is not always better
– More information increases complexity and cost of both
infrastructure and analysis exponentially while marginal value
diminishes
– Evaluate the minimum information required to accomplish the
desired objectives.
Drivers of supply chain performance - Sourcing.
 SOURCING
• Role in the Supply Chain
– Sourcing is the set of business processes required to purchase goods
and services.
– First define whether the task will be performed by a responsive or
efficient source.
– Will tasks be performed by a source internal to the company or a
third party
– Globalization creates many more sourcing options with both
considerable opportunity and potential risk
 SOURCING
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they affect the level of efficiency
and responsiveness in a supply chain
– Outsource to responsive third parties if it is too expensive to develop
their own
– Keep responsive process in-house to maintain control
 COMPONENTS OF SOURCING DECISIONS
1. In-house or outsource
– Perform a task in-house or outsource it to a third party. Better to
outsource if the growth in surplus is significant with little additional
risk.
2. Supplier selection
– Number of suppliers, evaluation and selection criteria, direct
negotiations or auction
3. Procurement
– The supplier sends product in response to customer orders.
 COMPONENTS OF SOURCING DECISIONS
1. Sourcing-related metrics
– Days payable outstanding (#Days between when a task is completed and when it was
paid)
– Average purchase price
– Range of purchase price (Fluctuation in purchase price)
– Average purchase quantity (Amount purchased per order)
– Supply quality (Quality of product)
– Supply lead time (#Days between when an order is placed and when the product arrives)
– Fraction of on-time deliveries
– Supplier reliability (Variability of <supplier´s lead time and the delivered quantity)
 SOURCING
1. Overall trade-off: Increase the supply chain surplus
– Increase the size of the total surplus to be shared across the supply
chain
– Impact of sourcing on sales, service, production costs, inventory
costs, transportation costs, and information cost
– Outsource if it raises the supply chain surplus more than the firm can
on its own
– Keep function in-house if the third party cannot increase the supply
chain surplus or if the outsourcing risk is significant
Drivers of supply chain performance - Pricing.
 PRICING
• Role in the Supply Chain
– Pricing determines the amount to charge customers for
goods and services
– Affects the supply chain level of responsiveness required and
the demand profile the supply chain attempts to serve.
– Pricing strategies can be used to match demand and supply
 PRICING
• Role in the Competitive Strategy
– Firms can utilize optimal pricing strategies to improve efficiency and
responsiveness
– Pricing strategies vary to meet different customer responsiveness
requirements
 COMPONENTS OF PRICING DECISIONS
• Pricing and economies of scale
– The provider of the activity must decide how to price it appropriately
to reflect these economies of scale
• Everyday low pricing versus high-low pricing
– Different pricing strategies lead to different demand profiles that the
supply chain must serve
 COMPONENTS OF PRICING DECISIONS
• Fixed price versus menu pricing
– If marginal supply chain costs or the value to the customer vary
significantly along some attribute, it is often effective to have a
pricing menu
– Can lead to customer behavior that has a negative impact on profits
 COMPONENTS OF PRICING DECISIONS
• Pricing-related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales
 PRICING

• Overall trade-off: Increase firm profits

– Understand of the cost structure of performing a supply chain activity
and the value this activity brings to the supply chain
– Strategy may support efficiency in the supply chain, lower supply
chain costs, defend market share, or steal market share
– Differential pricing may be used to attract customers with varying
needs
– Strategy should help either increase revenues or shrink costs or
preferably both
4. Financial measures of performance
 FINANCIAL MEASURES OF PERFORMANCE
• Increasing the surplus allows for a growth of supply chain
profitability, which facilitates an improvement in the financial
performance of each member of the supply chain.
 FINANCIAL MEASURES OF PERFORMANCE
1. Return on equity (ROE) is return on investment made by a
firm’s shareholders
• ROE = Net Income / Average Shareholder Equity

2. Return on Assets (ROA) is return earned on each dollar

invested by the firm in assets.
• ROE = Earnings before Interest / Average Total Assets.
 FINANCIAL MEASURES OF PERFORMANCE
3. Return on Financial Leverage (ROE) captures the amount of
ROE that can be attributed to financial leverage (such as
accounts payable and debt)
ROE = ROE – ROA
4. Accounts Payable Turnover, an important ratio that defines
financial leverage.
APT = Cost of Goods Sold / Accounts Payable

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 FINANCIAL MEASURES OF PERFORMANCE
5. Key Components of Asset Turnover.
– Accounts Receivable Turnover
– Inventory Turnover
– Property, plant and equipment turnover

6. Cash-to-cash (C2C) cycle, which roughly measures the aver- age amount of time
from when cash enters the process as cost to when it returns as collected
revenue.
QUESTIONS?
When and how these drivers and metrics can be used based on the
framework provided?