Instructors’ Manual
Supply Chain Management
Text and Cases
Second Edition
Janat Shah
Indian Institute of Management Udaipur
Copyright © 2016 Pearson India Education Services Pvt. Ltd
Chapter 2
Supply Chain Strategy and Performance Measures
Learning Objectives
After reading this chapter, you will be able to answer the following questions:
What are the key supply chain performance measures?
How does supply chain performance affect financial performance?
Why is it necessary to ensure a god fit of the business strategy with the supply chain strategy?
What are the different dimensions of customer service?
What are the ways in which firm can simultaneously reduce supply chain costs and improve
customer service?
Teaching Note: In this chapter, the focus is on supply chain strategy and supply chain
performance measures. We discuss customer service and cost trade-offs and suggest ways by
which a firm can integrate business and supply chain strategies. We also look at the various
dimensions of customer service and use two of these, namely, order delivery time and
responsiveness, to characterize various types of supply chains. A framework to analyse the
impact of supply chain initiative on business performance has been provided. Finally, an
approach which can help firms in enhancing their supply chain performance on an ongoing basis
has been suggested.
Introduction
Teaching Note: As discussed in Chapter 1, supply chain management is still loosely defined in
literature and practice. Consequently, we do not have one commonly defined unique set of
measures for supply chain performance. The Supply-Chain Council is an independent, non-profit,
global corporation, interested in getting the industry to standardize supply chain terms so that
meaningful supply chain benchmarking can be carried out. It has developed the Supply chain
operations reference (SCOR) model, as the industry standard for supply chain management.
SCOR model and related performance are discussed in one part of chapter (Slide 14). However in
my view there are limitations to the SCOR performance measures. So, we start with board level
performance measures defined in terms of cost and service. Of course service in turn has multiple
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Chapter Two: Supply Chain Strategy and Performance Measure
dimensions. The cost versus service trade-off view of performance measures allows for a better
understanding of the supply chain strategy.
Encourage students to come up with various supply chain contexts where different dimensions
of service are more important vis-à-vis other dimensions of service. Bring in examples of Dell
computers (product variety), TVS Scooty (product variety), Domino’s Pizza (delivery reliability),
Safexpress (delivery lead time and delivery reliability).Cisco is good example of a firm which
was not responsive and ended up writing off huge inventory.
Use Slides 1–7 to start the discussion on Evolution of SC.
Our aim is always to arrange the material and machinery and to simplify the operations
so that practically no orders are necessary. Our finished inventory is in transit. So is
most of our raw material inventory. Our production cycle is about eighty-one hours from
the mine to the finished machine (automobile) in the freight car.
Ask the students to guess name of company and possibly a decade where automobile company
managed operations such that supply chain performance was so poor. Those who are familiar
with auto industry are likely to say that it refers to American and European automobile industry in
seventies and early eighties. Most students would identify the company as Toyota and the decade
as seventies or eighties. Students would be shocked to know that this data refers to Chrysler in
2006. Emphasize that for several reasons inefficacy can creep because of complacency or bad
management practices. Chrysler used to mange its supply chain in much better way but and did
not respond to signal from market places
The instructor can also use slide 19 to show Apple which was not in top 10 has emerged as
no.1 from 2009 onwards. Instructor can use slide 20 to discuss to rate supply chain
performance of firms.
Most students would know the difference between normal postal delivery and speed post
service offered by postal department. Speed post is reliable and fast but customer has to pay
higher cost. Instructor can show difference in cost for.
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Chapter Two: Supply Chain Strategy and Performance Measure
Customer Service and Cost Trade-offs (Slides 3–13)
Order Delivery Lead Time (Slides 10–11)
Push-Pull Boundary of the Supply Chain (Slide 11)
Supply Chain Responsiveness (Slides 12–13)
Delivery Reliability
Product Variety
Supply Chain Performance Measures:
Teaching Note: Encourage the students to visit the Web site [Link]
Benchmarking Supply Chain Performance Using Financial Data
Total length of the chain: The total length of the chain is arrived at by adding up the days of
inventory for raw materials, work in progress and finished goods. The firm that has the
minimum total length of the chain is said to have the best performance.
Supply chain inefficiency ratio: This ratio would be low for the firms with better
performance
Supply chain working capital productivity: The analysis of firms on this metric would also
be based on the levels of inventory, accounts receivable and accounts payable. Firms with
efficient supply chains would usually have high supply chain working capital productivity.
Calculating the Length of Various Stages of the Chain
The following formulae are used to calculate the length of the various stages in the supply chain.
DRM, DWIP, DFG = Days of raw material, work in process and finished goods respectively
DRM = RM * 365/ CRM, DWIP = SFG*365 / CP
DFG = FG * 365 / CS
Total Length of chain in days = DRM + DWIP + DFG
The duration of time taken by the material flow is captured by this measure. Firms like Dell
perform very well on this dimension.
Evaluating the Efficiency of Supply Chain Management
The internal supply chain inefficiency ratio is a measure of the efficiency of internal supply chain
management. To calculate this ration, we consider total inventory carrying costs and the
distribution costs to be components of the internal supply chain management costs. We calculate
internal supply chain inefficiency ratio as under:
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Chapter Two: Supply Chain Strategy and Performance Measure
SCC = DC + INV * ICC
SCI = SCC / NS
SCC = Supply chain management costs
ICC = Inventory-carrying cost
SCI = Supply chain inefficiency ratio
The inventory-carrying cost for most firms is estimated to be in the range of 0.15 to 0.25.
The methodology for estimating inventory carrying costs is presented in chapter 4. In the absence
of any data, one can work with inventory carrying cost of 0.2.
The supply chain inefficiency ratio (the lower the better) provides an insight into the internal
supply chain management efficiency of the firm. This measure is termed the supply chain
inefficiency ratio since the supply chain cost would be higher if there are inefficiencies in the
system. Firms with efficient supply chain systems would have relatively lower scores on this
performance measure.
Supply Chain Working Capital Productivity
The supply chain working capital productivity is calculated using the following formula:
SWC = INV +AR–AP
SWC = Supply chain working capital
SWCP = NS / ISWC
SWCP = supply chain working capital productivity
A firm can compare its own performance with that of its competitors and the industry
aggregate in order to ascertain where it stands in terms of supply chain performance. Using
benchmarking data, a firm can also map a supply chain profile which allows it to effectively
capture both the dimensions of time and cost in one diagram. Further, a firm can also compare its
own profile with that of its competitors in order to ascertain where it stands in terms of costs and
length of time in the chain.
Benchmarking is a useful tool for comparing the performance of competing firms so as to
identify areas of improvement for further detailed investigation which may lead to process
improvements. In this section, we have focussed on financial benchmarking which can help a
firm in comparing its supply chain performance with competitors using financial data. Once a
firm has identified performance gaps, it should try and do process benchmarking. Process
benchmarking focuses on the investigation of business processes of leading edge firms with of the
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Chapter Two: Supply Chain Strategy and Performance Measure
objective of identifying and observing the best practices from one or more benchmark firms.
Rather than re-inventing ideas, process benchmarking focuses on borrowing ideas from the best-
practice firms.
Linking Supply Chain and Business Performance
Enhancing Supply Chain Performance
Once a firm is on the efficiency frontier, any attempt at improving on one particular dimension
will force the firm to sacrifice performance on the other dimension. At this stage, the only way
for a firm to improve performance, on both fronts simultaneously, is by moving the entire
efficiency frontier curve in a downward direction. There are three different ways in which a firm
can shift its efficiency frontier downward: integration, optimization and reconfiguration.
Supply Chain Optimization
Initiatives involving improvement in the above practices can be achieved by using optimization
tools— these set of initiatives being known as supply chain optimization.
Supply Chain Integration
It has been found that there are significant wastages at all departmental and organizational
interfaces. But better intra- and inter-firm integration of supply chains helps to reduce waste in
the system and improve the overall efficiency.
Teaching Note: Instructor can use examples such as Toyota, Dabbawala and Ford Motor
Company
Supply Chain Reconfiguration
Summary
A firm must ensure a smooth fit between business strategy and supply chain strategy. As
a part of the business strategy, a firm decides the market segment in which it wants to
operate and the level of customer service it wants to offer.
Supply chain strategy results in costs that firms have to incur to provide the targeted level
of customer service. Firms must recognize the nature of trade-offs between customer
service and costs and arrive at an optimal decision on this front.
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Chapter Two: Supply Chain Strategy and Performance Measure
Firms will have to decide on the optimum level of customer service by targeting
performance levels across four dimensions of customer service: order delivery lead time,
responsiveness, delivery reliability and product variety.
Two of these customer service dimensions, namely order delivery time and
responsiveness help in characterizing supply chains. Depending on the order delivery
time or order penetration point, supply chains can be characterised as MTS, MTO or
CTO. Similarly, based on product characteristics, one can label a supply chain as either
an efficient chain or a responsive chain.
Firms must monitor their supply chain performance and benchmark the same against
competitors. Firms must also realize that not all supply chain measures are of equal
importance.
Any supply chain initiative planned by a firm must get translated into business
performance, since a firm is ultimately interested in improving its return on investment
(ROI). To this end, firms can use the strategic profit model framework to prioritize
various supply chain initiatives.
Though at any given point in time managers have to understand customer service versus
cost trade-offs, in the long run, firms have to find a way of increasing performance on
both the costs and the services fronts.
By working on supply chain innovations involving SC optimization, SC integration and
SC reconfiguration firms can improve performance on these fronts on a sustained basis.
Mini Project
Supply Chain Benchmarking Study
The objective of the study is to carry out a supply chain benchmarking study for a selected
industry.
Teaching note: This should be ideally a graded project/assignment where students should be
asked to calculate the three following performance measures for last three financial years for all
the companies in the set. They should carry out a field survey and write up their analysis and
submit it as a report. Two to three groups from the class should be asked to present their findings
to the class. This assignment helps them internalize whole lot of issues discussed in supply chain
strategy and performance measures in the introductory session. This assignment also makes them
active partners in the course. Our experience has been that students enjoy doing this assignment.
Depending on the time and group size, you can vary the product portfolio (number of SKUs) and
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Chapter Two: Supply Chain Strategy and Performance Measure
the number of retailers to be included in the study. Students should be encouraged to include
Subhiksha as one of the retailers in the sample and they can use learning from this field study
while discussing the Subhiksha case. While working on this assignment, students should be
encouraged to integrate their learning (distribution and retiling) from marketing courses. If you
include this field study in the course design, you should also include the Subhiksha case study in
the course curriculum. You can ask the students to choose from the following list of industries for
industry-level benchmarking study (any one industry for industry-level benchmarking):
1. Food Products
2. Beer and Alcohol
3. Tobacco Products
4. Cotton Textile
5. Synthetic Textile
6. Fertilizers
7. Automobile ancillaries
8. Automobiles
9. Alkalis
10. Inorganic Chemicals
11. Paints
12. Drugs and Pharmaceuticals
13. Soaps and Detergents
14. Cosmetics and Toiletries
15. Organic Chemicals
16. Petroleum Products
17. Tyres and Tubes
18. Non-electrical machinery
19. Electrical machinery
20. Electronics
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