Supply Chain Drivers and
Metrics
Prepared by
Afrista Birjis
Financial Measures Of Performance
•From a shareholder perspective, return on equity (ROE) is
the main summary measure of a firm’s performance.
Financial Measures Of Performance
•Return on assets (ROA) measures the return earned on
each dollar invested by the firm in assets.
Financial Data for Amazon
Financial Measures Of Performance
•An important ratio that defines financial leverage is
accounts payable turnover (APT).
Financial Measures Of Performance
•ROA can be written as the product of two ratios—profit
margin and asset turnover.
Financial Measures Of Performance
•Cash-to-cash (C2C) cycle roughly measures the average
amount time from when cash enters the process as cost to
when it returns as collected revenue
Drivers of Supply Chain Performance
Facilities
The physical locations in the supply chain network where
product is stored, assembled, or fabricated.
Inventory
All raw materials, work in process, and finished goods
within a supply chain
Transportation
Moving inventory from point to point in the supply chain.
Drivers of Supply Chain Performance
Information
Data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the
supply chain.
Sourcing
Who will perform a particular supply chain activity.
Pricing
How much a firm will charge for the goods and services that
it makes available in the supply chain.
A Framework for Structuring Drivers
Facilities
Role in the supply chain
•The “where” of the supply chain
•Manufacturing or storage (warehouses)
Role in the competitive strategy
•Economies of scale (efficiency priority)
•Larger number of smaller facilities
(responsiveness priority)
Facilities
Components of facilities decisions
Role
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus
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.
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
• Utilization
• Processing/setup/down/idle time
• Production cost per unit
• Quality losses
• Theoretical flow/cycle time of production
• Actual average flow/cycle time
Facilities
Overall trade-off: Responsiveness versus
efficiency
•Cost of the number, location, capacity, and type of
facilities (efficiency) and the level of responsiveness
•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
Inventory
Role in the supply chain
•Mismatch between supply and demand
•Satisfy demand
•Exploit economies of scale
•Impacts assets, costs, responsiveness, material flow time
•Material flow time: The time that elapses between the point
at which material enters the supply chain to the point at
which it exits
•Throughput, the rate at which sales occur
•Little’s law
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
Cycle inventory
•Average amount of inventory used to satisfy
demand between shipments
•Function of lot size decisions
Safety inventory
•Costs of carrying too much inventory versus cost of
losing sales
•Inventory held in case demand exceeds
expectations
Components of Inventory Decisions
Seasonal inventory
•Inventory built up to counter predictable variability
in demand
•Cost of carrying additional inventory versus cost of
flexible production
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 inventory
•Inventory turns
•Products with more than a specified number of days of
inventory
•Average replenishment batch size
•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
Transportation
Role in the supply chain
•Moves the product between stages in the supply chain
•Impact on responsiveness and efficiency
•Faster transportation allows greater responsiveness but
lower efficiency
•Also affects inventory and facilities
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
•Direct or with intermediate consolidation points
•One or multiple supply or demand points in a single run
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
•Average income shipment size
•Average inbound transportation cost per shipment
•Average outbound transportation cost
•Average outbound shipment size
•Average outbound transportation cost per shipment
•Fraction transported by mode
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
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
•Push versus pull
Different information requirements and uses
•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
•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)
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
Sourcing
Role in the supply Chain
•Set of business processes required to purchase goods and
services
•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
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
In-house or outsource
Perform a task in-house or outsource it to a third party
Supplier selection
Number of suppliers, evaluation and selection criteria, direct
negotiations or auction
Procurement
The supplier sends product in response to customer orders
Components of Sourcing Decisions
Sourcing-related metrics
•Days payable outstanding
•Average purchase price
•Range of purchase price
•Average purchase quantity
•Supply quality
•Supply lead time
•Fraction of on-time deliveries
•Supplier reliability
Sourcing
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
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
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
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