Supply Chain ManagementForce or Farce?K.L.Bhaskaran*

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*External EnvironmentGlobal competitionEvolution of Info.TechnologyShorter product life cycle Impatient customers Product variety Changing customer requirements Customer expectations Quality Price Delivery After Sales serviceReliability, Responsiveness and Agility have become key drivers

*Global BusinessA Canadian meets his Indonesian counterpart in a French restaurant, located in London, owned by an Indian. One is dressed in an Italian suit, wearing a Brazilian pair of shoes while other wears Hong Kong suit and Thai shoes. Shirts are made of Egyptian Cotton. Business is discussed over a cup of coffee from Ivory Coast accompanied by Syrian pastries and ends with a Cuban cigar.

Fluffy, white idlis- Theres more to it than riceName of the company: Rice Land Agro Food Pvt.LtdBusiness: Processing of Paddy into RiceLocation: Manachanallur,near TrichyLabourers : BiharMilling Machine: Brazil Driers: ThailandSoRtex Z+ : From London,based on German Technolgy

Quality is controlled on line from London

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Born Local

Business Global*

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*Why is this happening?Indian economy has opened upDeveloped country markets have saturatedCustomer expectations are highCustomer segmentation is more refined

Too many manufacturers

Chasing limited customers*

Quality is no more a differentiatorBrand?Availability?NicheProduct?Delivery?Price?Service?*

Niche ProductBrand? Easy Availability?Quick After Sales ServiceWhat does customer want?State of the ArtProductsGood Payment terms*

*Customer NeedsRight product, at the right quality, at the right time, with the right packing, at the right price , backed up by right service.

A supply chain is designed

to address these requirements*

*SupplierBasic Supply ChainManufacturerCustomer Raw Materials Components Supply Items Electricity Janitorial Services Manufacturer of Products

Service providersRetailerWholesalerDistributorEnd Customer(Consumer)

Tier 2 SupplierRaw MaterialsTier 2 SupplierComponentsTier 2 SupplierServicesTier 2 SupplierTier 2 Supplier

Tier 2 Supplier

Tier 1SupplierTier 1SupplierTier 1SupplierManufacturerDistributorDistributorRetailerRetailerRetailerRetailerExpanded Supply Chain*

Supplier

Information FlowReverse Logistics FlowManufacturerCustomer Primary Product Flow Primary Cash Flow Orient towards customer*

Primary Product FlowRaw materials, components, subassemblies, in plant components, finished products, services, supply itemsInformation FlowPrimary Cash FlowPayments to suppliers, payments from customers,Return of cash against customer returns, Receiptof payments from suppliers against rejections Reverse Product FlowRaw Material, Component Supply status, Production Status, Delivery status, Order status, sales literature, invoice, etcReturns for repair, replacement, recycling, disposal, return of rejected items to suppliers*

*An exampleSuppliersSupplierSupplierProducerRetailerConsumerGas Manufacturer AgriculturistsManufacturersGas SuppliersUtilitiesMilk SupplierProvision SuppliersUtilitieschefWaitersConsumersA Restaurant

*Beware!!!A Supply Chain is NOT

ManufacturingLogisticsPurchasingSupplies Or any combination of the above

* Identifying Supply ChainsSumming up

Supply chainsStretch from raw materials to consumersInclude various entities and processesRun in reverse as well as toward end userContain cash, product, and information flowsConnect to outside stakeholders.

*A simple definitionSupply Chain begins with the Customer [order placement ] and ends with the customer [ delivery ] In some cases, after sales service is a part of supply chain

*DEFINITION OF SCMIt is a process orientated, integrated approach to procuring, producing and delivering products and services to the customers. Integrated SCM has a broad scope and and it includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers management of material, information and funds flows.

What Is Supply Chain Management?Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.*

Two Other Formal DefinitionsThe design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customerInstitute for Supply ManagementManaging supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customerThe Supply Chain Council*

* SC Management includes Forecasting Demand driven Sourcing and Procurement Production Scheduling Order Processing Inventory Management Transportation Warehousing Customer Service Collection of money Location A proper information system

*SCM DRIVERSCostInventoryLogisticsInformationCycle TimeAfter Sales ServiceResponsivenessReliability

*Successful SCM excels inCost ReductionImproving reliabilityImproving responsivenessImproving agilityImproving asset utilization

*SUPPLY CHAINA well designed supply chain addresses - Cycle time - Cost Control - Lead time at all levels - Inventory Planning, build up and disposal - Information across the chain - Products and material flow - Process considerations - Logistics - Cash Flow

* Evolution of Supply Chain ManagementStages of SCM evolution

1: Baseline2: Functional Integration3: Internal Integration4: ExternalIntegrationUnplanned activityPep talks, threatsNo teamworkLittle information exchangeMostly manual opsEfficiency improvement in owned facilitiesNew low-price purchasing strategiesSome hard-skills training, job enhancementEnhanced marketing and forecastingNo coordination of initiativesNew focus on processInternal process integrationERPIntranets, etc., across functionsDesign teamsEnhanced warehousing, logistics, forecasting, etc.Process integration across entity boundariesEventual electronic information connections among multiple partnersERP-to-ERP linksE-commerceSupply chain vs. supply chain competition

*SupplierProducercustomer Stakeholder ValueWho are the stakeholders?

Stakeholders ValueFirmEnd customerInvestorsLendersSocietyGovernmentEmployeesCompetition Quality, Affordability, Availability and Service Profitability, Growth, Market Share, Image Return on investment, timely communication, growth Interest Stability and return of Principal Job creation, Clean Environment, Development Tax, Environment, Job creation, Abiding by LawCareer Path, Security, Salary,good working conditionMakes or mars your business*

Creating Value through SC ManagementSupply chain values Financial valueCustomer value

Social value (for community, environment, etc.)*

Creating Value through SC ManagementFinancial valuePotentially self-defeating tradeoffs (e.g., cost cutting without net gain)It takes money to make money (such as investments in upgrades)Distribution of net gains (with all stakeholders in mind)*

Creating Value through SC ManagementCustomer value

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Creating Value through SC ManagementSocial value*

Creating Value through SC ManagementAnswer: aDiscussion questionWhich of the following is most likely to increase long-term net financial value for a supply chain firm?Reinvesting profits in research and infrastructure upgradesChanneling SC cost savings into end-userdiscountsUse of market leverage to force down suppliercostsLarge-scale layoffs and plant closings*

*VelocityFive Vs of Supply ChainVisibilityVariabilityVarietyVolume Increase SpeedWider Visibility Better Control over operations Tune to the Market Demand Tune to the Market Demand

*Domestic Global Operations Standard ProductsMass CustomizationWork OrdersFlow ProductionVertical IntegrationOutsourcingDisconnectedNetworked Forecast DrivenCustomer ResponseTransformation to Best Practices

*Business Transformation From To Inward Centric Customer Centric Push to Pull Inventory Information Transactions Relationship From Functions Processes Stand Alone Network

* *RisksKnownUnknownUncontrollableControllable Natural disastersPolitical RisksEpidemicsTerrorismFuel PriceCurrency FluctuationPort delaysMarket ChangesSupplier PerformanceExecution Issues

Functional and Process PerspectiveORDER - TO - DELIVERY PROCESSSUPPLY CHAIN PROCESSProcurementDistributionManufacturingLogistics*

Processes*P2P3P4PnP1SuppliersPurchaseMfgSalesCustomersDiscrete Processes

ProcessesSupply chain processes

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SCOR ProcessesFive SCOR processes

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* Balance resources with requirements and establish and communicate plans for the whole supply chain, including return and the execution processes of Source, make and deliverManagement of business rules, SC performance, Data collection, inventory, capital assets,transportation,planning configuration, regulatory requirements and compliance and supply chain riskAlign the supply chain plan with finance planPLANScope of SCOR Processes

* Schedule deliveries, receive, verify and transfer product. Authorize supplier paymentIdentify and select supplier sourcesManage business rules, assess supplier performance and maintain dataManage inventory, capital assets, incoming product, supplier network, import/export requirements, supplier agreements and supply chain risks

SOURCEScope of SCOR Processes

* Schedule production activities, issue product, produce and test, package,stage product and release product to deliver. Waste disposal processesFinalize engineering for Engineer to order productsManage rules, performance, data, in process inventory, equipment and facilities, transportation, production network, regulatory compliance for production. And SCM risk

MAKEScope of Processes

* All order management steps from processing customer inquiries and quotes to routing shipments and selecting carriersWarehouse management from receiving and picking products to load and ship productsInvoicing customerManage delivery business rules,performance, information, finished product inventories, capital assets,transportation,PLM, Impex requirements, and SCM risks

DELIVERScope of SCOR Processes

* All return Defective product steps from source-Identify product condition,disposition product, request product return authorization, schedule product shipment and return defective product and deliver etc.Same for all returns for maintenance and excess supply returnsManage return business rules,performance, data collection, return inventory,capital assets,transportation,network configuration,regulatory requirements and compliance and supply chain return risk.

RETURNScope of Processes

SCOR Process Reference Model Standard Descriptions of management processes A framework of relations among standard processes Standard metrics to measure performance Management practices that produce the best in class performance Standard alignment to features and functionality

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SCOR ProcessesCapture the complex management process in standard process reference modelCan be implemented purposefullyDescribed unambiguouslyMeasured, managed and controlledTuned and retuned to a specific purpose

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*Why Measure?To determine how effectively and efficiently the process or service satisfies the customer.

To identify improvement opportunities.

To make decisions based on FACT and DATA

If you dont know where youre going, youre probably not going to get there.

DataInformationKnowledgeWisdom*

What is Metrics? Measure Everything That Results In Customer Satisfaction

*Metrics

*What do you measure?Individual PerformanceDepartments PerformanceCompanys performanceBased on Customer Expectations and Internal Requirements

*Objectives of Metrics DesignTo check the deviation from the goals and analyzing the same.To identify strong and weak areas and take corrective action.To revisit the goals based on performance.For performance evaluation of individuals.To provide guidance for future investments.To see if trends exist and take proactive action.To act as an enabler for process review and organizational restructuring.To evaluate quality of processes

*S.M.A.R.T GoalsS- Specific

M- Measurable

A- Agreed upon, Attainable

R Relevant

T - Timely

Supply Chain MetricsCannot improve what cant be measuredCant measure all possible objectivesChoose reasonable number of KPIs

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Supply Chain MetricsKey Performance Indicators*

*Level 1 SCOR metricsSupply-Chain Council (SCC) modelNOT tied to plan, source, make, deliver, return processesCross-industry standard for SCMFormulas included for each attributeDozens of firms contribute to metrics Supply Chain Performance Metrics

Supply Chain Performance MetricsBalanced scorecard*

Balanced Scorecard (BSC)*

GoalMeasureTargetActualMeet delivery promises.Supplier XYZ delivery performance99%98%

GoalMeasureTargetActualXYZ can survive downturn.Downside SC adaptability20% fewer orders15% fewer orders

GoalMeasureTargetActualSupplier sustain-ability.Supplier XYZ sustainability conformance100%100%

GoalMeasureTargetActualSupplier financial stability.XYZs debt-to-total assets ratio0.350.40

Key Elements in a Balanced Scorecard (BSC) Initiative*

Strategic SCM Objectives Customer Facing - Reliability - Responsiveness - Agility Internal Facing - Costs - Assets Management*

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Description Performance MeasurementCustomer FacingInternal FacingReliabilityResponsivenessAgilityCostsAssetsPerfect Order Fulfillment Cycle TimeUpside SC FlexibilityDownside SC FlexibilityDownside SC AdaptabilitySCM CostCOGSCash to Cash Cycle timeReturn on SC Fixed AssetsInventory Performance

Performance Attribute-Reliability Definition :SC performance in delivering right product to right place at right time in right condition in right packaging in right quantity with right documentation to right customer Metric: Perfect Order Fulfillment Calculation: Percentage of orders meeting delivery performance with complete and accurate documentation and no delivery damage Formula Total number of Perfect Orders Total No of orders

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Performance Attribute- Responsiveness Definition: Speed at which SC provides products to customerMetric : Average Order Fulfillment Cycle TimeCalculation: Average speed at which the supply chain delivers products to customers. Customer Order to Customer Receipt TimeFormula: Sum of all actual cycle times or all delivered orders Total No of Orders Delivered *

* Performance Attribute- Agility

Supply Chain Performance Metrics*Supply chain costs

SC MetricDefinitionFormula Costs of Goods SoldDirect Costs of ManufactureCost of Goods Sold = Direct Material + Direct Labor + Overhead

Supply chain management costAll direct and indirect expenses associated with operating SCOR business processes across the supply chainCost to Plan +Cost to Source+ Costs to Deliver+ Costs to Return

Performance Attribute- Asset ManagementDefinition: Effectiveness of organization in managing assets to support demand satisfaction, including management of all assets: fixed and working capitalMetric: cash to cash cycle timeCalculation :Time required for an investment in raw materials to flow back in an organizationFormula = Inventory days of supply+ Accounts receivable - Accounts Payable

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Performance Attribute- Asset ManagementDefinition: Effectiveness of organization in managing assets to support demand satisfaction, including management of all assets: fixed and working capital Metric:Return on supply chain fixed assetsCalculation: Return an organization receives on capital invested in supply chain fixed assets used in plan, source, make, deliver, and return activitiesFormula Revenue- COGS- Supply Chain Costs Fixed Assets

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Performance Attribute-Asset ManagementDefinition: A measure of how well the inventory is managed.Metric: Inventory Turnover RatioCalculation: Calculates how fast the inventory is converted into sales Formula: Cost of Goods Sold Average Inventory*

Supply Chain Asset Management*Definition: Magnitude of an investment relative to a companys working capital position versus the revenue generated from an SCMetric: Return on working capitalCalculation: Profit on working capital used Formula: (SC Revenue COGS SC Management Costs) (Inventory + A/R A/P)

Customer-Focused Metrics*

AttributeMetricDefinitionAvailabilityStockout frequencyProbability of inventory not being available to meet customer demandFill rateImpact of stockouts over time, e.g., want 100 items, 92 in = 92% fill rateOrders shipped completeAll items ordered are in shipmentBackorders Unfilled order or commitmentTime needed to deliver customer orderSpeed of performanceElapsed time from order to ready to useDelivery consistencyCycle frequency meeting planned timeFlexibilityAbility to accommodate unusual requestsMalfunction recoveryContingency plans; alternate source

Customer-Focused Metrics (continued)*

AttributeMetricDefinitionProduct supportResponse time to inquiriesNumber of days it takes for customer to receive a response to an inquiryResponse accuracyMeasures if response is on target and customer doesnt require follow-upCustomer complaintsNumber of complaints or amount of negative feedback in given periodOverall satisfactionRepeat purchasesMeasure of customer completing another purchase from same sellerReferrals to other potential customersNumber of names provided

* A manufacturer or a retailer that responds to changes in sales in hours instead of weeks is no longer at heart a product company, but a service company that has a product offering Customer Relationship Management- Bill Gates

*MovementFrom qualitative targets to quantitative ones.From descriptive passages to crisp statementsOther aspects are also reviewed. - Attendance - Team work - Willingness to take additional responsibilities

* Incremental data volume improvementPartial data better than no dataCapture data at the sourceAutomatic better than manual captureCapture ancillary data when possibleData Mining

Acquisition of Data

*Second Level of Metrics-ExampleResponsiveness: Speed at which the products are delivered to the customer.

Sub items:Order Entry TimePick time from inventory Packing TimeDocumentation timeLoading timeTransportation TimeUnloading Time

Activity Based

*Second Level of Metrics-ExampleDefinition :SC performance in delivering correct product to correct place at correct time in correct condition and packaging in correct quantity with correct documentation to correct customer.

Sub items: a. Correct Picking of Items b. Correct documentation c. Adequate Documentation d. Correct Packaging e. Timely Preparation of documents. f. Delivery by the correct mode. g. Correct Delivery by the chosen mode. h. Proper handling across the Logistics Chain Activity Based

* Example A company involved in turnkey jobs, where the company would procure all required materials , deliver to the customers and install them.The procurement was back to back. There was no inventory kept.The target cycle time was 50 days.The actual was 100 days!!

Customer OrderDateReceipt atSCM CentreReceipt of goods inWarehouse

ShipmentReceipt atCustomerSite 25 30 35 10 100ElapsedTimeTotal*

*AnalysisAnalysis revealed that the time from customer order to SCM receiving the order was too high. The reasons were gone into and corrective action was taken.From receipt into the warehouse till shipment was too high. Analysis revealed that in most cases, the customer was not ready to receive the equipment. The sites were simply not ready. Corrective action was taken.

*Characteristics of Effective MetricsEach metrics should measure a parameter.The performance indicator should adequately cover the parameter to be measured.Should be objective and quantified as much as possible.Measurement should be periodic and not sporadic.Periodicity should be adequate and not too spaced apart.Parameter definition should be constant.Keep it simple.Cover all sub activities through selection of parameters. The parameters should be linked so that no sub activity is omitted.

*Vanity- Fixing standards that are easily achievable.(Fixing promised date of shipment than required date)Provincialism ( Silos )- Organization boundaries and concerns and dictate measures.(Freight Cost Reduction)Narcissism- Measuring from organizational point of view (Warehouse measure)Laziness Not giving adequate attention ( Date of shipment vs. date of customer receipt)Pettiness- Measuring only a small component ( Mfg Cost Vs total profitability)Inanity- Not looking at the consequences of metrics on human behaviourFrivolity- Taking metrics lightlySeven Deadly Sins in Performance Measurement

*Find out what the customer wants. Do not assume. Set customer satisfaction goalsDesign Supply Chain to address the sameSelect correct performance measures accordinglyMeasure correctlyEmbed these into a process for performance improvement. Treatment and not post mortemDo not use metrics as threats or something to be feared. Use them for continuous improvement.The emphasis is on end to end business processes and a focus on drivers of the enterprise results.How do we overcome?

*Revenue RecognitionGoodsLeave the WarehouseGoods Reach customer site Goods are installedManufacture, Supply and InstallationCompany A Company B Company C

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