426 W6: Case Discussion
Tie3D
Ch13PPT10e.pptxCHAPTER 13
Supply Chain Performance Measurement and Financial Analysis
Supply Chain Management: A Logistics Perspective (10e)
Coyle, Langley, Novack, and Gibson
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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discussion Outline
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Characteristics of good performance measures
Performance categories
The supply chain–finance connection
Financial implications of supply chain strategies
Financial implications of supply chain services
Measure vs. Metric vs. Index
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Index
Metric
Measure
Combines two or more metrics into a single indicator, usually used to track trends in the output of a process.
Logistics example: Perfect order
Involves a calculation or a combination of measurements, often in the form of a ratio.
Logistics examples : Inventory future days of supply, Inventory turns, Sales dollars per stock-keeping unit
Requires no calculations and with simple dimensions.
Logistics examples: Units of inventory, Backorder dollars
Characteristics of Good Performance Measures
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Is quantitative
1
Is easy to understand
2
Encourages appropriate behavior
3
Is visible
4
Is defined & mutually understood
5
Encompasses outputs & inputs
6
Measures only what is important
7
Is multidimensional
8
Uses economies of effort
9
Facilitates trust
10
Characteristics of Good Performance Measures Raising the Performance Bar
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Key Performance Measures
Production costs
Manufacturing & Inventory costs
Transport costs
Distribution & logistics costs
Supply chain & customer service costs
Fair
Acceptable
Good
Superior
Excellent
Source: Figure 13-3
Successful Development of a Supply Chain Metrics Program
Is a result of a team effort.
Involves customers and suppliers (where appropriate).
Develops a tiered structure.
Identifies metric “owners” and ties metric goal achievement to an individual’s or division’s performance evaluation.
Establishes a procedure to mitigate conflicts.
Is consistent with corporate strategy.
Establishes top management support.
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Images courtesy of The Recruiting Division
Performance Categories
Process Measure Categories
SCOR Level-1 Metrics
Logistics Quantification Pyramid
Performance Categories Process Measure Categories
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Time
Quality
Cost
Other / Supporting
On-time delivery/receipt
Order cycle time
Order cycle time variability
Response time
Forecasting/Planning cycle time
Overall customer satisfaction
Processing accuracy
Perfect order fulfillment
On-time delivery
Complete order
Accurate product selection
Damage-free
Accurate invoice
Forecast accuracy
Planning accuracy: Budgets and operating plans
Schedule adherence
Finished goods inventory turns
Days sales outstanding
Cost to serve
Cash-to-cash cycle time
Total delivered cost
Cost of goods
Transportation costs
Inventory carrying costs
Material handling costs
All other costs
Info systems
Administrative
Cost of excess capacity
Cost of capacity shortfall
Approval exceptions to standard
Minimum order quantity
Change order timing
Availability of information
Source: Figure 13-4
Performance Categories SCOR Level-1 Metrics
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| Attribute | Performance Attribute Definition | Level 1 Metric |
| Supply Chain Reliability | The performance of the supply chain in delivering: the correct product, to the correct place and customer, at the correct time, in the correct condition and packaging, and with the correct quantity and documentation | Delivery Performance |
| Fill Rates | ||
| Product Order Fulfillment | ||
| Supply Chain Responsiveness | The velocity at which a supply chain provides products to the customer | Order Fulfillment Lead Times |
| Supply Chain Flexibility | The agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage. | Supply Chain Response Time |
| Production Flexibility | ||
| Supply Chain Costs | The costs associated with operating the supply chain. | Cost of Goods Sold |
| Total Supply Chain Management Costs | ||
| Value-Added Productivity | ||
| Warranty / Returns Processing Costs | ||
| Supply Chain Asset Management Efficiency | The effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets: fixed and working capital. | Cash-to-Cash Cycle Time |
| Inventory Days of Supply | ||
| Asset Turn |
Source: Figure 13-5
Performance Categories SCOR Process D1 Metrics
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Source: Figure 13-6
Process Category: Deliver Stocked Product
Process Number: D1
Reliability
Responsiveness
Agility
Costs
Asset Management
Performance Attributes
Metric
Perfect order fulfillment
Order fulfillment cycle time
Upside Supply Chain Flexibility
Upside Supply Chain Adaptability
Downside Supply Chain Adaptability
Overall Value at Risk
Total cost to serve
Cash-to-Cash Cycle Time
Return on Supply Chain Fixed Assets
Return on Working Capital
Performance Categories Logistics Quantification Pyramid
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Source: Figure 13-7
1
Channel Satisfaction
3
Logistics Operations
2
Transaction Cost and Revenue
4
Logistics Service
1
Looks at how logistics cost and service are perceived by channel members.
2
Focuses on how a seller’s cost influences a customer’s profit and on how a seller’s service impacts a customer’s revenue.
3
Example: Transportation cost tradeoffs between less expensive (slower & less reliable) and more
expensive (faster & more reliable) transportation.
4
Product availability
Order cycle time
Logistics operations responsiveness
Logistics system
information
Post-sale
logistics
support
The Supply Chain–Finance Connection
Revenue–Cost Savings Connection
Supply Chain Impact on ROA
The Supply Chain–Finance Connection
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The cost of providing logistics service not only affects the marketability of the product (via the landed cost, or price), but also impacts its profitability.
Images courtesy of The Frugal Model
Inventory management & capital
Logistics techniques such as just-in-time and vendor-managed inventories reduce inventory levels and capital required.
Lead times & inventory cost and customer service
Consistent and short lead times helps inventories and can build customer satisfaction and loyalty.
Order processing time & order-to-cash cycle
Order processing time has a direct bearing on an organization’s order-to-cash cycle: Longer order-to-cash cycle = higher accounts receivable and higher investment in “sold” finished goods.
The Supply Chain–Finance Connection Revenue–Cost Savings Connection
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Images courtesy of GensRate
Transform cost reductions into equivalent revenue increases
Profit = Revenue − Costs
Where:
Cost = (X%)(Revenue)
Then:
Profit = Revenue − (X%)(Revenue)
= Revenue (1 − X%)
Where:
(1 − X%) = Profit margin
Sales = Profit/Profit Margin
The Supply Chain–Finance Connection Revenue–Cost Savings Connection (continued)
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| CLGN 2015 | SALES EQUIVALENT FOR COST SAVINGS OF | ||||
| (000) | Percentage | $200,000 | $500,000 | $1,000,000 | |
| Sales | $150,000 | 100.0 | $2,857,143* | $7,142,857** | $14,285,714† |
| Total cost | 139,500 | 93.0 | 2,657,143 | 6,642,857 | 13,285,714 |
| Net profit | 10,500 | 7.0 | 200,000 | 500,000 | 1,000,000 |
* $200,000 cost saving ÷ 0.07 profit margin
** $500,000 cost saving ÷ 0.07 profit margin
† $1,000,000 cost saving ÷ 0.07 profit margin
Source: Table 13-1
CLGN Example
Financial Implications of Supply Chain Strategies Supply Chain Impact on ROA
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Revenue
Costs
Inventory
Accounts receivable
Cash
Fixed assets
Profit
Capital employed
Return on assets
Supply chain effectiveness
Supply chain efficiency
Asset deployment and utilization
Source: Figure 13-9
Financial Implications of Supply Chain Strategies Supply Chain Impact on Balance Sheet
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Source: Figure 13-10
ASSETS
Cash
Receivables
Inventories
Property, plant, and equipment
Current liabilities
Debt
Equity
Order cycle time/order to cash
Order completion rate
Invoice accuracy
On-time delivery
Service levels/stockout rates
Distribution facilities
Transportation equipment
Outsourcing policies
Financing options for inventory, warehouses, and equipment
Financial Implications of Supply Chain Strategies
Financial Implications of Supply Chain Strategies Supply Chain Strategic Areas Affecting ROA
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Source: Figure 13-11
Channel Structure Management
Use of outsourcing
Minimize channel inventories
Improve information
Efficient channel structure
Inventory Management
Minimize safety stock
Optimize availability
Improve information
Eliminate obsolete excess items
Order Management
Reduce stockouts
Optimize order fill rate
Reengineer order-to-cash cycle
Improve information
Transportation Management
Improve on-time delivery
Improve information
Optimize mode mix
Reduce transit time variability
ROA Increased
Financial Implications of Supply Chain Strategies Supply Chain Decision and ROA
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Source: Figure 13-17
CLGN Example: Comparison of Supply Chain Alternatives
| Ratio Analysis | CLGN, 2015 $(000) | Transport Cost Reduced 10 % | Warehousing Cost Reduced 10% | Inventory Reduced 10 % |
| Profit margin | 7.00% | 7.24% | 7.06% | 7.12% |
| Return on assets | 7.24% | 7.49% | 7.30% | 7.42% |
| Inventory turns/year | 8.00 | 8.00 | 8.00 | 8.89 |
| Transportation as percentage of sales | 4.00% | 3.60% | 4.00% | 4.00% |
| Warehousing as percentage of sales | 1.00% | 1.00% | 0.90% | 1.00% |
| Inventory carrying as percentage of sales | 2.00% | 2.00% | 2.00% | 1.80% |
Financial Implications of Supply Chain Strategies Supply Chain Decision and ROA
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Example: CLGN 2015 and Reduced Transportation Costs
Source: Figure 13-18
Financial Implications of Supply Chain Services
Financial Implications of Supply Chain Service Supply Chain Service Failure
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Source: Figure 13-19
Annual orders
Correctly filled orders
Service failure orders
Rectified orders
Refused orders
Invoice deduction per order
Total orders rehandled
Revenue per order
Invoice deduction from sales
Rehandling cost per order
Lost sales revenue
Rehandling cost
Financial Implications of Supply Chain Service Supply Chain Service Improvement
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Example: Strategic Profit Model & On-Time Delivery Improvement
Source: Figure 13-22
Summary
Successful metric development for logistics and supply chains is consistent with corporate strategy, focuses on customer needs, carefully selects and prioritizes metrics, focuses on processes, uses a balanced approach, and uses technology to improve measurement effectiveness.
Four principal categories for performance metrics are: time, quality, cost, and miscellaneous or support; OR: operations cost, service, revenue or value, and channel satisfaction.
Supply chain management impacts ROA via decisions regarding channel structure management, inventory management, order management, and transportation management.
Supply chain service failures result in lost sales and rehandling costs. The financial impact of modifications to supply chain services can be analyzed using the strategic profit model which shows the relationship of sales, costs, assets, and equity.
