Supply chain strategy - Performance measurement System
- 1. SUPPLY CHAIN STRATEGY Assignment – 1 Next generation performance measurement Submitted to – Prof. Arindam Burman - Submitted By Lokesh Kalwar Roll No – 42419 PRN - 19020148019 MBA Exe – 2019-22
- 2. Performance Measurement • It is defined as the process of quantifying effectiveness and efficiency of action. • It can provide important feedback information to enable managers to monitor performance, reveal progress, enhance motivation and communication, and diagnose problems. • It is an approach to judge the performance of supply chain system
- 3. Classification of performance measurement • Qualitative measures − For example, customer satisfaction and product quality. • Quantitative measures − For example, order-to- delivery lead time, supply chain response time, flexibility, resource utilization, delivery performance. The performance of a supply chain can be improvised by using a multi-dimensional strategy, which addresses how the company needs to provide services to diverse customer demands.
- 4. Quantitative Measures Quantitative measures is the assessments used to measure the performance, and compare or track the performance or products. Its further breakup – • Non-financial measures • Financial measures
- 5. Non - Financials Measures The metrics of non-financial measures comprise cycle time, customer service level, inventory levels, resource utilization ability to perform, flexibility, and quality.
- 6. Cycle Time Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a business process. For supply chains, cycle time can be defined as the business processes of interest, supply chain process and the order- to-delivery process. • Supply chain lead time - the time taken by the supply chain to transform the raw materials into final products along with the time required to reach the products to the customer’s destination address. • Order-to-delivery lead time - the time of delay in the middle of the placement of order by a customer and the delivery of products to the customer.
- 7. Customer Service Level The customer service level in a supply chain is marked as an operation of multiple unique performance indices. • Order fill rate − The order fill rate is the portion of customer demands that can be easily satisfied from the stock available. For this portion of customer demands, there is no need to consider the supplier lead time and the manufacturing lead time. The order fill rate could be with respect to a central warehouse or a field warehouse or stock at any level in the system. • Stockout rate − It is the reverse of order fill rate and marks the portion of orders lost because of a stockout. • Backorder level − This is yet another measure, which is the gauge of total number of orders waiting to be filled. • Probability of on-time delivery − It is the portion of customer orders that are completed on-time, i.e., within the agreed-upon due date.
- 8. Inventory Levels As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient inventory to meet the customer demands. In a supply chain system, inventories can be further divided into four categories. • Raw materials • Work-in-process, i.e., unfinished and semi-finished sections • Finished goods inventory • Spare parts
- 9. Resource Utilization In a supply chain network, huge variety of resources is used. These different types of resources available for different applications are mentioned below. • Manufacturing resources − Include the machines, material handlers, tools, etc. • Storage resources − Comprise warehouses, automated storage and retrieval systems. • Logistics resources − Engage trucks, rail transport, air- cargo carriers, etc. • Human resources − Consist of labor, scientific and technical personnel. • Financial resources − Include working capital, stocks, etc.
- 10. Financial Measures The measures taken for gauging different fixed and operational costs related to a supply chain are considered the financial measures. Finally, the key objective to be achieved is to maximize the revenue by maintaining low supply chain costs. The financial performance of a supply chain is assessed by considering the following items − • Cost of raw materials. • Revenue from goods sold. • Activity-based costs like the material handling, manufacturing, assembling rates etc. • Inventory holding costs. • Transportation costs. • Cost of expired perishable goods. • Penalties for incorrectly filled or late orders delivered to customers. • Credits for incorrectly filled or late deliveries from suppliers. • Cost of goods returned by customers. • Credits for goods returned to suppliers.
- 11. Performance Management System Two advance and widely used models to measure performance of Supply chain are – • SCOR Model • Balanced Scorecard
- 12. SCOR Model Supply chain operations reference model (SCOR) is a management tool used to address, improve, and communicate supply chain management decisions within a company and with suppliers and customers of a company. The model integrates business concepts of process re- engineering, benchmarking, and measurement into its framework This framework focuses on five areas of the supply chain: plan, source, make, deliver, and return.
- 13. SCOR Model Plan - Demand and supply planning and management are included in this first step. Elements include balancing resources with requirements and determining communication along the entire chain. Source - This step describes sourcing infrastructure and material acquisition. It describes how to manage inventory, the supplier network, supplier agreements, and supplier performance. Make- Manufacturing and production are the emphasis of this step. The make step includes, production activities, packaging, staging product, and releasing. Deliver - Delivery includes order management, warehousing, and transportation. It also includes receiving orders from customers and invoicing them once product has been received. Return - Companies must be prepared to handle the return of containers, packaging, or defective product. The return involves the management of business rules, return inventory, assets, transportation, and regulatory requirements
- 14. Benefits of Using the SCOR Model • The SCOR process can go into many levels of process detail to help a company analyze its supply chain. • It gives companies an idea of how advanced its supply chain is. • The process helps companies understand how the 5 steps repeat over and over again between suppliers, the company, and customers. • he model enables full leverage of capital investment, creation of a supply chain road map, alignment of business functions, and an average of two to six times return on investment.
- 15. Balanced Scorecard • The balanced scorecard is a holistic framework used by business management strategists to measure performance, set goals, and prioritize projects. • It helps us to measure performance at all eight levels in a supply chain and measures the performance using metrics.
- 16. Balanced Scorecard The balanced scorecard approach contains four different metrics or perspectives which are used to measure performance at all the levels in the supply chain. These four metrics combines the strategy and vision for every aspect of the supply chain. • Financial: To succeed financially, how should firms appear to their shareholders. • Customer: To achieve our vision, how should firms appear to their customers. • Internal Business Processes: To satisfy their shareholders and customers, what business processes firms must excel at. • Learning and Growing: To achieve their vision, how will firms sustain their ability to change and improve.
- 18. Balanced Scorecard Example of how to measure these 4 metrics using- Objectives, Measures, Initiatives and Targets. Perspectives Goals Objectives Measurements Customer Continuously improve customer satisfaction Decrease lead time Average lead time Increase on-time delivery Percentage of deliveries on time Reduce customer complaints Number of customer complaints Internal Business Continuously improve business processes Decrease cycle time Average cycle time Increase quality Number of defects and the number of items reworked. Increase productivity Average output per employee Innovation & Learning Continuously develop and deliver new innovative products & services Increase sales of new products and services Percentage of sales obtained from new products & services Reduce development time Average time from initial design to production Financial Continuously improve financial performance Decrease costs Average unit costs Increase sales growth The growth rate in sales Increase market share Company’s market share Increase return on investment Return on investment
- 19. Benefits of Using Balanced Scorecard A balanced scorecard will help you and the firms to gain different types of feedback related to their supply chain operations including – • Strategic data for high-level decision-makers, • Diagnostic feedback to guide process improvement, • Knowledge of trends in metrics over time, • Feedback on the effectiveness of the performance measurements themselves, • Data which will be used for forecasting future business activities.
- 20. Conclusion The supply chain performance measurement system will produce output in the form of total performance value and level of the company’s supply chain performance indicator category. The main cause of the supply chain performance is less efficient lies in the low performance of the material management process (source). The low performance of the source process is caused by several things, including inaccurate forecast, unintegrated supply planning, weak coordination between parts of the company, inadequate supplier performance, poor inventory management, and no inventory checking in the warehouse. In implementing these Models, it is expected that real participation from all components of the company, especially at the top management level.