Supply Chain Strategy & Performance Measurement
Supply chain strategy aligns operational decisions with business goals, delivering customer value while managing costs. Effective performance measurement, including lead times, reliability, and responsiveness, optimizes revenue and profitability. Understanding service-cost trade-offs and process views like push/pull enables businesses to achieve an efficient frontier and enhance overall supply chain performance.
Key Takeaways
Supply chain performance balances customer value with cost efficiency.
Service level impacts revenue, cost, and overall profitability.
Lead time, responsiveness, and reliability are key service dimensions.
Supply chain processes can be viewed as cycles or push/pull systems.
Financial data and models like SCOR measure supply chain effectiveness.
What Defines Effective Supply Chain Performance?
Effective supply chain performance delivers superior customer value by offering variety and quick service at lower prices. It balances customer service with cost, aligning decisions with business strategy for competitive advantage and sustained profitability.
- Superior customer value.
- Variety and quick service at lower price.
- Trade-off between customer service and cost.
- Business strategy and supply chain decisions.
How Do Customer Service and Cost Trade-offs Impact Strategy?
Balancing customer service with cost is crucial. Businesses seek an 'efficient frontier' to optimize service relative to cost, aligning with market segments. Identifying performance gaps allows for strategic improvements and shifting this frontier for better outcomes.
- Fit between business and supply chain strategy.
- Market segment and customer service level.
- Cost to provide targeted customer service.
- Efficient frontier concept.
- High customer service at low cost.
- Trade-off between service and cost.
- Efficiency frontier: best compromise.
- Efficiency frontier: upper ceiling on performance.
- Gaps between existing and potential performance.
- Shifting the efficiency frontier.
What is the Impact of Service Level on Revenue, Cost, and Profit?
Service level directly influences demand and pricing, impacting revenue, cost, and overall profit. There is an S-shaped revenue response, indicating a minimum threshold service level is needed, beyond which service improvements may not significantly increase demand.
- Demand and price are a function of service level.
- Optimize performance based on revenue and cost.
- S-shaped revenue response to service level.
- Minimum threshold service level.
- Point beyond which service improvement doesn't increase demand.
What are the Different Dimensions of Customer Service Level?
Customer service level encompasses various dimensions crucial for meeting customer expectations. These include the speed of delivery, the ability to respond to changes, the consistency of delivery, and the range of products offered to customers.
- Order Delivery Lead Time.
- Responsiveness.
- Delivery Reliability.
- Product Variety.
What is Order Delivery Lead Time (ODLT)?
Order Delivery Lead Time (ODLT) is the total time taken to complete all activities from when a customer places an order until it is delivered. This metric varies significantly across industries, from fast-moving consumer goods to e-retailers.
- Time taken to complete activities from order to delivery.
- ODLT for FMCG.
- ODLT for Consumer Durables.
- Pizza delivery time.
- E-retailer delivery time.
- Caterpillar service commitment.
What is Supply Chain Lead Time (SCLT)?
Supply Chain Lead Time (SCLT) represents the total time required for all supply chain activities, from raw material sourcing to final product delivery. SCLT is typically longer than ODLT, as it includes processes before a customer order is received.
- Total time for supply chain activities.
- SCLT and ODLT mismatch.
- Preferred delivery lead time.
- Order delivery lead time dictated by competition.
- SCLT usually longer than order delivery lead time.
What are Order Penetration and Decoupling Points?
The order penetration point is where a customer order enters the supply chain, making subsequent activities certain. The decoupling point, often with decoupling stock, separates activities based on received orders from those based on forecasts.
- Customer enters the supply chain.
- Activities after penetration point are certain.
- Activities before penetration point are based on forecast.
- Decoupling point: activities after based on received order, before based on forecast.
- Decoupling stock at penetration point.
What are the Different Types of Order Fulfillment?
Different order fulfillment types dictate how products are manufactured and delivered. Make to Stock (MTS) involves producing goods in anticipation of demand, while Make to Order (MTO) and Configure to Order (CTO) respond directly to customer specifications.
- Make to Stock (MTS).
- Make to Order (MTO).
- Configure to Order (CTO).
What are the Process Views of a Supply Chain?
Supply chains can be viewed through different process lenses. The Cycle View examines processes at interfaces between stages, while the Push/Pull View categorizes processes based on whether they are initiated by a customer order or in anticipation of one.
- Cycle View: processes at interface between stages.
- Push/Pull View: processes in response to customer order or in anticipation.
- Push/Pull Boundary: separates push and pull processes.
How Does L.L. Bean Utilize the Push/Pull View?
L.L. Bean's supply chain illustrates the push/pull concept. Procurement, manufacturing, and replenishment cycles often operate as push processes, anticipating demand. The customer order cycle, however, is a pull process, initiated directly by customer demand.
- Procurement, Manufacturing, Replenishment Cycles: Push Processes.
- Customer Order Cycle: Pull Process.
- Replenishment and Manufacturing Cycle: Pull Process.
- Procurement Cycle: Pull Process.
How Does Ethan Allen Utilize the Push/Pull View?
Ethan Allen's model demonstrates a different push/pull dynamic. Their customer order and manufacturing cycles are primarily pull processes, driven by specific customer requests. Conversely, their procurement cycle often functions as a push process, anticipating material needs.
- Customer Order and Manufacturing Cycle: Pull Process.
- Procurement Cycle: Push Process.
- Customer Order and Manufacturing Cycle: Pull Process.
- Procurement Cycle: Push Process.
What is Responsiveness in Supply Chain Management?
Responsiveness refers to a supply chain's ability to handle market demand uncertainty. This is critical for innovative products with unstable demand, contrasting with functional products that have stable demand. Matching the supply chain type to product characteristics is key.
- Ability to handle market demand uncertainty.
- Supply chains characterized by demand uncertainty.
- Matching supply chain type to product characteristics.
- Responsive chain during growth stage, efficient chain during mature stage.
What are the Differences Between Functional and Innovative Products?
Functional and innovative products exhibit distinct demand characteristics. Functional products (e.g., groceries) have stable, predictable demand, while innovative products (e.g., fashion, technology) face high variety and unstable demand, impacting their life cycle, margins, and forecast error.
- Product life cycle.
- Contribution margin.
- Product variety.
- Likely forecast error.
- Average stock-out rate.
- End-of-season markdown.
What is Delivery Reliability in Supply Chain?
Delivery reliability measures a firm's ability to service customers within promised times, often expressed as a fraction of demand satisfied or percentage of orders delivered on time. Achieving high reliability involves trade-offs with inventory and capacity costs.
- Degree to which a firm can service customers within promised time.
- Fraction of demand satisfied within promised time.
- Product availability (service level) in MTS.
- Percentage of orders delivered within promised time in CTO or MTO.
- Trade-off inventory costs and stock-out costs.
- Higher inventory in MTS for higher service levels.
- Higher inventory and slack capacity in CTO for higher reliability.
- Slack capacity in entire system in MTO for high reliability.
Why is Product Variety Important in Supply Chains?
Product variety is a key customer service dimension, offering more choices. However, higher variety can lead to increased complexity and costs, potentially affecting profitability. Balancing variety with other service dimensions is essential for optimal performance.
- Quantum of variety offered is an important dimension.
- Higher variety offers more choices.
- Higher variety leads to complexity and costs.
- Variety explosion affects profitability.
- Trade-off between variety and other service dimensions.
- Example: Fast-Food vs. Restaurant.
What are Key Supply Chain Performance Measures (SCOR Model)?
The SCOR model provides a framework for measuring supply chain performance, categorizing metrics into internal-facing and customer-facing. Internal metrics include cost and assets, while customer-facing metrics cover reliability, responsiveness, and agility.
- Internal Facing: Cost (logistics, productivity, warranty), Assets (cash-to-cash, inventory days, asset turns).
- Customer Facing: Reliability (order fulfillment), Responsiveness (speed), Agility (response time, flexibility).
How is Supply Chain Benchmarking Done Using Financial Data?
Benchmarking supply chains using financial data involves analyzing metrics like total chain length (sum of inventory days), supply chain inefficiency ratio, and working capital productivity. These measures help assess internal management efficiency and identify areas for improvement.
- Total length of the chain: sum of inventory days.
- Supply Chain Inefficiency Ratio: relative efficiency of internal management.
- Supply Chain Working Capital Productivity: analysis based on inventory, receivables, and payables.
What is the Impact of Supply Chain Initiatives on Business Performance?
Supply chain initiatives significantly impact business performance by improving Return on Assets (ROA). Their effects are estimated by analyzing cost reductions (inventory, logistics), improved revenue and profitability, enhanced operational efficiency, and reduced working capital.
- Improve Return on Assets (ROA).
- Estimate impact in terms of costs and benefits.
- Cost Reduction: inventory, logistics, materials.
- Improved Revenue and Profitability: higher margin, market share, reduced backorders.
- Improved Operational Efficiency: procurement costs, asset utilization.
- Reduced Working Capital: inventory, accounts receivable.
Frequently Asked Questions
What is the core trade-off in supply chain management?
The core trade-off involves balancing customer service levels with the associated costs. Higher service often means higher costs, so finding the optimal 'efficient frontier' is crucial for profitability and competitive advantage.
How does service level impact business profitability?
Service level directly influences demand and pricing, affecting revenue and costs. There's an S-shaped response where revenue increases with service up to a point, beyond which further improvements yield diminishing returns on demand.
What is the difference between Order Delivery Lead Time and Supply Chain Lead Time?
Order Delivery Lead Time (ODLT) is the time from customer order to delivery. Supply Chain Lead Time (SCLT) is the total time for all supply chain activities, from raw materials to delivery, and is typically longer than ODLT.
What are the main types of order fulfillment strategies?
Main strategies include Make to Stock (MTS), where products are made in anticipation of demand; Make to Order (MTO), where production starts after an order; and Configure to Order (CTO), allowing customization after order.
How do push and pull processes differ in a supply chain?
Push processes are initiated based on forecasts, anticipating customer orders. Pull processes are initiated by actual customer orders. The 'push/pull boundary' separates these two types of activities within a supply chain.
