Chapter 3 notes

Financial Measures of Performance

1. Growing the supply chain surplus is our ultimate goal of supply chain.
2. As the surplus grows; supply chain profitability will grow and as a result each member in a supply chain will grow (in
financial terms)
3. Return on equity (ROE) is the main summary measure of a firm’s performance.
4. ROE= Net income/ Average shareholder Equity
5. ROE means return on investment made by firm’s shareholder.
6. Return on Assets (ROA) means the return earned on each dollar invested by the firm in assets.
7.

8. ROA can be increased by growing the profit margin and profit margin can be increased by either providing a
responsive supply chain to the customers or having good supply chain management which helps to decrease the
expenses occurred.
9. Return on financial Leverage (ROFL) means you borrow some money from another person and invest in your
business to grow without using your money.
10. Formula for ROFL= ROE- ROA
Cost of goods sold
11. Accounts Payable Turnover (APT) =
Accounts Payable
12. A small APT indicates that the firm was able to use the money it owed to suppliers to finance a considerable
fraction of its operations.
13. If APT comes to be 20 it means a company can finance its own operations for 20 weeks with their supplier’s
money.
Sales Revenue
14. Accounts Receivable Turnover (ART)=
Accounts Receivable
15. It tells us about the time in which a firm collects its money that has been made by sales. For ex- If APT=19.45 then
52/19.45=2.7 i.e., in 2.7 weeks the company will get money whatever it makes after a sale is made.
Cost of goods sold
16. Inventory turnover (INVT)=
Inventories
17. It tells us about the time for which the inventory sat with the firm. Ex- INVT= 8.74 then 52/8.74=5.95 i.e., for 5.95
weeks the inventory will only be there.
Sales Revenue
18. Property, Plant and Equipment Turnover (PPET)=
PP∧E
19. It tells us about what company made on each dollar that they have invested in property, plant and equipment and
if INVT is high then the revenue generated will be high as the time the firm will keep their inventory is low i.e.,
they are selling their products faster to market.

20. Cash-to-cash (C2C) cycle= −Weeks Payable ( APT1 )+ Weeks∈inventory ( INVT

1
)+Weeks receivable ( ART
1
)

21. It roughly measures the average amount of time from when the cash enters the process as cost to when it returns
as collected revenue.
22. Ex- if a company has C2C of -11.53 it means that the firm is collecting its money from the sale of products more
than 11 weeks before they have to pay to their suppliers.
23. Markdowns represent the discounts required to convince customers to buy excess inventory.
24. Lost sales represent customer sales that did not materialize because of the absence of their products the
customer wanted to buy.
25. Both markdowns and lost sales are not part of financial statements, but they represent the biggest impact of
supply chain performance on the financial performance of the firm.
26. Firms like Amazon, Wal-Mart, and Zara that achieve strong financial performance do so in large part because their
supply chains allow them to better match supply and demand, thereby reducing markdowns and lost sales.

Drivers of Supply chain Performance

1. To understand how a company can improve its supply chain performance in terms of responsiveness and efficiency
we must examine the logistical and cross-functional drivers of supply chain performance.
2. The goal is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost, thus
improving the supply chain surplus and the firm’s financial performance.
3. Logistical drivers: - Facilities, Inventory, Transportation
4. Cross functional drivers: - information, sourcing and pricing
5. Facilities: - Physical locations in supply chain network where product is stored, assembled or fabricated. Two types: -
(i) Production sites (ii) Storage sites
6. Inventory: - It includes all raw materials, WIP, and finished goods within a supply chain. Inventory belonging to firm
comes under asset.
7. Transportation: - includes moving inventory from point to point in the supply chain.
8. Information: - consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and
customers throughout the supply chain.
9. Sourcing: - is the choice of who will perform a particular supply chain activity such as production, storage,
transportation, or the management of information. For ex- what functions a firm should do in-house and what to
outsource.
10. Pricing: - determines how much a firm will charge for the goods and services that it makes available in the supply
chain. Differential pricing provides responsiveness to customers that value it and low cost to customers that do
not value responsiveness as much.
11. The key to achieving strategic fit and strong financial performance across the supply chain is to structure the
supply chain drivers appropriately to provide the desired level of responsiveness at the lowest possible cost.

Facilities: -
1. Inventory- as what transportation –as how & facilities-as where of supply chain.
2. Key driver of supply chain performance in terms of responsiveness and efficiency.
3. Ex- a company gain economies of sales when a product is manufactured or stored at one location only ; this
centralization increases efficiency.
4. But this cost reduction reduces responsiveness too.
5. Another Ex- like that we opened facility near to customers will increase responsiveness but decrease in efficiency.
6. There is major 3 components the company should analyse before taking any decision; these are role, location and
capacity.
7. Firms must decide whether they facility should be either flexible dedicated or combination
8. flexible facilities are those which are able to make many type of products and these type of facilities are less
efficient manner
9. while dedicated facilities are those which are properly for a single product and this makes them more efficient
10. The company must make a trade-off between the efficiency and responsiveness to determine the right amount of
capacity to have at each of its facilities.

Facilities-Related metrics: -
facilities decision impacts the cost of goods and assets in PPE (property, plant and equipment)
Capacity measures the maximum amount a facility can process.
Utilization measures the fraction of capacity that is currently being used in the facility.
As Utilization increases Unit cost reduces and delays increase
Processing/setup/down/idle time measure the fraction of time that the facility was processing units, being set up
to process units, unavailable because it was down, or idle because it had no units to process.
Production cost per unit measures the average cost to produce a unit of output.
Quality losses measure the fraction of production lost due to defects.
Theoretical flow/cycle time of production measures the time required to process a unit if there are absolutely no
delays at any stage.
Actual average flow/cycle time measures the average actual time (including theoretical time and delays) taken for
all units processed over a specified duration such as a week or month.
Flow time efficiency is the ratio of the theoretical flow time to the actual average flow time.
Product variety measures the number of products/product families processed in a facility.
Volume contribution of top 20 percent SKUs and customers measures the fraction of total volume processed by a
facility that comes from the top 20 percent SKUs or customers.
Average production batch size measures the average amount produced in each production batch. Batch size ↑
production cost↓ inventories ↑
Production service level measures the fraction of production orders completed on time and in full.
Overall trade-off between responsiveness and efficiency
No. of Facilities↑ Facility cost↑ Inventory cost↑ transportation cost↓ response time↓
Flexibility & Capacity↑ facility cost↑ Inventory cost↓ response time↓
Inventory: -
1. Inventory exists in the supply chain because of a mismatch between supply and demand.
2. Inventory increase the amount of demand that can be satisfied by having the product ready and available when
customer wants it and also reduces cost by exploiting economies of scale.
3. Inventory↑ Markdown can happen Inventory↓ lost sales can happen
4. Material flow time is the time that elapses between the point at which material enters the supply chain to the
point at which it exits.
5. For a supply chain, throughput is the rate at which sales occur.
6. Little’s law → Inventory(I)= Throughput(D) X Time(T)
7. Supply chain should be designed in such a way that it provides the right level of responsiveness at the lowest
possible cost.
8. For example, Amazon changes the form, location, and quantity of inventory it holds by the level of sales of a book to
provide the right balance of responsiveness and efficiency.
9. 4 Major components of inventory decision; Cycle inventory, Safety inventory, Seasonal inventory, Level of product
availability.
10. Cycle inventory is the average amount of inventory used to satisfy demand between receipts of supplier
shipments.
11. The basic trade-off supply chain managers face is the cost of holding larger lots of inventory (when cycle inventory
is high) versus the cost of ordering product frequently (when cycle inventory is low).
12. Safety inventory is inventory held in case demand exceeds expectation; it is held to counter uncertainty.
13. Safety inventory involves making a trade-off between the costs of having too much inventory and the costs of
losing sales due to not having enough inventory.
14. Seasonal inventory is built up to counter predictable seasonal variability in demand.
15. The basic trade-off supply chain managers face in determining how much seasonal inventory to build is the cost of
carrying the additional seasonal inventory versus the cost of having a more flexible production rate.
16. Level of product availability is the fraction of demand that is served on time from product held in inventory.
17. The basic trade-off when determining the level of product availability is between the cost of inventory to increase
product availability and the loss from not serving customers on time.
Inventory-Related Metrics:-
Impact the cost of goods sold, the C2C cycle and the assets held by company
Cash-to-cash cycle time is a high-level metric that includes inventories, accounts payable, and receivables.
Average inventory measures the average amount of inventory carried.
Inventory turns measure the number of times inventory turns over in a year. It is the ratio of average inventory to
either the cost of goods sold or sales.
Products with more than a specified number of days of inventory identifies the products for which the firm is
carrying a high level of inventory.
Average replenishment batch size measures the average amount in each replenishment order.
Average safety inventory measures the average amount of inventory on hand when a replenishment order
arrives.
Seasonal inventory measures the difference between the inflow of product (beyond cycle and safety inventory)
and its sales that is purchased solely to deal with anticipated spikes in demand.
Fill rate (order/case) measures the fraction of orders/demand that were met on time from inventory.
Fraction of time out of stock measures the fraction of time that a particular SKU had zero inventory (used to
estimate lost sales).
Obsolete inventory measures the fraction of inventory older than a specified obsolescence date.
Inventory↑ supply chain responsive↑ production & transportation cost↓ inventory holding cost↑

Transportation: -
1. Faster transportation allows a supply chain to be more responsive but reduces its efficiency vice-versa for slower
transportation.
2. Firms use rapid transportation for high value items for responsiveness while centralizing its facilities and inventory
to lower cost.
3. Firms use low-cost transportation (sea, rail etc.) low-value, high demand items and store a fair amount of inventory
close to customer.
4. 2 components of Transportation decision; Design of Transportation matrix and choice of transportation mode.
5. DESIGN OF TRANSPORTATION NETWORK The transportation network is the collection of transportation modes,
locations, and routes along which product can be shipped.
6. Design decision include whether there should be multiple demand/supply points or single demand/supply point
along with whether they should be included in single run or through intermediate consolidation points.
7. CHOICE OF TRANSPORTATION MODE The mode of transportation is the manner in which a product is moved from
one location in the supply chain network to another.

Transport-Related metrics: -
Average inbound transportation cost typically measures the cost of bringing product into a facility as a
percentage of sales or cost of goods sold (COGS).
Average incoming shipment size measures the average number of units or dollars in each incoming shipment at a
facility.
Average inbound transportation cost per shipment measures the average transportation cost of each incoming
delivery.
Average outbound transportation cost measures the cost of sending product out of a facility to the customer.
Average outbound shipment size measures the average number of units or dollars on each outbound shipment at
a facility.
Average outbound transportation cost per shipment measures the average transportation cost of each outgoing
delivery.
Fraction transported by mode measures the fraction of transportation (in units or dollars) using each mode of
transportation.
OVERALL TRADE-OFF: RESPONSIVENESS VERSUS EFFICIENCY The fundamental trade-off for transportation is
between 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: -
1. Good information can help improve the utilization of supply chain assets and the coordination of supply chain flows
to increase responsiveness and reduce costs and simultaneously increasing efficiency.
2. The right information can help a supply chain better meet customer needs at lower cost.
3. 4 major components of information decisions:- Push vs Pull, Coordination and information sharing, Sales and
operations planning, Enabling Technologies
4. PUSH VERSUS PULL When designing processes of the supply chain, managers must determine whether these
processes are part of the push or pull phase in the chain.
5. COORDINATION AND INFORMATION SHARING Supply chain coordination occurs when all stages of a supply chain
work toward the objective of maximizing total supply chain profitability based on shared information.
6. SALES AND OPERATIONS PLANNING Sales and operations planning (S&OP) is the process of creating an overall
supply plan (production and inventories) to meet the anticipated level of demand (sales).
7. ENABLING TECHNOLOGIES Many technologies exist to share and analyze information in the supply chain.

INFORMATION-RELATED METRICS:-
Forecast horizon identifies how far in advance of the actual event a forecast is made.
Frequency of update identifies how frequently each forecast is updated.
Forecast error measures the difference between the forecast and actual demand.
Seasonal factors measure the extent to which the average demand in a season is above or below the average in
the year.
Variance from plan identifies the difference between the planned production/inventories and the actual values.
These variances can be used to raise flags that identify shortages and surpluses.
Ratio of demand variability to order variability measures the standard deviation of incoming demand and supply
orders placed.
OVERALL TRADE-OFF: COMPLEXITY VERSUS VALUE
It is important to evaluate the minimum information required to accomplish the desired objectives.
Sourcing: -
1. Sourcing is the set of business processes required to purchase goods and services.
2. Managers must first decide whether each task will be performed by a responsive or efficient source and then
whether the source will be internal to the company or a third party.
3. Sourcing decisions are crucial because they affect the level of efficiency and responsiveness the supply chain can
achieve.
4. 3 major components; In-house or outsource, supplier selection, procurement.
5. IN-HOUSE OR OUTSOURCE It is best to outsource if the growth in total supply chain surplus is significant with little
additional risk.
6. SUPPLIER SELECTION Managers must decide on the number of suppliers they will have for a particular activity.
7. PROCUREMENT the process of obtaining goods and services within a supply chain. Managers must structure
procurement with a goal of increasing supply chain surplus.
SOURCING-RELATED METRICS: -
Sourcing decisions directly impact the cost of goods sold and accounts payable. The performance of the source
also impacts quality, inventories, and inbound transportation costs.
Days payable outstanding measures the number of days between when a supplier performed a supply chain task
and when it was paid.
Average purchase price measures the average price at which a good or service was purchased during the year.
Range of purchase price measures the fluctuation in purchase price during a specified period.
Average purchase quantity measures the average amount purchased per order. The goal is to identify whether a
sufficient level of aggregation is occurring across locations when placing an order.
Supply quality measures the quality of product supplied.
Supply lead time measures the average time between when an order is placed and when the product arrives.
Fraction of on-time deliveries measures the fraction of deliveries from the supplier that were on time.
Supplier reliability measures the variability of the supplier’s lead time as well as the delivered quantity relative to
plan.
OVERALL TRADE-OFF: INCREASE THE SUPPLY CHAIN SURPLUS
Sourcing decisions should be made to increase the size of the total surplus to be shared across the supply chain
Pricing: -
1. Pricing is the process by which a firm decides how much to charge customers for its goods and services.
2. Pricing is one of the most significant factors that affect the level and type of demand that the supply chain will face.
3. Pricing is a significant attribute through which a firm executes its competitive strategy (responsiveness and
efficiency).
4. 3 major components of pricing decision; Pricing and economies of scale, everyday low pricing vs high-low pricing,
fixed price vs menu pricing.
5. PRICING AND ECONOMIES OF SCALE Most supply chain activities display economies of scale. Foe ex- Changeovers
make small production runs more expensive per unit than large production runs.
6. EVERYDAY LOW PRICING VERSUS HIGH–LOW PRICING Everyday low pricing strategy results in relatively stable
demand. While high–low pricing strategy results in a peak during the discount week.
7. FIXED PRICE VERSUS MENU PRICING A firm must decide whether it will charge a fixed price for its supply chain
activities or have a menu with prices that vary with some other attribute, such as the response time or location of
delivery.

PRICING-RELATED METRICS: -
Pricing directly affects revenues but can also affect production costs and inventories depending upon its impact on
consumer demand.
Profit margin measures profit as a percentage of revenue.
Days sales outstanding measures the average time between when a sale is made and when the cash is collected.
Incremental fixed cost per order measures the incremental costs that are independent of the size of the order.
Incremental variable cost per unit measures the incremental costs that vary with the size of the order.
Average sale price measures the average price at which a supply chain activity was performed in a given period.
Average order size measures the average quantity per order.
Range of sale price measures the maximum and the minimum of sale price per unit over a specified time horizon.
Range of periodic sales measures the maximum and minimum of the quantity sold per period (day/week/month)
during a specified time horizon.
OVERALL TRADE-OFF: INCREASE FIRM PROFITS
All pricing decisions should be made with the objective of increasing firm profits. This requires an understanding
of the cost structure of performing a supply chain activity and the value this activity brings to the supply chain.
Chapter 4 notes
Role of Distribution in supply chain
1. Distribution refers to the steps taken to move and store a product from the supplier stage to a customer stage
in the supply chain.
2. The process of designing a distribution network has two broad phases.
(i) the broad structure of the supply chain network is visualized. This stage includes decisions such as
whether the product will be sold directly or go through an intermediary.
(ii) second phase then takes the broad structure and converts it into specific locations and their
capability, capacity, and demand allocation.
Factors considered in distribution network design
At the highest level, performance of a distribution network should be evaluated along two dimensions:
i. Customer needs that are met
ii. Cost of meeting customer needs
1. Measures influenced by structure of distribution network: -
• Response time • Product variety • Product availability • Customer experience • Time to market • Order
visibility • Returnability
2. Response time is the amount of time it takes for a customer to receive an order.
3. Product variety is the number of different products/configurations that are offered by the distribution
network.
4. Product availability is the probability of having a product in stock when a customer order arrives.
5. Customer experience includes the ease with which customers can place and receive orders and the extent
to which this experience is customized.
6. Time to market is the time it takes to bring a new product to the market.
7. Order visibility is the ability of customers to track their orders from placement to delivery.
8. Returnability is the ease with which a customer can return unsatisfactory merchandise and the ability of the
network to handle such returns.

9. Inbound transportation costs are the costs incurred in bringing material into a facility.
10. Outbound transportation costs are the costs of sending material out of a facility.
11. Total logistics costs are the sum of inventory, transportation, and facility costs for a supply chain network.

Design Options for a Distribution Network: -

1. Managers must make two key decisions when designing a distribution network:
i. Will product be delivered to the customer location or picked up from a prearranged site?
ii. Will product flow through an intermediary (or intermediate location)?
2. 6 distribution networks are there:
3. Manufacturer storage with direct shipping

4. Manufacturer Storage with Direct Shipping and In-Transit Merge

5. Distributor Storage with Carrier Delivery
6. Distributor Storage with Last-Mile Delivery
7. Manufacturer or Distributor Storage with Customer Pickup
8. Retail Storage with Customer Pickup
9. In this option, often viewed as the most traditional type of supply chain, inventory is stored locally at retail
stores. Customers walk into the retail store or place an order online or by phone and pick it up at the retail
store.
Selecting a Distribution Network design: -

Online Sales and its Distribution Network: -

Impact on Customer Service
1. Response time of customers is increased (from retail store) as shipping time is also included.
2. A company selling online can offer a large amount of product variety than a physical store.
3. By aggregating its inventory, a company selling online improves product availability.
4. Customer experience can be enhanced in terms of access, customization and convenience.
5. FASTER TIME TO MARKET A firm can introduce a new product much more quickly online as compared to
physical channels.
6. ORDER VISIBILITY The Internet makes it possible to provide visibility of order status.
7. RETURNABILITY is harder with online orders, which typically arrive from a centralized location. It is much
easier to return a product purchased at a retail store.
8. DIRECT SALES TO CUSTOMERS The Internet allows manufacturers and other members of the supply chain
that do not have direct contact with customers in traditional channels to get customer feedback and build a
relationship with the customer.
9. FLEXIBLE PRICING, PRODUCT PORTFOLIO, AND PROMOTIONS Given the ease of changing prices and
assortments online, the Internet allows a company selling online to manage revenues from its available
product portfolio much more effectively than do traditional channels. Promotion information can be
conveyed to customers quickly and inexpensively using the Internet.
10. EFFICIENT FUNDS TRANSFER The Internet and cell phones can enhance the convenience and lower the cost
of revenue collection, especially in small amounts.

Impact on Cost

1. Online sales can lower inventory levels by aggregating inventories far from customers if most customers are
willing to wait for delivery.
2. Two basic types of facilities costs must be included in the analysis: (1) costs related to the number and
location of facilities in a network and (2) costs associated with the operations that take place in these
facilities.
3. The Internet has significantly lowered the cost of “transporting” information goods in digital form such as
movies, music, and books.
4. An online seller can share demand information throughout its supply chain to improve visibility. The
Internet may also be used to share planning and forecasting information within the supply chain, further
improving coordination. This helps reduce overall supply chain costs and better match supply and demand.