Chapter 2
Supply Chain Strategy and Performance
 Customer service and cost trade offs
 Supply chain performance measures
 Linking
supply chain and business
 Enhancing supply chain performance
Cost Versus Service
 A firm must ensure a smooth fit between its business
strategy and supply chain strategy
 Business strategy: the firm decides the market
segment in which it wants to operate and the level of
customer services it wants to offer
 Supply chain strategy: issues of costs that the firm
has to incur to provide the targeted level of customer
Cost of service
Supply Chain Performance Measures
Service Level
Managing Supply Chains Efficiently
Inefficient Practices
Existing Position
Service Level
Impact of Service Level on
Revenue Costs and Profits
Supply Chain Performance
Measures: Cost Versus Service
 Cost
 Service
 Order delivery lead time
 Responsiveness
 Delivery reliability
 Product variety
Order delivery lead time
 It is the time taken by the supply chain to complete
all the activities from order to delivery
Order penetration point/
decoupling point
Customer order
Order delivery lead time
Supply chain lead time
Supply Chain Typology
 Order Penetration Point/ Decoupling Point
 Make to Stock
 Make to Order
 Configure to Order
 Supply Chain Focus
 Efficiency
 Responsiveness
Supply Chain Typology: Order Penetration
Point/ Decoupling Point
Push-Pull Boundary of Supply Chains
Supply Chains responsiveness
 Responsiveness captures the firm’s ability to handle
the uncertainty of market demand
 Functional products are those that satisfy the basic
needs of a customer and therefore have low variety,
stable and predictable demand, long life cycles and
low profit margins
 Innovative products are those that try to satisfy a
broad rand of customers’ wants and have the high
variety, unstable, very hard to predict demand, short
life cycles, high profit margins and frequent stock
outs and markdowns
 Physical function is the
process of converting
materials into parts, then to finished products and
then transporting them across the various stages of
the chain
 Market mediation function ensures that the variety
of products reaching the market matches the needs
of the customers
Functional Versus Innovative
Products: Differences in Demand
Aspects of demand
Functional (predictable
(Unpredictable Demand)
Product Life cycle
More than 2 years
3 months to 1 year
Contribution margin ( % of 5% to 20%
sales price)
20% to 60%
Product variety
Low ( 10 to 20 variants per High ( often thousands of
variants per category)
Likely forecast error
5% to 20%
40% to 100%
Average stock-out rate
1% to 2%
10% to 40%
End-of-season mark
10% to 30%
Match Supply Chain Design with Product
Delivery reliability
 It is the degree to which a firm is able to service its
customers within the promised delivery time
Product variety
 The quantum of variety offered by a firm
 Variety explosion
Supply Chain Performance Measures:
SCOR Model
 Internal Facing
 Total logistics management cost, Value-added productivity ,
Warranty cost
 Cash-to-cash cycle time, Inventory days of supply, Asset
 Customer facing
 Order fulfilment performance ,Perfect order fulfilment
 Supply-chain response time, Production flexibility
Benchmarking Supply Chain
Performance Using Financial Data
 Total length of the chain: = DRM + DWIP + DFG
 DRM = RM * 365/ CRM, DWIP = SFG*365/ CP, DFG = FG *
365 / CS DRM , DWIP , DFG = Days of RM, WIP and FG
 Supply chain inefficiency ratio:
 SCC = DC + INV * ICC
& SCI = SCC / NS
 SCC = SC mgnt. costs , ICC= Inv. Car. cost SCI = SC
inefficiency ratio
 Supply chain working capital productivity:
 SWC = SC working capital, SWCP = SC working capital
productivity SWC = INV +AR–AP
The Strategic Profit Model
Impact of supply Chain Intiative on Business
 Cost reduction achieved by:
Reducing Inventory, Reducing logistics expenses, Reducing
direct material expenses, Reducing indirect material expenses
 Improved revenue and profitability by:
Selling higher margin products, Achieving higher market
share, Reducing backorder and lost sales, Attacking new
markets, Decreasing supply time to market
 Improved Operational efficiency by:
Reducing procurement expenses, Increasing assets utilization,
Delaying capital expenditure
 Reducing working capital by
Reducing inventory, Reducing accounts receivables
Enhancing Supply Chain Performance
Enhancing Supply Chain Performance
 Supply Chain Integration
 Toyota, Ford Motor Company (1910-1920),
 The Dubbawallas of Mumbai
 Supply Chain Optimisation
 Use of Quantitative models in supply chain design and
 Supply Chain Reconfiguration
 Dell, TVS Scooty

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