Achieving Competitive Edge through Supply Chain Management

Executive Summary

Efficient Supply Chain Management is increasingly being viewed as critical ingredient of realization of organizational goals and a means of gaining competitive advantage. And hence, companies are leaving no stone unturned to attain an excellent command over their supply chain, be it adoption of new practices or expending huge funds. However despite this, not many companies have been able to build up their supply chain to the level of being qualified as critical component of the organizational strategies. This is due to the inability of the organizations to measure appropriate metrics which would then decipher the strengths and weaknesses of the existing supply chain. There would always be a scope of refining the current supply chain so as to remove any defects that are present in it. These metrics would empower the Decision Makers or the Managers with refined data that will give them a complete perspective of how well the various components of the present supply chain are performing both on the supplier's and the consumer's side, and to remove the faults discovered in it by strategic decision making. In the following paper, we suggest the use of Data Analytics to measure these metrics (Key Performance Indicators). This would enable the manager to understand the Supply Chain better and make his own strategic decisions.

Introduction

Supply chains, initially thought of as a mean to implement re-engineering, downsizing and cost reduction, is now growing increasingly multifaceted. On average, any disruption in the supply chain results in nearly 11% decrease in stock price, and hence deeply affects the shareholder's value [1] . In this view, companies are looking up at strengthening their supply chains to achieve competitive advantage and gain market share. Not only this, Supply Chain management is now increasingly being viewed as an essential component of the overall organizational strategy. While the business strategy would lay an impetus on where an organization wants to reach, the Supply Chain would encompass the operations that enable realization of those goals. However, with ever increasing competition and price pressure, changing market dynamics owing to fast paces of globalization, increasingly complicated demand planning and more complex product life cycles, the "process of getting the right product to the right place at the right time at the right price", has become a challenge in itself.

Knowing What to Measure

Supply chain is fast becoming the catalyst meant to enhance the profitability of any project. In view of this, Companies are investing huge chunk of money to gain an advantage in their supply chain mechanisms. However the glitch in this scenario is that not many businesses are able to measure how well they are doing.

"You can't manage what you can't measure"

This age old management adage has found relevance in all disciplines of management, and supply chain management, keeping the above perspective in mind, is no exception. Hence measuring all available metrics is not the key learning, rather the focus should be on identifying and measuring metrics that will point out how well the businesses are accomplishing the strategic goals of the organization and earning increasing consumer satisfaction and hence their loyalty. Therefore what is critical to gaining competitive advantage through supply chain is to figure out which metrics have to be measured and then measuring them accurately. For example consider a company which has ten suppliers. Not all of these suppliers will be equally efficient or cost effective. In this paper we are proposing a methodology that enables managers to get a holistic picture of the efficiency of their supply chain and then manage and control them to gain competitive advantage. We are not proposing any Information Technology enabled tools like Electronic Data Interchange, SAP for gaining efficiency. Even with the application of the enterprise tools and sophisticated technologies companies fail to manage their supply chain because they don't know what to measure.

Data Analytics for Supply Chain Management

Data Analytics suggests converting raw data, which the company has, to gain useful information about the various processes, efficiency and then use that information for strategic decision making. It could be considered a performance management framework that helps companies set their goals, analyze their progress, gain insight, take action, and measure their success. It helps identify trends, perform comparisons and highlight opportunities in supply chain functions, even when large amount of data are involved. This technology can help decisions makers in supply chain areas such as sourcing, inventory management, manufacturing, quality, sales and logistics. Data Analytics advantage to Supply Chain Management Get an up-to-date view of each phase of the supply chain to expose issues before they can result in problems. Percolated information which can help suppliers and production planners take corrective action and fine tune plans and schedules. Empowered executives vested with the power to oversee important metrics of supply chain like quality of vendor, inventory shortages and production yields along with other key performance indicators. Identify critical supply chain details like most reliable suppliers with balances outstanding, inventory of warehouses, and material demand/supply chain. Better forecasting of demand Detailed information about inventory levels Maintaining constant supply of products Lower costs of goods by ordering optimal quantities Minimizing cost of excess and obsolete inventory Tight cash flow management Overview of logistics of the entire supply chain For a successful use of Data Analytics it is imperative that we should know what to measure i.e. identifying Key Performance Indicators for each element of the supply chain. What follows below is an analysis to deduce the KPIs for some elements of the supply chain and monitoring those KPIs to attain competitive advantage.

Identifying Key Performance Indicators

Key Performance Indicators, also known as KPI or Key Success Indicators (KSI) are used to measure the progress of an organization towards attaining its long term goals. The selected Key Performance Indicators should be quantifiable (measurable) and must be reflective of the organization's strategy. In addition, they should also be the key to the organizational success. Key Performance Indicators usually are long-term considerations, in a sense that their definitions and methods of measuring them do not change often. This would have some exceptions if the organization's goals change, or as it inches closer to achieving a goal. The legendary Pareto's Principle, "80% of the benefit will be derived from 20% of the activity" - also holds well in the case of these metrics. And therefore, choosing the right metrics is critical and less is also more. KPI for Supply Chain Management Above are the KPIs identified for some elements of Supply chain. Please note that we are not proposing any changes in the supply chain. This is because we believe lot of companies do not understand the underlying problems in their supply chain. If we can manage the supply chain by measuring the KPIs and give management an important tool to understand each element of the chain, we believe it will greatly enhance the efficiency of the supply chain and give them the competitive advantage. What we have done is to create some model dashboards to illustrate how the same can be done.

How can we measure the Supplier's Performance

The first dashboard shows how an organisation can measure the supplier performance.

Selection Criteria : Supplier

Supplier performance has been measured across the criteria which are listed below. For each criteria we have given a weightage that can vary across organisations. A score on a scale of 10 is awarded to each supplier for each criteria, following which the overall rating is calculated. Savings versus Target : This indicator captures the revenue saving the company registers by partnering with a particular supplier versus its set target.Companies today donot partner with lots sof suppliers but only a few key suppliers to enhance collaboration and communication. However saving cost is also an objective.Allocated weight: 0.2 Delivery Lead Time & Inventory Level: Consider a situation where the supplier doesn't deliver the raw materials on time. A situation like this can disrupt the entire supply chain. Of the several possible causes, one reason could be the supplier might be running out of stock. This can be disastrous for the company and can lead to loss in customer and market share. This is captured in the second and third criteria.

Allocated weight: 0.25.

(Figure: 1- To see the working model click here : Dashboard for supplier performance. Note the dashbaords are designed by the team using SAP BI Objects.) Score Card for the overall rating. Product Quality : Loss in market share of an organization can be attributed to delivery of defective products in the market. Most of the time this is caused by production fault. Yet another reason can be the quality of raw materials that are received from Supplier.

Allocated weight: 015

Product Innvoation: Innovation comes with a cost. Suppliers continously keep on innovating their products to enhance quality, create a differentiation which can provide competitive edge to not only suppliers but the company which buys them. Though innovation is important but the other criteria highlighted above are core to measure suppliers performance and hence we gave a low weightage to innovation and more weightage to other criterias. Allocated weight: 0.05 The Dashboard highlights all these criteria for each supplier and also the overall rating. A score board is provided for the decision makers to know the ratings of the suppliers. Note we have shown the ratings for the year 2009 but performance can be measured along various dimension lik time, product, location etc. The dashboard below shows the trend analysis for Supplier A. We can see that the overall rating of the supplier A has been continously declining and it is not wise for the management to carry on further business or renogotiate with this supplier. (Figure 2- To see the working model click here : Dashboard for supplier performance. Click on the 'Show Trend' tab on the top right corner of the dashboard.

Inventory, Customer and Prodcution Performance

Inventory and Production performance show the internal strength of the companies while suppliers and customers show the external linkages of the organization, and how well it collaborates with them. Effectively measuring the success indicators for Inventory & Production is a key to reduce cost, waste and increase efficiency. Knowing what to measure and measuring effectively is key to manage well. We have shown some indicators below, more indicators can be added across various dimensions. What we have captured is the Inventory Level, Product Quality , Inventory Turn over days across two hypothetical product A and B for the quarter ended on June'10. Top customers by sales value have been identifed for the same Quarter for both the products. Customer Sales : The pie chart shows the top 5 cutomers by sales for Product A. The same can be seen for product B. Figure 3: To see the working model click here : Customer Inventory Production Management Dashboard. Note the dashbaords are designed by the team using SAP BI Objects.) For Product A 65% of the total sales value comes from the top 5 customers. If we can monitor the important customers and the type of products they buy, then we could come up with customized options and schemes so as to gain their loyalty. Also, Customer related KPIs like new customers acquisiton, Shipping accuracy, Delivery Team, Percentage of prducts accurately deliveres, Percentage of product return which are not shown here can be captured and fairly indicate the customer satisfaction. For example suppose a company has operations throught India. We are analysing the indicator Percentage of product return(defective). We can start with analysing, for which product and from which geographical regions we are having the maximum return. Once we have identified the region, we can further drill down to know the state, and city information. We can further analyse the Distributors performance in the city and see is there is any fall in revenue from a particular distributor. Through the Dashboard, we can conclude say "Percentage of retruns for Product A is maximum in Cuttak, Orissa, Bhubaneswar from Distributor A". We can then deal with distributor and try to understand the root cause and take decision to correct the problem. We can also track the performance of the Success indicators across product lines, geographies or a particular customers segments. The whole concept behind this to 'know your customer well'. Till now we have mentioned about the External collaborations required to enhance the effectiveness of the supply chain. The below section talks about the internal strength of the company. This constitute the ability to manufacture and produce the quality product. In the model we have shown the Inventory Level, Inventory Turn Over day and Quality of Products manufactured. Other KPIs like Sales Production, Inventory management are also very crucial for any organization as increase in inventory drastically reduces the PBIT for the company. It is crucial that the management gets the up-to-date information on the Inventory levels and the Inventory Turnover days. We have also shown the Quality of the products for the Quarter. For Product A the Quality of the products was continusly increasing throughtout the Quarter (Figure 3), while for Product B we see a sharp decline in Quality. This lead to the differentiation in the revenue from the Top 5 customers for Products A & B. For Product A it is 65% of the total sales value and for B it is just 47%. Because of the decline in the Quality of the products delivered we can book sharp decline in Figure 4: To see the working model click here : Customer Inventory Production Management Dashboard. Select Product B from the Select Product Menu). Sales revenue. If we analyse the Revenue for the whole organization consisting of many products lines without a dashboard it becomes almost difficult to understand where the problem lies. Through a Dashboard, as in this case, we can know that for Porduct B there is decline in Sales Revenue because of not adhereing to the Quality. Hence management doesn't need to waste there effort understanding the whole supply chain. A timely and accurate information through a dashboard can make their lives easier, enable them to quick fix the problem and hence give them a competitive advantage. What we have tried to show here is that every company has the pool of data starting from supplier to customers. But very few companies are efficiently managing it. This is where our modeled dashboard comes to rescue. The key learning is that whenever sales comes down or there is a delay in delivery, which can lead to major changes in the supply chain process, it is imperative to understand the root cause of the problem which could be in a diverse range, starting from Cutomer segments, geographical location to production and manufacturing. Dashboards enable manager to identify the exact problem in their supply chain. Efficently monitoring each phase of the suppy chain will lead to huge competitive advantage and will enable the managers to focus on the acutal issue instead of incurring unwanted expenditures and efforts.

Conclusion

Through this paper we are not proposing any changes in the exisitng supply chain, rather, we are suggesting to manage the supply chain by measuring the KPIs. This would give management an important tool to understand each element of the chain and evaluate their performances. We believe that the above mentioned techniques will greatly enhance the efficiency of the supply chain and pave the way for competitive advantage.

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