Logistics & Supply Chain Management ( all inclusive)
FHNW BIT Logistic & supply chain management
FHNW BIT Logistic & supply chain management
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Lernkarten
What different types of KPIs are there?
- Statistical differentiation: absolute and relative
- Absolute KPIs e.g Revenue, Profit
- Relative KPIs, e.g. Revenue per full time equivalent, profit per full time equivalent
- Differentiation according to goal: perforamcne, liquidity and value-based KPIs
- Performance KPIs
- Return on Sales (ROS), Return on Equity (ROE), Retun on Total Capital (ROTC), Return on Capital Employed (ROCE), Return on Assets(ROA), Return on Investment (ROI)…
- Liquidity KPIs
- Cash Flow, Working Capital, Cash-to-Cash-Cycle, etc.
- Value-based KPIs
- Economic Value Added (EVA), Economic Profit, Added Value, Cash Value Added. Etc.
- Performance KPIs
- Differentiation according to effectiveness : Strategic and operational KPIs Strategic as well as operational indicators can be aligned either to a network (external) or internally
- Strategic
- KPIs for effectiveness
- KPIs measuring long-term effects
- Operating
- Efficiency KPIs
- Viability KPIs
- Strategic
- Differentiation according to the object: Performance and cost KPIs
- Performance
- Compliance with time and quality targets
- In modern value creation networks, further performance criteria such as adaptability, complexity willingness to cooperate
- Cost –Adherence to budget targets
- Performance
What KPI typology is there in the supply chain for the generic/structural KPIs?
Two dimensions:
- Increase in value, reduction of opportunity costs
- Input: procurement KPIs
- Throughput: KPIs for storage, production and picking
- Output: distribution KPIs
- Payment: financial KPIs
- Types of KPIs
- Generic KPIs (structural KPIs)
- KPIs for productivity and profitability evaluation
- Quality and service KPIs
Note: The KPIs and KPI typology are exemplary, depending on the company, industry, etc., other KPIs may also be relevant.
What is Working Capital?
- KPI for measuring liquidity
- The higher the working capital, the better future liquidity will be.
- Supply chain management has a direct influence upon this KPI:
- Inventories and receivables as part of current assets
- Effect of increase or decrease in inventories and receivables
- Excluding excess and obsolete assets and long-dated receivables (disputes), only
Working Capital % = (Current assets(<1 year) * 100) / current liabilities
What is the Cash-to-cash-cyle?
- KPI for measuring the liquidity cycle in days
- Number as small as possible, ideally negative
- Time span between outgoing payment (supplier) and incoming payment (customer)
- Cash-to-cash-cycle = The time span in days that is derived from the customer's payment, the coverage from inventory and the supplier's invoice (synonym: "liquidity cycle")
- Average cash-to-cash cycles of two to three months
- Does not reflect a «win-win situation», players leverage their market power.
- Let customers pay quickly for deliveries and services.
- Supplier invoices only paid after several weeks or months.
- Supplier finances the customer (interest-free), opportunity costs arise for the supplier.
What are the important areas in the cash to cash-cycle?
Important areas in the Cash-to-Cash-Cycle:
- Accounts receivable management (Days Sales Outstanding, DSO)
- Time between customer order and customer payment
- Order-to-Cash-Process
- Accounts payable management (Days Payables Outstanding, DPO)
- Time between purchase and outgoing payment
- Procure-to-Pay-Process
- Inventory management (Day of Inventory on Hand, DOH)
- Time between forecast for the production, storage and delivery.
- Forecast-to-Fulfilment-Process
Procedure 1. Analyze the credit quote creation process (BPMN diagram) on the following slide with regard to possible relevant KPIs
Which key figures would you use to measure the depicted process? Name at least three key figures, one each at KPI, BPI, PPI level. Describe the key figures according to how they’re differentiated and assign them to the key figure typology
Possible (responses (are neither selective nor exhaustive)
KPI
- Order lead time (generic key figure, throughput)
- Accepted offers (generic key figure or quality key figure, output)
- Rejected credit offers (quality indicator, output)
- Credit volume (generic key figure, output)
BPI
- Processing time for risk and conditions (productivity indicator, throughput
PPI
- Risk assesment period (productivity KPI, throughput)
Define the bullwhip effect
The «bullwhip effect» describes the following phenomenon: «If an unplanned increase in demand of 10% is detected within a value chain (consisting of the stages producer, distributor, dealer and customer), the manufacturers overreact. They do not want to lose potential sales. They increase their production by up to 40%. Only after about a year does the supply level off at the specified 10% increase in demand.»
The longer the whip the more the time lack. If there is a change in the customer demand and you work in the sales departement you will notice fast. So no enormous bullwip. But the supplier will be hit hard since it takes time to go from sales, to planner, to procurement to supplier.
What are causes of the bullwhip effect and how do you notice and measure the bullwhip effect?
General causes
- Lack of demand transparency: Changes in demand do not lead directly and immediately to production adjustments.
- Distortion of information: Disposition and ordering are geared to your own organization.
- Frequent adjustments of the stock level: successive planning instead of simultaneous planning.
Information deficits
- Demand forecast: Passing on demand information to suppliers only with a delay.
- Procurement policy: When supply shortages are feared, the strategic ordering behavior of institutional customers and end consumers changes abruptly.
- Demand bundling: Aggregation of customer call-offs over several periods to achieve economies of scale, volume discounts, fixed order costs.
- Price variation: Sales promotion activities lead to short-term surge in demand.
What are instruments to combat the bullwhip effect?
- Exchange of information on actual demand (reduction of uncertainty)
- e.g. with E-Procurement and EDI, Vendor Managed Inventory (see Block 2)
- Simultaneity of actions (avoidance of time delays and idle times)
- e.g. with Efficient Consumer Response (see Block 6)
- Centralization of disposition
- e.g. with disintermediation of retailers (see Block 9)
- Formation of strategic partnerships
- e.g. with Advanced Planning and Scheduling (APS) (see Block 5)
- e.g. with cooperation strategies (see Block 2)
- Reduction of variability (synchronization of ordering cycles)
- e.g. with optimal order quantities (see Block 3)
Which indicators are there to assess the performance of a supply chain?
On which areas of the supply chain do these indicators focus?
Performance measure help to point out what is working. There are four areas of the supply chain to focus on.
- Planning. Identify planning by review
- Stock turnover. = Ratio total sells vs. Actual stock at a point in time
- Planned versus actual production= tells me if I meet goals.
- Operations goal is that customer receive orders on time
- Order lead time = time from when customer submits order to the moment order arrives
- Delivery of products and services
- Order fulfillment = orders delivered with the right quantity, right quality and on time on the first try. (ask customer if order fulfillment is high = you are doing great if not you should work on your processes)
- On-time delivery
- Post-delivery performance
- Returns
- Wron product delivered
- Late delivery
- Defect delivery
- Invoice accuracy
- Returns
Which interpretation errors can occur for key figures?
That they be only looked at individually. You need to check all the key figures cause they are depending on each other. To get an accurate reflection of your performance you have to multiply all the KPIs out. E.g.
You got:
- Order entry accuracy: 98%
- Inventory availability: 80 %
- Warehouse DIFOT service level:90%
- Carrier delivers IFOT:98%
- Customer accepts order: 95%
- Accurate invoice paid: 98%
Multiply that the probability of getting an order right the first time is only 64%
How should a company use key figures, for example, to motivate its employees?
Show the KPI on all the screen for all employees visible. Employees were able to focus on that KPI and increase it by 200% over the next year just by seeing the number going up or down and them wanting to improve it.
What is the "cash cycle" or "cash-to-cash cycle"?
A cash cycle is the amount of time it takes of one unit of currentcy spent by your business today to turn into cash again and come back hopefully with more profit.
What is "Maverick-Spending" or "Maverick-Buying"? What is the problem?
Purchases made without the correct approval from any old vendor is calle maverick-spending.
Rule of thumb: if you do maverick-spending you'd on average will pay 20% more for whatever you purchase. Most commonly does Maverick-spending occurs most often with indirect purchases like printer paper, pens, toilet paper, keyboards etc. short stuff that can not be tied to any particular project.
Best ways to prevent maverick-spending from happening is to implement processes that seamslessly tie requestors and approvers together and store them all in one place
What is the "Beer Game" and what does it have to do with the bullwhip effect?
Beer game simulates a supply chain where unknown amount of orders go in with the retailer and orders neet to be made to distributer, warehouser and manufacturer. It clearly shows the effect a spice in customer demand can have on the manufacturing side.
What is the "Or-to-Payment-S", what are the "controllers", what is the "controlled system"?
The controller is the management level and the controlled system is the order-to-payment-S of the supply chain management.
What economic impacts do inventories, material costs, freight costs have?
They have an impact of procurement and logistics activities on the balance sheet and income statement.
- Cost changes with new suppliers
- Total cost of ownership. Sum of operational procurement costs
- Total landed cost. All costs up to the customer (incl. Taxes)
Which economic variables have an impact on the balance sheet, which on the income statement?
- Capital tied up
- Gross and net inventory
- Freight costs and material prices
- Indirect impact = cost of sales, operating costs, tooling costs, personnel costs.
What are key figures from a supply chain perspective? How can key figures be differentiated in relation to the management level?
- KPI= Key performance indicators, highlty strategic, long-term character.
- Strategic level e.g. order fulfillment time
- BPI = business performance indicators, tactical key figures
- Tactial level e.g. replenishment time, storage time, packaging time, delivery time
- PPI = process performance indicator, operational key figures
- Operational level e.g purchase requisition time, material disposition time, goods receipt time, incoming goods inspection time
What is the difference and relationship between key figures and benchmarking?
KPIs show where is the company relative to ist competition and benchmarking explains how an oranization managed to capture a good practive. Benchmarking as a navigation system to improve KPIs
According to which aspects can key figures be differentiated?
- Performance and costs KPIs
- Strategic (effectiveness, long-term) and operational (efficiency & viability) KPIs
- Performance liquidity and value-baded KPIs
- Absolute and relative
According to which two dimensions can a supply chain key figure typology be structured?
Two dimensions of KPI typology in the supply chain
1. increase in value, reduction of opportunity costs
- Input (purchasing)
- Throughput (storage, picking, production)
- Output (distribution)
- Payment (finance)
2. types of KPIsk
- Generic KPIs
- KPIs for productivity and profitability evaluation
- Quality and service KPIs
What is the categorization of the two dimensions?
- Generic KPI
- Input (purchasing)
- Purchased parts
- Throughput (storage, picking, production)
- Packaging units
- Output (distribution)
- deliveries
- Payment (finance)
- Working capital
- Cash-to-cash-cycle
- Input (purchasing)
- KPIs for productivity and profitability evaluation
- Input (purchasing)
- Acceptance time
- Receipt costs
- Daily shipments
- Throughput (storage, picking, production)
- Inventory changes
- Storage costs
- Incoming orders
- Output (distribution)
- Shipping cost
- Order processing
- Payment (finance)
- Billing rate
- Material intensity
- Input (purchasing)
- Quality and service KPIs
- Input (purchasing)
- Service level, return delay
- Throughput (storage, picking, production)
- Excess and obsoletes
- Storage losses
- defects
- Output (distribution)
- Same as input
- Payment (finance)
- Sc disputes
- Cost-change-back
- Inventory reserve
- Input (purchasing)
What is "working capital" and, what is the "cash to cash cycle"?
Cash to cash cycle: The cash to cash cycle is the time period between when a business pays cash to its suppliers for inventory and receives cash from its customers. The concept is used to determine the amount of cash needed to fund ongoing operations, and is a key factor in estimating financing requirements.
working capital: Working Capital cycle (WCC) refers to the time taken by an organization to convert its net current assets and current liabilities into cash. ... Therefore, a business tries to shorten the working capital cycles to improve the short-term liquidity condition and increase their business efficiency. Working capital % = (current assets(<1 year) * 100)/current liabilities
What is the "bullwhip effect" and, what are the reasons for this effect?
Bullwhip effect describes the effect something small has in one point and with delay there is a much bigger effect on a different end.
reasons for that effect to come in place are lack of demand transparency, distortion of information and frequent adjustments of the stock level.
What is the relevance of sustainability?
Sustainability plays a central role from an investment perspective. It must be possible to generate income today, tomorrow and the day after tomorrow.
- Customers and society demand sustainability:
- explicit (e.g. product requirements, supplier agreements, laws and regulations)
- implicit (expectations, feelings, willingness to pay)
- Sustainability in the internal supply chain and at suppliers is indispensable, measurable through:
- Quality, efficiency / resource conservation, innovation capability, etc.
- Sustainability issues today are rapidly becoming transparent and have a rapid impact:
- e.g. through media coverage, social media, interest groups
You must therefore understand…
- what the elements and approaches of sustainable SCM & Digital Business are
- how associated risks can be minimized and innovation potential can be realized
Define Sustainability
According to Elkington (1994), three dimensions must be fulfilled cumulatively so that an object under consideration (company, supply chain, etc.) can be regarded as sustainably performant:
- economic performance,
- ecological performance,
- and social performance.
For supply chain management, sustainability means taking into account all three target dimensions in intercompany collaboration and in the management of material, information and financial flows, so that:
- the actors in the supply chain must meet minimum ecological and social standards
- and the actors jointly strengthen their competitiveness (economic dimension)
Triple bottom line model:
- Economy (e.g. cost reduction through intercompany process optimization)
- Ecology (e.g. reducing the use of resources)
- Society (e.g. minimum standards in occupational safety)
Embedding sustainability in this module:
- Thus far: Focus primarily on economy
- In this block: broadening the focus to include ecology, social issues and the conclusion about the economy
What is the model for performance improvement through sustainability?
The following initiatives have a major impact on supply chain management when implemented.
- The «Konzernverantwortungsinitiative» aims to oblige corporations based in Switzerland to implement internationally recognized human rights and environmental standards.
- The «Gletscherinitiative» calls for a reduction in Switzerland's greenhouse gas emissions to 0 by 2050 and, as a result, a complete ban on the use of fossil fuels. –The «Initiative für sauberes Trinkwasser» calls for clean drinking water and the complete restructuring of agricultural production and food production.
- Introduction of the five-step «Nutri-Score» for «healthy foods» in Switzerland.
What are typical problem areas & challenges for sustainable SCM?
Typical problem areas
- Economy: costs, quality, reliability, flexibility, efficiency, transparency, innovation, ...
- Ecology: emissions, climate change, biodiversity, health, natural disasters, ...
- Social: child labor, slavery, occupational safety, discrimination, wars, ...
Typical challenges
- To anchor the own company’s and customer’s understanding of sustainability in the supply chain (and to enable customers to make a contribution).
- Problems diverge in space and time (i.e. where and when they occur in the supply chain)
- Different perspectives, motivation and possibilities of the actors
- Different types of influence and control (power)
What are Laws and voluntary commitments towards more sustainability in SCM
Laws and governmental initiatives in Switzerland
- Ordinance on the return, take-back and disposal of electrical and electronic devices (vREG)
- Ordinance on the amount of the early disposal fee for glass beverage packaging (VEG) –CO2 levy
Voluntary commitments / labels act like a law for the participants
- Marine Stewardship Council, e.g. at Coop
- Forest Stewardship Council, e.g. at MIGROS
- Demeter, e.g. straight from the farm
Typical voluntary initiatives in sustainable SCM
- Certification schemes (e.g. ISO 26000)
- Structured communication with customers (e.g. via labels, see http://www.labelinfo.ch)
- Harmonized reporting standards (z. B. Global Reporting Initiative)
- Common standards and sharing of results (z. B. PSCI)
Reasons for voluntary initiatives in sustainable SCM
- No worldwide applicable laws or regulations
- Regulatory vacuum in politically unstable countries and regions
- Economic necessity (cost reduction through cooperation in sustainability)