Year: 2020

University of Mumbai BMS Notes

Logistical Network Analysis Meaning, Objectives, Importance

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Strategic analysis of logistical networks is designed to reduce costs, increase client service levels, and maximize profits. To achieve these goals, strategic decision making must be balanced between procurement, production, inventory management, and transportation.

Objectives of Logistical network analysis

Logistical network analysis is fundamentally aimed at determining the number of production sites, warehouses, and depots. It is also used to develop scenarios for assigning not only a capacity to each of these sites, but also an optimal geographic location in view of specific network constraints.

From both a local and global perspective, logistical network analysis is aimed at determining supply sources, production volumes, and inventory levels for each site being studied. As this pertains to transportation, logistical network analysis is used to weigh the merits of various transportation modes.  It is also used to develop a transportation plan with a view to determining the most suitable modes for each segment of the network.

Logistical network analysis: Proposed methodology

Given the need to jointly optimize various logistical aspects, such as production levels, inventory levels, and supply sources, adopting a systemic methodology is essential to the success of such a project.

Collect data

It is very important that data be collected concerning the current network (site location, node typologies), products (nomenclature, weight and volume), constraints (client demand, production capacity, delivery lead times, service levels, etc.), network costs (facilities, storage, production, transportation, etc.), and the transportation modes utilized.

Determine distribution strategy

The distribution strategy is used to determine the service level sought by the organization in response to demand in various markets. This strategy also stands at the forefront of considerations concerning the desired network transportation structure.

Determine scenarios

Determining scenarios forms the central pillar of strategic analysis. By varying site locations, network structures, client demand levels, and service levels, an array of scenarios can be developed to model a large number of situations with a reasonable likelihood of occurring. For example, you can determine the impacts of soaring client demand on network costs, significantly increasing service levels in certain regions or delocalizing your production activities.

Evaluate scenarios and select one

Once various scenarios have been established, they should be evaluated. To this end, you should develop an evaluation scale, including parameters to be considered and appropriate weighting factors. Once the criteria have been established and the scenarios have been evaluated, you can decide which scenario is most suitable this will be the future logistical network.

Implement scenario

Implementing the scenario requires meticulous planning, not only in structural terms, but also in terms of change management and training, two intangibles that remain a key component of project success.

Evaluate performance

After the scenario has been implemented, performance evaluation is used to provide the feedback required for project analysis. Evaluating financial factors (effective cost of the new network) or client service factors (delivery lead times, inventory outs, etc.) facilitates competitive benchmarking and ensures continuous improvements in our logistical network.

The source of a competitive advantage

From a perspective of globalized supply chain management, logistical network analysis thanks to the role it plays in reducing costs and improving client service is likely to be a major source of competitive advantages.

  1. Network design is prime responsibility of logistical management since a firm’s facilities and structure is used to provide products and materials to the customers.
  2. Logistics facilities typically include manufacturing plants, warehouses, cross-dock operations, and retail stores.
  3. Determining how many of each type of facility are needed, their geographic locations, and the work to be performed at each is an important part of network design.
  4. In certain situations, some of the facility operations may be outsourced to service specialists. Regardless of who does the actual work, all facilities must be managed as an integral part of a firm’s logistical network.
  5. Network design, not only determines the number and location of all types of facilities required to perform logistics work but also determines what inventory and how much to stock at each facility and where to assign customer orders for shipment.
  6. The network of facilities including information and transportation forms a structure from which logistical operations such as processing of customer orders, maintaining inventory and material handling performed.

The design of network must consider geographical variations. In context of global logistics, issues relating to network design become increasingly more complex.

The factors influencing modification of network design are:

  • Change in demand and supply
  • Product assortment
  • Changes in Supplier’s supplies
  • Manufacturing requirements.
University of Mumbai BMS Notes

Characteristics of Ideal Measurement System in Supply Chain

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Performance management is a continuous comprehensive process of communication and evaluation between a manager and an employee. A performance management system aims to fulfill the strategic objectives of the organization. Performance management focuses on employee engagement, development and performance evaluation. Every performance management system helps to improve the effectiveness of talent management in an organization by monitoring and improving the performance of the employees, by engaging them with continuous feedback, appreciation and rewards program. The performance management includes ensuring organizational buy-in of the employees, creating an open feedback culture and providing development opportunities to the employees.

Goal-setting and management:

Goals management is an integral part of an effective performance management system. Goals are important because they challenge the employees and motivate them to perform better. Setting goals would mean providing direction, priority and time frame for an employee to achieve the objectives. Based on the business models, goals are set by the employees and approved by the managers or set by the managers. However, the key factor is goals must be aligned with the organization’s objectives. In general, organization set goals that are challenging yet attainable. Clearly defined goals make employees understand what is expected of them and proceed with clarity.

Performance Appraisals:

Performance appraisals are the heart of the employee performance management system. Feedback questionnaires are created for employees based on their goals and competencies. Self-feedback, manager feedback and ratings are sought during the appraisal cycle. Performance manager software automates the appraisal cycle. The automated reminders and notifications in the software help reduce the manual follow-up efforts of HR to make the employees and managers to complete the feedback process. It also helps to drastically reduce the appraisal duration.

One-on-one appraisal meeting summary is captured in the system and final ratings and recommendations are published for the employees. These ratings are then used to decide compensation revisions. From creating appraisal feedback forms and workflows to appraisal letter distribution the software helps to automate the entire performance appraisal process.

360 Degree Reviews:

An ideal performance management system does not only stimulate feedback from the manager but considers an overarching perspective of everyone who is involved in the business. This could be the employee, or his colleagues and external stakeholders. So how do we bring in a system where everyone is involved in the feedback process?

One way of doing this is by creating a survey or a rating mechanism where the employee can do a self-evaluation, the colleagues can rate him, then the managers, customers, vendors, and HR can give their feedback. This gives an overall perspective on the employee’s performance. You can even make this creative by adding emoticons in the rating section.

With a 360-degree review mechanism, there is an upward feature through which employees can give anonymous feedback to their managers. The managers will then be able to know how capable they are in terms of their leadership skills and team management. Through this, employees can identify the perception gaps between the managers and the employees.

Employee engagement Employee engagement is the hallmark of a successful performance management system. Employee engagement is the process of creating the best work conditions for an employee to keep him motivated. When employees are engaged, they give their best performance every day.

In a performance management system, engaging an employee would mean, having a system where employees are reviewed on an overall basis, they are recognized for good performance, rewarded for their achievements and are appreciated for their talent. Something as simple as, “You did well today” can go a long way.

One way of doing this is to have a software that creates employee engagement surveys. The survey can have various questions that measure employee engagement either qualitatively or quantitatively. An example of a qualitative survey question could be, “How well are you being able to contribute to the goals of the organization?” a quantitative question, on the other hand, would either use a rating scale or yes or no questions.

Continuous Feedback Mechanism:

From the beginning, we have been emphasizing one thing that is very significant for a successful performance management system. It is a feedback mechanism that is continuous. When you have a continuous feedback mechanism in your performance management system, all the other processes will become easier. In one way, you could say that the continuous feedback mechanism is a backbone to any performance management system.

When you have a continuous feedback mechanism in your performance management system, you could have something like a wall or a portal that could serve as a platform for employees and managers to post their comments and feedback for employee performance. In a way, this digital wall could become an employee performance evaluation tool.

In a performance management system, continuous feedback promotes healthy collaboration between all the employees and the managers. The feedback that is provided is accurate and timely. This process is a lot more convenient than those excel sheets that you send every year. You can even have a facility in which you can send confidential comments to the employees by having a mobile app.

Performance Analytics:

In order to do effective performance management, it is important that your performance management system has a thorough record of all the performance reports of the employees. It is important that your PMS has proper records of all the employees’ profile reports and career history so that the managers can come up with strategies for employee’s talent management.

Management Notes

Dimensions of Performance Measurement in Supply Chain

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This system suggests that any supply chain can be measured on three key dimensions.

A) Service

B) Assets

C) Speed

Service relates to the ability to anticipate, capture and fulfill customer demand with personalized products and on-time delivery; Assets involve anything with commercial value, primarily inventory and cash; and Speed includes metrics which are time related, they track responsiveness and velocity of execution.

Every supply chain should have at least one performance measure on each of these three critical dimensions.

A) Service Metrics

The basic premise for service metrics is to measure how well the company is serving (or not serving) its customers. Generally it is difficult to quantify the cost of stock outs or late deliveries, so the targets are set on customer service metrics. Also, the build-to stock situation differs from the build-to-order situation, so related but different metrics are used in these environments. Table 13.3 contains some common service metrics used in these two environments. These are time-tested measures, which continue to be valuable customer service metrics for supply chains.

The Line Item Fill Rate is the percentage of individual “lines” on all customer orders, which are filled immediately, while the Order Fill Rate counts as a success only those customer orders in which all “lines” have been filled.

“Aging” refers to maintaining data on how long it takes to fill a backorder, or how long it takes to complete an order, which is late. Tracking this data and maintaining it in an accessible database enables its periodic recall.

Build to Stock (BTS) Build to Order (BTO)
Line item fill Rate Quoted customer Response Time
Complete order fill Rate On-time Completion
Delivery process on Time Delivery process on Time
Backordered/Lost Sales Late orders
No of Order No. of Late Orders

In the IT and especially Internet era, extensions of the customer order response time include the on-line service response time of a website as well as the response time required to complete delivery of the product or service.

B) Assets Metrics

The major asset involved in supply chains is inventory throughout the chain. Two metrics generally used for inventory are:

1) Monetary Value ($, Yen, Euro, et cetera)

2) Time Supply or Inventory Turns

Inventory can be measured as a time supply, for example a 3-week supply of inventory, or as inventory turns, defined as

Turns = (Cost of goods sold)/(Inventory Value)

The Time Supply or Turns measures relate to inventory flows; the Value of inventory relates to inventory as an asset on the firm’s Balance Sheet. Inventory Turns are calculated in isolation, by accountants with access to financial and inventory data but without corresponding access to customer service data.

C) Speed Metrics

There are a series of metrics related to timeliness, speed, responsiveness and flexibility

  • Cycle (flow) Time at a Node
  • Supply Chain Cycle Time
  • Cash Conversion Cycle
  • “Upside” Flexibility

Cycle Time Reduction- i.e. lowering lead-time and WIP inventory levels.

The Supply Chain Cycle Time – measures the total time it would take to fulfill a new order if all upstream and in-house inventory levels were zero. It is measured by adding up the longest (bottleneck) lead times at each stage in the supply chain.

The Cash Conversion Cycle (or Cash to Cash cycle time) attempts to measure the time elapsed between paying the suppliers for material and getting paid by the customers. It is estimated as follows, with all quantities measured in days of supply:

Cash Conversion Cycle = Inventory + Accounts Receivable – Accounts Payable

Upside flexibility refers to requirements in high-tech industry that a vendor be prepared to provide say 25% additional material above and beyond the committed order, in order for the buyer to be protected when the buyer’s demand is higher than forecasted.

Dimension based measurement system tries to cover the different dimension of the supply chain and also provide the detailed measure for each dimension. The system has limitation to provide the strategic alignment of different dimension and to measure the effect of different tradeoff between the dimensions.

Interface Based Measurement System

This framework aligns performance at each link (supplier customer pair) within the supply chain. The framework begins with the linkages at the focal company and moves outward a link at a time. The link-by-link approach provides a means for aligning performance from point-of-origin to point-of-consumption with the overall objective of maximizing shareholder value for the total supply chain as well as for each company.

The framework consists of seven steps:

  • Map the supply chain from point-of-origin to point-of-consumption to identify where key linkages exist.
  • Use the customer relationship management and supplier relationship management processes to analyze each link (customer supplier pair) and determine where additional value can be created for the supply chain.
  • Develop customer and supplier profit and loss (P&L) statements to assess the effect of the relationship on profitability and shareholder value of the two firms.
  • Realign supply chain processes and activities to achieve performance objectives.
  • Establish non-financial performance measures that align individual behavior with supply chain process objectives and financial goals.
  • Compare shareholder value and market capitalization across firms with supply chain objectives and revise process and performance measures as necessary.
  • Replicate steps at each link in the supply chain.

Interface based measurement system looks at the supply chain as a series of different links and to optimize the total supply chain a win-win approach is required at all linkages. Conceptually it looks good but in actual business setting it requires openness and total sharing of information at every link of the chain, which seem to be difficult to implement.

Comparison of measurement systems

Different measurement systems described above have different views for integrating the supply chain performance measures. These systems can be compared using five dimensions:

(1) Hierarchy (Strategic, Tactical and Operational)

(2) Results (Financial and Non-financial)

(3) Linkages (Integrated and Isolated)

(4) Determinants (Quality, Flexibility and Time)

(5) Stability (Static and Dynamic).

It is evident from the above explanations that supply chain balanced scorecard covers all the parameters.

The system is easy to implement if the company strategy is well defined. Hierarchical based measurement system encompasses all parameters but at one time it tries to cover only one perspective, so a hybrid model of balance score card and hierarchical can be an another alternative i.e. at each hierarchical level we define the measure for each perspective.

Perspective based system also sees the measures in isolated manner but it covers some unique perspectives which are not covered in balance scorecard like system dynamics and operation research which provides a great help in measuring dynamic capability of supply chain. SCOR covers all relevant parameters required in the system and tries to cover the whole supply chain in standard set of processes.

It also covers the different dimensions at each level of the supply chain. The model applicability is easier where ERP and BPR practices are in progress and large set of data collection software’s are already in place. In SMEs and especially in Indian context applicability is questionable due to extra cost of maintaining such an exhaustive system. Interface based measurement system doesn’t cover the non-financial measures and strategic links to different linkages is not possible. The system gives more emphasis on strengthening the internal and external linkage to improve the overall supply chain.

Selecting measures

While the approaches described above provide guidance for supply chain measurement, they provide less help in assessing specific metrics to be used. In this regard, a key driving principle is that measures should be aligned to strategic objectives. Supply chain strategy depends upon its current competencies and strategic direction, which differs for every company. Companies, for example, can generally fall into the following developmental stages that will dictate the types of measures and the degrees to which they will need to focus:

  • Functional Excellence: A stage in which a company needs to develop excellence within each of its operating units such as the manufacturing, customer service, or logistics departments. Metrics for a company in this stage will need to focus on individual functional departments.
  • Enterprise-Wide Integration: A stage in which a company needs to develop excellence in its cross-functional processes rather than within its individual functional departments. Metrics for a company in this stage will need to focus on cross-functional processes.
  • Extended Enterprise Integration: A stage in which a company needs to develop excellence in inter-enterprise processes. Metrics for a company in this stage will focus on external and cross-enterprise metrics.

Most companies have focused their performance measurement on achieving functional excellence. With the advent of Supply Chain Management (SCM) principles aimed at integrating their supply chains, many have objectives to increase their degree of enterprise-wide integration and extended enterprise integration. In order to achieve these types of objectives, their performance measurement systems will need to align to them.

Management Notes

Types of Performance Measurement in Supply Chain

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Dimension-based Measurement Systems (DBMS)

DBMS concept is based on the premise that any supply chain can be measured on dimensions (Ramaa et al., 2009). Initially in 1999, Beamon (1999) identified three types of measures as necessary components in supply chain performance measurement systems, namely: Resources (R), Output (O) and Flexibility (F). She believed that each of these types is vital to reflect the overall performance success of a supply chain and that the result of each type affects the others.

Examples of resource performance measures are manufacturing cost, inventory cost and return on investment (ROI). Output measures include total sales, on-time deliveries and fill rate, whereas flexibility measurements measure volume changes and new product introduction.

Another example of DBMS is that identified by Hausman (2003) who suggests that a supply chain needs to perform well on three key dimensions: Service, Assets and Speed.

Service related to the ability to anticipate, capture and fulfil customer demands. Assets involve anything with financial value such as inventory and cash, while speed includes metrics that are time-related to track responsiveness and velocity of execution.

DBMS are generally simple, flexible and easy to implement; however, they don’t reflect the performance of internal functions and operations within the chain since they only focus on top level measures.

Interface-based Measurement Systems (IBMS)

IBMS was primarily put forward in 2001 by Lambert and Pohlen (2001). They proposed a framework in which performance of each stage is linked within the supply chain. The framework begins with the linkages at the focal company and moves outward one link at a time. This link by link approach provides a means for aligning performance from point of origin to point of consumption with the overall objective of maximizing the shareholder value for the entire supply chain as well as for each individual company. The IBMS approach theoretically looks good but in actual business setting, it requires openness and total sharing of information at every stage which is eventually difficult to implement.

Perspective-based Measurement Systems (PBMS)

PBMS look at the supply chain in all possible perspectives and provides measures to evaluate each of them. They were developed in 2003 by Otto and Kotzab (2003) who identified six main perspectives as follows: System Dynamics, Operations Research, Logistics, Marketing, Organization and Strategy. The authors presented six unique sets of metrics, one for each perspective, to measure performance of supply chains.

An example of a PBMS is the Logistics Scoreboard in which recommended performance measures focus only on logistical aspects of the supply chain. They fall into the following general categories: logistics financial performance measures (ex: expenses and return on assets), logistics productivity measures (ex: orders shipped per hour), logistics quality measures (ex: shipment damage) and logistics cycle time measures (ex: order entry time).

PBMS provides different vision to evaluate the supply chain performance. However, there might be a trade-off between measures of one perspective with measures of other perspectives.

Hierarchical-based Measurement Systems (HBMS)

In 2004, Gunasekaran et al. (2004) developed HBMS in which measures are classified as strategic, tactical or operational. The main idea was to assign measures where they can be best dealt with by the appropriate management level, thus facilitating quick and appropriate decisions. The metrics are further distinguished as financial or non-financial. Such systems tie together the hierarchical view of supply chain performance measurement and maps the performance measures specific to organization goals. However in such systems, a clear guide cannot be made to put the measures into different levels that can lead to reduced levels of conflict among the different supply chain partners.

Function-based Measurement Systems (FBMS)

FBMS is one in which measures are combined to cover the different processes in a supply chain. It was originally developed in 2005 by Christopher (2005) to cover the detailed performance measures applicable at different linkages of the supply chain. Though easy to implement and targets can be dedicated to individual departments, it does not provide top level measures to cover the entire supply chain. FBMS are generally criticized for viewing the separate supply chain functions in isolation with the overall strategy and hence results in localized benefits that may harm the whole supply chain.

Efficiency-based Measurement Systems (EBMS)

EBMS are systems that measure the supply chain performance in terms of efficiency. Several approaches were developed in this context provided a framework to study supply chain performance by developing a Data Envelopment Analysis (DEA) model for the internal supply chain performance efficiency using case study applications.

Chen et al. (2006) investigated the efficiency existing between two supply chain members. They proposed several DEA-based supply chain efficiency functions aimed at identifying the inefficiency among the chain members by developing two efficiency functions. They established the existence of several Nash1 equilibriums in the supplier manufacturer game.

Liang et al. (2006) developed a new DEA based approach to measure the supply chain efficiency when intermediate measures are built into the evaluation scheme. It aimed at correcting the inadequacies of the conventional DEA model when evaluating multi-member supply chain operations directly. Berrah and Cliville (2007) developed a framework which linked elementary performance expression to the overall performance of a supply chain. Aggregation was done using the Choquet integral Operator. Their approach allowed for the comparison of situations conventionally considered incomparable.

Most of the EBMS are DEA-based. Despite being very useful, they suffer the main limitations of the conventional DEA approaches in any other context. The efficiency measured is only a relative one. It determines the efficiency of different units within the supply chain relative to each other and not versus a previously set target value or a best practice. This might sometimes be misleading to managers and stakeholders.

Generic Performance Measurement Systems (GPMS)

Since the early 1980s, a number of generic performance measurement models and frameworks, i.e. not necessarily specific to supply chains, have been developed. Each of which has its respective benefits and limitations. However, the literature review indicates that only very few of them (Tangen,, 2004; Kurien and Qureshi , 2011) are widely cited and referred to as discussed below.

  1. Performance Prism

The performance prism is a performance measurement framework that suggests performance should be measured across five distinct, but linked, perspectives of performance as indicated by: stakeholder satisfaction, strategies, processes, capabilities and stakeholder contributions.

The performance prism has a much more comprehensive view of different stakeholders than other frameworks. The major strength of this conceptual framework is that it first questions the company’s existing strategy before the process of selecting measures is started. Hence, it ensures that the performance measures have a strong foundation.

The performance prism also considers new stakeholders (such as employees, suppliers, alliance partners or intermediaries) who are usually neglected when forming performance measures. Although the performance prism extends beyond traditional performance measurement, a main drawback is that it offers little about how the performance measures are going to be identified and selected.

ii. Performance Pyramid

The purpose of the performance pyramid is to link an organization’s strategy with its operations by translating objectives from the top down (based on customer priorities) and measures from the bottom up (Kurien and Qureshi, 2011; Lynch and Cross, 1991). This framework includes four levels of objectives that address an organization’s external effectiveness (left side of the pyramid) and its internal efficiency (right side of the pyramid) as demonstrated in Tangen (2004). The development of a company’s performance pyramid starts with defining an overall corporate vision at the first level, which is then translated into individual business unit objectives. The second-level business units are short-term targets of cash flow and profitability and long-term goals of growth and market position. The business operating system bridges the gap between top-level and day-to-day operational measures such as customer satisfaction, flexibility and productivity. Finally, four key performance measures: quality, delivery, cycle time and waste, are used at departments and work centers on a daily basis.

iii. Medori and Steeple’s Framework In 2000, Medori and Steeple (2000) developed and presented an integrated framework for auditing and enhancing performance measurement systems. The graphical framework of their approach is presented in Medori and Steeple (2000). It consists of six detailed stages. Similar to most frameworks, the starting point begins with defining the company’s manufacturing strategy and success factors. In the next stage, the primary task is to match the company’s strategic requirements from the previous stage with competitive priorities. Then, the selection of the most suitable measures takes place in the following stage. After the selection of measures, the existing performance measurement system is audited to identify which existing measures will be kept. An essential activity is the actual implementation of the measures. The last stage is based around the periodic review of the company’s performance measures. An important advantage is that it can be used both to design a new system and to enhance an existing one. It also contains a unique description of how performance measures should be selected. Its limitations are mainly located in the second stage, where a performance measurement grid is created in order to give the system its basic design. Little guidance is given in this stage and the grid is only constructed from six competitive priorities whereas performance measures can be divided into many other categories.

In an earlier literature survey on SCPM, Ramaa et al. (2009) have previously classified SCPM systems into seven distinct types. However in this review, other two novel groups are added to their classification, namely: EBMS and GPMS. The first refers to the performance measurement systems that aimed at measuring the efficiency of supply chains and groups them into one category, while the latter is composed of the common performance measurement frameworks available in literature that can be used for SCPM.

Management Notes

Meaning, Objectives of Performance Measurement in Supply Chain

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The Council of Logistics Management defines Supply Chain Management as “the process of planning, implementing and controlling efficient and cost effective flow of materials, in-process inventory, finished goods and related information from point-of-orderto point-of-consumption, for the purpose of conforming to customer requirements”. The fundamental objective of a high performance of supply chain is to produce products to match customers’ demand cycle, while producing the greatest value possible to the customers. A number of technologies and managerial attention has gone into improving supply chain performance. The increasingly competitive environment calls for speedy, cost efficient, accurate and reliable supply chains. Supply chain management is no longer a matter of operational and functional areas of the firm. Today, it is a strategic issue demanding top-level management attention. The supply chain can have huge leverage on the creation of customer value. Supply chains will fight the new battle for market dominance; as such measurements around the supply chain are critical. If we look at competition today, it is supply chain versus supply chain. This brings out a situation that competitors might focus on developing superior supply chain Performance. Accordingly, companies will have to find or develop metrics to measure performance of supply chain.

Process measurements

Key Performance Indicator (KPI) is a performance measure, a yardstick for tracking progress and a tool to achieve a goal. KPI encompasses all areas of Business: Demand Management, Supply, Conversion and Delivery.

The best practices of business are:

Key Performance Indicator (KPI) is a performance measure, a yardstick for tracking progress and a tool to achieve a goal. KPI encompasses all areas of Business Demand Management, Supply, Conversion and Delivery.

The best practices of business are:

  • Quantitative and qualitative metrics
  • Areas include cost, quality, and customer satisfaction
  • Best-in-class standards for the defined processes
  • Used to measure against current business process

Supply chain performance measure can be defined as an approach to judge the performance of supply chain system. Supply chain performance measures can broadly be classified into two categories:

  • Qualitative measures: For example, customer satisfaction and product quality.
  • Quantitative measures: For example, order-to-delivery lead time, supply chain response time, flexibility, resource utilization, delivery performance.

Here, we will be considering the quantitative performance measures only. The performance of a supply chain can be improvised by using a multi-dimensional strategy, which addresses how the company needs to provide services to diverse customer demands.

Quantitative Measures

Mostly the measures taken for measuring the performance may be somewhat similar to each other, but the objective behind each segment is very different from the other.

Quantitative measures is the assessments used to measure the performance, and compare or track the performance or products. We can further divide the quantitative measures of supply chain performance into two types. They are:

  • Non-financial measures
  • Financial measures

Non – Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level, inventory levels, resource utilization ability to perform, flexibility, and quality. In this section, we will discuss the first four dimensions of the metrics:

Cycle Time

Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a business process. For supply chains, cycle time can be defined as the business processes of interest, supply chain process and the order-to-delivery process. In the cycle time, we should learn about two types of lead times. They are as follows:

  • Supply chain lead time
  • Order-to-delivery lead time

The order-to-delivery lead time can be defined as the time of delay in the middle of the placement of order by a customer and the delivery of products to the customer. In case the item is in stock, it would be similar to the distribution lead time and order management time. If the ordered item needs to be produced, it would be the summation of supplier lead time, manufacturing lead time, distribution lead time and order management time.

The supply chain process lead time can be defined as the time taken by the supply chain to transform the raw materials into final products along with the time required to reach the products to the customer’s destination address.

Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the logistics lead time for transport of raw materials from suppliers to plants and for shipment of semi-finished/finished products in and out of intermediate storage points.

Lead time in supply chains is governed by the halts in the interface because of the interfaces between suppliers and manufacturing plants, between plants and warehouses, between distributors and retailers and many more.

Lead time compression is a crucial topic to discuss due to the time based competition and the collaboration of lead time with inventory levels, costs, and customer service levels.

Customer Service Level

The customer service level in a supply chain is marked as an operation of multiple unique performance indices. Here we have three measures to gauge performance. They are as follows:

  • Order fill rate: The order fill rate is the portion of customer demands that can be easily satisfied from the stock available. For this portion of customer demands, there is no need to consider the supplier lead time and the manufacturing lead time. The order fill rate could be with respect to a central warehouse or a field warehouse or stock at any level in the system.
  • Stockout rate: It is the reverse of order fill rate and marks the portion of orders lost because of a stockout.
  • Backorder level: This is yet another measure, which is the gauge of total number of orders waiting to be filled.
  • Probability of on-time delivery: It is the portion of customer orders that are completed on-time, i.e., within the agreed-upon due date.

In order to maximize the customer service level, it is important to maximize order fill rate, minimize stockout rate, and minimize backorder levels.

Inventory Levels

As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient inventory to meet the customer demands. In a supply chain system, inventories can be further divided into four categories.

  • Raw materials
  • Work-in-process, i.e., unfinished and semi-finished sections
  • Finished goods inventory
  • Spare parts

Every inventory is held for a different reason. It’s a must to maintain optimal levels of each type of inventory. Hence gauging the actual inventory levels will supply a better scenario of system efficiency.

Resource Utilization

In a supply chain network, huge variety of resources is used. These different types of resources available for different applications are mentioned below.

  • Manufacturing resources: Include the machines, material handlers, tools, etc.
  • Storage resources: Comprise warehouses, automated storage and retrieval systems.
  • Logistics resources: Engage trucks, rail transport, air-cargo carriers, etc.
  • Human resources: Consist of labor, scientific and technical personnel.
  • Financial resources: Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets or resources efficiently in order to maximize customer service levels, reduce lead times and optimize inventory levels.

Finanacial Measures

The measures taken for gauging different fixed and operational costs related to a supply chain are considered the financial measures. Finally, the key objective to be achieved is to maximize the revenue by maintaining low supply chain costs.

There is a hike in prices because of the inventories, transportation, facilities, operations, technology, materials, and labor. Generally, the financial performance of a supply chain is assessed by considering the following items:

  • Cost of raw materials.
  • Revenue from goods sold.
  • Activity-based costs like the material handling, manufacturing, assembling rates etc.
  • Inventory holding costs.
  • Transportation costs.
  • Cost of expired perishable goods.
  • Penalties for incorrectly filled or late orders delivered to customers.
  • Credits for incorrectly filled or late deliveries from suppliers.
  • Cost of goods returned by customers.
  • Credits for goods returned to suppliers.

In short, we can say that the financial performance indices can be merged as one by using key modules such as activity based costing, inventory costing, transportation costing, and inter-company financial transactions.

University of Mumbai BMS Notes

RORO/LASH

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Roll-on/roll-off (RORO or ro-ro) ships are cargo ships designed to carry wheeled cargo, such as cars, trucks, semi-trailer trucks, trailers, and railroad cars that are driven on and off the ship on their own wheels or using a platform vehicle, such as a self-propelled modular transporter. This is in contrast to lift-on/lift-off (LoLo) vessels, which use a crane to load and unload cargo.

RORO vessels have either built-in or shore-based ramps or ferry slips that allow the cargo to be efficiently rolled on and off the vessel when in port. While smaller ferries that operate across rivers and other short distances often have built-in ramps, the term RORO is generally reserved for large oceangoing vessels. The ramps and doors may be located in the stern, bow, or sides, or any combination thereof.

Description

Types of RORO vessels include ferries, cruiseferries, cargo ships, barges, and RoRo service for air deliveries. New automobiles that are transported by ship are often moved on a large type of RORO called a pure car carrier (PCC) or pure car/truck carrier (PCTC).

Elsewhere in the shipping industry, cargo is normally measured by the metric tonne, but RORO cargo is typically measured in lanes in metres (LIMs). This is calculated by multiplying the cargo length in metres by the number of decks and by its width in lanes (lane width differs from vessel to vessel, and there are several industry standards).

Advantages of a ro-ro ship

A ro-ro ship offers a number of advantages over traditional ships. Some of the advantages are as follows:

  • For the shipper, the advantage is speed. Since cars and lorries can drive straight on to the ship at one port and then drive off at the other port within a few minutes of the ship docking, it saves a lot of time of the shipper.
  • It can also integrate well with other transport development, such as containers. The use of Customs-sealed units has enabled frontiers to be crossed with the minimum of delay. Therefore, it increases the speed and efficiency of the shipper.
  • The ship has also proved extremely popular with holidaymakers and private car owners. It has significantly contributed to the growth of tourism. A person can take his car from one country to another by the sea with the help of a ro-ro vessel.

Roll-on/Roll-off Ships Stowage and Securing of Vehicles

Principal Sources of Danger

Though Ro-Ro vessel’s make a very small proportion of the Merchant marine tonnage, there have been many accidents involving these, giving rise to far worse consequences. It is very important to understand the “Sources of Danger “which leads to such petrifying situations. These sources of danger don’t only affect the safety of roll-on/roll-off vessels but also the passenger/crew in it.

  • The unacceptable condition of the consignment constraining it to be properly lashed for Sea. Example: insufficient number and incorrect positioning of securing points, Weak securing points etc.
  • The free surface effect in tank vehicles and tank containers which are slack;
  • Poorly maintained ramps, lifts and bow and stern doors;
  • Poorly maintained, inadequately illuminated or badly planned decks;
  • Wet Decks;
  • Vehicles being moved negligently on vehicle decks and ramps;
  • The reversing of road vehicles on vehicle decks and ramps;
  • Insufficient or incorrectly applied lashings or wrong use of Lashing equipment or of inadequate strength having regard to the mass and centre of gravity of the vehicle and the weather conditions likely to be encountered during the voyage;
  • Free play in the suspension of vehicles;

Lighter Aboard Ship is the name of a type of vessel that carries standardised pushed barges. The pushed barges, that can weigh up to 600 tons when loaded, are loaded and unloaded by means of a heavy-duty gantry crane onboard the ship. Once the pushed barges are loaded in the water, they are interlinked to form major pushed convoys.

LASH vessels are used only in areas with large deltas (the Maas Delta, The Mississippi estuary) as the large pushed convoys can travel deep into the hinterland of these regions.

University of Mumbai BMS Notes

Activity Based Costing in Logistics

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Activity-based costing seeks to relate all relevant expenses to the value adding activities performed. For example, costs are assigned to a customer or product to reflect all relevant activity cost independent of when and where they occur. The fundamental concept of activity-based costing is that expenses need to be assigned to the activity that consumes a resource rather than to an organizational or budget unit. For example, two products produced in the same manufacturing facility, may require different assembling and handling procedures. One product may need an assembly or packaging operations that requires additional equipment or labor. If total equipment and labor costs are allocated to the products on the basis of sales or units produced than both items will be charged for the additional assembly and packaging operations required by only one of them.

In case of logistics, the key event is a customer order and related activities and relevant costs that reflect the work required to fulfill the order. In other words, activity based costing in logistics must provide managers the insights needed to determine if a specific customer, product, order, or service is profitable. This requires matching specific revenue with specific costs. The guiding criteria for effective logistical activity-based costing are relevancy and consistency. Relevancy is important in the sense that the costs assignment helps managers to better understand the major factors affecting logistics expenses. Consistency is important in terms of comparing related activities over time. In the final analysis, activity based costing in logistics  has to make sense only to the managers who are using it as a guide to decision making.

(I) Cost Identification:

All costs associated with the performance of logistics function should be in the activity- based classification. The total cost associated with fore casting and order management, transportation, inventory, warehousing, packaging must be isolated. Typical logistics costs can be categorized under two headings direct and indirect costs, cost of capital and overheads.

  1. Direct Costs:  These costs are those expenses specifically caused by the performance of logistics work. Such costs are difficult to identify. For example, the transportation costs for an individual truckload order can be directly attributed to a specific order. Likewise only minor difficulty is experienced in isolating the direct administration cost of logistical operations.
  2. Indirect Costs: These are more difficult to isolate. For example, the cost of capital invested in real estate, transportation equipment, and inventory- just a few of the areas within the capital structure of logistics- must be identified to arrive at a comprehensive total cost. The manner by which total costs are attributed to logistics activities are determined by managerial judgments. One approach is to allocate the overhead cost on the basis of the average cost per unit.  All expense paid to support capital investment in logistical operations are relevant to activity-based costs. The judgment applied in arriving at cost of capital will greatly influence logistical system design. Thus procedures and standards used to calculate indirect logistical costs are critical. They are also essential for potential outsourcing.
  3. Cost of Capital:  Capital investment Expenses for logistical activities are relevant to logistical activity- based costs. Cost of such capital also needs to be included in your logistical cost.
  4. Overhead: An enterprise incurs considerable expenses on behalf of all organizational units, such as for light and heat in various facilities. Judgement is required to determine how and to what extent various types of overhead should be allocated to specific activities. One method is to directly assign total corporate overhead on a uniform basis to all operational units. At the other extreme, some firms withhold all overhead allocations to avoid distorting the ability to measure direct and indirect logistical activity- based costs.

(II) Cost Time Frame  

A basic concern in activity based costing in logistics is to identify the period of time over which costs are accumulated for measurement. Accounting principles call for accrual methods to relate revenues and expenditure to the actual time period during which services are performed. Expenses associated to raw material procurement through finished product distribution and almost all other logistical operating costs are incurred in anticipation of future transactions, making accrual methods difficult to administer.

To overcome the time problem, accountants attempt to break costs into 2 groups- costs assigned to a specific product and costs associated with the passage of time. Using this classification an attempt is made to match the appropriate product and time period costs to specific periods of revenue generation. From a logistical perspective, a great many of the expenses associated with procurement and manufacturing support can be assigned and absorbed into direct product cost.

In situations where a considerable period of time elapses between production and sales, such as in highly seasonal businesses, significant costs of maintaining inventory and performing logistical operations may not be associated with revenue generation.

(III) Cost Formatting  

The typical way to format activity-based costs is to assign expenses to the event being managed. For example, the object of analysis is a customer order, than all costs that result from the associated performance cycle contribute to the total activity cost. Typical units of analysis in activity based costing in logistics are customer orders, channels, products and value added services. The cost analysis will vary depending on which analysis unit is selected for observation Logistical expenses can be presented in a number of ways for managerial use. Three common ways are;

  1. Functional Grouping: To format costs by functional grouping requires that all expenditures for direct and indirect logistical services performed for a specified operating time be formatted and reported by master and sub account classifications. Thus, a total cost statement can be constructed for comparison of one or more operating periods .It is important to identify as many cost accounting categories as practical and to develop a coding system that will facilitate assignments to these cost accounts.
  2. Allocated Costs Grouping: This consists of assigning overall logistical expenditures to a measure of physical performance. For example, total logistical cost can be generated on a per ton, per product, per order, or on some other physical measure that is useful for comparative analysis of operating results.
  3. Fixed Variance Grouping: This is the most useful for identifying the logistics cost implications of current or alternative operating practices. This method of formatting consists of assigning costs as either fixed or variable to approximate the magnitude of change in operating expenditure that will result from different volumes of logistical throughput. Costs that do not directly vary with volume are classified as fixed. In the short run, these expenses would remain if volume were reduced to zero. Costs influenced by volume are classified as variable. For example, the cost of a delivery truck is fixed, however gasoline to operate the truck is variable.
University of Mumbai BMS Notes

Functions, Importance of Inventory Management

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Inventory means all the materials (may be raw or finished parts/components, in process or finished products, castings and consumable tools, electrodes etc.) recorded on the ledgers/books of the organization and kept in its stocks (in the store or warehouses) for some period of time.

So inventory is an essential part of an organization. Every enterprise/business or manufacturer concern however big or small has to maintain some inventory.

Functions

From the definition of inventory, it is clear that it is related to stock of raw materials, semi-finished and finished products/items maintained by the enterprise/business/organization.

The following points will explain the concept and functions of inventory:

(i) Inventories Serve as Cushions:

Against shocks due to demand/supply fluctuations, it separates different manufacturing operations from one another and makes them independent so that each operation can be performed economically.

For example, an organization has to deal with several consumers and vendors and due to their unpredictable behaviour there are always fluctuations in demand or supply of goods which disturbs the schedule of the enterprise.

Inventories absorb these fluctuations and help in maintaining undisturbed production i.e., we decouple the manufacturing activities from the consumer and vendor successfully by cushions of stocks.

Furthermore purchasing/order of raw material can be carried out independently of the finished products distribution and both of these activities can be made low cost operations say by ordering raw material and distributing products in one big lot than in small batches. Thus it leads to better utilization men and machines besides economy.

(ii) Inventory, a Necessary Evil for Any Enterprise:

Inventories require valuable space, capital and other overheads for maintaining it. The invested capital remains idle till the stocks are not consumed. On the other hand, smooth working of the organization is not possible without inventory so it is a necessity. Further it has been observed that costs of not having inventory (stock out conditions) are usually greater than costs of having them. Thus inventory is a necessary evil.

(iii) Inventory Provides Production Economies:

Purchase in desired quantities nullifies the effects of change in prices or supply. Stocks bring economy so purchase of various inputs due to discounts on bulk purchase.

(iv) Maintenance of Smooth and Efficient Production Flow:

Maintains smooth and efficient production flow thus keeps a process continually operating.

(v) Creation of Motivational Effect in Decision Making:

Creates motivational effect in decision and policy making e.g. a person may be tempted to purchase more if inventories are displayed in bulk.

Importance

The following points give the importance of inventory to an organization:

(i) Good consumer service can be provided and maintained in the organization.

(ii) Enables smooth and efficient production flow of goods/items.

(iii) Provides protection against uncertainties regarding demand and supply of materials and output.

(iv) Various production activities can be independently and economically performed,

(v) Ensure better utilization of men, machines and materials.

(vi) With bulk purchases quantity discounts can be availed.

Management Notes

Logistics Costing: Meaning, Total Cost Approach

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The basic principle of logistics costing is to identify the different costs that result from servicing customers with particular product mixes. Conventional accounting methods, which were strongly based on a few volume-based cost drivers for the allocation of shared and indirect costs, are being superceded by other costing methods such as direct product profitability (DPP) and activity-based costing (ABC) where overhead costs are allocated in relation to a firm’s activities and their consumption of resources. The research showed that direct operating costs could turn healthy gross profit figures into marginal overall contributions to profit. It also highlighted where further cost savings could be made by utilising sales promoters more effectively and reviewing minimum order sizes and delivery orders.

Total cost approach

Total cost approach focuses on considering all of the relevant activities in moving and storing products, instead of looking at things individually; this way all logistical cost items are considered simultaneously when making a decision.

Total cost approach to logistics  is the key to managing the logistics function. Management  should strive to reduce the total cost of logistics rather than the cost of each activity.  So logistics must be viewed as an integrated system rather than the individual  system, because reduction in one cost invariably lead to increase the cost of other  components. Effective management and real cost savings can be accomplished only by viewing logistics as an integrated system and minimizing its total cost given the firms customer service objectives. So the main costs which are involved in logistics function are:

  • Customer service level costs
  • Transportation costs
  • Warehousing costs
  • Order processing and information costs
  • Lot quantity costs
  • Inventory carrying costs

Customer Service Level Costs

Most business people find it difficult, if not impossible to measure this cost. The  cost associated with alternative customer service levels is the cost of lost sales( not  only the margin lost by not meeting current sales demand, but the present value of  all future contributions to profit forfeited when a customer is lost due to poor  availability, long lead times, or other service failures).

By comparing total logistics system costs, management can make knowledgeable  judgment about the likelihood of recovering, through increased sales, the increase in  total system costs brought about by an increase in customer service levels. Of  course, management could also reduce spending in some other to component of the  marketing mix promotion, for example in order to maintain profits with a  similar sales volume. Likewise, with decrease in customer service levels,  management can improve profitability or increase expenditures for other  components of the marketing mix in an effort to maintain or improve market  position. At the end the goal is to determine the least total cost method of logistics  while keeping customer service objectives in mind.

Transportation Costs

Costs associated with the transportation function can be identified in total and  be segments (i.e. inbound, outbound, by vendor, by customer, by mode, by carrier,  by product, or by channel). This detail is necessary to determine the incremental  costs associated with changes in the logistics system. If transportation costs are not  currently available in any other form, management can determine them at a  relatively low cost by sampling product flows and auditing freight bills (for  common carriers) or corporate accounting records (for private fleets).

Warehousing Costs

Warehousing costs are all the expenses that can be eliminated or that must be  increased as a result of a change in the number of warehousing facilities.  Warehousing costs should be separated into two distinct categories:

  • Throughput Costs: These costs are associated with selling product in a given market by moving it into  and out of a warehouse in that market, and the fixed costs associated with the  Example is charges that public warehouses assess for moving product into  and out of their facilities, and the costs of leased and owned facilities for the  movement of the goods.
  • Storage Costs: Warehousing costs related to inventory storage should be included in inventory carrying costs. These warehousing costs change with the level of inventory held in a specific warehouse and tend to be negligible in a company- owned or leased 

Throughput costs should be included instead in warehousing costs so that the  increments can be easily added or subtracted when the logistics system  configuration system changes.

Order Processing and Information Costs

Order processing and information costs include the cost of order transmittal,  order entry, order processing, related handling costs, and associated internal and  external communication costs. When establishing these costs management  should remember to include in the analysis only those costs that will change  with decision being made.

Lot Quantity Costs

Lot quantity costs are those production related or purchasing/acquisition costs that  will change as a result of a change in the logistics system. Generally it consists of  production preparation costs, capacity lost due to changeover, materials handling,  scheduling and expediting. The lot quantity costs associated with purchasing are the  costs of buying in various quantities.

Inventory Carrying Costs

Conceptually inventory carrying costs are the most difficult costs to determine next to the costs of lost sale. Inventory carrying costs should include only those costs that vary with the level of inventory stored and that can be categorized into 4 costs.

  • Capital costs
  • Inventory service costs
  • Storage space costs
  • Inventory risk costs.
University of Mumbai BMS Notes

Mission Based Costing in logistics

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“Mission” is a set of customer service goals to be achieved by the system within the specific market/product context. A successful achievement of defined mission involves a large input from various activity centres of the firm. Hence the logistics costing should be able to identify the total costs of meeting a desired mission. This is referred as Mission Based Costing.

Essentially Mission Based Costing seeks to identity unique costs that are generated as a result of

Specific logistics activities aimed to achieve certain objectives in a specific customer/market. There is no point in incurring additional costs if the additional benefits do not justify the same.

Functional Inputs to Logistical Management

There are four stages in implementing an effective Mission Based Costing.

  • Define the customer service segment This is required as all customers do not have the same service requirements
  • Identify factors that produce variations in the cost of service: for example – reducing the frequency of delivery .will reduce the costs.
  • Identify the specifies specific resources used to support customer segments.
  • Attribute activity cost by customer type or segment.
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