Institute of Science

SUPPLY CHAIN
PERFORMANCE MEASURES
Y. NARAHARI
Computer Science and Automation
Indian Institute of Science
Bangalore - 560 012
hari@csa.iisc.ernet.in
http://www.csa.iisc.ernet.in

Institute of Science

OBJECTIVE OF TALK

To identify and understand different

indices of supply chain performance
To understand the "science" of lead time
reduction in supply chains
To appreciate the role of Internet
technologies in improving the delivery
time performance of supply chains

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OUTLINE OF TALK

Taxonomy of Supply Chain Performance

Measures
Quick Response Supply Chains
Fundamental Laws of Lead Time
Reduction
Synchronized Supply Chains

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FUNCTIONAL VS PROCESS
PERFORMANCE MEASURES

Functional measures provide only a

partial picture
Functional excellence does not imply
process excellence
Function-based optimization can be
disastrous
Our attention will be on supply chain
process performance measures

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FINANCIAL MEASURES OF
SUPPLY CHAIN PERFORMANCE

Financial Measures

Market share
Stock
Valuation
Profits
ROI
Inventory Turns

Financial measures are lagging metrics, a result of

past decisions
Operational, non-financial measures are excellent
indicators of process health

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OPERATIONAL,
NON-FINANCIAL MEASURES

Cycle time
Customer service level

order fill rate

stockout rate
backorder level
probability of ontime delivery

Inventory levels
Resource utilization
Capacity/Throughput

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OPERATIONAL,
NON-FINANCIAL MEASURES

Quality
Reliability
Dependability/Performability
Flexibility

volume
product mix
routing
delivery time

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QUICK RESPONSE
SUPPLY CHAINS

Minimal cycle times

supply chain end-to-end lead time

order-to-delivery lead time

Minimal spread in cycle times

Synchronization among various stages

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LEAD TIME REDUCTION

Cycle time is an all-encompassing

measure
Provides competitive edge
Leads to increased customer satisfaction
Leads to reduced inventory, reduced
onsolescence and increased quality

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COMPONENTS OF
SUPPLY CHAIN LEAD TIME

Procurement lead time

Manufacturing lead time
Distribution lead time
Logistics lead time
Setup times
Waiting times
Decision-making times
Synchronization times

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FUNDAMENTAL LAWS OF
LEAD TIME REDUCTION
First Law: Little's Law

Average Inventory is the product of average

waiting time and throughput rate
Inventory reduction and optimal utilization of
resources is the key to lead time reduction
Throughput and lead time are negatively
correlated (classical queueing theory)
Load balancing and optimal resource allocation
will help

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FUNDAMENTAL LAWS OF LEAD TIME

REDUCTION
Second Law: Pollaczek-Khintchine Formula

Waiting times are positively correlated to

variance of arrival and processing times
Input control
Process control
Fluctuation smoothing

Controlled arrivals can significantly reduce lead

times

closed mode operation better than open mode

Strict control of processing times reduces lead

times considerably

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FUNDAMENTAL LAWS OF LEAD TIME

REDUCTION
Third Law: Forrester Effect

Inventories grow in successive echelons of the

supply chain as demands get amplified in the
upstream direction
Inventory expansion leads to rising levels of lead
time
Accurate forecasting and intelligent use of
information are is key to reducing the effects of
this

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FUNDAMENTAL LAWS OF LEAD TIME

REDUCTION
Fourth Law: Taguchi's Loss

Taguchi's loss function is decided by variability

and also bias (deviation from optimal nominal)
Do not always try to eliminate variation, but
minimize the effects of variability
Find robust operating points (nominals)

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FUNDAMENTAL LAWS OF LEAD TIME

REDUCTION
Fifth Law: Use the Internet

Availability and intelligent use of critical

information is a key requirement
Use of Internet and Ecommerce
Technologies can help dramatically in this
Synchronization between the front-end
and back-end is critical

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SYNCHRONIZED SUPPLY
CHAINS

Variability is the main enemy in achieving lead time

reduction,as evidenced by:

Forrester Effect
Pollaczek-Khintchine Formula
Taguchi's Loss Function

Our objective is to design a highly synchronized

supply chain network that works like a world class
relay racing team
We wish to use best practices in manufacturing,
design, and tolerancing domains

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DESIGN OF SYNCHRONIZED
SUPPLY CHAINS

Y = f (X1, X2, . . . , Xn)

Y represents supply chain lead time or order-to-delivery lead time

f is a deterministic function
X1, X2, . . . , Xn are lead times of individual business processes,
continuous random variables

Y is a continuous random variable

Analysis: Compute the probability distribution of Y
given f and the distributions of X1, X2, . . . , Xn.
Synthesis: Find the best nominals and tolerances for
X1, X2, . . . , Xn, given nominal and tolerance
specifications for Y.

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EXAMPLE:
A PLASTICS SUPPLY CHAIN

Procurement
Sheet Fabrication
Transportation
Manufacturing
Assembly
Delivery

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A SIX SIGMA FRAMEWORK

Six Sigma Quality: A process is considered

to be of six sigma quality if there are no more
than 3.4 non-conformities per million
opportunities (3.4 ppm) in the presence of
typical sources of variation.
Analysis and Synthesis are based on:

Characterizing product-process quality using

process capability indices Cp and Cpk
Use of statistical tolerancing techniques to
reduce lead times

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WHERE CAN WE APPLY

THIS?

Due Date Setting

Selection of Supply Chain Resources
Make-to-stock versus make-to-order
versus build-to-order
Resource Allocation
Selecting logistics providers
Select Robust Operating Points

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CONCLUSIONS

There are fundamental laws governing lead

time reduction in supply chains
Variability reduction and synchronization
among internal business processes of a
supply chain is a key to achieving a high level
of delivery performance
Use of Internet and Ecommerce technologies
could be a key for achieving outstanding
delivery performance