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CHAPTER - IV
KEY PERFORMANCE
PARAMETERS OF
SUPPLY CHAIN
MANAGEMENT
 CHAPTER-IV
KEY PERFORMANCE PARAMETERS OF
SUPPLY CHAIN MANAGEMENT
Introduction:
One of the major objectives of the business is maximization of profit / ROI
(return on investment). In today's cutthroat competition prices of various
products are showing declining trend. In such a situation maintaining high
profitability has become difficult and more challenging. Therefore now a days
the role of supply chain management has drastically changed. There is no other
way expect adopt the technique of integrated supply chain management.
Various activities which are involved in supply chain are demand forecasting,
material planning, procurement, storage and preservation of raw matehals,
stock management, production planning and scheduling, transportation
planning, dispatch documentation and so on. It is very essential to identify value
adding activities (key activities) out of various activities of organization and our
focus should be to perform those activities more efficiently and effectively, so as
to maintain high rate of profitability even in the competitive business
environment.
This chapter throws light on need of performance monitoring and the key
performance parameters of integrated supply chain management. In this study
only those key performance parameters are used which can mainly reflect the
impact of integration on the selected manufacturing companies and retail
business group.

Types of Performance Indicators^

Performance indicators are those process parameters which can directly /
indirectly contribute to monitory and other (non-monitory) benefits of the
organization. V M V - > ^ CJ*-**^**- --sr^A/^ ^

Key performance indicators are those performance indicators, which

contribute directly, and proportionally more to the success or failure of the
business at market place. For example product delivery, customer services etc.

71
Primary performance indicators are those performance indicators, which
contribute proportionally at low extent^to the success, or failure of the business
at market place. For example inventory performance

Monetory performance indicators are those which possess direct impact on

the financial performance (profitability) of the business. For example raw
material price, labour overheads etc.

Non-monetory performance indicators are those which possess indirect

impact on the financial measures but affecting the strategic goals and
objectives of the business. For example manpower turn over ratio.

Quantitative performance parameters are those indicators that can be

measured in terms of quantity or which can be quantifiable. For example
delivery performance can be measured in terms of percentage.

Qualitative performance parameters are those performance indicators, which

cannot be measured in terms of quantity or which, are not quantifiable. These
parameters are more subjective in nature. For example attitude of the employee
(positive or negative).
The following performance parameters are generally used to measure the
performance of key processes of the supply chain management. These
methods of measurement of performance parameters are suitable for all kinds
of manufacturing as well as trading organizations.

1) Customer delivery performance: It measures the performance of

organization (supply chain) to meet customer's requirement at right time and at
right place. Delivery performance is generally measured in terms of the
percentage of items supplied against total items requested by the customer.
100% delivery performance means supply chain team has successfully met the
products requirements of the customer on right time, right quantity and at right
place. Thus, delivery performance is quantitative measure of performance.
Once product is delivered to customer it adds monitory benefits to organization
thus it has direct impact on financial measures of the organization. Hence we

T>
can say that delivery performance is also a monetary performance indicator of
supply chain team.

Total quantity delivered

Delivery Percentage = x 100— A
Total quantity ordered by customers

In most of the cases delivery performance is measured as total quantity

delivered against accepted order quantity. It is necessary to state that a
company does not accept the complete order of the customer due to capacity
constraints or due to any other reason. In such situation it does not reflect the
true performance of supply chain team because there involves the opportunity
cost due to loss of sale. In today's competitive environment it is very essential
to avoid such sales losses by increasing flexibility of the supply chain system.
Thus 100% delivery performance calculated against actual quantity requested
by customer, means system is flexible enough to avoid the sales loss.
Equation 'A' represents the general formula to calculate delivery performance of
supply chain team where the formula dose not measures the delivery
performance with respect to date of delivery at customer's place and date on
which it is expected by customer. If we consider time factor, the formula for
delivery performance will be

Quantity received by customer (till date)

Delivery Percentage = x 100 B

Total Quantity expected by customers
(till date)

in the above formula the performance of the transportation system is also taken
into account. The difference between 'A' and' B 'represents transportation
delay. In the above formula we are not considering the effect of poor quality of
the products on delivery performance. Because we are considering the total
quantity delivered to the customer but not considering the chances of products
being rejected at customers end due to quality problem. To work out the effect
of poor quality of the products the delivery performance formula will become as
below.

7",
 Quantity accepted by the customer (till date)
Delivery Percentage = x100-C
Total Quantity expected by customers (till date)

Thus in the above formula only accepted quantity is taken into account for the
calculation of delivery performance and thus the effect of poor quality of the
products on delivery is getting reflected in the above formula. The difference
between 'A' and 'C represents the effect of poor quality on delivery
performance. Here again we have not considered effect of other factors like
non-availability of test certificate, inspection report, and other dispatch
documentation on delivery performance. Equation 'D takes care of these
factors.
Part quantity that customer can use
(till date) due to miscellaneous reasons
Delivery Percentage = x 100— D
Total Quantity expected by customers
(Till date)

A - B = Delivery performance lost due to transportation

A - C = Delivery performance lost due to poor quality
A - D = Delivery performance lost due to miscellaneous reasons
Therefore we can write,
A = A1+B + C + D E
Where A = Delivery performance of Supply chain management (considering
dispatch of product from manufacturer's plant)
A1 = Actual Performance of complete supply chain cycle
Considering future challenges organization should measure A1 performance
and should set target for the same.
Measuring and monitoring the performance are non-value adding activities, but
are essential. Hence one should not simply monitor the Performance Indicators
but it is very essential to take necessai7 corrective / preventive actions to
improve the performance. It is observed that, in most of the cases the root
causes for poor delivery performance are repetitive in nature. So supply chain
should focus to eliminate those reasons and corrective action should to be
taken accordingly.

74
2) Inventory Performance
Inventory is another key performance area of supply chain management.
Today most of the organizations have adopted the JIT (Just in time) concept for
procurement to achieve minimum (zero) Inventory level. The main reason for
this is to avoid the blockage of the capital and proper utilization of the financial
resources. Another reason for keeping low inventory is today's fluctuating
market conditions. Needs and taste of the customers are changing
continuously. This has increased the risk of obsolesce which can be avoided by
adopting zero inventory concept.
Inventory is measured in terms of monetory value (in India Rs.) or in the terms
of Inventory turnover ratio or in terms of percentage of sales (% MAT) etc. As
inventory performance is quantifiable, it is quantitative performance parameter.
Also it directly affects the financial aspect of the business. So Inventory is the
monetory performance indicator Generally Inventory performance is termed as
primary performance indicator of the supply chain team.
Inventory turn can be calculated as below.
Annual Sales
Inventory Turn Ratio=
Average Inventory Value

Percentage Inventory = Inventory value in percentage of annual sales

Inventory days = Inventory calculated in terms of days = (365/ Inventory turns)

Average Inventory = Average inventory value (for the defined time period) in
monetary terms

Thus inventory performance can be measured by using different indicators. In

most of the companies inventory is measured product wise. This helps to
monitor the product wise performance.
Other effective way to measure the inventory performance is percentage
inventory in terms of sales (i.e.% MAT).See the example of P.C.Makers Pvt.Ltd.
Please refer table 4.1 below.

7S
 Table 4.1
P.C.Makers Inventory performance in percentage inventory in terms of
sales.(Value of inventory in Million Rupees.) «^^^^^''\v^'^^ ' ,
Month Jan-01 !Feb-01 M ar-"0 l ^ u i v 0 1 JuT-01 Aug-01 Sep-01 Oct-01
Raw Material Inv 47 44 38 42 45.2 42 42.6
% MAT 9.5 i 8.2 7.4 8,3 9.2 7.3 8.1

Month Nov-01 Dec-01 Jan-0 > Feb-02 JMar-02 Apr-02 May-02 Jun-02 ]
Raw Material Inv 37.5 35.6 34.2 31.4 ! 31.6 34 33.5 32.3
% MAT
i
7.5 7.1 7.8 7.1 : 7.2 7.4 7.3 i7.5 1
i j !

If we refer table 4.1 the value of inventory in June -01 is Rs.38 million .which is
much higher as compared to Jan-02(inventory value of which is Rs.34.2 million.
It seems that inventory performance for June-01 is poor than Jan -02 ,but the %
MAT value of inventory reflects the actual performance .
The %MAT of June -01 is 7.4 % which is much less as compared to Jan-02
,but the % MAT value which 7.8%.It means the value of inventory was more
because of more sales projection during june-01.So actually inventory
performance in the month of June-01 was better as compared to Jan-02 .Thus
% MAT indicates actual inventory performance of supply chain team compared
to Jan -02 .Thus % MAT indicates actual inventory performance of supply chain
team compared to inventory measured in terms of monftory value(in Rs.).

Inventory Control and Target setting

Integrated supply chain approach is very essential to control the inventory.
There are many reasons that cause the building up of inventory, which are
given as below:
1. Purchasing management - Purchasing team is often rewarded for achieving
low per unit cost for raw materials and supplies. To achieve this target
purchasing team always has tendency to purchase in bulks to get the quantity
discounts. It ultimately causes building up of inventory.
2. Production management- Production team is often rewarded for achieving
the lowest possible per unit cost. So production personnel always have

7<S
tendency to produce in bulk to achieve the target cost. This causes building up
of WIP (work in progress) inventory. Also, production people always demand
excess raw material to avoid interruption in production. This tendency also
affects the inventory performance adversely.
3.Sales and marketing management- Sales personnel always demand for
large inventory of finish*^oods in the field and as close to the customer as
possible to keep their market presence as well as to offer fastest possible
service to the customers. Thus sales people have tendency to achieve their
•

sales target at the cost of inventory.

4.Distribution management- Most of the companies monitor the
transportation performance to achieve lower per unit transportation cost.
Transportation managers have tendency to ship the products by full truckload or
by full load container. These large shipments of products cause increase in
inventory.
5. Intermediaries and customers- Consumers (users) and intermediaries
have tendency to purchase more frequently to reduce the inventory at their
ends thereby forcing the inventory and associated inventory carrying costs back
towards the manufacturer.
The basic objective of integrated supply chain management is to maintain
continuous flow of material keeping minimum material in pipeline and thus to
avoid blockage of money in the form of ideal material resource. As discussed
above inventory is the end result of the various key functions (business
interfaces) and not the outcome of the work done by single department in the
organization. So it^ery essential to set performance target for various key
functions (not at the cost of inventory but) with the common objective of
minimizing inventory. Integrated supply chain management co-ordinates and
controls, these key functions in order to achieve performance target by keeping
minimum inventory. Thus integrated supply chain helps to control the inventory
and to improve material flows.

Classification of inventory:
In general supply chain has to deal with two types of materials
1. Direct materials
2. Indirect materials

77
Direct materials are those materials, which are directly used into final product,
which are further categorized as raw material Inventory, WIP inventory, and
finish goods inventory.
Indirect materials are those materials required for production but which are not
the part of the final product. For example tools M/c Spares, maintenance Items
etc.
Raw material inventory is the function of procurement lead time which includes
purchase order placement time (material planning and identing), order
processing time at supplier, manufacturing lead time at supplier, transportation
lead time, time required for testing and final inspection lead time.
Materials planning, ordering and scheduling functions play important role in
controlling raw materials inventory. All above factors should be taken care while
planning and ordering of raw materials.

The overall procurement lead-time can be reduced by :

1. Reducing internal lead-time for order placement- This can be achieved
through improving planning activity by adopting sophisticated planning tools
& techniques or computerization (MRP).
2. Improving the manufacturing processes at supplier end to reduce the overall
manufacturing lead-time. This also includes the up gradation of
manufacturing technology to achieve cost benefits. Process improvement
also results into quality product. This avoids incoming material inspection
process at buyer's end.
3. Inspection at supplier premises
4. Effective fleet management.
Upstream integration fulfills the above requirement with supplier's help.
Procurement team (purchasing and vendor development team) has to focus
more on purchasing research and planning activity. It includes:
• Rationalization of suppliers base by adopting proper vendor selection
criteria.
• Procurement of materials in optimum lot sizes
• JIT purchase.
• Long term contracts with supplier.

IK
• Centralization and co-ordination of purchasing.
• Optimization of procurement and inventory carrying cost.
• Reduction in raw material cost by continues improvement programme.
Thus procurement function (material planning, purchasing, vendor
development, incoming inspection and testing, fleet management) plays
important role in controlling raw materials inventory.
Work in progress material is the function of manufacturing lead-time, which in
turn is the function of processing time, operational efficiency, in process and
final inspection time etc. Production planning and scheduling activity plays
important role in controlling work in progress inventory. Production team can
contribute more in reducing manufacturing lead-time by:
1. Selection of proper production process or upgradation of production
technology (which includes machine upgradation, use of proper tools etc.).
2. Proper process designing to minimize the tool movement, tools set up time
etc.
3. Adopting FMS (flexible manufacturing system) and production in optimum
batch quantity.
4. By setting process parameters to achieve high production performance and
capability index. One can eliminate in process inspection and testing activity.
Thus production team (planning and scheduling, process designing, line
balancing, capacity planning, in process and final quality control) plays
important role in controlling work in progress inventory.
Finish goods Inventory is basically result of demand fluctuations, improper
product requirement planning and loss of sales orders. Organizations prefer to
follow Made to Order policy to avoid the risks. But in most of the cases the total
throughput time for order processing is more, which forces them to produce the
products by using suitable demand forecasting tools.

70
 Table 4.2
Pareto analysis for productwise avera revenue contribution In
Auto Comp Pvt. Ltd.

Product Average Cumulative Cumulative % Product

code Sales Revenue(Rs) Sales Revenue(Rs) Sales Revenue Category
A068A 1,176,680.00 1,176,680.00 19.36 A
A098A 1,557,904.00 3,319,584.00 36.47 A
A087A 1.157,904.00 4,477,488.00 49.20 A
AL10A 715,590.00 5,193,078.00 57.06 A 1
AN10A 673,200.00 5,866,278.00 64.46 A !
i
A093A 644,004.00 6,510,282.00 71.53 A
A091A 493,350.00 7,003,632.00 76.95
' i
A138A 432,612.00 7,436,244.00 81.71 B i
i

A183A 425,664.00 7,436,244.00 86.38 B

A04A 386,100.00 8,248,008.00 90.62 B
AF10A 306,900.00 8,554,908.00 94.00 C
A180A 159,624.00 8,714,532.00 95.75 C
A123A 93,665.00 8,808,197.00 96.78 C
A140A 86,210.00 8,894,407.00 97.73 C
A130A 80,840.00 8,975,247.00 98.62 C
A125A 67,809.00 9,043,056.00 99.36 C
A018A 58,218.00 9,101,274.00 100.00 C
Total 9,101,274.00

Thus finish goods Inventory is basically function of products planning activities,

total throughout time (order processing time) and customer demand
fluctuations.

80
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The finish goods Inventory can be controlled by reducing total throughput time
and increasing flexibility of overall supply chain system so that it can sustain
the market demand fluctuations.
Inventory target setting is very critical task of integrated supply chain
management. To have a better control over the stocks it is necessary to
define a stock holding policy for different categories of inventory. Auto-Comp
Pvt. Ltd. has set a stock holding policy by considering level of services to be
provided to the customers and differentiating products on the basis of their
sales contribution and profitability. In this concern the Pareto analysis (80/20
rule) is used to decide stock holding policy. Table 4.2 shows product wise
average sales revenue. On the basis of this data we can conduct the Pareto
analysis and classify the products into A, B and C categories. Table 4.3
explain^that A category products (e.g. A068A, A098A, A087A, AL10A,
AN10A, A093A etc.) are contributing almost 70% of the total sale revenue.
These products require more attention and more control from planning point
of view as compared to B and C categories products. Therefore stock-holding
policy is framed accordingly. Higher stock levels for these products are
allowed. B category products (e. g. A091A, A04A, A138A, A183A etc.) are
contributing almost 20% of the total sales. These products require moderate
attention and more control from the C category products (e. g. AF10A, A180A,
A123A, A140A, A130A, A125A, A018A etc.) are contributing only 10% of the
total sale revenue. So these products may require low service levels.
Thus, on the basis of revenue contribution stock-holding policies can be
defined.

3) Customer service
Integrated supply chain management plays an important role in delivering the
best customer services. This chapter throws light on those key performance
indicators, which have direct impact on customer service and customer
satisfaction. Traditionally customer service indicators were monitored in terms
of subjective performance indicators but at present most of the organizations
prefer to use quantitative performance indicators. The customer service
related performance indicators are generally measured by getting feedback

82
from the customers (periodically). This is to identify the weak areas of supply
chain team

Qualitative Performance: indicators to measure customer service.

• Order confirmation effectiveness:
No. of sales orders confirmed
within a defined Period
Order confirmation effectiveness = x 100
Total no. of orders attended

Higher order confirmation effectiveness indicates that information is

communicated more effectively and fast within the supply chain as well as to
the customers.

• Response time: It is the time required to respond to customer's queries

related to quality, price, documentation etc. This is generally measured in
terms of quantitative terms. Most of the organizations have adopted single
window approach by which they have reduced the response time to the
customers.
Response time of P.C. Makers Pvt. Ltd. was 12 hrs. to attend and reply the
queries related to price, order status etc. and 72 hrs, for quality related
matters. But after integration of the system P.C. Makers have adopted single
window approach, which has reduced the response time to 4 hrs and 24 hrs.
respectively.
Similarly Auto-Comp Pvt. Ltd. has been using technique of GEMBA Kaizen to
reduce the response time within the supply chain. The working system of
GEMBA Kaizen which is as below.
2M-2H-2D-2W problem solving method adopted by Auto-Comp Pvt. Ltd.
After the receipt of product quality related query / complaint from the customer
is being noted down in the GEMBA register within 2 minutes, then the short
term corrective action is taken on the complaint within 2 hrs. Then the
problem is analyzed in 2 days period to find out the permanent solution to
resolve the problem. Then within two weeks period preventive action is taken
to avoid the re-occurrence of the such complaint. This Method has improved
the communication within the supply chain as well as it helps for front line

83
sales persons to respond the customer's quality related queries at the
minimum possible time.
Similarly other queries of customers are noted down in the GEMBA Kaizen
query book instantly (within the 2 minutes). The necessary information is
collected from the internal planning department within two hours and reply is
given to customers within 4 hrs. (this system is applicable for queries which
are complicated in nature).

• System Flexibility. System flexibility means ability of the system to adopt

the
changes as per the customer's requirements. More flexibility of the system
indicates ability to provide best customer services at minimum cost. Thus
system flexibility is not only the measure of ability to provide the best
customer service but also measure of capability of ihe system to optimize the
utilization of its resources effectively. It is being measured in terms of
subjective / objective rating scale. For example rating scale of flexibility from
10 to 100 where 100 indicates that the system is completely flexible to adopt
any kind of customers demand fluctuations with optimum resources utilization.
On the other hand rating scale 10 represents poor flexibility of the system.
The main objective of system flexibility is to avoid sales loss and adopt
changes as per the customer's requirements with maximum utilization of
available resources.
No. of rush orders delivered
(a) System Flexibility = — x 100
Total no. of rush orders

Extra resources spent for rush orders

(b) System Flexibility = — • x 100
Budgeted resources

Here equation a' represents system flexibility which possesses the in built
ability to deliver the rush orders whereas equation b' represents lack of ability
to deliver the rush order. Therefore extra cost has to be incurred on extra
resources for delivering orders,

84
• Feed forward information: Performance of thie supply chain can not be
judged only on tfie basis of response time to the customers queries, but it is
also judged by feed forward information provided to customer proactively.
Most of the organizations monitor the occasions of feed forward information
as a performance indicator. This is measured on subjective / objective scale
which differs from organization to organization. For example Auto-Comp Pvt.
Ltd. has developed its communication system with the key customers in such
a manner that the information such as delay in delivery / ASN (advance
shipment notification) is communicated to the customers well in advance
which help them to take proper decision and action.

4) Supplier performance
Supplier's performance has direct impact on supply chain performance hence
it is very essential to monitor supplier performance periodically. Suppliers'
performance depends upon how effectively supply attains the upstream
integration with the suppliers. General key performance indicators are as
follows.
• Delivery performance:

No. of lots received

Delivery performance = x 100
Total no. of lots ordered
Or

Total quantity received

Delivery performance = x 100
Total quantity ordered

• Quality performance: Quality performance is measured in terms of

percentage rejection.
Quality performance =
Or
Total no. of lots accepted
— x 100
Total no. of lots received

Total quantity accepted

Quality performance = x 100
Total Quantity received

8.S
Part per million (PPM) is also one of the effective tool to measure quality of
the product.

No. of parts rejected

PPM = X one million
Total parts received from supplier

This is also effective parameter to measure the product quality performance of

the suppliers in zero defect work environment because this parameter
magnifies the errors made by the supplier (as rejected part quantity is
magnified on million scale) and thus it forces supplier to achieve zero defect
for the supplies.

• Price: In today's cutthroat competition cost reduction is the major

performance indicator of the supply chain management. This Performance
indicator is measured in terms of price index.
Price offered by supplier
Price Index = x 100
Lowest price bid
Or
Actual material Price
Price Index = x 100
Budgeted price

• Supportive Activities: Other than above parameters, there are some

activities which are essential to build up strong supplier relationship, are
called as supportive activities. Most of these activities are measured in
subjective terms. These supportive activities are such as
i) Order confirmation time
ii) Response time
iii) System flexibility
iv) Response to product development
v) Response to quality complaints
vi) Supplier's initiative for cost saving
vii) Supplier's assistance in solving technical problems
viii) Other services provided by supplier like documentation and account
related activities.

S(>
5) Productivity: The productivity of supply chain can be measured in terms of
planned Vs actual delivery performance. This term is not only related to
production function but it also measures the ability of supply chain to deliver
the product as per the planned schedule.

No. of orders delivered

(a) Integral planning productivity = x100
Total no. of orders planned for delivery

Equation 'a' represents the productivity in terms of delivery of the product

against planned delivery.
Product quantity planned
(b) Productivity = x100
Total production capacity

Equation 'b' represents the productivity in terms of resource utilization.

Eiectro-Sv^/itch has utilized both the ratios i.e. Plan Vs Actual production and
Plan Vs Production capacity to monitor the productivity of supply chain team.
Table 4.4 explains equation (b) with reference to Electro-Switch Pvt. Ltd.

Table 4.4
Production planned Vs actual production
for MS ( Double and Triple Products) Electro-Switch Pvt. Ltd.(ln 2001)

Total Total Produce/

Weeks Productivity
Planned Qty dispatch Qt\'
\Vc-37 24040 287.30 120%
\Vc-38 26800 23220 87%
\Vc-39 27800 259.30 93%
Wc-40 23900 22895 96%
Wc-41 17835 10755 60%
We-42 16925 11095 66%
Wc-43 18100 17545 97%
\Vc-44 2()()00 17710 ' 89%"
\Vc-46 20300 18565 91%
Average productivity 89%

Above table indicates the production planned Vs actual production / dispatch

performance of Integral planning department of Electro-Switch Pvt. Ltd.
During 37"" to 46**" weeks .The average productivity duhng this period is 89%.

X7
 MS Total Planned Vs Actual production (In 2000)

We 41
we«ks

* Total Planned Qly **'«ft^'«^Tolal Pffxluce Qty

Table 4.5
Production planned Vs Total Capacity utilization for MS
( Double and Triple Products)
Electro-Switch Pvt. Ltd.(ln 2000)

Planned Capacity
Weeks Total Capacity Qtj'
Qty Utilization
\Vc-37 24040 30050 80%
\\'c-38 26800 30050 89% u — J ^
\Vc-39 27800 30050 93%
\\'c-4() 23900 30050 80%
\Vc-41 17835 30050 59%
Wc-42 16925 30(750 56%
\X'e-43 181(K) 30050 60%
Wc-44 20000 30050 67%
VVc-46 20300 30050 68%
Average Utilization 72%

Table 4.5 indicates the production planned Vs total Production capacity

utilization. This shows how effectively resources are utilized by Integral
planning department of Electro-Switch Pvt. Ltd. during 37"^ to 46'^ Weeks. The
average capacity utilization during this period is 72%. Thus even the planned
Vs Dispatch performance is found satisfactory during the 37"^ to 46'^ Week.

S8
6) Space productivity: This performance parameter is used in retail business
to monitor the sales, inventory and profit performance with respect to
occupied space. In retail organization the success of the business mostly
depends upon how the items are displayed to attract the customers and how
effectively the floor space is utilized to display the items. The example of SPR
group of companies, which monitors the sales, inventory and profit
performance in terms of floor space utilized in the retail shop is discussed
here for the sake of illustration.

Table 4.6
Space Productivity Vs Inventory.Sales and GM performance
of SPR Group Co Ltd
o peice r r o u u c u v i i y v s i n v e n t[ o r y , o a i e s e i n a o i v i p e r r o r m a n e e

PL PL-DESCRIPTION Area Space prcKJuctivity (Per Sq.meter)

SQ.Mtr. Avg Inventory Sales in $ GiVlinS
in $

EL ELECTRICAL GOODS FOR WIRING & FITTING 241.30 2,908.13 8,819.36 3,869.58

PL PLUMBING WARE 246.12 2,958.95 8,37686 2,054.23

TO TOOLS AND GARDENING 291.00 1,879.68 6,413.26 1,765.19

HW HARDWARE LINES 566.68 2,157.29 4,716.26 1,362.84

TL TILES, ADHESIVE. GROUT, GLASS BLOCKS. ETC. 276.80 2,913.87 6,708.96 8,434.94

HM HOMEWARE APPLIANCES 682 55 699.18 1,922.41 878.66

PA PAINTS AND ADHESIVES 31380 1,087.18 4,23675 854.42

Table 4.6 shows the space utilized by different Departments of SPR Ltd.
These figures referred to one of the retail shop of SPR Group. If we refer the
average inventory per Sq. mtr for different departments, the performance of
home ware department is the satisfactory as compare to other departments
(which shows lowest inventory value per Sq. mtr. i.e. $ 699 per Sq. mtr.)
whereas, Electrical department shows highest sales performance i.e. sales
value is $8,819 per Sq. mtr. If we refer the gross margin earned by the
departments, the performance of tiles department is highest. The gross

S')
margin of tiles department is $ 8434 per Sq. mtr. The main reason for this is
only sample tiles are kept at the front to display it to customers and stock is
kept at the bulk stores.
Thus based on these figures management can take appropriate decision
about allocation space to different department in retail area. More profitable
items can be allocated more space where as less profitable items can be
accommodated in small space. Thus space productivity is one of the main
performance indicators in retail sector.

7) Other tools for monitoring performance Indicators of integrated

supply chain management ^.
a) Purchase
Latest price of material
i. BOM Index (Price Index) =
Budgeted price of material

Present MOQ of material supply (offer by supplier)

ii. Lot size Index =
Expected minimum lot size

Present lead-time of purchasing

i. Lead time Index =
Expected lead time

No. of purchase Indents processed

iv. Purchase Processing = x 100
Efficiency Total no. of purchase indents

Total Purchase value

V. Purchasing cost efficiency = x 100
Total purchase expenses

Cost of material which is purchased

through rush order
vi. Rush Order cost Index = Cost of material normally paid

b) Value Engineering, Product development and Purchasing

Cost saving achieved in value engineering
i. Value engineering Efficiency = x 100
Total matehal cost

9(1
 Cost of material taken for the production
ii. Material cost Index = ~~~~
Production cost

Actual time required to develop product

Development efficiency = x 100
Standard time required for the product
Development as per plan

Total No. of items after standardization

iv. Standardization Index =
Total no. of items before standardization

No. of items coded

V. Codification Index =
Total no. of items

c) Materials planning and forecasting

1) Planning Efficiency = It is measured in terms of no. of stock out
situations and It's effect on customer delivery.

No. of delayed purchase indents

ii) Planning Delay Index = x 100
Total no. f purchase indents raised.

No. of rush orders delivered

ill) Planning Flexibility index =
Total no. of rush orders

d) Stores Management
No. of items for which book stock
is equal to physical stock
i) Stock Accuracy Index = Total no. of items

Total material handling cost

ii) Material Handling cost Index = Total value of material received and issued
 No. of items rejected at incoming
inspection stage
iii) Incoming material
Inspection efficiency Total no. of defective items (incoming material)

Value of material lost in handling

iv) Handling Damage Index
Total value of material received and issued

Value of material lost in storage

v) Damage in storing Index =
Total value of material received and issued

No. of pending Works orders for which

Material not issued for production
vi) Material Issue Index =
Total no. of works order in hand

e) Marketing and Distribution

No. of orders processed and
Forwarded to integral planning department
i) Order processing Index =
Total no. of orders received

ii) Premium freight = Excess freight paid w.r.t. Target value. The freight value
increased due to failure of planning or any other reason.
Value of finish goods in transit
iii) GIT Index =
Total sales value over a period

Cost of distribution
iv) Distribution Index =
Sales value of item distributed

92
f) lnventot7 Tools
Annual Sales value
i) Raw material Inventory Turn over =
Average Raw material Inventory Value

Annual Sales value

ii) Finish goods Inventory Turn over =
Average Finish goods Inventory Value

Average WIP value

iii) Work in progress index =
Total production value (annual)

Value of consumed spares parts

iv) Spares parts Index
Inventory value of spares parts

Average Value of finish goods in transit

v) GIT Inventory Index =
Average Value of finish goods Inventory

Total value of non-moving items

vi) Obsolescence Index =
Total Inventory Value

g) Computerization

No. of key activities computerized

i) Computerization Index =
Total no. of key activities

Time required to perform key activities

after computerization
ii) Computerization efficiency =
Time required to perform key activities
after computerization

Internal Supplier Effectiveness Index (ISEI)

Most of the organizations have adopted concept of Internal Supplier
Effectiveness to monitor and improve the performance of the individual
departments. Here we will see the example of P.C. Makers Pvt. Ltd. that has
adopted this concept of ISED to improve performance of individual
departments. For that P.C.Makers has established buyer-seller relations
among ail the departments. Every seller department offers the products and
services to its buyer departments. Buyer department sets targets for their
seller department as per their requirements and monitor the same on monthly
basis. Thus performance of the every department is monitored and controlled
by their respective internal buyer departments. Each buyer and seller conduct
formal meeting every quarter to set performance targets for the next quarter.
Buyer department suggests the improvements to seller department. Decisions
like employee's promotion and increments are based on their performance
measured by their internal customers. In this chapter the important functions
of material planning, production planning, production, marketing, sales and
Logistics, organization efficiency (O.E.), Finance (A/C payables, A/C
receivables) departments of P.C. Makers Pvt. Ltd. are considered.
P.C. Makers ISEI buyer supplier matrix is presented in Chart 4.a

Chart 4.3
P.C. Makers ISEI buyer supplier matrix

Buyer Seller (Supplier) Products Offered

Department Department
Material Marketing , Sales • Sales pending order status
Planning and Logistics • Product wise rolling forecast for the
next 12 weeks
• New product development status
• Customers rush orders Status
Production Marketing, Sales • Customer pending order status
Planning and Logistics • Product wise rolling forecast for the
next 12 weeks
• New product development status
• Customers rush orders status

94
Production Material Planning • Ensure availability of raw material on
production line.
• GRN entry of incoming material
• QC status of incoming material
• Feed forward information about the
projected material shortages
• Ensure availability of raw material for
new developmental projects.

Production Production planning • Work order entry in JDE system

• Material movement note to raw
material stores
• Ensure availability of material at
workstation at right time.

Production Logistics • Daily production report

• Daily finish goods movement note
• Ensure timely availability of finish
goods for delivery.

Buyer Seller (Supplier) Products Offered

Department Department
Material Finance / Accounts • Supplier payment
Planning Payables • Cash requirements for cash purchases
• MIS report
• Excise records
Marketing Finance / Accounts • Customers A/C status
sales and receivables • Creditors follow up (fund collection)
Logistics • MIS report
• Invoicing / documentation and other
legal requirements

y.^s
Material (O.E.) • Maintain supplier database
Planning Organization • Maintain Item database
Efficiency • Update master files
• Working of BOM index
• Budget
• Target setting
Production (O.E.) • Production layout
planning Organization • Motion study
Efficiency • Time study
• BOM updatation
• Production efficiency and target setting

Chart 4.b indicates the format of measurement of the Internal Supplier

Effectiveness Index used by P.O. Makers Pvt. Ltd. The chart is self
explanatory. Rating scales for different activities are given in chart 4.b

Bench marking

In today's competitive environment it is essential to choose best method for

target fixing. Benchmarking is one of the best methods for fixing the targets. In
this method organizations compare the performance measures with the
relevant metric or benchmark.
The question is what metric should be considered for the comparison
purpose? An immediate competitor is one of the best options for the same.
Benchmarking is not just comparison of the outputs (results) but it is
comparison of the process, which has produced, that outputs. Here we can
categorize the benchmark process into two classes

• Competitive Benchmark
• Non-Competitive Benchmark
Competitive benchmark is the process of comparison with the best in the
same class where Non-Competitive benchmark is the comparison with the
best in the different class.

9(1
Xerox is the best example of gaining the competitive advantages and non-
competitive advantages through benchmarking process. Xerox logistics and
distribution performance has doubled as a result of benefits obtained through
non-competitive collaborative benchmarking"^. Following table 4.i shows five
practices that Xerox has identified through non-competitive benchmarking
process to improve productivity ^.

')7
 Chart 4.b
P.C. Makers Pvt. Ltd.
Internal Supplier Effectiveness Index (ISEI)

The most important measure of NOAC (Next Operation As Customer) progress is not what thinks it is,
but what customer say it is. The elegance of ISEI is the remarkable way in which it simulteneously
analyzers :1) The relative importance internal customers

Customer:Production department Supplier: Purchase department

Date:
Product:BOM Purchasing

Importatnts (1) Rating ( R)

Requirements Score (S) = (1) X ( R )
Scale 1-5 Scale 1-5
1. Quality
* Completeness 4 3 12
* Accuracy
2 Timeliness
' On-time delivery 5 2 10
* Cycle time
3 Depandability
* Promise kept
4 4 16
* Credibility
* Trustworthiness
4 Comoperativeness
* Responsiveness 4 4 16
* Flexibility
* Approachability
5 4 20
* Courtesy
5 Communication
* Listening
5 4 20
* Understanding of
customer expectations
* Feed forward
information 5 4 20
* Courtesy
32 25
[Total Score: Total (Y) 1 Total (T): 114
ISEI=T/5YX100:71%
Suggetsions for improvement: Commited Date (to be filled
by the supplier)
In absence of reliable MPS, close interation with planning (logistics) should
be maintained to gather immediatesignals reg. Change in requirements of
different materials
NoteThe maximum ISEI is 100% A ISEI rating below 20% would indicate a relationship that is terminally

^;8
Chart 4.C shows the practices adopted by Auto-Comp Pvt. Ltd. through
Competitive and noncompetitive benchmarking
Chart 4.0
The practices adopted by Auto-Comp Pvt. Ltd
Process Process Competitors Target set by Auto-Comp
parameter to Status Pvt.Ltd.
be compared
Purchase Method of MRP system Established Computerized
Plannirig planning matehal planning system
Purchasing Lead time JIT Plan for S-T-U status
Supplier delivery % Delivery 100% 100% "
Supplier quality PPM Below 1000 Below 1000
Inventory Turn Annual sales/ Above 50 Above 35
Avg. Inventory
Logistics and local Milk route Milk route method adopted
transportation transportation method for outbound and inbound
incoming and transportation.
outgoing
material
Production Process Above 1.63 Above 1.63
Process capability
index
Product delivery Replenishment Replenishment Adapted Replenishment
system for system system suggested by
finish goods Cummins India Ltd.
Customer Product 15 Days 7 days
Expectation delivery lead
time

SCM Process mapping

Process mapping is the powerful tool to eliminate the non-value added
activities. In entire supply chain, thousands of processes are involved. Only
few of them are creating benefits for the final product for which customer is
ready to pay are called as value added activities. The time required to carry
out these processes is called effective time or value adding time. On the other
hand process that is not creating any value or benefit for the final product but
are essential part of the supply chain are called as non-value added activities.
The time required to carry out these processes is called ineffective time or
non-value adding time.
The role of integrated supply chain is to identify value-adding activities in the
supply chain and reduce the time to carry out the non-value adding activities

()i)
by using the best practices. Let us discuss the process mapping conducted by
Auto-Connps Pvt. Ltd. to eliminate / reduce the time required for the non-value
added activities.
Table 4.7
SCM Process mapping - Auto-Comp Pvt. Ltd.
Proces Supply chain Process % Value Lead time Lead time
Sr. No. addition in Days after
integration
A Raw material Purchasing 20% 20 days 20 days
B Incoming material inspection and RM 0% 25 days 15 days
storage
C Subcontracting -Roughing operation To% 10 days 10 days
D Semi finish material stock at suppliers end 0% 20 days 10 days
E Primary Operation 10% 5 days 5 days
F Secondary Operation 15% 5 days 5 days
G In-house Semi finish stock 0% 15 days lOdays
H Assembly 30% 3 days 3 days
1 Final Inspection & Damper testing & 5% 2 days 2 days
packaging
J Finish Goods Stock & invoice 0% 15 days 1Odays
documentation
K Dispatch of product to customer 10% 10 days 10 days
Total 100% 130 days 100 days

Table 4.7 and the graph indicates key processes of the supply chain of Auto-
Comp Pvt. Ltd. and their lead time and value addition.
Actual analysis shows that total process time in the supply chain is 130 days.
Out of which effective / value adding time is 55 days and non-value adding
time is 75 days.
Effective / Value adding time (in days) -^'^ t '•^^T^v
ISCM efficiency = X 100 fS<~-\^
Total lead-time (in days)

ISCM efficiency
55 K-ips-- ^^"^
X 100 = 42.30%
130

Based on above process mapping Auto-Comp has concentrated its efforts to

reduce the time required for non-value adding activities like incoming material

100
inspection and raw material storage. After system integration, Auto-Comp has
established SQI department (vendor development) to develop the supplier
quality system to eliminate the in-house inspection activity of raw material and
thus to achieve S-T-U (ship to use) deliveries. After integration lead-time for
incoming material inspection and RM storage is reduced to 15 days also lead
time of semi finish material storage at supplier end is reduced to 10 days
Auto-Comp process development team is continuously working on reducing
the production batch quantity to bring more flexibility and reduce work in
progress inventory. Due to which in-house semi finish storage lead-time is
reduced to 10 days.
Auto-Comp has implemented replenishment system especially for Diesel
India's damper products, which helped to have control over, finish goods
inventory. This has reduced the finish goods storage lead-time to 10 days.
Auto Comp's SQI team, product development team and process development
team is continuously working on reducing the non-value adding time by
eliminating these non-value-adding activities.
After system integration Auto-Comp has reduced its total lead-time from 130
days to 100 days.
Thus after integration the ISCM efficiency increased to 55% from 42.30%
Effective / Value adding time (in days)
ISCM efficiency - X 100
Total lead time (in days)

55
ISCM efficiency = X 100 = 5 5 %
100

101
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Thus various performance indicators are being used to measure the
changes in the different productive activities of a manufacturing units as well
as non manufacturing units .All these activities affect cost of production and
ultimately profitability of the organization .Out of the total indicators
.performance indicator such as customers delivery performance .supplier's
delivery performance, inventory performance are used.From qualitative
performance indicators , order confirmation effectiveness .response time.
system flexibility are used.Qualitative performance indicators are also used
which shows the change in quality of product as a result of adoption of
integration of all the activities of supply chain management .In addition to
these indicators some other indicators such as lead time index, marketing
and distribution are used to study the impact .At the end an attempt is made
to show how all these activities affect cost of production and
helps in increasing profitability of organization.

103
References:

1. "Logistics and Supply Chain Management" By Martin Christopher, Second

edition, financial times Pitman publishing, Second Indian Reprint 2001,
page 122.
2. "Materials Management" by M.M. Varma, Sultan Chand and Sons, Fourth
Edition June 1999, page 143-147
3. Ibid p. 106

104