Supply Chain Metrics

CHAPTER II

REVIEW OF LITERATURE

2.1. INTRODUCTION

This project is about assessing the Supply Chain Metrics of Indian Automotive Industry. This project aims in evaluating the values of cycle time metrics, cost metrics, Service / quality metrics and asset metrics in Indian auto and auto ancillaries. It also concentrates in identifying if there is any significant dependence between various metrics. The project also deals in assessing the relation between the total cycle time and total supply chain cost and also analyzes the significance of the difference between the total cycle times of automobile manufactures and auto ancillaries. This project also deals in analyzing the significance of difference between the total supply chain cost of automobile manufactures and auto ancillaries. In this chapter, the literature relevant to the topic of research is reviewed. The purpose of this chapter is to take a broader perspective, is to remove the need to rediscover knowledge that has already been reported. The researcher has searched the literature thoroughly and has identified most of the material that could be useful in this project.

2.2. DEFINITIONS

2.2.1. Supply chain:

Supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers (Ganeshan and Harrison 2002 pp:4)

supply chain is a set of three or more companies directly linked by one of more of the upstream and downstream flows of products , services , finances and information from a source to a customer ( Hedberg and Olhager 2002 pp:34)

2.2.2. Supply Chain Management:

supply chain management is a systemic , strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain , for the purpose of improving the long term performance of the individual companies and the supply chain as a whole ( Mentzer 2000 pp.52)

Supply chain management is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system. (Lee and Billington 2001 pp43)

''the objective of SCM is to increase the competitive advantage of the supply chain as a whole , rather than to increase the advantage of any single firm (Garver M S and Mentzer J T 2000 pp.12 )

2.2.3. Logistics:

logistics as that part of the supply chain process that plans , implements and controls the efficient forward and reverse flow and storage of goods , services and related information between the point of origin and the point of consumption in order to meet customer's requirements (Day G S 2000 pp24)

2.2.4. Supply chain metrics:

A metric is a standard of measurement of performance. The metrics give the basis on which to evaluate the performance of processes in the supply chain. They give managers the opportunity to follow the development of the supply chain (Smith C D 2000 pp182)

Further (Nix 2000 pp.9) explains the objectives of supply chain metrics is to increase the competitive advantage of the supply chain as a whole, rather than to increase the advantage of any single firm

2.3. BASIC CONCEPTS

2.3.1. SUPPLY CHAIN MANAGEMENT DECISIONS

Based on the studies by Zhang and Dilts (2004 pp: 72-96) supply chain management decisions are related to four factors. They are production, location transportation and inventory. Production decisions are used to decide which products to produce, where to produce, which suppliers to use and so on. Location decisions deals with the numbers size and geographic locations like distribution centers and plants. Transport decisions are used to decide the mode of transport. Inventory decisions will manage inventories throughout supply chain.

2.3.2. STRUCTURE

The structure of the SCM in this research can be divided into tiers like first tier, second tier and third tier. The supply chain starts with third and fourth tier suppliers who supply the raw materials to the second tier suppliers who manufacture some simpler individual components. The second tier companies supply the simpler components to auto components manufacturers, who form the first tier. The first tier suppliers provide the components to the OEMs, who in turn provide the automobiles to the customers.

2.3.3. PERFORMANCE MEASURE

Supply chain excellence can be measured by performance metrics like cost, inventory, and order cycle times. Responsive, lean, inexpensive supply chains are better than slow, costly ones. Supply chain excellence can also be defined by the thinness of the gap between demand and fulfillment. What prevents us from knowing demand? What does every customer want to buy? In a perfect supply chain demand would be known and satisfied. Combining the two notions might yield flexible, smooth efficiency in the supply chain network with the highest customer service.

2.3.4. BACKGROUND OF THIS RESEARCH

Today's rapidly changing business environment places ever greater demands on business such as to provide products and services quicker, with greater added value, to the correct location, with no relevant inventory position (Lee pender2001 pp23).

The Indian automobile industry is currently experiencing an unprecedented boom in demand for all types of vehicles. This boom has been triggered primarily by two factors: a) increase in disposable incomes and standards of living of middle class Indian families estimated to be as many as four million in number; and b) the Indian government's liberalization measures such as relaxation of the foreign exchange and equity regulations, reduction of tariffs on imports, and banking liberalization that has fueled financing-driven purchases. (India Today, june 2007p23).

According to (Peter Drucker 1998 pp42) the above trends have encouraged many multinational manufacturers from Japan, U.S.A and Europe. As a result they showed their keen interest to enter the Indian market mainly through joint ventures with Indian firms. Hence the supply chain of Indian Automotive industry is been taken as the background of this research in order to measure its performance and enhancement.

2.4. STRENGTHS

The strength of this research is based on the review of literature which has been presented in six different views as mentioned below

A) Studies relating to role of supply chain management in Indian automotive industry

B) Studies related to structure of supply chain flow in Indian automotive industry

C) Studies related to various supply chain decisions taken by Indian automotive industry

D) Studies relating to process techniques adapted by Indian automotive industry to fulfill its decisions

E) Studies relating to recent trends in supply chain management related to Indian automotive industry in improving its process techniques

F) Studies relating to measurement of supply chain management performance in relation to its trends and techniques adapted.

2.4.1. Review of studies relating to role of SCM in Indian Automotive Industry

Ketchen Jr., G., & Hult, T.M. (2006 pp: 573-574) studies that in the past ten years many significant changes has been takes place in the Indian automobile industry. His studies further states that there was a healthy change in the relationships between Indian automobile assemblers and their suppliers due to globalization, implementation of lean production and the development of modularization. There were stiff competition among many manufacturers and it helps to improve their quality, cost reduction targets and on-time delivery to market. And also it creates more mergers or acquisitions.

Larson, P.D. and Halldorsson, A. (2004 pp: 17-20), in his studies, aimed at analyzing the role of SCM in Indian automotive industry confirms that SCM is a best-in-class, high performance solution which is been utilized by Indian automobile manufacturer, logistics and distribution companies, and auto component retailers to blend the demand chain with the supply chain. The author further confirms his statement by saying that SCM helps in demand forecasting; taking an order; giving an accurate promise date; sourcing and manufacturing the right goods; position inventory properly; pick, pack, and efficient transshipment; most importantly, SCM makes a world of difference to the manufacturers by maintaining a minimal finished goods inventory.

Further, McCubbrey, D., Pinsonneault, A., & Donovan, R. (2006 pp: 722-727) studies SCM flow in Indian automotive industry is based on its products, information and finance. His studies reveal that the product flow is nothing but movement of goods from supplier to customers and also in case of any customer returns or service requirements. The information flow covers updating the status of the delivery as well as sharing information between suppliers and manufacturers. The finance flow encompasses credit terms, payment schedules and consignment and title ownership arrangements.

Based on above facts, Kaushik K.D., & Cooper, M. (2000 pp: 65-67) studies that in order to execute supply flow in Indian automotive industry, Supply chain management has two types of softwareplanning application and execution applications. Planning application is utilized to determine the best way to fill the order; execution software determines the physical status of goods, the management of materials and financial information of all parties involved.

According to a survey by Handfield and Bechtel (2001 pp: 284-286), SCM benefits Indian automotive industry in several ways which include on-time delivery to the suppliers, proper pricing and discounts. The billing error has been reduced and the payments were made simple and faster.

Administration costs were reduced for customers/vendors; better warehousing and transportation management, timely and correct asset capitalization, credit management (customers), better plant maintenance, and easy access to data /information.

2.4.2. Studies related to structure of supply chain flow in Indian automotive industry

Lavassani, M. K., Movahedi B., Kumar V. (2008pp: 543 and 622) examined that the structure of the Indian automotive industry can be divided into tiers like first tier, second tier and third tier. The supply chain starts with third and fourth tier suppliers who supply the raw materials to the second tier suppliers who manufacture some simpler individual components. The second tier companies supply the simpler components to auto components manufacturers, who form the first tier. The first tier suppliers provide the components to the OEMs, who in turn provide the automobiles to the customers. But today there are new direct suppliers, who design systems and co-ordinate the supply chain required for the manufacturing and assembly. ''The larger first tier suppliers go a step further of supplying the components, by semi-assembling the modules like steering systems and rear axle systems, which can be directly fixed on the final assembly of the cars.'' (Hemila, 2002 pp: 72)By this the costs incurred by the car manufacturers in finding the individual component manufacturers, material handling and processing are reduced. This even transfers the risks and problems associated with each component to the suppliers. According to (Francisco Veloso and Rajiv Kumar, 2002 pp72) the latest development in supply chain of the automotive industry is the emergence of tier 0.5. The auto ancillary companies, which cater to the research and design requirements of automobile manufacturers, are called the tier 0.5 vendors. The following is the flow-chart representation by the researcher to demonstrate the supply chain flow in Indian automobile industry

Lower-Tier Sub-Suppliers

3rd Tier Suppliers

2nd Tier Suppliers

1st Tier Suppliers

0.5 Tier Suppliers

OEMs / Assemblers

Dealer Networks

Consumers

2.4.3. Studies related to various supply chain decisions taken by Indian automotive industry

According to Garver M S and Mentzer J T (2000 pp.12-22) in the Indian automobile industry there are three levels in the supply chain management decisions. They are strategic, tacticaland operationallevel. Strategic level decisions are related to production, location transportation and inventory. Production decisions are used to decide which products to produce, where to produce, which suppliers to use and so on. Location decisions deals with the numbers size and geographic locations like distribution centers and plants. Transport decisions are used to decide the mode of transport. Inventory decisions will manage inventories throughout supply chain.

Based on the studies by (Haag, S., Cummings, M 2006 pp: 124-132) strategic level decisions are interrelated. For instance mode of transport will change according to the geographic locations of plant and warehouses. Inventory policies may change according to the supplier's choice. Tactical level decisions are responsible for medium term decisions. For instance some of the tactical level decisions are weekly distribution, production, and transportation planning. The operational level of supply chain management is concerned with the very short term decisions made from day to day. The border between the tactical and operational levels is vague and often no distinction is made. The researcher concludes that these decisions form the appropriate selection for SCM.

2.4.4. Studies relating to process techniques adapted by Indian automotive industry to fulfill its decisions

According to Lewis and Talalayevsky, (2004 pp: 90) Indian automotive industry adapts different techniques in its supply chain such as Quick Response (QR), Continuous Replenishment Programs (CRP) and Efficient Consumer Response (ECR)

Quick Response (QR) is both a management paradigm and a methodology that is adapted by Indian automotive companies since it allows auto components supply systems to react quickly to changes while improving their performance. (Wagner,B 2000 pp1003).

Mills et al., (2004 pp: 12) studies that Continuous Replenishment Programme (CRP) has been managed by Indian automotive industry in two different ways. The first way of managing is by considering which party has the responsibility for the inventory management and the other way is by considering to what extent the partners are sharing information. Due to these above reasons the automotive industry has been improved in the speed of supply, product availability, cost reduction target and it helps to give better service.

Efficient Consumer Response (ECR) as a strategic initiative working to overcome traditional barriers between trading partners, thus eliminating internal barriers that result in costs and time that add little or no value to consumers (Skjoett-Larsen, T 2007 pp284).

According to Kumar V. (2008) nowadays, these companies have started to adopt the emerging Internet technologies to have constant contact with their suppliers. The Internet is very useful to do online B2B transactions. Ashok Leyland has reduced their inventory cost by using an end-to-end supply chain management system. Mahindra & Mahindra has employed a single network to connect all its plants, corporate office and all offices.

2.4.5. Studies relating to recent trends in supply chain management related to Indian automotive industry in improving its process techniques

In the book Complementary theories to supply chain management Halldorsson, A., Kotzab, H., Mikkola, J. H., Skjoett-Larsen, T. (2007 pp:90-94) studies that the Indian auto manufacturers have started to take upon new concepts in supply chain management like distribution manufacturing, back hauling, vendor managed inventory, containerization and logistics out-sourcing. Indian auto suppliers has adapted a new concept called Supplier Relationship Management (SRM) and is said as the consolidation and classification of procurement data to provide an understanding of supplier relationships in order to develop procurement strategies that reduce costs, make procurement predictable and repeatable, enlighten supplier partnership decisions and provide leverage over suppliers in negotiations. It's also called: Sourcing, Strategic Sourcing, SRM, and e-Sourcing. (Bob lowson, Russell King, et al, 1999 pp523) sees that it helps to improve the efficiency of the auto components supply process, through collaboration with the suppliers.

Baziotopoulos, (2004 pp:42) worked hard to study supplier relationship management's (SRM) goal and came to the conclusion that customer relationship management(CRM) is the best tool to streamline and make effective supply chain processes between an enterprise and their customers. SRM practices helps to maintain the effective communication between an enterprise and its suppliers. As a result SRM increases the supply chain processes, inventory and good service of goods. Author further explains that if the enterprise uses SRM in an appropriate way then it would definitely decrease the production costs and improves the quality and service.

According to the studies by Yusuf et al., (2003 p: 122) many automation technologies are also adapted by Indian auto suppliers in the recent time. Some of them are Automatic Guided Vehicles (AGV's), Automated Storage and Retrieval Systems (AS/RS), Stores and Conveyor System, Radio frequency terminals and radio frequency data communications. As Gallegos, J (2002 pp: 213) says automated Storage and Retrieval Systems is a very good technology that can be considered to cut auto component inventory cost and to improve its productivity.

2.4.6. Studies relating to measurement of supply chain management performance in relation to its trends and techniques adapted

Measuring the performance of a supply chain isn't easy. For one thing, supply chains are subject to conflicting requirements, creating confusion about which aspects of performance ought to be monitored and improved. For another, there are dozens of metrics to choose from, and it's far from obvious how to select among them (David A. Taylor, 2004 pp: 223).

As Marshall Fisher explained in his classic Harvard Business Review article (1997 p: 4) Efficiency and flexibility are the basic trade-off in the supply chain process. If the supply chain processes are said to be more efficient process then it is capable of minimizing the inventory at each location and it can definitely achieve economies of scale at every link. On the other way around if the supply chain processes are flexible then reserve capacity inventory must be maintained. As a result it will help to produce and deliver products in a very short time even if there is a fluctuation in the quantities.

The methods Ramakrishnan R V (2006 pp: 167-231), suggest for measuring the supply chain performance are:

Balanced Scorecard

Supply chain council's SCOR model

Logistics scoreboard

Activity-Based Costing

Economic Value Analysis

According to Hedberg and Olhager,(2002 pp:72-74 ) , Supply Chain Balanced Scorecard tracks a limited number of key metrics . These metrics should be closely aligned to the automobile companies' strategic objectives. The measurements usually cover 4 areas:

1. Financial - ex: The cost of manufacturing, warehousing, transportation etc

2. Customer - ex: Order Fill Rate, Backorder Levels, On Time Delivery 3

3. Internal Business - ex: Adherence -To-Plan, Forecast Error

4. Training: ex: In house Training Hours, APICS Membership/Certification

While the Balanced Scorecard approach was not specifically designed for the automobile and auto-component supply chain, it does give a good guidance for its core measures of this research objective. The central idea is to focus on key metrics that have real meaning to automobile company. The Balance Scorecard approach helps the manufacturers to keep their measures aligned with their specific objectives. These measures should be tracked over time (usually monthly) with specific targets for each supply.

Ketchen Jr., G., & Hult, T.M. (2006 pp: 19). studied the Supply Chain Operations Reference -model (SCOR) and found that it isolates key supply-chain management processes of auto component companies and matches their process elements against industry -specific best practices , benchmarking performance data , and appropriate software applications , providing its users with a framework for understanding where they need to make improvements . SCOR builds on the concepts of automobile business process reengineering, benchmarking, and process measurement by integrating their techniques into a cross-functional framework that addresses management issues at the enterprise rather than at functional level. The main factor of adapting this model in this research project is because SCOR is recognized by the 800 member companies of the Indian Automotive industry Supply -Chain Council as an effective toolkit for companies wanting to upgrade their supply chains for strategic advantage. While using the SCOR model is not a substitute for developing a comprehensive operations strategy, it is a tool for ensuring that the operations strategy has the desired outcome. Cross - industry studies show that integrated supply chain management in Indian automobile industry typically yields the following results:

25 -50% reduction in total supply chain costs

25-60% reduction in inventory holding

25-80% increase in forecast accuracy

30-50% improvement in order -fulfillment cycle time.

When it comes to measuring performance of Indian auto industry, it is a prescriptive and recommended set of logistics metrics that covers: logistics financial performance; logistics productivity; logistics quality; and logistics cycle time can be used to map the supply chain performance measurement processes. This method is adapted in this research project since it's prescriptive and recommends the use of a specific set of supply chain performance measures.

As recommended by Mentzer, J.T. et al (2001 pp:124) Activity based costing is been adapted by Indian auto suppliers since its a measurement method that ties financial measures of these companies to operational performance since it involves breaking down activities into individual tasks or cost drivers. ABC is one of the most accurate cost management methodologies by Indian companies since it focuses on indirect costs. It traces rather than allocates each expense category to the particular cost object .It makes indirect expenses direct. ABC is used when overhead is high, products are diverse: complexity, volume, amount of direct labor. It is used when cost of errors are high, also when competition is stiff.

Bennett stewart 111, (2000 pp: 92) The most successful measurement of performance is Economic value analysis (EVA). It is mainly used as a guide to take decisions in the new company. In the Indian automobile supply chain metrics, it has been given equally high importance and it is used for managing both intangible and tangible assets. Economic value analysis (EVA) is been adapted in this research because EVA metrics vary from other metrics. The characteristic features of EVA metrics are complete, practical and avoid confusion in the business.

2.5. Future:

The review of previous studies presented above has outlined the researcher that an appropriate approach for the measurement of supply chain metrics in Indian automotive industry is required to be studied in the future. Thus study on the best practices followed by existing automobile and auto component manufacturers, suppliers and dealers would help the quick and easy response to customer's expectations.

2.6. Conclusion:

In this chapter, the researcher has looked into the aims, objectives and findings of the previous studies relating to the present research problem. These studies have showed their strengths and existences. An insight into these previous studies reveal that there needs both qualitative and quantitative study relating to supply chain metrics measurement and trends.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/supply-chain-metrics.php


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