Supply Chain Management & Sustainability Business Models and Processes 2 | PDF

Supply Chain Management & Sustainability Business Models and Processes 2  Do you have any questions... − about the previous block? − about the preparatory and follow-up (self-study) tasks? − about the learning-objective quizzes? − about current topics relevant...

Supply Chain Management & Sustainability Business Models and Processes 2  Do you have any questions... − about the previous block? − about the preparatory and follow-up (self-study) tasks? − about the learning-objective quizzes? − about current topics relevant to this block? 2024 Institute for Information Systems www.fhnw.ch/business 4  Blocks 2 & 3 Blocks 4 & 5 Blocks 6, 7 & 8 Model of Networked Value Creation - “Big Picture” Own organization Strategic Positioning Why? Layer Co-Value- Integration of resources Co-Value- creation and competencies creation Customer Networks Business Partners Business Partners Supply Chain Supplier Networks E-Sourcing E-Commerce (Customers) E-Procurement Process (Suppliers) How? Layer Procurement Distribution Production Planning Supplier Relationship Customer Relationship Management Management Information Systems Technology Procurement Sales solutions solutions ERP-System What? (e.g. Online shop, EDI) Layer (e.g. Buy-Side, EDI) Blocks 9, 10 & 11 Logistic System Procurement Internal logistics Sales logistics logistics Block 12 2024 Institute for Information Systems www.fhnw.ch/business 5  Business Models and Processes 2 1. Controlling the Supply Chain 2. Cost Tracking in the Supply Chain 3. Key Figures in Supply Chain Management 4. Bullwhip Effect 5. Group Exercise “Beer Game” 2024 Institute for Information Systems www.fhnw.ch/business 6  Own organization Strategic Positioning Why? Layer Co-Value- Integration of resources Co-Value- creation and competencies creation Customer Networks Business Partners E-Sourcing Supply Chain Supplier Networks Business Partners E-Commerce E-Procurement (Customers) Process (Suppliers) How? Layer Procurement Distribution Production Planning Supplier Relationship Customer Relationship Management Management Area of Activity: “Processes” Information Systems Technology Procurement Sales solutions solutions ERP-System What? (e.g. Online shop, EDI) Layer (e.g. Buy-Side, EDI) Logistic System Procurement Internal logistics Sales logistics logistics The area of activity “processes" focuses on the overall cooperation between the suppliers, the own company and the customers. Central questions are: – How can value creation be improved through overarching processes? – How can the overarching processes between business partners be further automated and standardized through digitalization? – Which innovations can influence and change processes in the future? 2024 Institute for Information Systems www.fhnw.ch/business 7  Relevance Supply chain management requires data and information from different areas of the organization for planning, controlling and monitoring. Data on the duration of activities in processes, financial data from bookings, assessments of business partners for cooperation, etc. is required. The controlling of the supply chain processes the data and information into meaningful key figures. Key figures that can be analyzed for internal and external comparisons and for the assessment of changes due to improvement measures. You must understand… – which factors influence the success of the supply chain and need to be analyzed. – How the controlling of the supply chain can be structured. – How supply chain key figures can be structured and categorized. 2024 Institute for Information Systems www.fhnw.ch/business 8 Supply Chain Management & Sustainability Controlling the Supply Chain  Learning Objectives – You know the business management basics of supply chain controlling and can explain these aspects. – You understand the economic importance of inventory management and can explain this using an ROI (Return on Investment) calculation. 2024 Institute for Information Systems www.fhnw.ch/business 12  Business fundamentals #1 Internal Supply Chain Supply Chain Management as a «control loop» External SC (Throughput) External SC – The «Controller» is the management level (Input) (Output) Order – The «controlled system» is the «Order-to-Payment-S» (see figure on the right, red "S"). WE HRL KOZ VM ZL EM VS The control variables in value chains have a direct impact on the balance sheet and income statement. Payment – Inventories, freight costs, material prices, throughput Supplier Procurement Customers Production times, set-up times, etc. Distribution SC management accounting as a subsystem of leadership Disposal / recycling (Werner, 2017, p. 9) – Information preparation for planning, controlling and IT SC managament accounting monitoring of all activities within the supply chain – Ensuring the supply of information to (supply chain) WE = Goods receiving ZL = Interim storage HRL = High-bay warehouse EM = Final assembly management KOZ = Picking VS = Shipping VM = Pre-assembly 2024 Institute for Information Systems www.fhnw.ch/business 13  Business Fundamentals #2 Inventories #1 – Component of the balance sheet – Capital bound (tied up) by inventories: cash invested is not available for other purposes – Freed capital could generate interest: Opportunity costs – Reduction of inventories enables asset swap in the balance sheet (reduce current assets and increase fixed assets, e.g. by investing in equipment and buildings) – Reduction in inventories has a positive effect on cash flow («surplus cash and cash equivalents») – Gross and Net Inventories – To be distinguished in financial analyses – Value adjustment of gross inventories in case of excess and obsolete to net inventories, e.g. uncertainties in demand planning, discontinued products, fashion trends – Value adjustment (write-off) as a component of the income statement 2024 Institute for Information Systems www.fhnw.ch/business 14  Economic significance of Inventories Price 2 Inventory reduction by 20% from 100,000 to 80,000 x Quantity leads to lower current assets, which results in a higher Turnover 270’000 capital turnover and ultimately in a higher ROI (ceteris 540’000 Profit paribus) 30’000 - Material Return Costs 398’000 On Sales : 510’000 + 5.56% ROI Turnover Personnel  Reduction of stocks by 20% 14.03% x 540’000 102’000 Capital- Fixed +  Improves ROI by 1.21 percentage points Turnover : Assets 2.52 124’000 Other  Yield increase of 8.5% Assets 10’000 214’000 + Current Assets Inventory 90’000 80’000 + Other 10’000 (Werner, 2017) 2024 Institute for Information Systems www.fhnw.ch/business 15  Business fundamentals #3 Inventories #2 – Indirect impact on the income statement – Impact of allocating warehousing costs to the «cost of sales»: operating costs of the warehouse, material overheads, tooling costs, personnel costs, etc. – Calculated inventory impact via WACC («Weighted Average Cost of Capital»): Interest is calculated using the cost of equity and borrowed capital rates (6% to 10%), Negative impact on EBIT. Freight costs and material prices – Components in the income statement – Increase or decrease has a 100% impact on EBIT – The amounts are reported either in cost or separately in the income statement. 2024 Institute for Information Systems www.fhnw.ch/business 16 Supply Chain Management & Sustainability Cost Tracking in the Supply Chain  Learning goals – You know what cost tracking is and can describe the purpose. – You understand why cost tracking is relevant and can explain this using an example. – You understand the key figures TCO and TLC. You can calculate them and apply them to make (sourcing) decisions 2024 Institute for Information Systems www.fhnw.ch/business 20  Definition of Cost Tracking «Cost Tracking is a special monitoring system which serves to demonstrate the effectiveness of corporate activities. It is often integrated into a reporting system.». (Werner, 2017, p. 358) Aspects of Cost Tracking – Areas of cost tracking: inventories, freight costs, and material prices – Impact of procurement and logistics activities on the balance sheet and income statement – Cost changes due to new suppliers (raw materials, semi-finished and finished products) – "Total Cost of Ownership” (TCO): The sum of operational procurement costs. – "Total Landed Cost" (TLC): All costs up to the customer incl. customs duties and taxes (e.g. for an online shop or a B2B offer) – Use of forms (e.g. as excel tables) 2024 Institute for Information Systems www.fhnw.ch/business 21  Total Cost of Ownership: Sample Calculation Consider the example of a machine with a 10-year lifespan. Data as per market, experience, suppliers. – Cost category 1: Initial costs on purchase: CHF 800’000 (3.42% of TCO) – Purchase price, negotiations, legal, duties, delivery, installation, inspection, licenses – Cost category 2: Regular ongoing operational costs (p.a.): CHF 2’000’000 x 10 years (85.62% of TCO) – Consumables, software upgrades, staff safety training – Cost category 3: Fuel and energy cost (p.a.): CHF 100’000 x 10 years (4.28% of TCO) – Electricity, gas, water – Cost category 4: Regular service and maintenance (p.a.): CHF 10’000 x 10 years (0.43% of TCO) – Annual and preventive maintenance – Cost category 5: Downtime (incl. unplanned, p.a.): CHF 100’000 x 10 years (4.28% of TCO) – Cost category 6: Additional supplier costs (p.a.): CHF 5’000 x 10 years (0.21% of TCO) – Support, project management, improvement projects TCO: 23.36M – Cost category 7: Miscellaneous non-annual: CHF 15’000 (0.06% of TCO) – E.g. year 5 overhaul and recalibration Breakdown: – Cost category 8: Disposal: CHF 400’000 - CHF 5’000 = CHF 395’000 (1.69% of TCO) Total initial cost: 0.8M Total expenses p.a.: 2.215M – Deconstruction, transportation, waste, ecological restauration, write-offs Total income: 0.005M – Income from disposal (*negative cost*), e.g. resale, salvage of parts, consumables https://www.procurement.govt.nz 2024 Institute for Information Systems www.fhnw.ch/business 22  Total Landed Cost: Sample Calculation Sample gross TLC (incl. VAT) for comparable machinery parts from two suppliers (simplified for illustration). Data Reference ex China ex USA Price in CHF Weight Piece kg 1100 3 1200 2 Step 1: gather data Pre-carriage and airfreight to Zurich kg 11 10 New Rate; Duties in CHF kg 0 11 8.1% Import processing Piece 15 20 Import VAT Customs value* 7.70% 7.70% Delivery in Switzerland in CHF Piece 90 95 Step 2: process data Damages and rework Price 2.00% 0.50% Airfreight in CHF 33 20 Duties in CHF 0 22 Import VAT in CHF 87.241 95.634 Step 3: calculate TLC Damages in CHF 22 6 TLC in CHF 1347.241 1458.634 * «Value» at import (price + transport + duties) 2024 Institute for Information Systems www.fhnw.ch/business 23  Discussion Read the article «Alle wichtigen Kosten berücksichtigt» («all important costs considered») What cost-tracking aspects can you read from the article? What is the starting point? Which decisions must be made? Which problems are addressed? – Please make a note of your answers along with the corresponding rationale (time: 6 minutes). – Discuss your responses with your fellow students (time: 3 minutes) – Afterwards, you’ll be asked to present your answers in plenary, and we’ll discuss them together (time: 3 minutes). 2024 Institute for Information Systems www.fhnw.ch/business 24 Supply Chain Management & Sustainability Key Figures in Supply Chain Management  Learning goals – You understand what key performance indicators are from a supply chain perspective and what benefits they have for comparisons. – You know the differences and similarities between KPI, BPI and PPI and can explain them. – You know possible differentiations of key figures and can describe them. – You know how key figures can be classified according to two dimensions from a supply chain perspective and how to classify them using an example. – You can calculate Working Capital (also as a percentage) and the Cash-to-Cash-Cycle (DSO, DPO and DOH) and interpret the results. 2024 Institute for Information Systems www.fhnw.ch/business 28  Definition of «KPIs» «KPIs generally have the function of providing quick and meaningful information about business facts and figures [...]. They represent a reproduction of quantitively measurable facts and figures in concentrated form.». (Werner, 2017, p. 365) Aspects of Key figures (KPIs) – Enable individual operations to be linked to each other. – When viewed in insolation, however, not very meaningful. – Through internal or external comparison they gain in importance (e.g. internal time comparison over a period of time). 2024 Institute for Information Systems www.fhnw.ch/business 29  «KPI comparison» vs. «Benchmarking» A KPI indicates where a company stands. But it does not show the way to a best practice situation. KPIs show the «where are we». – Where is the company relative to its competition? Benchmarking explains «how» – How has an organization managed to capture a best practice / good practice? – Benchmarking as a «navigation system» to improve KPIs 2024 Institute for Information Systems www.fhnw.ch/business 30  KPI, BPI und PPI #1 Key Performance Indicators (KPI): highest level key figures, highly strategic, long-term character – Usually not exact, provide answers about the performance. – For example, customer satisfaction and order fulfilment time. Business Performance Indicators (BPI): tactical key figures – Decomposition of strategic key figures into indicators – E.g. «Order Fulfilment Time»: replenishment lead-time, storage time, packaging time and delivery time Process Performance Indicator (PPI): operational key figures – Measurement is accurate and can be equated with the term «key figure» in its most exact sense. – Selected PPIs of the «replenishment lead-time» include purchase requisition time, material disposition time, goods receipt time and incoming goods inspection time (to name a few examples) 2024 Institute for Information Systems www.fhnw.ch/business 31  KPI, BPI und PPI #2 Strategic level Order Fulfilment Key Performance Indicators Time Tactical level Replenishment Packaging Storage time Delivery time Business Performance Indicators time time Operational level material incoming purchase goods receipt disposition goods Process Performance Indicator requisition time time time inspection time 2024 Institute for Information Systems www.fhnw.ch/business 32  Ordering scheme for operational application systems cross-section systems Management Information Top Systems mgmt Target group in the company cross-section systems Planning systems Middle mgmt The arrows symbolize the necessary integration of (Industry-specific or Industry- the information systems for the automated Operating neutral) exchange of data between the levels for the mgmt Operational Systems generation of key figures. The key figures must be able to be prepared on a level-by-level basis from actual data in the systems. Future orientation of the contents (Leimeister, 2015, p. 138) Now/short term Mid-term Long-term 2024 Institute for Information Systems www.fhnw.ch/business 33  Types of KPIs #1 Statistical differentiation: absolute and relative – Absolute KPIs e.g. – Revenue Typology of relevant Key Figures – Profit KPI type Statement Example – Relative KPIs, e.g. Part of some Absolute market – Revenue per full time equivalent Classification whole share in % – Profit per full time equivalent Normalization of Revenue per Relation basic numbers employee and period Assessment of Commodity price Index the development index over time (Werner, 2017, p. 367) 2024 Institute for Information Systems www.fhnw.ch/business 34  Types of KPIs #2 Differentiation according to goal: performance, liquidity and value-based KPIs Performance KPIs – Return on Sales (ROS), Return on Equity (ROE), Return on Total Capital (ROTC), Return on Capital Employed (ROCE), Return on Assets (ROA), Return on Investment (ROI), etc. Liquidity KPIs – Cash Flow, Working Capital, Cash-to-Cash-Cycle, etc. Value-based Key Figures – Economic Value Added (EVA), Economic Profit, Added Value, Cash Value Added, etc. 2024 Institute for Information Systems www.fhnw.ch/business 35  Types of KPIs #3 Differentiation according to effectiveness : Strategic and operational KPIs Strategic as well as operational indicators can be aligned either to a network (external) or internally. Strategic – KPIs for effectiveness Examples of Strategic and Operational Key Figures – KPIs measuring long-term effects Type Strategic Operational Operating Supply level − Throughput SC − Cash-to-Cash-Cycle – Efficiency KPIs Network key − Total cost SC − Interfaces SC figures − Time-to-Market SC − Customer contacts SC – Viability KPIs − SC lead time − Inventories − Cost per order Internal key figures − Service level − Orders per year − Delivery flexibility − Inventory turnover (Werner, 2017, S. 373) 2024 Institute for Information Systems www.fhnw.ch/business 36  Types of KPIs #4 Differentiation according to the object: Performance and cost KPIs Performance – Compliance with time and quality targets Examples of Performance and Cost Key Figures – In modern value creation networks, Category further performance criteria such as Category Example Type – adaptability, − speed − lead-time − quality − reject rate – complexity Performance − adaptability − setup time – willingness to cooperate − cooperation − Same records − complexity − Procduct variants Cost − legal costs − transaction costs − quality costs − recall costs – Adherence to budget targets Cost − stocking costs − inventory costs − coordination costs − communication costs − distribution costs − freight charges (Werner, 2017, p. 374) 2024 Institute for Information Systems www.fhnw.ch/business 37  KPI Typology in the Supply Chain Two dimensions: 1. Increase in value, reduction of opportunity costs – Input: procurement KPIs – Throughput: KPIs for storage, production and picking – Output: distribution KPIs – Payment: financial KPIs 2. Types of KPIs – Generic KPIs (structural KPIs) – KPIs for productivity and profitability evaluation – Quality and service KPIs Note: The KPIs and KPI typology are exemplary, depending on the company, industry, etc., other KPIs may also be relevant. 2024 Institute for Information Systems www.fhnw.ch/business 38  Key Figure typology in the supply chain – generic / structural key figures Input Throughput Output Payment (Purchasing) (Storage, Preparation, Production) (Distribution) (Finance) − Purchased parts − Variants − Deliveries − Discounts ratio − Purchasing volume − Packaging units − Warehouses − Discount structure − Order lines − Stored parts − Order volumes − Accounts payable − Number of suppliers − Storage operations − Distribution stages − Liquidity − Price index − Order volume − Revenues per customer − Cash Flow − Volume structure − Planned parts − Self-transport ratio − Working Capital − Maverick buying − Order intake − Order fulfillment − Cash-to-Cash-Cycle − Trunover semi-finished goods − Throughput time − Economic Value Added (EVA) − Warehouse range − Turnover finished goods − Return on Capital Employed − Storage cost (ROCE) − Space utilization − Return on Investment (ROI) − Storage area KPIs in red have − Stock ratio − Picking lines already been discussed − Automation degree in past blocks. − Space utilization − Manufacturing depth (OPP) − Upside production flexibility − Recycling (Werner, 2017, p. 407) 2024 Institute for Information Systems www.fhnw.ch/business 39  «Working Capital» – KPI for measuring liquidity – The higher the working capital, the better future liquidity will be. – Supply chain management has a direct influence upon this KPI: – Inventories and receivables as part of current assets – Effect of increase or decrease in inventories and receivables – Excluding excess and obsolete assets and long-dated receivables (disputes), only