1. Measures and Trust in SCM
Eli Schragenheim

2. The IT Vision for Supply Chains
It is predicted that in the future the main competition would be between supply chains
Every supply chain has to react very fast to the changing tastes and wishes of consumers
The stumbling block to fast reaction of any supply chain is lack of information
Current IT technology is capable of very fast B2B communication that would provide full collaboration throughout the supply chain

3. A Hole in the IT Vision
Suppose that company S identifies a rising demand for product P produced by Vendor V and the relevant information is communicated to V in no time
Would Vendor V immediately start to produce according to the forecast by company S?
Take into account that V is paid so-and-so days after S places an order and gets the delivery
Does V trust S? Who would suffer if the optimistic forecast does not materialize?
Is S truly interested in communicating all the relevant information to V?

4. An Inherent Problem in supply chains
The idea behind SCM is that by acting as one system better results for all would be achieved
Can it work when some links have not implemented the systemic rules within their own organizations?
Every organization that is part of a supply chain looks for its own benefit
Hence, every link must profit from acting within the supply chain’s one big system rules
This kind of business relationship is frequently referred to as “collaboration”
Can it work without a win-win culture?
And there is a need to establish trust between all the links

5. Business Rules in SCM
The current common business rule: the vendor receives an order and is paid some time after delivery
Being exposed to updated information won’t impact the vendor’s decisions
The vendor has no say regarding the size of the order
If it is too small – then sales will be lost
If it is too high, it will take very long time until the next order is received
It is not clear how the vendor can profit from a faster response
On one hand the next link might be able to sell more
On the other hand the next link might order less

7. Business Rules in SCM
A new emerged business rule: vendor managed inventory (VMI)
The vendor is responsible for the inventory at the client
The client draws from the inventory when the need arises and this triggers payment to the vendor
All the risk is now placed on the vendor
Now the vendor has a lot to gain from a fast response
Financial benefits to the vendor would occur if and only if sales would go up
This is possible only when it enables the seller to spot new opportunities relying on fast and reliable response
In the former scheme the seller would refrain from holding inventory for such opportunities
And less sales are lost due to shortages

8. The TOC visionary business rules
The objective:
Allow the seller to grab any opportunity that is beneficial to all the links in the chain
Motivate all the links to respond quickly to any market trend
Institute a win-win culture over the entire chain
Let those who have the best knowledge and intuition make the decisions
Each link gets more

9. The TOC visionary business rules
The TOC business rule:
Each producer in the link manages his finished goods inventory at the next link
Payment is made immediately following each daily sale by the seller
Every producer gets:
The truly variable costs (TVC) invested by the producer
A percentage of the throughput (T)
It is in everybody’s interest not to cannibalize any sales and not to ignore any optional sale

10. Supporting the TOC Scheme
Every link within the chain should manage its operations based on replenishment to the buffers
The inventory at the next link is a buffer
Every producer would maintain its own centralized buffer when the products go to several supply chains
Using buffer management as a sensitive tool to identify changes in the market demand
Information on each sale should flow immediately to every link in the chain
But, there is a need to validate that every link in the chain is doing what it should do to allow more business to come in

11. How to maintain trust between different organizations?
The win-win agreement is not enough to ensure high performance
We need to measure the performance of each link to establish an overall control that the actions taken truly support the global chain
The downstream links need to ensure fast response to any market opportunity
The upstream links need to validate that sales are generated from what is already in the system
Note that maintaining trust is needed also for the other business rules

12. How should a seller measure the performance of the vendor?
Criteria
Every delay in measured, not just being late but also by how many days
The financial value of the sale should be measured as well
Throughput-Dollar-Days (TDD)
Every day a delay is noted the full T value of the order is added to a counter of TDD
When the order is late by 5 days, its full T value is added to the counter 5 times

13. How should a seller measure the performance of the vendor?
A common problem at the seller’s site
Orders that cannot be fulfilled may not have been registered, even though the specific sale was actually lost
Hence, the full damage caused by the unavailability of products cannot be directly measured

14. How should a seller measure the performance of the vendor?
The TDD measurement in this case could be directed to the red-line level of the parts
The red-line level (emergency level) is defined in the buffer management methodology
It is usually a certain percentage of the replenishment buffer
The red-line represents a very high probability of losing sales
Hence, when the on-hand stock is below the red-line level – the TDD counter ticks

15. Seller Producer An example: Product P10 T per unit = $60
Replenishment level = 100 un. Red-line level = 30 un.
Seller
Inventory ready for
immediate sale
Fast replenishment
Producer
On 4/15/2002:
On hand stock = 17 un.
Additional TDD due to P10: (30-17)*60 = 780 dollar-days
On 4/16/2002 the on hand stock went down to 5 units
Additional TDD = (30-5)*60 = 1500 dollar days
Total TDD due to P10 = = 2280 dollar-days

16. The TDD as a measure of the performance of a vendor to a seller
The vendor is responsible for full availability of his products at the seller’s site
The replenishment and red-line levels are agreed between the seller and the vendor
Whenever the on-hand stock is below the red level the TDD counter ticks
The full throughput value of the parts that are missing is added to the periodical TDD measurement
When no stock is available at the seller, the full T value of the whole emergency level as added every day
This measure rises VERY fast when response time drops
The measure institutes the right priorities given both the financial aspects and the duration of the delay

17. The TDD measurement for a vendor of a producer
The differences between a producer who measures his vendor and a seller who measures the vendors
The producer knows when lack of materials causes a delay in the internal operations
The financial damage of missing a part is more problematic to measure
The part might participate in a variety of end-items sold by the supply chain
Hence, for every part the vendor is responsible for a “typical end-product T” should be defined
We still assumes that delay in the producer’s operation might cause missing a final sale, even though this is much less straightforward

18. The TDD measurement for a vendor of a producer
The vendor is responsible for full availability of his products as raw materials at the producer’s site
Whenever the producer needs to release materials to the floor and a specific part is missing the TDD counter ticks
The exact amount of units missing multiplied by the typical T for the end-products is added every day to the periodical TDD

19. Link C measures B’s performance according to the periodic TDD
Whenever C needs materials and they are not found in Inventory B, the TDD counter in increased by the T of the end items
Link C
Inventory B
Link C measures B’s performance according to the periodic TDD
Link B
Inventory A
Link A

20. Measuring the performance of the seller
Every link in the chain that is not the seller likes to judge the performance of the seller
This is true even for the traditional business rules
The main focus is how fast products that are stocked at the seller’s site are being sold
And what products are NOT sold!
Every producer that is judged according to TDD has to invest capacity and materials in an effort to maintain very low TDD and gain from the supply chain sales
Hence, there is a need to measure the investment

22. Inventory-Dollar-Days - measuring the flow
Every area that contains inventory can be measured according to:
The value of the item – only the raw material purchasing costs are considered
The number of days each item remains in the area
Every item in the measured area carries inventory dollar days equal to its value in dollars multiplied by the number of days it remains in the area
The IDD is a snapshot: how much money is stuck in the area and for how long

23. Basic calculation of the IDD for an area
A measured area where
inventory items spend
some time

24. Using the IDD measurement
Each producer should measure the following areas:
Raw materials from vendors that are not managing their materials
WIP
Every finished goods area that is controlled by the producer
Under the TOC supply chain vision the area that truly measures the performance of all the downstream link is:
From the completion area in the shop until the supply chain sells it

25. Link C
TDD
measurement
Inventory B
Link B
Every day link A adds to the IDD measure, the value of all its inventory in the supply chain
TDD
measurement
Inventory A
Link A

26. IDD and Inventory Turns
Inventory turns is the current common measurement of the effectiveness of inventory in the system
It measures the average of how much inventory waits in a certain area
The dollar value of the inventory is specified separately
Being an average, it misses pointing to the problematical area, and it does not give a clue regarding the variability
The combined effect of time (delays) and money is given only at a very global level

27. Summary
The TOC vision for supply chains provides a new business scheme for real collaboration between the links
All the current business rules for supply chains should maintain trust among all parties
Trust needs to be supported by a measurement system that motivates all the parties to do what is good for the chain as a whole
The measurements need to contain both time and money

28. Summary
Throughput-dollar-days (TDD) measures the performance of the vendors by accumulating the full dollar value of every late order and the length of time it was delayed
Inventory-dollar-days (IDD) measures the flow through the supply chain by measuring how much inventory-money is being held at each area, thus blocking the flow
IDD should be used, among other uses, to check how fast products are being sold

29. Summary
Both the TDD and IDD measurements have uses that stretch beyond measuring the performance of the links in the supply chain
The TDD is an operational performance measurement of the damage caused by failing to meet the market requirements
The IDD is a measure of effectiveness of the operational policies to achieve as low TDD as possible