 Hello everyone, welcome to this course on supply chain digitization. This course is jointly being offered by myself, Professor Priyanka Verma, Professor Sushmita Narayana and Professor Deva Pratadas from IIM Mumbai. We are running into the first week and this is the fifth session of the first week module and today we are going to explore the functions that we have discussed in previous sessions in detail. So, we are going to continue our discussions on the fundamentals of supply chain management. If we refer to the last session, we have discussed about different supply chain processes. We started our discussions with processes like planning and forecasting, sourcing and procurement, production and manufacturing, inventory management, distribution and logistics and customer services. In the last sessions, we discussed in detail about planning and forecasting, sourcing and procurement and we briefly introduced about production and manufacturing. In today's session, we will cover the remaining processes in detail. Let us look into the process of production and manufacturing and let us try to review what we have done in our previous session. As far as you remember, we discussed about the role of technologies in production and manufacturing and that how the way we started using technologies in our production and manufacturing processes, how this is leading to a large amount of data which needs to be analyzed for proper decisions. We have also seen about the different data analytics that can be done on this available data. Using this data, we can take decisions related to predictive maintenance. The quality can be controlled using SPCs and different types of machine learning models. Followed by this, we can also look into root cause analysis of all of this data and the processes can be monitored very nicely using proper data analytics. Most importantly, in this process of production and manufacturing, it is important that we focus on certain KPIs which needs to be in target throughout the system throughout the time so that you are following it in a right manner. Some of the prominent KPIs for production and manufacturing includes OEE, cycle time throughput and capacity utilization. In order to demonstrate that how this can be calculated, let us try to understand it with the help of one example. So, we will be talking about a very simple example of how we will calculate capacity utilization and efficiency in a production environment. Let us look into example of a company which is actually engaged in manufacturing different type of leather bags and they are trying to understand their capability. So, for this purpose the data has been collected and it was found that in the last week, the facility was able to produce around 1,00,000 of leather bags whereas the effective capacity is around 1,00,000 7,500 for making the same type of leather bags. Followed by this some more data was captured and it was observed that the production line was able to operate for 7 days per week. So, that was the time you can see that the production line can work, but in this the shift for which they can be working in a working condition included 2 9 hour shift per day. So, you can sense that the production facility is working for 18 hour in a day. The production line has the capacity of making around 900 leather bags per hour. So, we can see from this very simple example that we have captured so many data points over here and now it is very important that how do we use these data points to decide about some of the KPIs and to keep a track on those KPIs. So, here we have to calculate certain important KPIs which are related to design capacity, industrialization and efficiency of the plant. All these keywords are very important. So, in order to calculate these details we are required to we should be knowing about 3 types of capacities over here. These are design capacity, effective capacity and actual capacity. So, let us try to understand what is the meaning of design capacity. When we talk about design capacity it is a capacity for which the system is available to be operated. Whereas, when we talk about effective capacity it is considered after excluding the plant resources unavailability. For example, if there is a plan for preventive maintenance or if there is a plan for some setups or changeover then that is considered in calculating this particular capacity and that is why it is called as the effective capacity. Whereas, when you talk about the third capacity which is the actual capacity you can see that this is this capacity is something which is very interesting and this is the actual capacity as it takes care of all the unplanned resource unavailability from the effective capacity which can include scenarios like machine breakdowns which happen suddenly or may be unavailability of some of the spare parts which are not in the control of the given processes. So, we have seen today 3 different types of capacity. One is the design capacity, the second one is the effective capacity and the third one is the actual capacity. Now, let us try to see that if we have these capacity information how do I use this for calculating my utilization and efficiency for the given scenario. So, going forward let us see the formula for utilization and efficiency. When we look into the formula of utilization you can see that the utilization is given by actual output versus the design capacity. Now, this is something very very interesting. So, utilization is referred as actual output versus design capacity whereas, the efficiency is calculated as actual output versus effective capacity. So, the numerator you can see remains same which is actual output and but the denominator is changing for both utilization and efficiency. So, in case of utilization the formula is given as actual output divided by design capacity whereas, in case of efficiency the formula is given as actual output divided by effective capacity. Now, let us use this formula to calculate the utilization and efficiency for the given case. You can see that utilization is nothing but it is the percentage of the design capacity which is actually achieved. So, what you have what you are capable of to the maximum level what percentage of it you are able to achieve is referred as utilization in a way you can say that. Whereas, efficiency is different than utilization it is nothing but it is the percentage of effective capacity which is actually achieved. So, it takes care of all your planned activities for calculating your capacity and from that effective capacity what percent of it is actually achieved is referred as efficiency. So, we are going to use these two formulas over here. Let us see how a design capacity is calculated because the facility works for 7 days for 2 shifts and for 9 hours every day. We can say that the facility is available for 7 days 2 shifts and 9 hours this becomes the total available time plus every time it is making 900 leather bags per hour this is also given as the capacity of the production line. So, when we multiply this together we get our design capacity. So, using this we can say that over here we have around the design capacity of the process is around 13400 leather bags. Now, using this design capacity let us calculate our utilization. Let us refer the old formula once again which is actual output by design capacity giving this formula over here we have already been given with the idea about the actual output which is around 100000 which is already given to us in the problem divided by the design capacity which is around 113400. So, this gives you the utilization as 89.9 percentage. Going forward let us try to calculate the efficiency out of this which is nothing but the ratio of actual output versus effective capacity. So, putting this into the formula once again we have been given with the actual output which is around 100000 leather bags and the effective capacity is given as 17500. So, following this formula we can see that the efficiency for the given process is coming around 94.8 percentage. So, today we have learned that how capacity utilization can be calculated and how efficiency can be calculated using the design capacity and effective capacity and actual capacity how they are different from each other and using that how the KPIs can be calculated which are required to be monitored for ensuring that your production and manufacturing is proper. Going forward we will pick up the next process which is a very important process of supply chain and it is called as inventory management. When we talk about inventory it is nothing but it talks about how much of the product is available on hand and along with that you also get to know about its location. So, if you are knowing the location of the quantity of the product this helps in taking many decisions for managing your supply chain. In inventory management it is important that you keep a balance between adequate merchandise on hand and also try to avoid hoarding these surplus stocks. So, what are the different famous inventory management techniques many of these techniques are well known we are trying to list it over here for just to see a quick comparison of the different techniques for inventory management. The most prominent and most famous of inventory management technique is ABC analysis as you all know about it which depends upon classifying the product based on the importance of it or the value of it. So, here we can classify the product into three categories that is A category B category or C category and this is one of the very well known technique for managing inventory and is being used at many respective companies as well. The other way of inventory management technique is managing your safety stock which depends totally on how what is your lead time and what is the variability of your lead time for managing your demand. The third one is called as economic order quantity which is EOQ and it totally depends on the combination of ordering cost and holding cost which in a way it tries to keep a balance between both of them. So, EOQ is again a very prominent technique for inventory management and the last one is a reorder point which is which ensures that products are available when they are needed. In line with this there are different KPIs for the inventory management as we all know and all the industries and all the businesses are required to keep a track of their inventory by using these KPIs. Some of these KPIs are which are very famous are referred as here as average inventory which is just the average of beginning inventory and the ending inventory. Then we have inventory turnover ratio which is calculated as cost of goods sold divided by average inventory. Then we have stock out rate which is nothing but it is looking for the frequency and duration of shortage of inventory and customer satisfaction. Then we have the inventory carrying cost which is calculated and it also takes care of the cost associated with the warehousing that is with the storage, insurance for the products to be stored, the labours which are associated with it and so on. The last one is the days of inventory on hand which is the value of average inventory divided by the cost of goods sold for 365 days. So, these are some of the important KPIs for inventory management but this is just a brief list which is shared over here. The different industries have their own KPIs which they keep tracking to ensure that products are managed efficiently. Let us see a quick example of how these KPIs are calculated for the inventory management. We will talk about a case again and we will try to demonstrate that how these KPIs are being calculated. Let us assume that there is an online t-shirt boutique and they are trying to sell their t-shirts. So, here the t-shirts are being purchased from a supplier by the retailer and there are two distinct scenarios with different average inventory for a quarter period. So, this information we have already calculated, we have already collected and we are going to analyse these two scenarios. Using these two scenarios, we will try to find out the right policy for managing these inventories. So, in the first scenario, we can see that there is a lower average inventory. When we compare the cost of goods sold information along with the average inventory, we can see that in scenario one, the cost of goods sold is given as 15 lakh rupees and whereas the average inventory is coming around 1 lakh 50,000 rupees. Similarly, when there is higher average inventory, we can see that the cost of goods sold remains same, which is around 15 lakh itself, but the average inventory has increased and now it is the value of average inventory is around 5 lakh rupees. So, if we have been given with these two scenarios, let us try to calculate the inventory turnover rate and analyse these scenarios to find out the right strategy for a given quarter period. So, remember this planning is done for a quarter period and all the information that is given over here is for a time period of 3 months. Going forward, let us see the solution. In case of lower average inventory, that is your scenario one, when we try to calculate our inventory turnover ratio, using the formula, very simple formula that we have just seen, we can calculate our turnover ratio, which is a ratio of cost of goods sold at the average inventory value and this is coming around 10 for the scenario one. Similarly, we continued our calculation and did the calculation for the inventory turnover rate and because the planning was done for a quarter period, which is equivalent to 90 days, we use this 90 days and then we are trying to find out that what is the inventory turnover rate for this time period. So, this is given as 90 days divided by inventory turnover ratio and we got the value as 9 days. We did the similar analysis for scenario 2 also, that is for higher average inventory value and then we found out that the inventory turnover ratio is coming as 3 and the inventory turnover rate for the scenario 2 is coming as 30 days. So, let us analyze these numbers that what do you mean by inventory turnover ratio for this example and what do you mean by inventory turnover rate in this example. When we talk about inventory turnover ratio, it is nothing, but it is trying to give us an information that it how many times your inventory is sold or used up to. So, when it you are saying that the inventory turnover ratio is 10, it means that you have got a very high turnover ratio and the inventory is sold at a very faster rate and that is why the inventory is used about 10 times per year. Whereas, when we see about inventory turnover rate which is coming around 9 days for scenario 1, it simply indicates that for 9 days the company is able to sell or use up its inventory. It simply indicates that in this time period that is in a gap of 9 days, the company is able to sell all the available inventory and the company has to refill its inventory levels. So, you can see that the scenario 1 is quite responsive because of very high inventory turnover ratio that is 10 which is higher than 3 as shown in scenario 2 and the number of days for which the inventory is sold or is in use is also very less for scenario 1 and it is just 9 days compared to scenario 2 which is around 30 days. So, we can see that when we compared both the scenario 1 and scenario 2, we can see that when you are carrying lesser average inventory, there in this scenario you are able to carry your inventory for lesser number of days, but your turnover ratio is very high. It simply means that you need to refill your inventory more number of times where your turnover rate is very less. Whereas, if you are carrying very high inventory, then the inventory turnover rate is high it means you are carrying your inventory for more number of days, but the turnover ratio is very low which means that you need to refill your inventory for lesser number of times. So, using these logic you can easily decide that what is the right amount of inventory that needs to be carried to ensure that you are not missing any opportunity of fulfilling the demand requirement from the customer end. Going forward, let us see the third function of supply chain processes which is again a very important lifeline of supply chain and it is referred as distribution and logistics. When we talk about its role, it is all about ensuring that how product is made available to the customer and this particular processes ensures that the product is available to the customers as per their requirements. Here in this process, lot amount of coordination is required starting from the activity of order management, then in between the processes which are executed at warehouses followed by the inventory management and the transportation. As you can see that all these activities are very closely linked with each other and in this process, the customer is always expecting to and see that the order is visible to the customer and in parallel they are able to track the customer. Now, how does digitization is playing an important role in distribution logistics? So, we have we can see that there are different ways in which the data can be captured from here and in this case, we have the opportunity to do lot of data analytics. The data analytics can be implemented in topics or in areas like root optimization, warehouse optimization, fleet optimization, inventory optimization and ensuring real time visibility. When we talk about root optimization, it is nothing, but how you can analyze your historical traffic data and maybe some weather condition to ensure that you can optimize your delivery routes in real time. Another example of warehouse optimization is all about ensuring that how the space utilization is optimized, how you are deciding the product placement, picking process and so on. Similarly, fleet optimization decisions related to vehicle routes, routing, fuel consumptions, planning of the maintenance schedules and also reducing operational cost can be effectively done. So, we can see that how data analytics is playing a very critical role over here seeing that how data analytics can be used in planning all these activities properly in distribution and logistics processes. Now, some of the decisions that can be taken over here through the help of digitization and data analytics, we can decide about the type of supply chain network which is suitable or which can fulfill the requirement. Similarly, the type of transportation mode can be decided and this can be again level down to the type of vehicle decisions. Talking about the KPIs which are again one of the prominent features which the industries track continuously is about transportation cost per unit, order cycle time, on time delivery, inventory turnover rate, on time in full deliveries also called as OTIF in short in today's time. So, we will talk about the application of KPI in distribution and logistics through this case once again. Suppose we have a company who has decided about a third party logistics for different type of products. So, you can see from here there are three different type of products, modern, semi-modern and a classical product. Their unit cost has been given as rupees 18,000, rupees 14,000 and rupees 9,500 in parallel with that. Now, the company has to decide that which is the right type of logistics company which they can hire, these are the third party logistics company. So, suppose we have got two option called as avitruck and logitruck and their requirements are also given as minimum shipment size, lead time and also the unit transportation cost that they are charging. So, we are now knowing all these values and now parallely the demand is assumed to be constant for every week. However, in real life that is not the case, but in order to simplify the problem we have assumed that demand is constant for every week which is around 150 units per week. The annual inventory carrying cost is considered as 25 percent of unit cost of each product. So, going forward how do I calculate my transportation cost? Again, transportation cost is dependent on inventory cost as well as the transportation cost together. So, for that purpose we will first calculate the cycle stock. The cycle stock is average of the shipment size. So, in this case it comes around 0.5 into 350 which is around 175 units. Similarly, we will talk about the pipeline inventory which is given with the formula of lead time into demand rate. So, when we use this value from the given case this is coming around 3 week into the demand rate is 150 units per week is already given to us. So, pipeline inventory is coming around 450 units. We are trying to assess logitruck option for the modern product. So, this is my logitruck option for the modern product. So, for this option we are taking up all the value. Now, while we are calculating the total inventory we have to consider both the cycle stock and the pipeline inventory together. Using this value we got the total inventory as 625 units and putting it into our formula for carrying cost we got the values like this. Along with that the total transportation cost is coming around annual demand into transportation per unit and we already have been given with the information of 150 units per week of weekly demand into 52 weeks into the transportation cost is 100 rupees per unit. So, when we give this value we can get our total transportation cost. In this way the total cost is a combination of both your annual inventory cost and your annual transportation cost which is coming around 35,92,500 rupees as the final solution. So, you can see that we have just evaluated one third party logistic service provider only for one type of product. Now, we need to analyze the all possible combination of logistic service provider along with the different type of products. So, we have done this and we have a excel solution for this. So, let me share with you this solution and the excel file for this solution will be shared along with this session. So, you can refer to that excel sheet for more details and the whole analysis is presented over here and we can see that when we have a product of modern product and we analyze the total cost against AV truck and logistic truck we found that the minimum cost is coming for the second option that is for logistic truck. Similarly, when we have the product of semi-model the minimum cost is coming for AV truck whereas, when we have a classical product the minimum cost is coming for AV truck. So, we can see that using this type of analysis we can easily decide that which third party logistic company is suitable for your given problem. Coming out to the last process of supply chain which is on customer service this is a very critical process as it drives the whole supply chain and it always focuses on providing the support to the customer. Most important expectation from the customer and for this particular process is that there should be effective communication and the customer is able to track the products very on a real type basis. The responsiveness is another expectation from the customer end and finally, the customers always expect very high quality product and services. So, what is the scope of digitization in supply chain for the customer service? Practices we can see that if we have properly enabled digitization services in supply chain the inventory management will improve the response time is can be further improved which will again attract more and more customer. The expectation of customers about transparency and visibility with the help of tracking orders can be easily achieved and most importantly the reverse logistics that is the expectation related to returns, refunds or exchange can be managed efficiently. So, that is why the whole of digitization is improving in supply chain with respect to the customer service requirements. In terms of KPIs for the inventory management which we are referring these are some of the KPIs which are monitored very carefully by any business because this directly tracks the customer expectation. Some of these KPIs are order fulfillment cycle time on time delivery performance, fill rate, return rate, supplier on time delivery and compliances of service level agreements. When we talk about fill rate, fill rate is nothing but it is a percentage of the customer demand that is fulfilled immediately from stock without any back orders or without any delays and also it ensures that the product is available for the customer. Similarly, when we talk about the return rate this is nowadays gaining huge attention reason being people are shifting towards online shopping and that is why return rate is having huge importance in the e-commerce world. So, when we talk about return rate it is the percentage of products which is returned by the customers and how efficiently these returns are processed will give a nice experience to the customers as well. Similarly, there are so many other KPIs which customers can target on a day to day basis. Let us try to analyze some KPIs for customer service as well. So, we have imagine we have a soap producer who makes soap bars and provides it to neighborhood shops. So, we have the data for this particular soap bar manufacturer and we can see that these are the details which are available to us. This includes that how many total soap bars are ordered, how many soap bars are delivered on time and what is the perfect order rate. Similarly, what is the total monthly operating cost, total delivery cost, supplier deliveries and supplier on time deliveries. So, using this data let us try to calculate some KPIs for the given process. So, we have we want to calculate on time delivery, we want to calculate delivery cost per soap bar and also we want to calculate supplier on time delivery rate. So, using this given data let us try to calculate the first kpi which is on time delivery which talks about on time delivery using the given data we can see that it is coming around 90 percent. So, we can interpret that the soap manufacturer is able to deliver around 90 percent of the soap bars may be on time or may be before the promised delivery date. So, what is the meaning of this statistic? It actually indicates that 90 percent of the soap bars are delivered before either on time or before time and that is what it can it ensures that the organization is actually able to do excellent job of fulfilling the given order on time. Similarly, let us talk about the second kpi which is delivery cost per soap bar which is again a very important kpi which needs to be tracked to compare the different option. So, here this is calculated as total delivery cost divided by total soap bar delivered we can see that for the given case this is coming around rupees 0.56 soap per bar. So, how does that can be interpreted? It simply means that the shipping fee is coming around 0.56 rupees for every soap bar and it actually takes care of cost involved in transporting the goods to the client. So, we can easily compare for different options if we can calculate this delivery cost per soap bar using this method. The third kpi which we are trying to demonstrate over here is about supplier on time delivery rate which ensures that the suppliers who are responsible for providing the raw material on time to the manufacturer how critical they are able to fulfill their requirements. So, it calculates basically the suppliers performance you can see from this kpi and it is given as supplier on time deliveries divided by the number of deliveries made by the supplier. In this case it is coming around 93.75 percentage which says that the soap manufacturer suppliers are have delivered the raw material on time may be around 93.75 percentage of the time which shows a good performance of the suppliers. So, with this we have covered different processes of the supply chain which has which includes from the beginning of the supply chain process till the end and we have gone into the details of each and every process. We have seen the scope of digitization in all of these processes and how the data can be captured what type of analysis can be done in these processes and finally, we have observed different KPIs of again these processes and we have seen different cases which are trying to demonstrate about these KPIs in different possible business scenario. With this we will end our first module and thank you for your patience. We believe that the basics of supply chains now we have covered so far and from this point onwards we will be moving to the second module on supply chain segmentation. Thank you everyone.