Evaluation of Supply chain performance

Categories: Economy Inventory Marketing Supply Supply Chain Management

Essay, Pages 8 (1976 words)

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The contents of the paper comprise the case study of ACTAVIS BULGARIA EAD Sofia’s supply chain performance evaluation. It is elaborated in the paper that supply chain performance evaluation is not a simple concept; instead, it pertains to various drives, environmental factors, needs, technologies, and other forces. Managers must keep on evaluating the supplier’s performance in order to provide the company with competitive advantage. The evaluation and improvement of supply chain is somewhat oversimplified. How the results of the evaluation will enhance the productivity of company is also discussed.

Outline of Paper:

The paper focuses on the supply chain management of the Actavis Bulgaria company and covers the following main points:
The importance of measuring the performance of the organisations supplies chain (upstream and downstream).
Key performance indicators to assess the company’s suppliers have been used.
Critical examination of the possibilities for improvements of the downstream supply chain has been undertaken.

Importance of Supply Chain performance evaluation:

With the increasing globalization the competition between the firms is also increasing. The Speed of delivery is becoming a key indicator of supply chain success.

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The goal of a supply chain should be to maximize overall supply chain profitability. Supply chain profitability is the difference between the revenue generated from the customer and the total cost incurred across all the stages of the supply chain.

Supply chain decisions have a large impact on the success or failure of each firm because they significantly influence both the revenue generated as well as the cost incurred.

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Successful supply chains manage flows of product, information and funds to provide a high level of product availability to the customer while keeping costs low. Measuring the performance of the supply chain is critical to identifying troubled segments, determining success, and assessing operational capabilities. Measuring performance requires a metric that measures the time from demand creation to demand fulfillment at the customer level.

Average customer wait time: a supply chain performance indicator
Army Logistician, Nov-Dec, 2004 by David R. Gibson
http://www.findarticles.com/p/articles/mi_m0PAI/is_6_36/ai_n8704513

From the managerial focus, the performance measurement can be defined as the information regarding the processes and products results, that allows the evaluation and the comparison in relation to goals, patterns, past results and with other processes and products.

Also, it is important to highlight that a managerial performance evaluation system needs to be focused on results, which should be guided by the stakeholder’s interests. Beamon & Ware (1998) affirm that the adoption of performance indicators should deal with the following questions:

Which aspects should be measured?
How to measure these aspects?
How to use the measures to analyze, improve and control the productive chain quality?

It is noticed that this is not an easy task, once there are several indicators available and it is necessary to align the used measures with the involved companies goals. In this direction, Maskell (1991) emphasizes the establishment of a relationship between the performance measures and the company strategic objectives.

According to Beamon (1998), previous researches indicate that the exclusive use of costs as a performance indicator is common among the companies. This happens because the performance measurement through a single indicator is relatively simple. It should be attempted, even so, to the fact that this practice can provide very superficial information about the reality.

Beamon (1996) also affirms that the chosen indicators should present simultaneously, inclusiveness (to include the measure of all the pertinent aspects), universality (to allow the comparison under several operational conditions), measurability (to guarantee that the necessary data are measurable) and consistency (to guarantee consistent measures with the objectives of the organization).

On the other hand, it is not recommended to simply discard costs as a performance indicator due to its importance. The alternative would be the adoption of multiple indicators, involving a cost combination with time, flexibility and quality, according to the company competitive priorities.

Traditionally, the performance evaluation is limited to an isolated company or productive process. For an effective SCM it is necessary to expand these concepts beyond the company limits, involving all the supply chain players. It is necessary then, the development of a performance evaluation system embracing all the business units. This can be achieved through the adaptation of the traditional performance evaluation systems.

Currently Actavis operates in the country split into two divisions - Operations and Sales & Marketing. Actavis Bulgaria Operations is a holding company responsible for the management of the three factories providing first class generic products, mainly for the Bulgarian, Russian, Ukrainian and CIS markets.

The Sales & Marketing division is represented in the country by Actavis EAD, a company registered under the Bulgarian law. It employs about 200 people and operates three warehouses in the country. Actavis EAD is mainly focused on marketing the Group's products as first class generics on the Bulgarian market, which is the third biggest market for the company's own brand revenues world wide.

Following its strategy for a vertical integration on the Bulgarian market Actavis recently acquired one of the biggest local distribution companies, Higia. It is expected that the combination of Actavis' strong portfolio and Higia's strategically important foothold in the distribution of pharmaceuticals will provide a more direct route to the customers and also provide a stronger platform for future growth.

Commercial entities licensed by the Ministry of Health for wholesale trading with pharmaceuticals. Due to the corporate structure of Actavis AD (Bulgaria), the wholesale companies are the end-users of the company, since Actavis AD (Bulgaria) does not distribute its products directly to pharmacies and hospitals but through its distributing companies (wholesalers) to which “to the market” sales are made. The value added by the distributing companies to the overall commercial activities of Actavis AD (Bulgaria) is defined both by the key position of our major partners in the whole pharmacy supply chain and by the ever improving logistics and warehouse capacities of the leading national distributing companies.

The distributing companies are the company’s clients and at Actavis the customers are treated as a key to the company’s success”. The wholesalers’ role for the overall business of Actavis AD (Bulgaria) is extremely important also due to the fact that the key distributing companies (e.g. Commercial League, Sanita Trading, Kaliman) have developed vertical integration within the distribution channel, that is they own pharmacy chains. (Actavis, 2004)

The generic pharmaceuticals industry is rapidly consolidating on a global basis with the key factors for future success being scale, geographic reach, product pipeline depth and access to low-cost manufacturing. The combination of Actavis and PLIVA achieves all of these crucial requirements and would create the third largest generic pharmaceuticals company globally, with the geographic scope and size necessary to compete with the largest industry players.

Furthermore:

The two companies are a perfect fit which will enable a rapid integration process and create a business with a leading position in the key US, European and Asian markets and a robust portfolio covering the entire spectrum of generic and biogeneric pharmaceutical products.

PLIVA will become an integral part of the combined Group's growth strategy and benefit from increased investment and a strengthened infrastructure. Actavis plans to increase the number of employees in Croatia to generate stronger growth and greater success. Actavis intends to increase production and R;D activities in Croatia, which will ultimately lead to more jobs in the region.

The enlarged business will benefit from low cost manufacturing facilities, efficient distribution and enhanced supply chain capabilities. Actavis has a strong track record of being able to drive down manufacturing costs across the Group without impacting the employee base.
PLIVA will become the headquarters for a substantial part of the enlarged business, and at the same time benefit from Actavis' global footprint and infrastructure.
Actavis will seek a stock listing in Zagreb to encourage ongoing support from the investment community in Croatia.
Actavis puts great value on PLIVA's Croatian roots and is committed to revitalizing the PLIVA brand and expanding its recognition in key markets.
Actavis has a high opinion of PLIVA's management team and envisages them playing a central role in the new company and sharing decisions regarding future strategy.
20. 04. 2006Actavis announces improved preliminary proposal to Pliva
http://www.actavis.bg/en/News/Pliva+improved+proposal.htm

Performance measurement of Actavis Suppliers:

Supplier performance must be rated on each of these factors because they impact the total supply chain cost. Next we discuss how each factor affects total supply chain cost and how a supplier’s rating on the factor can be used to infer a total cost of using the supplier.

Replenishment lead time: As the replenishment lead time from a supplier grows the amount of safety inventory that needs to be held by the buyer also grows proportional to the square root of the replenishment lead time. Lead-time performances by a supplier can directly the translated into the required safety inventory using equation 11.9. Scoring the performance of suppliers in terms of replenishment lead-time thus allows the firm to evaluate the impact each supplier has on the cost of holding safety inventory.
On-time performance: On-time performance affects the variability of the lead-time. A reliable supplier has low variability of lead-time whereas an unreliable supplier has high variability. As the variability of lead-time grows, the required safety inventory at the firm grows very rapidly.
Supply flexibility: Supply flexibility is the amount of variation in order quantity that a supplier can tolerate without letting other performance factors deteriorate. The less flexible a supplier is, the more lead time variability he will display as order quantities change. Supply flexibility thus impacts the level of safety inventory that the firm will have to carry.
Delivery frequency/minimum lot size: The delivery frequency and the minimum lot size offered by a supplier affect the size of each replenishment lot ordered y a firm. As the replenishment lot size grows, the cycle inventory at the firm grows, thus increasing the cost of holding inventory. For a firm using a periodic review policy, delivery frequency also impacts the required safety inventory. Thus, delivery frequency of a supplier can be converted into the cost of holding cycle as safety inventory.
Supply quality: A worsening of supply quality increases the variability of the supply of components available to a firm. Quality affects the lead-time taken by the supplier to complete the replenishment order and also the variability of this lead-time because follow-up orders often need to be fulfilled to replace defective products. As a result, the firm will have to carry more safety inventory from a low-quality supplier compared to a high-quality supplier.

Once a relationship between supply quality lead-time and lead-time variability is established, each supplier’s quality level can be converted to the required safety inventory and the associated holding cost. The component quality also impacts customer satisfaction and product cost because of rework, lost material, and the cost of inspection.

Inbound transportation cost: The total cost of using a supplier includes the inbound transportation cost of bringing material in from the supplier. Sourcing a product overseas may have lower product cost but will generally incur a higher inbound transportation cost, which must be accounted for when comparing suppliers. The distance, mode of transportation, and the delivery frequency affect the inbound transportation cost associated with each supplier.

Pricing terms: Pricing terms include the allowable time delay before payments have to be made and any quantity discounts offered by the supplier. Allowable time delays in payment to suppliers save the buyer working capital. The cost of working capital savings for each supplier can be quantified. Price terms also include discounts for purchases above certain quantities. Quantity discounts lower the unit cost but tend to increase the required batch size and as result the cycle inventory.