Measuring the value of a responsive supply network

Abstract

LargeCo, a large multinational consumer goods manufacturing and distribution company, has been pursuing initiatives to improve the responsiveness of its supply network. The impact of these initiatives on the supply network is measured through a few Key Performance Indicators (KPIs). LargeCo has invested in a responsive supply chain so that it can respond swiftly to unpredictable market demand and minimize lost sales. Reduction in lost sales leads to growth in sales. LargeCo is interested in finding out if its responsive supply chain is contributing to sales growth. In particular, LargeCo would like to determine whether improvement in KPIs, driven by improvement in the responsiveness of the supply chain, has a relationship with improvement in sales. LargeCo uses a measure of sales known as Sales Net of Effects (SNE) which measures sales net of the effects of discounts, marketing and promotions. Establishing a relationship between KPIs and sales will help LargeCo measure the value of responsiveness in its supply network. This research project develops an analytical framework using an econometric model to determine if relationships exist between the KPIs and sales and a causal model to explain the relationships. The econometric model shows that relationships exist between two of the KPIs - Days of Inventory and Supply Chain Cycle Time, and sales. The causal model explains how these KPIs and sales are linked.