Performance Measurement in Supply Chain

1. Introduction:
Business firms, now a days, focuses on customer satisfaction by delivering value in a
cost effective manner to survive in the competition. This is achieved by making
goods/Service available as per specification and quality. Logistical services aids businesses to
achieve this. Normally logistics cost is 15% to 45% of total costs. Along with logistic cost
marketing and distribution cost is responsible for waning profitability.

Logistic and supply chain management provides cost efficient value added services to
improve productivity. Supply chain integration makes it both efficient and responsive.
Integrating with supply chain partners and maintaining better relationships with them is the
strategy which many businesses are following. Since more importance is placed upon
logistics and SCM activities it is necessary to monitor and control these activities in terms of
performance measurement.

2. Dimensions of performance measurement

Productivity and profitability improvement on continuous basis is necessary for
survival. Performance management is important to ensure effective and efficient utilization of
resources. Performance management helps to improve productivity and profitability. There is
always scope to redefine and improve the process.

The process based measure deals with customer satisfaction delivered by supply
chain, there are three dimensions of performance measurement

i. Internal performance measurement

ii. External performance measurement
iii. Comprehensive Supply Chain Performance measurement

i. Internal Performance measurement:

In internal performance measurement compares performance of present logistic function
and/or goals with the previous operations and/or goals. With the help of internal performance
measurement loop holes in existing systems can be found. In this system focus is on five
categories of logistics measures

a) Cost: Here logistics cost of existing system and proposed systems are compared. These
logistics costs includes cost of material handling, warehousing, protective packaging, order
processing etc.

b) Customer Service: Logistical customer service is measured with regard with consistency
and reliability. Customer service affects company's corporate image.
c) Asset Management: It is mainly focused on return on investment. Performance is
measured in terms of inventory turnover and return generated by fixed assets
d) Quality: Quality measurement is on the basis of process evaluation. This includes
activities such as stock out, defective delivery, damages, number of credit claims, number of
customer return, cost of return goods, cost of recovery from defective delivery and
inconsistency and unreliability of services

e) Productivity: There are mainly three types of productivities which are static, dynamic,
and surrogate. Static productivity is for same system whereas dynamic productivity is ratio of
productivity of different systems. Surrogate productivity relates factors highly correlated with
productivity to performance.

ii. External Performance Measurement

In this case, performance is measured from customer and competition point of view.

a) Customer performance measurement:

It is essential to meet with customer expectation at all times. Hence logistical service
is measured from customer perspective. It may be done by monitoring customer satisfaction
regularly.

b) Competitive performance measurement:

Logistics and supply chain can be competitive advantage for the firm. Hence logistics
practices are compared with competitors to identify opportunity and threat. Performance of
firm's logistics system may be satisfactory but when it is compared with competition then
scope of improvement can be found out.

iii. Comprehensive supply chain measurement

This provides integrated framework for performance measurement. It includes all measures in
a matrix
Outcomes Diagnostics
Customer satisfaction/quality
Perfect order fulfilment Delivery to commit date
Customer satisfaction Warranty costs, returns, and allowances
Product quality Customer inquiry response time
Time
Order fulfilment time Source/make cycle time
Supply chain response time
Production plan achievement
Costs
Total supply chain cost Value added productivity
Asset
Cash to cash cycle time Forecast accuracy
Inventory days of supply Inventory obsolescence
Asset performance Capacity utilization
  Customer satisfaction/quality:
It is measure of providing customer satisfaction. It depends on timely delivery, warranty cost,
responsiveness.
Key customer satisfaction diagnostics:

Delivery to commit date: The percentage of orders fulfilled on or before the original
committed date.

Warranty costs, returns, and allowances: The average of actually incurred warranty costs
expressed as percentage of revenue.
Customer inquiry response time: The inquiry response time is the average elapsed time
between the receipt of a customer call and connection with proper company representative.

 Time: This measures firm's ability to meet customer demand.

Key Time Diagnostics:

Source/make cycle time: The cumulative external and internal lead time to build a shippable
product if you start with no inventory on hand or parts on order.

Supply chain response time: The theoretical time to recognize a major shift in marketplace
demand, internalize that finding, re-plan demand, and increase production by 20%.

Production plan achievement: The average actual achievement of production schedule

achievement.

 Cost: This include all cost related to total supply chain such as order fulfilment cost,
material acquisition cost etc.

Cost components include – Order fulfilment cost, Material acquisition costs, Total
inventory carrying cost, Logistics related finance and management information cost.

 Assets: It focuses on maximum return on deployed assets in terms of inventory,

facilities and equipment.
Key Asset Diagnostics:
Forecast accuracy: It is average absolute accuracy of forecasting for the period of the past
three months.

Inventory obsolescence: It is the percentage of expenses incurred due to depreciation of

inventory to the average gross inventory value.

Capacity utilization: It is percentage of actual output at current capacity utilization against

possible output achievable in a twenty four hour, seven day operation.
3. Tools for performance measurement:
3.1. Activity based costing:
In activity based costing variables, fixed and overheads cost are directly assigned to each
product using activities required to produce these product. Hence with ABC cost can be
traced to the particular activity. Hence ABC assists logistics managers by revealing the link
between performing particular activities and the demand those activities make on an
organisational resources.

ABC adopts two stage cost assignment. Initially cost of activities is measured. In second
stage activity costs to the different products.

Benefits of ABC:
1. Reduction in overall management overhead by identifying activities requiring resource
2. Areas of profit and loss can be identified with ABC.
3. Additional accuracy due to use of multiple cost drivers
4. ABC gives direct means of computing cost of poor or improved performance
5. ABC provide frame work for continuous improvement.

3.2. Benchmarking
Benchmarking is a process of industrial research that enables managers to perform
company to company comparisons of processes and practices to identify the 'best of the best'
and attain a level of superiority or competitive advantage.
Benchmarking is the process of comparing one's business processes and performance to
industry’s best practices from other companies. Things typically measured are quality, time
and cost. In Benchmarking best industry practices are uncovered, adopted, and implemented.
Benchmarking is most commonly used at the organisational or business unit level and is
based on the assumption that it is important to learn from organisations that are perceived as
the best. Emulating the best can fuel the motivation of everyone involved.
Benchmarking can be distinguished into two fundamental concepts:
Internal Benchmarking
The internal benchmarking process allows a company with a number of facilities that
operate the same supply chain processes to compare and contrast the ways in which the
process is performed in those facilities. For example if a company operates five distribution
centres in the India and China, the benchmarking process can examine a number of
operations that take place at each of the distribution centres and compare how they are
performed and what improvements can be made by comparing the results of the
benchmarking. If a company benchmarks the processes around inventory accuracy, shipping
accuracy and storage density, the results of the assessments of the facilities can help a
company to improve on those processes at all of the facilities.
External Benchmarking
For companies that have performed internal benchmarking and want to investigate
new ways in which to improve performance of their internal processes, external
benchmarking can produce significant improvements. Many companies believe that their
processes are as efficient as possible, but quite often, the efficiencies are limited by the
knowledge within the company. The external benchmarking process takes a company outside
of its own industry and exposes them to different methods and procedures. For example, a
manufacturer and distributor of electrical components have internally benchmarked their
warehouses for a number of years and have exhausted ideas on improving efficiencies. They
approached a very successful retail company to visit their central warehouse and benchmark
the processes that occur there to compare to their own warehouse processes. The external
benchmarking allowed the manufacturer of the electrical components to assess the processes
seen in the retailer’s warehouse and develop an improvement plan for their own facilities
based on the results.

External Benchmarking can be done in following ways:

 Collaborative (or co-operative) benchmarking – where companies share their

practices with other organisations
 Competitive benchmarking – where companies learn from the other companies
aiming to gain superiority one over another.
However, in some cases both types of benchmarking might coexist, as at the strategic level
companies would compete, but could cooperate at the operational level. Various Functions
which come under the scope of benchmarking are Billing, Inventory management,
distribution, Manufacturing and procurement.

Benchmarking Process:
During benchmarking three fundamental activities should be followed,
1. Know your operation: Assess the strengths and weaknesses. It should involve
documenting of work process steps and practices.
2. Know industry leaders and competitors: Capabilities can be differentiated by
knowing the strengths and weaknesses of the leaders.
 3. Incorporate the best and gain superiority: Emulate the strengths of the best and go
beyond.
After taking the above aspects into consideration, following steps should be followed in a
systematic process.
These steps are grouped into five phases namely; Planning, Analysis, Integration, Action, and
maturity.
Planning
 What to benchmark: Product or the final output of a process are given priority to
benchmark for opportunity to improve performance.
 What companies to benchmark: World class companies or functions with superior
work practices.
 Data sources and data collection: A wide array of sources exist, recently published
information can be searched on internet.
Analysis
 Measuring the gap: It is important to have a full understanding of the internal business
process before making any comparison to external organizations.
 Projecting the gap: Whether negative or positive these gaps provide an basis for
action.
Integration
 Report progress: Progress should be reported to all the employees involved.
Benchmarking findings can help to develop the end-point picture of the operation.
 Revise performance goals
Action
 Specific actions: Specific implementation actions, Periodic measurements and
assessments of achievement should be put in place.
 Assign responsibility: People who actually perform the work should be responsible
for implementing the benchmarking findings.
 Continuous improvement: The Company should stay in line with the current industry
trends by continuously benchmarking and updating work practices.
Maturity
 Institutionalize: Maturity is achieved when the best practices are incorporated in all
business processes and the benchmarking approach is institutionalized.

3.3. SCOR (Supply Chain Operations Reference) Model

SCOR modelling is referred today as the most popular methodology to analyse the SCM
performance of organisations. he supply-chain operations reference-model was developed in
1996 by the management consulting firm PRTM, now part of PricewaterhouseCoopers LLP
and AMR Research, now part of Gartner, and endorsed by the Supply-Chain Council (SCC),
now part of APICS, as the cross-industry de facto standard strategy, performance
management, and process improvement diagnostic tool for supply chain management.
SCOR is focused on improving the process by comparing with the reference processes.
a) Process Reference Model:
The SCOR model isolates key supply chain processes and matches their performance with
industry specific best practices. The steps in process reference model are:
1. SCOR analyses the current state of company’s processes and quantify the operational
performance.
2. It then quantifies operational performance of similar companies and establish internal
targets based on 'best in class' result.
3. SCOR model analyses the practices which resulted in 'best in class' performance.
b) Scope of SCOR model:
i. All customer interactions, from ordered entry to paid invoice.
ii. All physical material transactions, from the supplier's supplier and customer's customer,
including field service logistics.
iii. All market interactions, from the understanding of aggregate demand to fulfilment of each
order.
c) Structure of SCOR model:
At the core of this model there are four levels of SCOR.
SCOR Level 1: It defines the scope and content for the SCOR model and basis for
competition performance targets are set. The first model introduced was Supply Chain
Operations Reference (SCOR) Model

SCOR Level 2: It defines 26 core process categories that are possible component of a supply
chain. Organisations can configure their ideal or actual operations using these processes.

SCOR Level 3: It provides the information required for successful planning and setting goals
for supply chain improvements. It also defines a company's ability to compete successfully in
its market.

SCOR Level 4: Level 4 focuses on implementation i.e. putting specific supply chain
improvements into action. These are not defined within industry standard model as
implementations can be unique to each company.
Performance Metrics Level 1

Perspectives Metrics Measure

Supply chain On-time delivery Percentage

reliability Order fulfilment lead time Days
Fill rate Percentage
Perfect order fulfilment Percentage

Flexibility and Supply chain response time Days

responsiveness Upside production flexibility Days

Expenses Supply chain management cost Percentage

Warranty cost as percentage of revenue Percentage
Value added per employee Dollars

Assets/utilization Total inventory days of supply Days

Cash-to-cash cycle time Days
Net asset turns Turns

4. Impediments to improved performance:

1. Failure to adopt customer expectation: Most of the firms fail to recognize
customer's expectation from logistics services.
2. Lack of requisite cost data: There is complexity in the cost data and it is not possible
to find data on elements of logistical cost.
3. Lack of comprehensive management skills: Logistics and supply chain
management are no longer operational but strategic functions of the enterprise. But
there is lack of knowledge about this with gap in skills required and available.
4. Failure to think as a system: Sub-systems such as transportation, warehousing,
inventory management are functioning as individual systems providing less scope for
the performance improvement.
5. Lack of transformation in corporate vision and culture: Corporate vision towards
customer service and responsiveness is not well defined. The organisational culture
also overlooks at customer service aspect in logistics and supply chain.
6. Lack of infrastructure facilities: Transportation network, quality of vehicles, public
warehousing and information sharing are the areas of concern.