PERFORMANCE MEASURES IN SUPPLY CHAIN MANAGEMENT

By: Vignesh V Ramani

09117064
B. Tech, Mech

The definition of SCM has been explained multiple times in the course of the previous presentations, so lets assume we all know what it is. How do you define system performance?

Words like good, bad, poor, etc. are vague.

We prefer quantitative measures over such qualitative measures Preferably numerical performance measures But at the same time, these measures must be appropriate for the SCM in question The more complex a given SC, the tougher it is to choose an appropriate performance measure

INTRODUCTION

Identifying success Identifying whether customer needs are met Better understanding of processes Identifying bottlenecks, waste, problems and improvement opportunities Providing factual decisions Enabling and tracking progress Facilitating a more open and transparent communication and cooperation.

PURPOSES OF A PERFORMANCE MEASUREMENT SYSTEM

How to choose a performance measurement system?

Each has a few basic characteristics

The following are the required properties:

Inclusiveness (measurement of all pertinent aspects) Universality (allow for comparison under various operating conditions)

Measurability (data required are measurable)

Consistency (measures consistent with organization goals)

Benchmarking important method used in performance evaluation

PERFORMANCE MEASURE SELECTION

Supply chain models have predominantly utilized two different performance measures:

Cost
A combination of cost and customer responsiveness

Other measures are also considered, but these are qualitative and not quantitative in nature:

Customer Satisfaction
Information Flow Supplier Performance Risk Management

SUPPLY CHAIN PERFORMANCE MEASURES

Cost, activity time, customer responsiveness, and flexibility have all been used as supply chain performance measures either singly or jointly. These possess significant weaknesses Single Supply Chain Performance Measures Only one measure is used -> Simplicity! But this must adequately describe the system. But the most significant drawback was that inclusiveness was not present Ex: Assume measure is cost. Company might operate at minimum cost, but it may simultaneously demonstrate poor customer response time performance, or lack flexibility to meet random fluctuations in demand.

EVALUATION

Type of performance measures required for a manufacturing organization are directly related to the manufacturing strategy chosen by the company. Why?

The company may determine if its performance is meeting its strategic goals; and

People in the organization will concentrate on what is measured; thus the performance measure will steer company direction.

Strategic goals may point to one or many performance measure Might be difficult to choose the individual performance measures, but it is vital that the strategic goals be related to them.

STRATEGIC GOALS

Strategic goals involve key elements that include the measurement of resources, output and flexibility. The use of resources, the desired output and flexibility (how well the system reacts to uncertainty) have been identified as vital components to supply chain success. Each of these three types of performance measures has different goals
Goal High level of efficiency High level of customer service Ability to respond to a changing environment Purpose Efficient resource management is critical to profitability Without acceptable output, customers will turn to other supply chains In an uncertain environment, supply chains must be able to respond to change

Type Resources Output Flexibility

NEW FRAMEWORK

Therefore, the supply chain performance measurement system must contain at least one individual measure from each of the three identified types. Individual measures must coincide with the strategic goals.

This measurement system can then allow study of the interactions among the measures or can at least ensure a minimum level of performance in different areas.

NEW FRAMEWORK

Resource measures include:

inventory levels, personnel requirements, equipment utilization, energy usage, and cost.

Resources are generally measured in terms of the minimum requirements (quantity)

Too few resources can negatively affect the output and the flexibility of the system, while the deployment of too many resources artificially increases the system's requirements.

RESOURCES

The following is an example list of supply chain resource performance measures:

(1) Total cost. Total cost of resources used. (2) Distribution costs. Total cost of distribution, including transportation and handling costs. (3) Manufacturing cost. Total cost of manufacturing, including labor, maintenance, and re-work costs. (4) Inventory. Costs associated with held inventory:

Inventory investment. Investment value of held inventory. Inventory obsolescence. Costs associated with obsolete inventory; Work-in-process. Costs associated with work-in-process inventories. Finished goods. Costs associated with held finished goods inventories.

(5) Return on investment (ROI). Measures the profitability of an organization. The return on investment is generally given by the ratio of net profit to total assets.

RESOURCES

Output measures include: customer responsiveness, quality, and the quantity of final product produced. Output performance measures are easily represented numerically, such as:

Number of items produced; Time required to produce a particular item or set of items;

Number of on-time deliveries (orders).

But some such as customer satisfaction and quality are not quantitative. A minimum level of output is often specified. Resources affect the output of a supply chain, which in turn affects flexibility.

OUTPUT

Output measures must correspond to the customers goals and values The following is an example list of supply chain output performance measures:

(1) Sales. Total revenue. (2) Profit. Total revenue less expenses. (3) Fill rate. Proportion of orders filled immediately:

Target fill rate achievement. To what extent a target fill rate has been achieved. Average item fill rate. Aggregate fill rate divided by the number of items. Product lateness. Delivery date minus due date. Average lateness of orders. Aggregate lateness divided by the number of orders. Average earliness of orders. Aggregate earliness divided by the number of orders. Percent on-time deliveries. Percent of orders delivered on or before the due date

(4) On-time deliveries. Measures item, order, or product delivery performance:

OUTPUT

(5) Backorder/stockout. Measures item, order, or product availability performance:

Stockout probability. Instantaneous probability that a requested item is out of stock. Number of backorders. Number of items backordered due to stockout. Number of stockouts. Number of requested items that are out of stock. Average backorder level. Number of items backordered divided by the number of items

(6) Customer response time. Amount of time between an order and its corresponding delivery.
(7) Manufacturing lead time. Total amount of time required to produce a particular item or batch. (8) Shipping errors. Number of incorrect shipments made.

(9) Customer complaints. Number of customer complaints registered.

OUTPUT

Flexibility can measure a system's ability to accommodate volume and schedule fluctuations from suppliers, manufacturers, and customers. It is vital to the success of the supply chain, since the supply chain exists in an uncertain environment. Two types of flexibility: range flexibility and response flexibility. Range flexibility is defined as to what extent the operation can be changed. Response flexibility is defined as the ease (in terms of cost, time, or both) with which the operation can be changed. Although there will be a limit to the range and response flexibility of a supply chain, the chain can be designed to adapt adequately to the uncertain environment.

FLEXIBILITY

Some advantages of flexible supply chain systems are:

Reductions in the number of backorders. Reductions in the number of lost sales. Reductions in the number of late orders. Increased customer satisfaction. Ability to respond to and accommodate demand variations, such as seasonality.

Ability to respond to and accommodate periods of poor manufacturing performance (machine breakdowns).
Ability to respond to and accommodate periods of poor supplier performance. Ability to respond to and accommodate periods of poor delivery performance. Ability to respond to and accommodate new products, new markets, or new competitors.

FLEXIBILITY

Performance measurement selection is a critical step in the design and evaluation of any system. More complex the SC, the tougher it is to measure effectively. Many existing models are limited in scope (non-inclusive) We identified three types of performance measures that are necessary components in any supply chain performance measurement system: resource, output and flexibility Each was discussed in detail and their individual benefits were discussed.

SUMMARY/CONCLUSION

When a measurement model is selected, characteristics from each of the three types must be carefully chosen
The appropriate characteristics will adequately describe the SC and, at the same time, reflect strategic goals Supply chain models that utilize this framework can more completely characterize the supply chain system and the resulting reconfiguration effects, thus enabling the development of models that are more complete, accurate, and therefore more effective.

SUMMARY/CONCLUSION

Beamon, B. M., Measuring supply chain performance, International Journal of Operations & Production Management, Vol. 19 No. 3, 1999, pp. 275-292. Halme, J. et al, Global supply chain management and performance measurement, LEKA Literature Review.

Bhadwat R. et al, Performance measurement of supply chain management: A balanced scorecard approach, Computers & Industrial Engineering 53 (2007) 4362.

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