CHAPTER 14- PERFORMANCE

MEASUREMENT ALONG THE

SUPPLY CHAIN

Principles of Supply Chain Management:

A Balanced Approach

For Lecture Class discussion by -

Prof. Rajesh Pandey
 Learning Objectives
You should be able to:
– Describe why firms need to measure & assess performance.
– Discuss the merits of financial & non-financial performance
measures.
– List a number of traditional & world-class performance
measures.
– Describe how the balanced scorecard & the SCOR models
work.
– Describe how to design a supply chain performance
measurement system.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Chapter Fourteen Outline
Viewing the Supply Chain (SC) as Use of Firm-Wide Productivity &
a Competitive Weapon Utilization Measures
Understanding End Customers World-Class Performance
Understanding SC Partner Measurement Systems
Requirements Developing World-Class
Adjusting SC Member Performance Measures
Capabilities SC Performance Measurement
Traditional Performance Measures Systems
Use of Organization Costs, Specific Chain Performance
Revenue, & Profitability Measures
Measures The Balanced Scorecard
Use of Performance Standards & The SC Operations Reference
Variances Model
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 Introduction
“You can’t improve what you can’t measure”

– Companies using performance

measurement- more likely to achieve
leadership positions & twice as likely to
handle a major change successfully.
– Performance measurements vary from
company to company.
– World-class status may initially cost more.
– Adding several tiers of suppliers & customers
complicates performance measurement.
– Performance measures must be visible &
communicated to all members of the SC.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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Viewing the SC as a Competitive Weapon

Understanding End Customers- SCs need to look at each segment of

the market they serve & determine the needs of those customers.
– Variety of products required
– Quantity & delivery frequency needed
– Service level desired
– Product quality desired
– Price of the products
Understanding SC Partner Requirements- SC strategies must consider
the potential trade-offs existing between the:
– Cost
– Quality
– Quantity
– Service
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 Viewing the SC as a Competitive
Weapon- Cont.
Adjusting SC Member Capabilities
– SC members audit their capabilities & those of their supply
partners to determine if what they do is consistent with the
needs of the end customers & the SC.
– Matching SC capabilities to end-customer requirements means
that firms & their partners must continually reassess their
performance with respect to requirements.
– The best SC performers are more responsive to customer
needs, quicker to anticipate changes in the markets, & much
better at controlling costs.

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 Traditional Performance Measures

Traditional Performance Measures

– Financial statements & traditional cost-
based information do not reflect the
underlying performance of the productive
systems of an organization; cost & profit
information can be hidden or
manipulated.
– Decisions made solely to maximize
current stock prices do not necessarily
reflect that the firm is performing well.
– Financial performance measures, while
important, cannot adequately capture a
firm’s ability to excel in these areas.

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 Traditional Performance Measures- Cont.

Use of Organization Costs, Revenue, & Profitability Measures-

Several problems are associated with using these measures to
gauge performance, for example:
– windfall profits that occur when prices suddenly rise due to
supply interruptions, caused for the most part by
uncontrollable environmental conditions.
Another problem is the difficulty, to attribute cost, revenue, or profit
contributions to the various functional units or business units
Allocating costs based on a department’s percentage of direct labor
hours causes managers to waste time trying to reduce direct labor.

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 Traditional Performance Measures- Cont.

Use of Performance Standards & Variances

– Establishing standards for comparison purposes can be
trouble-some.
• Employees & managers do whatever it takes to reach the
goal
• Shoddy work
• “Cooking” the books.
– Performance variance- the difference between the standard
& actual performance.
– Managers can be pressured to find ways to make up these
variances, resulting in decisions that may not be in the long-
term best interests of the firm.

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 Traditional Performance Measures- Cont.

Use of Firm-Wide Productivity & Utilization Measures- useful but

have the same problems as revenues, costs, & profits.
– Decisions made to increase productivity may prove to actually
increase a firm’s costs & reduce quality.
– Tendency to continue producing & adding to inventory to keep
machines & people busy.
– Less time is spent doing preventive maintenance & training for
greater performance & profits in future.
– Traditional performance measures also tend to be short-term
oriented.

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 World-Class Performance Measurement
Systems
Developing World-Class Performance Measures
– Identify the firm’s strategic objectives.
– Develop an understanding of each functional area’s role & the
required capabilities.
– Identify internal & external trends likely to affect the firm & its
performance over time.
– For each functional area, develop performance measures that
describe each area’s capabilities.
– Document current performance measures & identify changes
that must be implemented.
– Assure the compatibility & strategic focus of the performance
measures to be used.
– Implement the new performance system.
– Periodically reevaluate the firm’s performance measurement
system.

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World-Class Performance Measurement
Systems

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 SC Performance Measurement Systems

Performance measurement systems must:

– Link SC trading partners to achieve breakthrough performance in
satisfying the end users.
– Overlay the entire SC to assure that all contribute to SC strategy.
In a successful chain, members jointly agree on a SC performance
measurement system.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
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 SC Performance Measurement Systems-
Cont.
Specific Supply Chain Performance Measures
– Total SCM costs: cost to process orders; purchase &
manage inventories; & information systems.
– SC cash-to-cash cycle time: Average # of days between
paying for materials and getting paid by SC partners.
– SC production flexibility: average time required to provide an
unplanned 20 % increase in production.
– SC delivery performance: average % of orders filled by
requested delivery date.
– SC perfect order fulfillment performance: average % of
orders that arrive on time, complete, and damage free.
– Supply chain e-business performance: average % of
electronic orders received for all supply chain members.
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 The Balanced Scorecard

Balanced scorecard (BSC) developed

by Kaplan and Norton to align an
organization’s performance measures
with its strategic plan and goals. The
BSC framework consists of four
perspectives:
– Financial perspective
– Internal business process
perspective
– Customer perspective
– Learning and growth perspective

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The Balanced Scorecard- Cont.

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The Balanced Scorecard- Cont.

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 Supply Chain Operations Reference
(SCOR) Model
Developed by the Supply-Chain
Council for supply chain management
diagnostic benchmarking, and
process improvement tool. The SCOR
model separates supply chain
operations into 5 process categories:
– Plan
– Source
– Make
– Deliver
– Return

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Supply Chain Operations Reference
Model- Cont.

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Supply Chain Operations Reference
Model- Cont.

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Supply Chain Operations Reference
Model- Cont.

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