This module explores various frameworks for performance measurement in the context of Supply Chain Management

1. MEL751
Module on
Performance Measurement
System in SCM

2. Contents..
 Imperatives
 Desirable characteristics
 Various frameworks
 Implementation Issues
 Concluding Remarks

3. 3
Evaluation & Measurement
 Evaluation is necessary
 What cannot be measured cannot be
controlled !
 Why measurement
 Support better decision making
 Support better communication
 Provide performance feedback
 Motivate and direct behavior

4. 4
Measurement
 Effectiveness: extent to which , by choosing a
certain course of action , a previously
established goal or standard is being met.
 Efficiency: Related to the resources which are
required to realize the previously established
goals.
 Relation between planned and actual costs !

5. 5
Effectiveness
 Purchasing materials costs/prices
 Materials price/cost control
 Materials price/cost reduction
 Product /quality
 Purchasing’s involvement in new product
development
 Purchasing and Total Quality Control
 Purchasing logistics
 Adequate requisitioning
 Order and Inventory policy
 Supplier delivery reliability

6. 6
Efficiency
 Purchasing organization
 Personnel
 Management
 Procedures and Policies
 Information system

7. 7
Typical Indicators…
 Average value of purchase order
 Stock-out frequency
 Rush Order Index =
 Number of rush orders/Total Number of orders
 Obsolescence index =
 Value of non-moving items/Total value of Inventory
 Lead time
 Inventory turnover ratio =
 Annual Purchase Value/Average Stock Value

8. Remarks..
 The objective of supply chain management (SCM) is to
make supply meet demand.
 SCM is the collection of actions required to coordinate and
manage all activities necessary to bring a product to
market, including procuring raw materials, producing
goods, transporting and distributing the goods and
managing the selling process
 Companies must always be concerned with their competition. Today's
marketplace is shifting from individual company performance to supply chain
performance: the entire chain's ability to meet end-customer needs through
product availability and responsive, on-time delivery, cost and inventory !.
 Supply chain performance crosses both functional lines and company
boundaries. Functional groups (engineering/R&D, manufacturing, and
sales/marketing) are all instrumental in designing, building, and selling products
most efficiently.

9. Remarks…
 To achieve that goal, you need performance measures, or
"metrics", for global supply chain performance improvements.
 Performance measures must show not only how well you are
providing for your customers (service metrics) but also how
you are handling your business (speed, asset/inventory, and
financial metrics). Given the cross-functional nature of many
supply chain improvements, your metrics must prevent
"organizational silo" behavior which can hinder supply chain
performance.

10. Remarks..
 In supply chains with multiple vendors, manufacturers,
distributors and retailers, whether regionally or globally
dispersed, performance measurement is challenging because it
is difficult to attribute performance results to one particular entity
within the chain.
 There are difficulties in measuring performance within
organizations and even more difficulties arise in inter-
organizational environmental performance measurement.
 The reasons for lack of systems to measure performance
across organizations are multidimensional, including non-
standardized data, poor technological integration, geographical
and cultural differences, differences in organizational policy,
lack of agreed upon metrics, or poor understanding of the need
for inter-organizational performance measurement

11. What Is Performance Management?
 It is a systematic process of
 Planning work and setting expectations
 Continually monitoring performance
 Developing the capacity to perform
 Periodically rating performance in a summary
fashion
 Rewarding good performance

12. Management Process Linkages
The management process of discovering, defining and
implementing business activities that will result in a value-
enhanced future of the firm
A management process
that is used to monitor
business activities and
thereby facilitate
achievement of the
firm’s objectives
A business process is
a collection of linked
business activities that
enable or deliver
goods, services,
information or money
Descriptions of the
“give and get”
relationships between
the firm and each of its
stakeholders, relative
to alternatives
Performance
Measurement
System
Business
Processes
Stakeholder
Value
Propositions
Business
Strategy

13. Performance Management Cycle
Planning
Rewarding
Rating
Developing
Monitoring

14. Issues in performance
measurement system
 How well the organization is doing?
 Is the organization meeting its goals?
 Are the customers happy?
 Are the processes in control?
 If and where improvements are necessary?

15.  Similar to the performance measurement used,
the performance measurement system may be
unique to each individual organization, or unit
within an organization, reflecting its
fundamental purpose and its environment

16. Objectives of Metrics
 Measuring the activity (volume) and the SC
performance
 Setting goals and comparing the actual
situation
 Following a plan
 Determining the levers that will help achieve
goals and single out the priority action
programs
 Revealing the degree of flexibility

17. Principles of metrics design
Speed, reliability , and simplicity are the main criteria for
efficient metrics
 Arranging indicators by priority
 Segmenting the metrics
 Visualizing the function content
 Classifying objectives of the function or team
 Selecting indicators that deal with quality
 Formatting the metrics effectively

18. Characteristics of Effective
Metrics
 Independence
 Appropriateness
 Objectivity
 Regularity
 Linkage with other
indicators
 Coherence
 Simplicity
 Cumulative
 Realistic

19. Performance measurement system
(PMS): Desirable Features
 Transparent
 Simplicity and clarity
 Self-regulating
 Objective
 Motivating and stimulating to all stakeholders
 Creativity
 Dynamic over time

20. Performance measurement system
(PMS): Desirable Features (contd.)
 PMS should have multiple criteria
 Primary purpose should not be to reward or to punish
 Performance-to-schedule measures must use group, not
individual results
 Specific goals must be established and reviewed
 PM must be understood by those whose performance is being
measured.
 PM data must be available for constant review

21. Problems with just one measure of
success
 If you were to ask most anyone how they would measure
company performance, they might give you a funny look
and say, "How much money the company makes, of
course! Isn't that obvious?" To a certain extent, they are
right. Profitability, gross revenues, return on capital, etc. are
the critical, "bottom line" kind of results that companies
must deliver to survive.
 Unfortunately, if senior management only focuses on the
financial health of the organization, several unfortunate
consequences arise. One of these is that financial
measures are "lagging indicators" of success. This means
that how high or low these numbers go depends on a wide
variety of events that may have happened months or years
before and that you have no immediate control of in the
present.
 Being in a plane falling from the sky is a bad time to realize
that you should have done routine maintenance, and oh, by
the way, filled it with fuel!

22. Quantitatively based performance
management
 Measurements of multiple performance factors
occur frequently at each stage in the supply chain
 Time and cost are key measures, but others are
used as appropriate to the specific supply chain.
 All measures must relate to the ultimate supply
chain goals.

23. Generic framework
 Decide what is needed
 Determine behavior
 Draw up a profile
 Review the current system
 Alignment
 Analyze the process
 Review

24. Some Indicators..1..
• Delivery performance
• Order fulfillment performance
• Fill rate (Make-to-stock)
• Order fulfillment lead time
• Perfect order fulfillment
• Supply-chain response time

25. Some Indicators..2..,
• Total supply-chain management cost
• Value-added productivity
• Warranty cost or returns processing
cost
• Cash-to-cash cycle time
• Inventory days of supply
• Asset turns

26. Some Indicators..3..
 Financial : ROI, Turnover ratio
 Productivity: Total productivity
 Efficiency: Realized Production /Planned
Production
 Customer LT: Time from order to
delivery
 Production LT: Time from order relapse
to finished product

27. Commonly used measures for
evaluating retail performance
 Service level;
 Lost sales;
 Product substitute percentage;
 Gross margin
 Stock-turn

28. PMS: Triggers
 Increasing customer/distributor
complaints followed by order
cancellations
 Increasing levels of stockholding
 Increasing levels of backorders
 periodic excesses and shortages of
storage space
 increasing levels of stock obsolescence

29. Operational performance
 Customer service levels over time
 inventory turnover performance :
product group, rate of sale category etc.
 inventory accuracy
 number of customers not supplied from
stock
 Number of stock outs per period

30. Financial performance
 Return on inventory investment
 Inventory investment/working capital
 Percentage inventory increase(decrease) vs
percentage increase(decrease) in sales
 Percentage inventory increase(decrease) vs
percentage increase(decrease) in cost of
sales
 stock write-offs

31. Some more measures...
 Total transportation capacity used/total
transportation capacity paid for
 actual transportation cost/budgeted
transportation cost
 actual transit time/standard transit time

32. Depot service index
 Hits vs Misses
 DSI= hits/misses

33. Internal Performance
Measurement
 Cost { total cost,cost/unit, cost/sales, inbound
freight, outbound freight, warehouse cost, admn,
processing, direct labor etc.}
 Customer service {fill rate, stock-outs, shipping
errors, on-time delivery, back-orders, cycle time,
customer feedback}
 Productivity {units shipped/employee, units/labour
Rs., ordes per sales person, etc.}
 Asset Measurement {Inventory turns, Inv. Carry
costs, obsolete Inv., ROI etc.}
 Quality {frequency of damage, Rs of damage,
Customer returns, Cost of returned goods etc.}

34. External Performance
Measurement
 Customer Perception Measurement
 Best Practices benchmarking
 World Class Logistic- CLM
 Logistics Excellence - Michigan State University

35. Various frameworks for
measurement
 Function based measurement system
 Balanced scorecard system
 SCOR Framework

36. Framework 1: Function based
measurement system
 Covers detailed performance measures
applicable at different linkages of SC
 Marketing, Operations, Finance etc.

37. Indicators: Inventory
• ABC-analysis of the assortment categorized by stock
value/volume
• mean throughput time of the product group
• variance in throughput time of the product group in total
• mean throughput time of the product group in total,
subdivided by the : activities loading, transit and receiving
• reliability of the inventory regarding quantity and correct
place

number of damages/claim
• mean throughput time of the various products in stock in
total
• variance in throughput time of the various products in
stock in total
• mean throughput time of the various products in stock in
total, subdivided in the activities loading, transit and
receiving


38. Indicators:Outbound logistics
• cost structure of the warehouse operations (handling-in,
storage, and handling-out)
• total investment
• total cost of the warehouse
• total capacity concerning output volume
• costs warehouse operations per unit volume (m3
, ton)
• total number of trucks loaded/unloaded per worked time
unit
• labor hours per unit of output volume ( m3
, ton)
• labor costs per unit of output volume (m3
, ton)
• labor costs as percentage of sales

39. Indicators: Customer service
 Product availability
 order lines delivered in turns and complete/order lines entered.
 orders delivered in time and complete/orders entered
 Rs value delivered in time and complete/dollar value entered
 real time vs planned lead time
 Quality of delivery
 Flexibility
 Support to customer
 Information

40. Framework : Balanced scorecard
 Various perspectives such as the following
should be Balanced!
 Financial
 Innovation & learning
 Customer service
 Internal business
Balance scorecard balances and links financial and non-
financial indicators, tangible and intangible measures,
internal and external aspects, performance drivers and
outcomes.

41. Balanced Scorecard Approach
Mission viewed from four perspectives:
– Customer
– Internal Processes
– Financial
– Learning, Growth and Innovation

42. Customer focus..
 Satisfied customers is the desired end result
of any supply chain management strategy, as
illustrated by a quote from Lee and
Billington[*]:
 HP management has recognized that its
performance filling orders will cause it
to win or lose the competitive battle.
*The Evolution of Supply-Chain-Management Models and Practice at Hewlett-
Packard. Interfaces 25 (pp.42-63): 5 September-October, 1995.

43. Customer Perspective
Objectives Measures Targets
Internal Business Innovation and Learning
Objectives Measures Targets Objectives Measures Targets
Financial Perspective
Objectives Measures Targets
How do our
customers see
us?
How do we look
to
stakeholders?
What must
we excel at?
How can we
continue to
improve and
create value?
Vision
and
Strategy
How do
customer see us?
How can we
continue to
improve and
create value
What must
we excel at?
How do we
Look to
shareholder?
Four Perspectives

44. Remarks..
 Once the company mission, strategy and measures have been defined
and agreed upon, the next step is to understand fully the drivers
(causes) behind movement (up and down) of your balanced scorecard.
Without the specific knowledge of what drivers will affect your
scorecard, your organization just might spend much time, money and
effort and achieve very little.
 These drivers fall into four categories:
 · Environmental - those factors outside the influence of your
organization, such as governmental regulations, the economic cycle,
local, national and global politics, etc.
 · Organizational - systems inside the organization such as company
strategy, human resource systems, policies, procedures,
organizational structure, pay, etc.
 · Group or departmental - work processes, group relationships, work
responsibilities, work assignments
 · Individual - personality, management style, skills, behaviors.

45. Various Measures..1..
Financial Perspective
 Return-on-capital-employed
 Cash Flow
 Project Profitability
 Sales Backlog
Innovation & Learning Perspective
 % revenue from New services
 Rate of improvement Index
 Staff Attitude survey
 Revenue per employee

46. Various Measures..2..
Customer Perspective
 Customer ranking survey
 Customer satisfaction index
 Market share
Internal Business Perspective
 Hours with customer on New Work
 Tender success rate
 Project performance index
 Project closeout cycle

47.  “The performance measurements become a
driving force behind the change process.”
— CEO of CFT

48. Some Issues…
 Performance measurement system and its
linkages with strategy
 Behavioral issues related to performance
measurement system
 Development of Multi-criteria decision making
framework
 Role of information system in measurement
 Benchmarking and performance
measurement system

49. Concerns..
 Overcoming mistrust. Traditional SCM practices have been adversarial. Trust
in data sharing, acquisition and monitoring needs to be built.
 Lack of understanding. Multi-organizational measures are difficult to
understand for managers focused on internal systems.
 Lack of control. Managers and organizations wish to be evaluated on
measures they can control. Inter-organizational measures are difficult to
manage and thus control.
 Different goals and objectives. Differing organizations have different goals
and thus would argue for differing measures.
 Information systems. Most corporate information systems are incapable of
gathering non-traditional information relating to supply chain performance.
 Lack of standardized performance measures. Agreed upon measures in terms
of units to use, structure, format, etc. may not exist.
 Difficulty in linking measures to customer value. Linkage to stakeholder value
(expanding to environmental issues) is becoming more complex. The
definition of who the customer may be inside a supply chain also is not clear.
 Deciding where to begin. Developing supply chain-wide performance is
difficult since it is not always clear where boundaries exist.
 Source: Brewer and Speh (2001)

50. 50
Typical problems with
measurement & evaluation
 Too much data and wrong data
 Measures that are short term focused
 Lack of detail
 Drive the wrong performance

51. Implementation
 The development of new measures and the development of new
benchmarks, based on these measures; in developing the new
measurement format, various aspects of the supply chain definition can be
expected to affect the specific mix of measures used.
 The position of players in the chain (supplier, manufacturer, wholesaler,
service supplier) affects their contribution and relevant measures, the level
of integration and the strategic approach may affect the relevance of
measures. Creating benchmarks based on the new measurement systems
may contribute to directing management effort in optimizing the supply
chain.
 The development of tools that can help support the implementation of the
new measurement approach may be a crucial step leading to the actual
application of new measurement approaches.
 The tools cannot be limited to the measurement system itself; they also
need to include strategic trade-off and planning frameworks in order to
assure executive “buy-in” and commitment and initiate actual improvement
processes in the supply chain.


52. Implementation..

53. 53
Measurement category..1..
 Price performance
 Actual price compared to plan
 Actual price to market
 Price comparisons between operations
 Cost effectiveness
 Cost changes and cost avoidance
 Workload

54. 54
Measurement category..2..
 Material status and control
 Supplier performance
 Quality, reliability , delivery flexibility etc.
 Strategic performance
 Purchasing planning and research

55. Implementation.. Industry view
 How much of improvement is due to measuring and
reporting performance, and how much is due to other
factors “is a really good question,” he added. : “When
we first started along this path, the global supply-
chain task force said that performance measurement
and measuring the right things and aligning
measures across the organization could very well be
the most important success factors in making sure
that we deliver results. We’ve taken that at face value
and really try to report the right supply-chain
measures.”

56. Balance : a MUST
 As with too many measurements, using too few
performance metrics, or giving too much weight to
one, also causes problems.
 Try to encourage people to recognize control points
in the process — where you get maximum value by
taking the time measure —
 And to use metrics in a collaborative fashion that
helps people recognize the interdependencies in their
organization or in the supply chain at large
 That gives people some sensitivity as to what went
on before them and what will happen next, so they
can optimize their actions and decisions in a larger
context.

57. Inventory ManagementInventory Management
The Indian Scenario Source: Sahay(2004), Presentation for FICCII
Inventory Overall Industry Sector
Averages[as number of days of sales] Average Lowers Highers Lowers Highers
Raw Material 33.41 1 120 CDs 25.0 Engg 42.2
Work in Progress 14.25 0.1 210 FMCG 4.4 Engg 20.7
Finished Goods 16.09 1 40 Auto 9.9 CDs 23.3
Goods in Transit 6.44 - 85 Auto 4.08 Elec 11.0
Accounts Receivables 46.51 2 145 FMCG 16 Engg 72.0
Accounts Payables 45 2 127 Elec 25 CDs 60.0
Inv. at DCs 14.48 2 50 Elect 10 CDs 24.7
Inv. at Distributors 16.77 3 45 Elec 3.0 Engg 23.4
Inv. at Retailers 13.48 1 45 Chem 8.6 Auto 30.0

58. Summary
 PMS is necessary in any Supply chain linking
planning with actual action!
 Typical Measures: inventories, lead times, costs,
customer service, financial performance etc.
 Triggers :increased costs, Increased inventory,
stock-outs etc., poor customer service, lost sales
and more.
 Frameworks: Functional, Balanced score card,
SCOR etc.
 Typical Problems: Motivational, Not capturing what is
supposed to capture, overkill etc.

Solutions : PMS should be Specific, Measurable,
Agreed-upon, Realistic and Time-bound
 In short :SMART

59. Concluding Remarks
 PMS helps in assessing the strength as well
as identifying the ‘weak spots’
 It directs improvement process
 It motivates variety of stakeholders
 Guides in implementing strategy
 Businesses rarely want to design
performance measurement systems from
scratch. Usually managers are interested in
eliminating any weaknesses in their existing
system.

60. Useful resources
 Books
Chopra, S. and P. Meindl, Supply Chain Management, Prentice-Hall
 Web site
 www.supplychainmetric.com
 Supply Chain Council (http://www.supply-chain.org)
 LogisticsWorld (www.logisticsworld.com )
 Links for Best Practices
 Best Practices in Management (www.bpmanagement.com)
 Best Change Practices
(www.changecentral.com/changepractices.html)
 Best Practices in Business Process Re-engineering (
www.prosci.com/bpr_ah1.htm)
 amrresesrch.com