February 10, 2014

Performance Measurement of Supply Chain and its Strategic Implications


In today’s world technical and competitive factors are changing at an alarming rate. In order to survive these radical changes organizations also need to learn to respond to them. The survival of an organization in today’s ever changing environment depends on its ability to respond to changes. This aspect of being dynamic becomes even more difficult for smaller firms. Over the years companies have also acknowledged that it is not economically viable to develop every part of the final product in-house and therefore outsourcing has become increasingly common. Also, with globalisation logistics have become vital part of any organisation and hence supply chain management has become the key to survival.
Supply chain management is the process of planning, implementing and controlling the operations of the supply chain with a purpose to satisfy customer’s requirements as efficiently as possible. SCM spans all movement and storage of raw materials, work-in- progress and finished goods from point-of-origin to point-of-consumption.
On the other hand performance management is also very important. It should be understood that all businesses need performance management, because without it nobody can actually comment on how well or poor any business is doing. There should be some benchmarks, targets etc. to compare so that performance of an organization can be measured. Supply chains constitute substantial costs to organizations. Hence cost and performance effectiveness become vital. Strength and performance of any process are only as good as its weakest link. Therefore performance measures specific to a firm are needed to enable improvements and to compare it with industry standards and competitors.
This brings us to the very important point that if anything cannot be measured, it cannot be controlled and thereby cannot be managed; finally if we cannot manage something, we cannot improve it.

Need of Metrics and Performance Management
Supply Chain Risk Management should become one of the top concerns of companies and supply chain executives, as the industry gains a greater conceptual understanding of the real costs of supply chain disruptions, combined with recent incidents such as the Mattel toy recall disaster and Boeing’s massive Dreamliner delays have reinforced the point.
Companies have also realised that in order to survive they need to change according to the market. The strength that they can boast of today may become a weakness tomorrow. This point can be made clearer by the example of State Bank of India which at one point in time boasted of its large amount of branches, but with the advent of internet banking these same branches have now become liability. In today’s business change is the only constant.
Some of the issues due to which organizations are not able to successfully integrate and monitor their supply chains are:

Lack of a balanced approach
Many companies have realized the importance of financial and non-financial performance measures. However, they failed to understand them in a balanced framework. While some managers and researchers have concentrated on financial performance measures, others have concentrated on operational measures. Such an inequality fail to create a metric that can present a clear picture of the organizational performance. For a balanced approach, companies should bear in mind that, while financial performance measurements are important for strategic decisions and external reporting, day to day control of manufacturing and distribution operations is better handled with non-financial measures.
Another area where inequality persists is deciding on the number of metrics to be used. Quite often, companies have a large number of performance measures to which they keep on adding based on suggestions from employees and consultants, and fail to realize that performance measurement can be better addressed using a few metrics which are able to measure the activities specific to our firm.

Lack of a clear distinction between metrics at strategic, tactical, and operational levels
 Metrics that are used in performance measurement influence the decisions to be made at strategic, tactical, and operational levels. However, we fail to come across any such classification for supply chain management. Using a classification based on these three levels, each metric can be assigned to a level where it would be most appropriate. For example, in dealing with inventory, it would be most suitable to assess it from an operational point of view where day-to-day inventory level can be measured and monitored. Therefore, it is clear that for effective management in a supply chain, measurement goals must consider the overall supply chain goals and the metrics to be used. These should represent a balanced approach and should be classified at strategic, tactical and operational levels, and be financial and non-financial measures, as well.
Supply chain performance affects the ability to provide customer value, especially in the most basic dimension of availability of products, so need to develop independent criteria to measure it. To test and reveal the viability of strategies without which a clear direction for improvement and realization of goals would be highly difficult

Supply Chain Operations Reference Model
 The supply chain operations reference model has been developed by the management consulting firm PRTM, which is now a part of Price Waterhouse Coopers. This model has been endorsed by Supply Chain Council (SCC). This model is the basis for all supply chain management. SCOR enables users to address, improve, and communicate supply chain management practices within and between all interested parties in the extended enterprise. SCOR is a management tool, spanning from the supplier's supplier to the customer's customer. The model has been developed by the members of the Council on a volunteer basis to describe the business activities associated with all phases of satisfying a customer's demand.
The metrics in this framework provide a solid foundation for measuring performance and identifying priorities, the processes are the common language in any supply chain operation.
Most of the important matrices used to measure performance of supply chain are given in the following table:
Supply Chain Reliability
On-time delivery
Order fulfilment lead time
Fill rate
Perfect order fulfilment
Supply chain response time

Upside production flexibility
Supply chain management cost
Warranty cost as percentage of revenue
Value added per employee
Total inventory days of supply
Cash-to-cash cycle time
Net asset turns

  3. Measures and Metrics: Links of an Integrated Supply Chain

Now let us discuss various measures and metrics that can be used to evaluate the performance of a supply chain. Before that we should look at the steps involved in a basic ordering process:
  • The first activity to begin with is to procure orders.
  • Once orders are planned and the goods sourced, the next step is to make/ assemble them.
  • The link in a supply chain that directly deals with customers is the delivery of goods or services. ‘Driver of customer satisfaction’.
This can easily be represented using the following diagram.

Now let us look at some of most appropriate metrics that can be used to measure the performance of a supply chain.

3.1 Performance Evaluation of Planned Order Procedures

For any firm, the first activity to begin with is to procure orders. It is obvious that the way the orders are generated and scheduled determines the performance of downstream activities and inventory levels. Hence, the first step in assessing performance is to analyse the way the order-related activities are carried out. To do this, the most important issues such as the order entry method, order lead-time and path of order traverse need to be considered. The details of these are discussed below:
  • The Order Entry Method
Determines the way and the extent to which the customer specifications are converted into useful information, and are passed down along the supply chain.
  • Order Lead-Time
Refers to the time,which elapses between the receipt of the customer’s order and the delivery of the goods important measure as well as a major source of competitive advantage directly influence the customer satisfaction level.
  • The Customer Order Path
Time spent in different routes and non-value adding activities can be identified, and suitable steps can be taken to eliminate them.

3.2 Supply Chain Partnership and Related Metrics

An efficient and effective performance evaluation of buyer and/or suppliers is not just enough; the extent of partnership that exists between them needs to be evaluated and improved. A strong partnership emphasizes direct, long-term association, encouraging mutual planning and problem solving efforts. Recently, buyer-supplier partnership has gained a tremendous amount of attention from industries and researches. Many of the studies done in the recent times stress the partnership for better supple chain operation throughout the organisation.
Now the most important question becomes how we evaluate whether a partnership is going to be beneficial for the involved parties. Major criterions used to evaluate partnership are following:
  • Level and degree of information sharing
  • Buyer-vendor cost saving initiatives
  • Extent of mutual co-operation leading to improved
  • The entity and stage at which supplier is involved
  • Extent of mutual assistance in problem solving efforts
 3.3 Production Level Measures and Metrics

Once orders are planned and the goods sourced, the next step is to make/assemble them. The performance of this ‘make/assemble’ step has a major impact on product cost, quality, speed of delivery, and on delivery reliability and flexibility. A san important part of supply chain management, the performance of the production process also needs to be measured, managed, improved, and suitable metrics for it should be established.
  •  Range of Product and Services
    • Wide ranges of products are likely to perform poorly on added-value per employee, speed and delivery reliability. A company with an extensive product portfolio less frequently breeds new products of innovation.
    • This indicates the impact of product range on supply chain performance, and so, it needs to be measured
  • Capacity Utilization
    • It directly affects the speed of response to customers' demand. Hence, by measuring capacity, gains in flexibility, lead-time and deliverability will be achieved.
  • Effectiveness of Scheduling Techniques
    • The effectiveness of this has a significant impact on the performance of a supply chain. e.g., scheduling based on JIT has tremendous influence on inventory levels

 3.4 Measuring Customer Service and Satisfaction
 Since customers are from as far as other corners of the globe, without a satisfied customer, the whole exercise of applying the supply chain strategy could be costly and futile. For effective performance measurement, supply chain metrics must be linked to customer satisfaction. This measurement is needed to integrate the customer specification in design, to set the dimensions of quality, for cost control, and as a feed back for the control of process. The following sub-sections discuss the related performance metrics:
  •  Flexibility
    • Making available the products/services to meet the individual demand of customers.
    • By defining it as a metric and evaluating it, companies can achieve rapid response to meet individual customer requirements
  • The Customer Query Time.
    • Time firm takes for a firm to respond to a customer inquiry with the required information
  • Post transaction measures of customer service
    • Function of a supply chain simply does not end by providing the goods to the customer. The post transaction activities play an important role both as part of customer service, and for valuable feedback for further improvements in the supply chain
    • Service Level compared to competitors.
    • Measuring customer perception of service.
 3.5 Performance Evaluation of Delivery link Supply Chain Finance & Logistics Cost
The financial performance of a supply chain can be assessed by determining the total logistics cost. It is necessary to decide on a broad level of strategies and techniques that would contribute to the smooth flow of information and materials in a supply chain environment. Since logistics cut across functional boundaries, care must be taken during decision making as the cost in one area affects the cost in other areas.
For example, a change in capacity has a major impact on cos s associated with inventory and order processing. What is needed is a trade-off based on a logistics-oriented cost accounting system that will uniquely identify the cost associated with each activity as well as its impact on others. This can readily be combined with customer profitability to make the approach in question a powerful one.
Following are the measures that can be used for evaluation here:
  • Measures for Delivery Performance Evaluation
    • Delivery-to-request date
    • Delivery-to-commit date
    • Order fill lead-time
  • Total Distribution Cost
    • Designing efficient and cost-effective distribution systems is vital.
    • Hence, a thorough understanding and a good performance evaluation of total distribution costs are essential.
  • Cost associated with Assets and ROI
    • Supply chain assets include accounts receivable, plant, property and equipment and inventories.
    • Average no. of days required to transform the cash invested in assets into the cash collected from a customer.
  • Total Inventory Cost
    • Traditionally perceived as a buffer in production to cope with uncertainties actually emerged to be one of the reasons for the increase in lead-time.
    • Accuracy of forecasting techniques.
4 . Performance Measures

Performance measures can be broadly divided in financial and non-financial measures. These are:
Financial measures
  • Raw material and other acquisition costs
  • Facilities investment costs
  • Direct and indirect manufacturing costs
  • Direct and indirect distribution costs
  • Inventory holding costs
  • Transport costs- inbound and outbound
  • Activity based costs like material handling, assembling, outsourcing etc
  • Costs due to customer returns/ rejects/ replacements
  • Ratio of net sales to assets employed
 Non-financial measures
  • Customer satisfaction levels, periodic customer surveys
  • Conformances to agreed performance (quality specs, quantity, schedule etc.)
  • Inventory level (days of sale)
  • Cash to cash cycle time (days of receivable and days of inventory less days of outstanding payables)
  • Lead times- production, procurement.
  • Cycle times- production, procurement, customer order fulfillment.
5. Strategic Implications
From over all discussion we can conclude that company should make high level strategic supply chain decisions complying with the following criterion:
  • The decisions should be relevant to whole organization
  • The decisions should reflect overall corporate strategy
This strategy influences the following:

Product Development:
While deciding on the type of products that the company want to manufacture, the senior management has to follow a strategic direction. As product cycles goes into decline stage or the sales of a particular product fails, the management has to take some hard decisions of discontinuing the product or introducing a new version of the same product or introduce a new range of products or services.
A single company can never cater to the needs of all the customers. While formulating the corporate strategy, company’s has to identify their core competency and choose a customer segment that they can cater to with their products and services.
Manufacturing decisions include the decisions that have to be made with regards to the manufacturing infrastructure and technology that is required. The way in which a product is manufactured depends upon a very high level of forecasting and sales estimates. The new decisions might include new manufacturing facilities to be built or to increase production at existing facilities.
Companies also have to decide up on the strategic supply chain policies with its vendors. Strategically, there are a number of ways in which a company can increase profits by having a increased bargaining power with their vendors in deciding upon the supply chain strategies. But these decisions should be in correspondence with the corporate strategy of the company. If a company has quality as its prime focus then the supply chain policies with the vendors should also be framed accordingly.
Strategic decisions are required in deciding the number of warehouses, their location, aggregation, distributor networks, mode of transportation etc. Order fulfillment is the ultimate goal that the company wants to reach. The design and operation of the network has a significant influence on the performance of the supply chain.

This article was submitted by Subhash Kumar. He is an Electrical Engineer from B.I.T. Sindri (Dhanbad). He has worked with Tata Motors Limited for 5 years, his interests are Supply Chain and Operations. Subhash can be reached at  pgp13098.subhash@iimraipur.ac.in

1 comment:

  1. This blog was... how do you say it? Relevant!! Finally I have found something which helped me.
    Thanks a lot!

    Supply Chain Performance