Measuring Supply Chain Performance

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Supply Network and Value Chain for a Manufacturing Company

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POPULAR SAYING

“Anything measured improves.”

“What you measure is what you get.”

“Anything measured gets done.”

“You can’t manage what you do not measure.”

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Importance of performance measurement

Measurements are important for directly controlling behaviour and

indirectly performance of system.

Tracks company’s progress towards achieving its supply chain

improvement objectives

Be careful :

Seemingly relevant, but cumbersome, measurements are of little use, and

are possibly a hindrance, in helping to improve supply chain performance

Picking the wrong measures and leaving out important ones could lead to

supply chain performance degradation

Driving a supply chain based only on after the-fact measures e.g. losing an

important customer or having poor financial performance is not very

effective

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Why Financial accounting measure not sufficient?????

The measures do not relate to important strategic, non-

financial performance, like customer service/ loyalty

and product quality.

The measures do not directly tie to operational

effectiveness and efficiency.

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Supply Chain Performance Measurement Approaches

The Balanced Scorecard

The Supply Chain Council’s SCOR Model

The Logistics Scoreboard

Activity-Based Costing (ABC)

Economic Value Analysis (EVA)

Balanced Scorecard & Its

Applications

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BSC Hall of Frame: Success Story One

Bob McCool became head of Mobil NAM&R in 1992 when the past performance was not acceptable. Mobil launched its Balanced Scorecard project in 1994.

From 1994 to 1998. The productivity strategy created a 20-percent reduction in the cost of refining, marketing, and delivering a gallon of gasoline.

The growth strategy, with its new value proposition for targeted segments, produced increased customer satisfaction led to increased revenue that exceeded industry averages by more than 2 percent per year. Kaplan and Norton, 2001

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BSC Hall of Frame: Success Story Two

Chrysler Group, the US automobile

division of DaimlerChrysler, which faced

a forecast loss of $5.1 billion in 2001.

The division brought in a new CEO, who

used the BSC to communicate a

turnaround strategy.

Despite continued weakness in the US

automobile market, Chrysler generated

$1.9 billion in profits in 2004.Kaplan and Norton, 2006

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BSC: Strategic Measuring for Performance (Robert S. Kaplan & David P. Norton)

Four Management Functions : Planning, Organizing, Staffing, Controlling

If you can’t measure, you can’t managedIf you can’t measure, you can’t improved

What gets measure, gets done

Measurement is core of the Balanced Scorecard

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The Balanced Scorecard expands the set of business unit objective beyond summary financial measures.

Balanced Scorecard is a set of measures that give top managers a fast but comprehensive view of the business.

A set of cause-and-effect performance measures linkage among four distinct perspectives— finance, customer, internal business process, and learning & growth —used to translate strategy into desired results.

The main focus of initial Balanced Scorecard is as an innovative strategic measurement tool, delivering strategy by emphasising control and communication.

Balanced Scorecard (BSC)

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Financial Perspective

• Objectives• Key Performance Indicators• Targets• Initiatives

STRAEGY

Innovative Learning & Growth Perspective• Objectives• Key Performance Indicators• Targets• Initiatives

CustomerPerspective

• Objectives• Key Performance Indicators• Targets• Initiatives

Internal business/ Process Perspective• Objectives• Key Performance Indicators• Targets• Initiatives

Balance Scorecard Perspectives

Kaplan and Norton, 1996

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Four Perspectives of BSC

Financial: What are our shareholders expectations for financial performance?

Customer: To each our financial objective, how create value for our customers?

Internal Process: What processes must we excel at to satisfy our customers and shareholders?

Innovative Learning & Growth: How do we align out intangible assets—people, systems, and culture—to improve the critical processes?

Kaplan and Norton, 2006

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What is Financial Strategy? [to satisfy shareholders]

Productivity strategyImprove cost structure/yieldsIncrease asset utilization

Growth strategyExpand revenue opportunitiesEnhance customer Value

How to reach the financial goals?

Financial Perspective

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Financial Perspective

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Performance Measures in Financial Perspective

Return on investment

Sales growth rate by segment

Percentage revenue from new product, service, or customer

Share targeted customer an account

Customer and product line profitability

Revenue/employee Cost reduction rate Unit cost Payback Return on Capital

Employed Working capital

ratios (cash-to-cash cycle)

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Information about market & customer

Customer selection, acquisition, retention & growth

Who are profitable customers? — Target Segmentations

What do they need? [same as the thing we serve them]— Customer Values Propositions

Lead Time Quality – defect level of incoming product as

perceived and measured by customer, accuracy of company delivery forecast

Performance and service Cost

Customer Perspective

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Performance Measures in Customer Perspective

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Performance Measures in Customer Perspective

Market Share: Reflects the proportion of business in a given

market (in term of number of customer, dollar spent, or unit volume sold) that a business unit sells.

Customer Acquisition: Measures, in absolute or relative, the

rate at which a business unit attracts wins new customers or business.

Customer Retention: Measures, in absolute or relative, the rate

at which a business unit retains or maintains ongoing relationships with its customers.

Customer Satisfaction: Assesses the satisfaction level of

customers along specific performance criteria within the value proposition.

Customer Profitability: Measures the net profit of a customer,

after allowing for the unique expenses required to support customer.

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Internal Process Perspective

In order to serve customers’ need and satisfy other stakeholders, what process the organization need to be excellent. The nature of the customer value proposition

determines the kind of internal processes

How to build excellent process to serve customer and other stakeholders.

Managers need to focus on those critical operations that enable them to satisfy customers need

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Internal Process Perspective

Production Management Processes Customer Management Processes Regulatory & Social processes

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Production management processes

Developing and sustaining supplier relationships

Producing products and services Distributing and delivering products

and services to customers Managing risks

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Customer management processes

Customer selection Customer acquisition Customer retention Customer growth

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Regulatory & social processes

Environment: Issues such as energy and resource consumption, and emissions into the air, water and soil

Safety and health: Safety hazards to employees

Employment practices: Diversity of employees

Community investment: Community-based organizations

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Performance Measures in Internal Process Perspective

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Performance Measures in Internal Process Perspective

Quality Response time Cost Yields Waste Scrap Productivity

Rework New product

introduction Service error rate Product

development cycle Hours with

customer Time to market Employee skill

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Innovative Learning & Growth Perspective

What competencies the organization need in order to obtain or sustain competitiveness? Competencies’ Gap Analysis

How to fill the gap between ‘what organization what to be’ and ‘its current position’ Competencies, Employee Satisfaction and

Retention Management Information System Corporate Culture and Motivations

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Innovation processes

Identifying opportunities for new products and services

Managing the research and development portfolio

Design and developing the new products and services

Delivering the new products and services into the market

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Learning & Growth Perspective

Human Capital —E mployees' skills, talent, and knowledge.

Organization Capital —C ulture, le adership, employee alignment, teamwo

rk, and knowledge management Information Capital — Databases,

information systems, network, and tech nology infrastructure

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Performance Measures in Learning & Growth Perspective

Employee satisfaction Employee retention/turnover rate Employee productivity Information system availability Personal Goals Alignment Index Staff development

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Innovation and Learning Perspective

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Key Performance Indicators

Derived from strategy Clearly defined/explicit purpose Mixed performance driver and

outcome measures Optimum number of measures (from

15 to 25 measures)

Construct Strategy Map (causal model—cause-and-effect relationships)

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Characteristics of good performance indicators

Relevant Accurate Understandable To measure things that can be

measured within certain time. Comprehensive Vs The main

things

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How to set targets

Stretch Target Benchmarking – External or Internal Stakeholders requirement Capacity

Incremental Target Comparing with baseline/last year

Baseline Target Natural number/Normal rate

Theoretical targets

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Contribution of BSC

Provide information to management and create accountability

Influence behaviors Facilitate development (learn and

adapt) Achieve goal congruence and make a

system self-correcting Encourage continuous improvement

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Implement Plan for Performance measurement System

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How to use the Balanced Scorecard

Strategic Measurement Systems

Framework for Implementing Strategy

Strategic Management System

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BSC Strategic Measurement Systems

Strategy

Key Performance Indicators

Targets

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BSC Framework for Implementing Strategy

Strategy

KPIs & Targets

Initiatives & Resources

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BSC Strategic Management System

BSC & KPIsBSC & KPIs

ImplementationImplementation

Strategic Learning

Performance Performance ReportReport

QuarterlyQuarterly

YearlYearlyy

Strategic Initiatives Strategic Initiatives & Resources& Resources

StrategyStrategy

Supply Chain Operations

Reference Model (SCOR)

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Supply Chain Operations Reference Model (SCOR)

SCOR: Integrates Business Process Reengineering,

Benchmarking, and Process Measurement into a cross-functional framework.

Benchmarking Best Practices Analysis

Process Reference Model

Business Process Reengineering

Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results

Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results Characterize the

management practices and software solutions that result in “best-in-class” performance

Characterize the management practices and software solutions that result in “best-in-class” performance

Capture the “as-is” state of a process and derive the desired “to-be” future state

Capture the “as-is” state of a process and derive the desired “to-be” future state

Capture the “as-is” state of a process and derive the desired “to-be” future state

Capture the “as-is” state of a process and derive the desired “to-be” future state

Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results

Characterize the management practices and software solutions that result in “best-in-class” performance

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Supply Chain Operations Reference Model (SCOR)

The Primary Use of SCOR:To describe, measure and evaluate supply chain configurations.

SCOR contains:Standard descriptions of management processesA framework of relationships among the standard processesStandard metrics to measure process performanceManagement practices that produce best-in-class performance

Enables the companies to:Evaluate and compare their performances with other companies effectively Identify and pursue specific competitive advantagesIdentify software tools best suited to their specific process requirements

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Supply Chain Operations Reference Model (SCOR)

The SCOR Model approach advocates a set of supply chain performance measures comprised of a combination of:

Cycle time metrics (e.g., production cycle time and cash-to-cash cycle)

Cost metrics (e.g., cost per shipment and cost per warehouse pick)

Service/quality metrics (on-time shipments and defective products)

Asset metrics (e.g., inventories )

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Supply Chain Operations Reference Model (SCOR): Boundaries

SCOR spans:• All customer interactions, from order entry

through paid invoice.• All product (physical material and service)

transactions, from supplier’s supplier to customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.

• All market interactions, from the understanding of aggregate demand to the fulfillment of each order

Supplier’sSupplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliverSource

Customer’s Customer

Plan

Supplier (Internal or External)

Your Company

Customer (Internal or External)

ReturnReturn ReturnReturn

ReturnReturn

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Supply Chain Operations Reference Model (SCOR): Boundaries

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Operation domain KPI’s

Source 1) Inward Material Quality

  2) Quantity and Timely Delivery

  3) Procurement Unit Cost

  4) Material Inventory Level

  5) Vendor Development Capability

Plan 1) Adherence to Production Target

  2) Sample Conversion Rate

  3) Material Utilization

  4) Cost Adherence

Make 1) Capacity Utilization

  2) Production Cost Efficiency

  3) Quality Capability

  4) Change Over Time

  5) Operator Training Effectiveness

Deliver 1) On Time Shipment

  2) Order Fulfillment

  3) Claims and Discounts

  4) Quality at Delivery

  5) Transit time

The Logistics Scorecard

successfully implemented in a variety of industries and

organizations including:

Coca-Cola, Honda, Pepsi-Cola, and Walt Disney World.

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The Logistics Scoreboard

The Logistics Scoreboard is an integrated set of performance measures falling into the following general categories:

Logistics financial performance measures (e.g., expenses and return on assets )

Logistics productivity measures (e.g. orders shipped per hour and transport container utilization)

Logistics quality measures (e.g., inventory accuracy and shipment damage )

Logistics cycle time measures (e.g., in transit time and order entry time)

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The Logistics Scoreboard is prescriptive and

actually recommends the use of a specific set

of supply chain performance measures.

These measures, however, are

skewed toward logistics, having limited focus

on measuring the production and

procurement activities within a supply chain.

The Logistics Scoreboard

Activity Based Costing

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Activity Based Costing

The method involves:

breaking down activities into individual tasks or cost

drivers,

while estimating the resources (i.e., time and costs)

needed for each one.

Costs are then allocated based on these cost drivers

rather than on traditional cost-accounting methods,

such as allocating overhead either equally or based on

less-relevant cost drivers.

This approach allows one to better assess the true

productivity and costs of a supply chain process.

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1. Identify and classify each activity. Estimate the

cost of resources for each activity.

2. Identify a cost driver for each activity and

estimate the quantity of each cost driver.

3. Calculate an activity cost rate.

4. Assign costs to cost objects based on the level of

activity required to make the product or provide

the service.

To implement ABC, managers:

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Cost Hierarchy

Many companies use a cost hierarchy to

manage the assignment of activity-

based costs to the level at which costs

are incurred.

A cost hierarchy for a manufacturer

typically has four levels:

1. Unit level.

2. Batch level.

3. Product level.

4. Facility level.

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Unit-Level Activities

Unit-level activities are performed each

time a unit is produced.

These activities vary with the number of

units produced. Insertion of a component during assembly.

Examples: assembling engine

subassemblies, connecting engines to car

frames

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Batch-Level Activities

Batch-level activities are performed

each time a batch of goods is

produced. These activities vary with the number

of batches prepared.

Examples: setup, scheduling, and

materials handling.

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Product-Level Activities

Product-level activities are

performed to support the diversity of

products in a manufacturing plant. Examples: implementing engineering

change notices,

redesigning the installation process.

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Facility-Level Activities

Facility-level activities are

performed to support a facility’s

general manufacturing process. Examples: lighting the manufacturing

plant,

Security of the manufacturing plant,

insuring the manufacturing plant.

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Sample Activities in Cost Hierarchies

Activity LevelCar Manufacturer:Engine Installation

Direct Mail Service:Preparing BankCustomer Mailing

Unit level Install engineTest engine

Print and fold letterInsert letter and other information into envelopeSeal and meter envelope

Batch level Set up installation processMove engines

Retool machinesVerify correct postageBill client

Product orservice level

Redesign installation process

Train employeesDevelop and maintain computer systems and databases

Facility oroperations level

Provide facility management, maintenance, lighting, security, and space

Provide facility management, maintenance, lighting, security, and space

Inspect engines

Economic Value Added

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Economic Value Added

Criticisms of traditional accounting is that it

focuses on short-term financial results like

profits and revenues, providing little insight into

the success of an enterprise towards generating

long term value to its shareholders – thus,

relatively unrelated to the long-term prosperity

of a company.

EVA estimates the increase in value of

shareholder when a company earns more than

its cost of capital

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Possible Supply Chain Performance Measures

Customer Service Measures

Process, Cross-Functional Measures

Purchasing Related Measures

Order Fill Rate Line Item Fill RateQuantity Fill RateBackorders/stockoutsCustomer satisfaction% Resolution on first customer callCustomer returns Order track and trace performanceCustomer disputes Order entry accuracy Order entry times

Forecast accuracyPercent perfect ordersNew product time-to-marketNew product time-to-first makePlanning process cycle timeSchedule changes

Material inventories Supplier delivery performance Material/component quality Material stockoutsUnit purchase costsMaterial acquisition costs Expediting activities

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Extended Enterprise Measures

Manufacturing Related Measures

Logistic Related Measures

Total landed cost Point of consumption product availabilityTotal supply chain inventory Retail shelf displayChannel inventories EDI transactionsPercent of demand/supply on VMI/CRP Percent of customers sharing forecasts Percent of suppliers getting shared forecast Supplier inventoriesInternet activity to suppliers/customersPercent automated tendering  

Product qualityWIP inventoriesAdherence-to-scheduleYieldsCost per unit produced Setups/Changeovers Setup/Changeover costsUnplanned stockroom issuesBill-of-materials accuracyRouting accuracyPlant space utilizationLine breakdownsPlant utilization Warranty costsSource-to-make cycle timePercent scrap/reworkMaterial usage varianceOvertime usageProduction cycle timeManufacturing productivityMaster schedule stability

Finished goods inventory turnsFinished goods inventory days of supplyOn-time delivery Lines picked/hourDamaged shipmentsInventory accuracyPick accuracy Logistics costShipment accuracyOn-time shipment Delivery timesWarehouse space utilization End-of-life inventoryObsolete inventoryInventory shrinkageCost of carrying inventoryDocumentation accuracyTransportation costsWarehousing costsContainer utilizationTruck cube utilizationIn-transit inventories Premium freight chargesWarehouse receipts

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Administration/Financial Measures

Marketing Related Measures

Other Measures

Cash flow IncomeRevenuesReturn on capital employedCash-to-cash cycle time Return on investmentRevenue per employeeInvoice errorsReturn on assets

Market sharePercent of sales from new products Time-to-marketPercent of products representing 80% of salesRepeat versus new customer sales

APICS trained personnelPatents awarded Employee turnoverNumber of employee suggestions

Possible Supply Chain Performance Measures

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