Chapter 5

MEASUREMENT ALONG THE SUPPLY CHAIN

If you can’t measure, you can’t control

If you can’t control, you can’t manage

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 MEASUREMENT ALONG THE
SUPPLY CHAIN….
• Measurements serve to determine whether
targets have been met & forecasts have been
accurate
• They also help to monitor events that are not
under the control of SC manager but influence
its performance

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 Measurement along the supply
chain….
• Most performance measures used by firms
today continue to be the traditional cost-
based and financial statistics reported to the
shareholders in the form of annual report,
balance sheet, and income statement data.
• Costs, revenues, and profits might at first
glance seem to be useful types of
performance measures but several problems
are associated with using them to gauge
performance (Wisner et al., 2005:437).
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 Measurement along the supply
chain….
• Another problem with the use of Costs,
revenues, or profits as performance measures
is the difficulty, in most cases, to attribute
cost, revenue, or profit contributions to the
various functional units or business units of
the organization.

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 Dimensions of Performance Metrics
• As stated in Langley (2006:484), about key
performance measures for the periods from
1960s to 2000s were as follows:-
1960s 1970s 1980s 1990s 2000s

Production Manufacturing Transportat Distribution and Supply chain

costs and inventory ion Costs Logistics Costs and customer

costs service costs

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 World Class Performance
Measurement Systems
Creating effective performance measurement
system involves the following steps;
1) Identify the firm’s strategic objectives,
2) Develop an understanding of each functional
area’s role and the required capabilities for
achieving the strategic objectives,
3) And identify internal and external trends
likely to affect the firm and its performance
over time
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 World Class Performance
Measurement Systems…
• Several authors tried to identify common
supply chain performance metrics as
summarized in the work of (Wisner et al.,
2005:441) as follows around the following
major dimensions; Cost/Price, Quality,
Delivery , Responsiveness and Flexibility,
Environment, Technology, Business Metrics
and Total Cost of Ownership

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 World Class Performance
Measurement Systems…
• In a major study done by the performance
measurement group from 1995 and 2000, the top
supply chain performers were found to be leading
in a number of areas; These are;
• High levels of responsiveness and flexibility,
• high levels of efficiency,
• use of internet to fundamentally alter
communications among trading partners
• and perfect order fulfillment is becoming the
new definition of reliability
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Time Dimensions Measurement ….

• On-time delivery/ receipt,

• order cycle time ,
• order cycle time variability, and
• response time

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 Quality Dimensions measurement

• Overall customer satisfaction, processing

accuracy, perfect order fulfillment- on-
time delivery, completed order, accurate
product selection- damage – free &
accurate invoice, forecast accuracy,
planning accuracy, budgets and operating
plans, and schedule adherence

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 Supply Chain Performance
Measurement Models
• Trends in Performance
Measurement Development
– Finance Based Performance
Measures
– Example – Cost and Management
Accounting, Activity-based costing,

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 Costs and Management
Accounting
• The common means of monitoring business
performance in today’s industry is based on cost
and management accounting practices.
• These techniques were developed in the late
nineteenth and early twentieth century’s to meet
the needs of expanding manufacturing industries.
• By the 1930s, fully integrated cost and
management accounting systems were
developed, regulated, subjected to independent
auditing and linked to external financial operating
systems

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 Costs and Management
Accounting…
• Johnson & Kaplan argued that: “today’s
management accounting information
driven by the procedures and cycles of
the organizations reporting system are
too late, aggregated, and distorted to be
relevant for managers ’ planning and
control decisions.

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 Activity -Based Costing (ABC)
• A new approach to cost accounting, known as
activity-based costing (ABC), was developed by
Johnson and Kaplan (1987) in the late 1980s as an
attempt to resolve some of the fundamental
inadequacies of traditional cost accounting.
• ABC is concerned with both direct & indirect cost
of activities within a company and their
relationships to the manufacture of specific
products rather than to basic functional areas.

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 Limitations of traditional/finance-
based performance measures….
• By the 1980s there was a growing
realization that the traditional
performance measures were no
longer sufficient to manage
organizations competing in modern
markets.

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 Limitations of traditional measures ….
• They are historical in nature & provide little
indications of future performance and strategic focus;
• They are too aggregated and distorted for long-term
decision -making process;
• They encourage short-term decision making, like
delayed capital investment;
• They do not report accurately the costs of processes,
products, quality, and customers;
• They are not applicable to new management
techniques that give shop -floor operators’
responsibility and autonomy;
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 Limitations of traditional measures ….
• They do not have strategic focus and failure to
provide data on quality, flexibility and responsiveness;
• They do not penalize overproduction and often inhibit
innovation;
• They encourage managers to minimize variance from
standard than to improve continuously;
• They are internally rather than externally focused,
with little regards for competitors or customers;
• They are rarely integrated with one another or aligned
to the business process; and Performance measures
are often poorly defined.

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 Multi-dimensional Performance
Measures (new norm)
• Traditional performance
measurement systems (based on
financial measures) have failed to
identify and integrate all those
factors critical in contributing to
business excellence as mentioned
before.
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 Sink and Tuttle Multi-dimensional Model

• A classical approach to a performance

measurement system is the Sink and Tuttle
model, which claims that the performance of
an organization is a complex interrelationship
between seven performance criteria. These
criteria are effectiveness, efficiency, product/
service quality, productivity, quality of work -
life, innovation and profitability (Sink and
Tuttle, 1989)
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 Medori & Steeple Integrated
Framework
• Medori and Steeple (2000) present an
integrated framework for auditing and
enhancing performance measurement
systems

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 Medori & Steeple Integrated
Framework…
• This approach consists of six detailed described stages
– defining the company’s manufacturing strategy and
success factors.
– match the company’s strategic requirements with six
defined competitive priorities (e.g. product quality, cost,
flexibility, time, delivery and future growth).
– selection of the most suitable measures
– the existing performance measurement system is audited
to identify which existing measures will be kept
– implementation of the measures
– periodic review of the company’s performance
measurement system
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 The Balanced Scorecard Multi-
dimensional Model
• The balanced scorecard (BSC) approach to
performance measurement was developed by
Kaplan and Norton in 1992, as a way to align
an organization’s performance measures with
its strategic plan and goals, thus improving
managerial decision making (Wisner et al.,
2005:444)

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 The Balanced Scorecard Multi-
dimensional Model …
• The BSC is designed to provide managers with a formal framework
for achieving a balance between non financial and financial results
across both short-term and long-term planning horizons.
– Financial perspective: Measures that address revenue growth,
product mix, cost reduction, productivity, asset utilization, and
investment strategy.
– Internal business process perspective: Focuses of performance of the
most critical internal business processes of the organization including
quality, flexibility,
– Growth and Development- innovation and people
– Customer perspective: Measures that focus on customer
requirements and satisfaction including customer satisfaction ratings,
customer retention, new customer acquisition, customer value
attributes, customer profitability, and market share

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 The Supply Chain Operations Reference
(SCOR) Model
• One of the most recognized methods for
integrating supply chains and measuring their
member’s performance is the supply chain
operations reference (SCOR) model developed in
1996 by the Global Supply-Chain Council- a
nonprofit global organization of more than 800
firms interested in supply chain management
(Wisner et al.,2005:446, Langley et al., 2006:495)
• The SCOR model separates supply chain
operations in to five process categories- plan,
source, make, deliver, and return.

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 The Supply Chain Operations
Reference (SCOR) Model …
These Processes are:-
• The plan process – encompasses demand and
supply planning and management which require
balancing resources with requirements and the
establishment and communication of plans for all
other processes in the supply chain which
includes management of business rules, supply
chain performances, data collection, inventory,
capital assets, transportation

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 The Supply Chain Operations
Reference (SCOR) Model …
• The source process- encompasses sourcing stocked,
make – to order and engineer – to order products or
materials which includes, scheduling deliveries,
receiving, transferring, and authorizing vender
payments.
• The make process- encompasses make – to stock,
make – to – order, and engineer – to – order
production which includes scheduling production
activities, issuing product, producing and testing,
packaging, staging, and releasing.

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 The Supply Chain Operations
Reference (SCOR) Model …
– The Deliver process- encompasses
ordering, warehousing, transporting and
installation of stocked, made- to – order
and engineer – to –order products.
– The return process- encompasses the
return of raw materials (to vender) and
receipt of finished goods (returns from
customers).

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 Market Based Supply Chain
Performance Measure
In this case, four measurement categories are
used as indicated below:
1. Customer Service
2. Internal Efficiency
3. Demand Flexibility
4. Product Development

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 [1] Customer Service

Customer service measures the ability of the

supply chain to meet the expectations of its
customers. Depending on the type of market
being served, the customers in that market will
have different expectations for customer
service. Customers in some markets both expect
and will pay for high levels of product availability
and quick delivery of small purchase quantities.

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 Internal Efficiency
Internal efficiency refers to the ability of
a company or a supply chain to operate
in such a way as to generate an
appropriate level of profitability

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 Demand Flexibility
• This category measures the ability to
respond to uncertainty in levels of
product demand. It shows how much of
an increase over current levels of
demand can be handled by a company or
a supply chain

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 Product Development
This encompasses a company and a supply
chain’s ability to continue to evolve along
with the markets it serves. It measures the
ability to develop and deliver new products in
a timely manner. This ability is necessary
when serving developing markets

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 A Framework for Performance
Measurement
[1] Customer Service Metrics
• Service relates to the ability to anticipate,
capture and fulfill customer demand with
personalized products and on-time delivery.
• There are two sets of customer service
metrics depending on whether the company
or supply chain is in a build to stock (BTS) or
build to order (BTO) situation. Popular
metrics for a build to stock situation are:

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 A Framework for Performance
Measurement…
[2] Internal Efficiency Metrics
• Internal efficiency refers to the ability of a
company or a supply chain to use their assets
as profitably as possible:
Inventory value
Inventory turns
Return on sales
Cash-to-cash cycle time
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 A Framework for Performance
Measurement…
 Complete Order Fill Rate and Order Line Item Fill Rate
 On-Time Delivery Rate
 Value of Total Backorders and Number of Backorders
 Frequency and Duration of Backorders
 Line Item Return Rate
 Popular metrics for a build to order situation are:
 Quoted Customer Response Time and On-Time Completion
Rate
 On-Time Delivery Rate
 Value of Late Orders and Number of Late Orders
 Frequency and Duration of Late Orders
 Number of Warranty Returns and Repair
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 A Framework for Performance
Measurement…
[3] Demand Flexibility Metrics
• Demand flexibility describes a company’s
ability to be responsive to new demands in
the quantity and range of products and to act
quickly
• measures of flexibility are:
Activity Cycle Time
Upside Flexibility
Outside Flexibility
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 Demand Flexibility Metrics…

(a) Activity Cycle Time

• The cycle time measures the amount of time it
takes to perform a supply chain activity such
as order fulfillment, product design, product
assembly, or any other activity that supports
the supply chain

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 Demand Flexibility Metrics…

(b) Upside Flexibility

• It is the ability of a company or supply chain to
respond quickly to additional order volume for
the products they carry
(c) Outside Flexibility
• This is the ability to quickly provide the
customer with additional products outside the
bundle of products normally provided.

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 A Framework for Performance
Measurement…
[4] Product Development Metrics
• Product development measures a company or a supply
chain’s ability to design, build, and deliver new
products to serve their markets as those markets
evolve over time
• The ability to keep pace with an evolving market can be
measured by metrics such as:
• Percentage of total products sold that were introduced in
the last year
• Percentage of total sales from products introduced in the
last year
• Cycle time to develop and deliver a new product

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 Thank you
The end of the lecture &
the chapter 5

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