DPS 301: SUPPLY CHAIN

MANAGEMENT
TOPIC SIX: MEASURING SUPPLY CHAIN
PERFORMANCE
At the end of this lecture you will be able to:
•Define the terms measurement and performance
•Identify the forms of Performance measurements
•Discuss the Key Performance Indicators (KPIs)
•Tools used in measuring performance
•Explain the need/ importance of measuring supply chain
performance in an organization
•Definitions
•Measurement
•Refers to evaluation of what has been set out e.g. objectives, standards
and targets in its specific nature.
•Measurements are criteria used to gauge results.
•It means evaluation of something.
Performance
•This implies measuring how well a particular activity has been
performed/carried out
•Performance is grading how somebody or something is doing or fairing
•It is objective in nature e.g. giving a score of good, bad, fair, excellent
etc.
•Reasons for supply chain performance measures
•Most organizations are operating in a very unstable environment i.e.
dynamic and volatile state.
•The causes of unstable environment include:
•Stiff competition
•Technology change
•Lifestyle or change in customer preferences.
•Political influence
•Economy
• Performance Measurement
◦Does the organisation understand which metrics are critical, or is it
still measuring everything it possibly can?
◦Does it know the (economic) value of the information it would
gain? Can it do a cost-benefit analysis?
◦How would having the information impact its decision processes?
• Problems with Performance Measurement
•The organisation chooses measures that do not link to its strategy, or
that stop relating to its strategy when its strategy changes
•The measures have little meaning for the people who are supposed
to drive them
•There are too many measures, the exercise lacks focus and creates
too much data
•There are not enough measures, some critical information is missed
•Measures focus on the organization's current state – some backwards-
looking (lagging) and forwards-looking (leading)
• Performance Measurement Culture
◦Accountability: People should only be measured on those things they can
change and control.
◦Deification: Metrics are tests, they should never be objectives.
◦Burying the bad news: Metrics will not work unless they promote
objectivity, which means accepting the bad with the good.
◦Delegating responsibility: Performance is everyone’s concern. Everyone
needs to have scientific thought processes; to be able to test theories and
assumptions for whatever truth they may contain.
◦Putting the technology first: It is not the tools that matter, but the things
that they make.
◦Neglecting to respect researchers and analysts: They need to be thought
leaders within the organisation.
• Forms of Performance Measurement
•For performance management to be realistic the following conditions
must be achieved:
•Targets must be set at individual, department or corporate level.
•Targets should give directions along which to operate.
•achieved.
Targets should assist to know whether objectives have been

N.B. In performance management these targets are known as KPIs.

•Key Performance Indicators (KPIs)
•This is a mechanism of evaluating performance against set targets.
•KPIs are clear qualitative or quantitative statements which define
adequate or desired performance in key areas (Critical success
factors) and against which progress and performance are measured.
•KPIs express abstract supply chain objectives in a
financial/physical unit for the purpose of comparison. These
objectives must be SMART.
•Data or information relating to various processes, functions or
activities is assembled, quantified and transformed into
physical/financial information.
•They are used to compare results often against benchmarks
•Supply Chain Measurement: Example
•KPI: To improve supplier delivery performance by 5% p.a.
•i.e. suppliers delivery performance is equal to number of orders
delivered at a given time divided by the total number
• of orders at that time multiplied by 100%.
•E.g. XY limited ordered 200, 000 tons of sugar from its suppliers
who then delivered 150,000 tons after the specified period of time.
•Determine the supplier delivery performance:
= number of orders delivered at a given time X100
Total number of orders at that time
= 150,000 X100=75%
200,000
•Performance measurements of the functions of
•procurement department:
•The procurement department has 3 basic functions:
i.Contribute to the profitability of the organization.
ii.Manage the basic purchasing workload.
iii.To develop the purchasing infrastructure and competence.
•Performance measurement is developed on the basics of the above
mentioned functions to determine how they can
• be performed right.
• Some of the KPI’s (Key performance Indicators) include:
a.Service to customers.
i.Delivery.
ii.Quality
•Examples of Key Performance Indicators
• Inventory:- indicators are:
• Holding economy in stock.
• Ordering process.
• Stock out.
• Distributions.
• Cost of holding stock etc.
• Savings:- indicators include
• Price savings.
• Price avoidance.
• Price increase.
• Added value savings.
•Supply Chain Performance measurements:

• S.C.P measures can be classified into 2 categories:

• Qualitative measures (such as customer satisfaction and product
quality)
•
Quantitative measures (such as delivery, resource utilization,
.

order to delivery lead time, performance, customer service level

etc..)
•Quantitative measures of supply chain performance can be classified
into non-financials and financials.
•Non-financials:
•This includes inventory level, cycle time, resource utilization,
customer service level.
•
For supply chains, the processes of interest are the supply chain
process and the order to delivery process.
Non-Financial:
Lead Time:
• In most cases, 2 types of lead times are considered i.e. supply chain
lead time and order to delivery lead time.
• The order to delivery lead time is the time elapsed between the
placement of an order by a customer and delivery of the goods to the
customer.
• The supply chain process lead time is the time spent by the supply
chain to convert the raw materials into final product plus the time
needed to reach the product to the customers it thus includes
supplier lead time, manufacturing lead time, distribution lead time
and logistics lead time for transport of materials.
Non-Financial:
Customer service level:
• In supply chain is a function of several different performance indices
for example order fill rate, which is the:
• 1. Fraction of customer demands that are met from stock. For this
fraction of customer orders, there is no need to consider supplier lead
time and man. lead time. The order fill rate could be with respect to
central warehouse or field warehouse or stock at any level in the
system.
• 2. Stock out rate is compliment of fill rate and represents the fraction
of orders lost due to stock outs.
• 3. Backorder level is the number of orders waiting to be filled.
Non-Financial:
• N/B: To maximize customer service level, one needs to maximize order
fill rate, minimize stock out rate minimize backorder level.
Inventory levels.
• There is need to carry just enough inventory to satisfy customer
demands since inventory carrying costs contribute positively to total
costs in an organization.
• Inventories held in a supply chain can include the following raw
materials, WIP (unfinished and semi finished parts) finished goods
inventory and spare parts.
• Each type of inventory is held for different reasons and there is need
to keep optimal level of each type of inventory.
Non-Financial:
Resource Utilization
• A supply chain network uses different kinds of resources for examples
manufacturing resources, storage resources, logistics, human
resources and financial resources.
• The objective are to utilize these resources or assets efficiently so as
to maximize customer service levels and minimize lead times.
Financial Performance Measures:

• Those that tell us how well the organisation is being run e.g.
profitability and cashflow
• Those that describe how well the organisation is doing for its owners
e.g. shareholder value
Financial Objectives:

• The shareholder concept : the purpose of the organisation is to maximize its

value for its owners.
• Sales maximization : organisations should maximize sales or revenues rather
than profits
• Managerial income : the point is to further the interests of the people who run
the organisation rather than those who own it
• Consensus : the organization's financial performance needs to satisfy a ‘basket’
of different stakeholders each with different objectives
• Wealth maximization : the organization's purpose is to maximize its own value
or wealth
• Best practice : running the organisation so that it is the best it can be, whatever
the concept of ‘best’ encompasses
Financials :
• The major aim of supply chain is to maximize the revenue by keeping the supply
chain costs low.
• The financial performance of a supply chain can be evaluated by looking at the
following items:
• Cost of raw materials.
• Revenue from goods sold.
• Activity based costs.
• Transportation costs.
• Penalties for incorrectly filled/late orders delivered
• Costs of goods returned by customers.
• Credits for goods returned to suppliers.
• Inventory holding costs.
• Costs of expired/perishable goods.
Measures of Supply Chain Performance :

• Percentage mark-up on products in cost recovery system

• ◦Percentage of average international reference price paid
• ◦Ratio of unit prices paid through ad hoc procurement to those
through systematic processes
• ◦Fixed order cost
• ◦Total supply cost
• ◦Value of unusable stock
• ◦Average response cost
• ◦Average transportation cost
• ◦Ratio of transportation cost to value of product
Value for Money Principles :

• Economy - securing resources for the least possible cost

• Efficiency - getting the maximum possible output from the available
inputs
• Efficiency is measured in terms of how economically the organizational
resources are utilized in providing a given level of stakeholder/customer
satisfaction. i.e. it focuses on cost reduction measures in an
organization.
• Effectiveness - the extent to which declared goals are met
• Effectiveness is measured by the extent to which stakeholders or
customer requirements are met over time.
Developing a Performance Measurement System :

• Step 1determine which areas to measure

• Step 2establish performance measures
• Step 3establish standards for comparison
• Step 4monitoring
• Step 5evaluation
• Step 6implement improvement actions
RADAR as an assessment tool :

• Results - what the organisation achieves.

• Approach - what is the organisation trying to do in order to address
the issues?
• Deployment - how widely is the approach used across the
organisation?
• Assessment - does the organisation ever consider how appropriate
the approach is?
• Review - can and does the organisation measure the success of the
approach?
Kaplan and Norton’s Balance Score Card :
A purchasing Score Card :
The Supply Chain Operations Reference (SCOR) :

• Model is a framework for understanding the scope of SCM based on five

basic functions:
• 1.Plan:developing a strategy that balances resources with requirements.
• 2.Source: procuring ‘raw’ goods and services to meet planned or actual
demand.
• 3.Make: transforming goods and services to a finished state to meet
demand.
• 4.Deliver:managing orders, transportation, and distribution to provide the
goods and services.
• 5.Return: customer returns, maintenance, dealing with excess goods.
SCOR Performance Attributes :

• Reliability: the ability to perform tasks as expected, ie the predictability of

a process’s outcomes
• Responsiveness : the speed at which tasks are performed, for example
cycle-time metrics
• Agility: the ability to respond to external influences and to change
• Costs : i.e. the cost of operating the process, including labour, material
and transport
• Assets : the ability to efficiently utilize assets, which covers inventory,
utilization and outsourcing decision
• NB: The 1st 3 attributes are qualitative, the others quantitative
Benchmarking :

• Definitions
• ◦Process of identifying ‘best practice’ in relation to both products and
the processes by which those products are created and delivered.
• ◦Using measures of another organization’s performance to judge
one’s own performance.
• ◦Comparing the performance of one organization to the others in
order to adapt best practice oriented continuous improvement in the
organization.
• ◦It is a tool for performance measurement through comparison and
analysis of performance data.
Objectives of Joint Performance Appraisal :

• To recognize the impact of buyer-side processes and behaviors on the

performance, efficiency and sustainability of the supply chain
• To identify problems within the buyer-supplier relationship that may
impair the performance of either party, with a view to collaborative
problem resolution
• To support long-term value-adding relationships, by ensuring mutual
advantage and the equitable sharing of relationship risks and rewards
• To encourage collaboration on continuous measurable improvements
in supply chain performance and relationship satisfaction
Importance of Performance Management in SCM :

• Most businesses set the plans which begin with both a mission
statement and then set a plan of how the business will be managed
overtime. Business management matters are led by strategic plans
which are developed by tactical and operational managers.
1.Performance measurements helps top management to be aware of
the progress that the organisation and supply chain is making in
contributing to overall strategic goals of the organization.
2.Performance management systems provide an effective framework
for management decision making.
Importance of Performance Management in SCM Cont.

3.Performance management facilitate all directional and cross

functional performance focused communication through the
organization and the supply chain
4. Performance measures direct the behavior of the members of the
organization and supply chain in pursuit of desired goals
5. Effective performance management fosters innovation and
improvement
6. Performance measures help organizations and supply chains to
evaluate their competitive positioning and capabilities
Importance of Performance Management in SCM Cont.

7. It will also help the purchasing department to identify the areas of

greatest impact and focus the effort on it e.g. identifying products or
supplies with the greatest amount of expenditure incurred and find ways
of reducing the amount.
8. The purchasing management will be able to intervene and provide
support if the expectation against any particular performance does not
go as planned.
9. It will also ensure that customers are satisfied by improving the service
levels.
10. Performance management in supply chain enables an organization to
achieve competitive advantage.
Thank You!