CHAPTER 14PERFORMANCE MEASUREMENT ALONG THE SUPPLY CHAIN

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

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Learning Objectives

You should be able to:– Describe why firms need to measure &

assess performance– Discuss the merits of financial & non-

financial performance measures– List a number of traditional & world-

class performance measures– Describe how the Balanced Scorecard

& the SCOR models work– Describe how to design a supply chain

performance measurement system

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Chapter Fourteen Outline

–Introduction–Viewing the Supply Chain as a

Competitive Force–Traditional Performance Measures–World-Class Performance Measurement

Systems–Supply Chain Performance Measurement

Systems–The Balanced Scorecard –The SCOR Model

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Introduction

“You can’t improve what you don’t measure” – Companies using performance measurement are

more likely to achieve leadership positions & twice as likely to handle a major change successfully.

– Performance measurements vary from company to company.

– World-class status may initially cost more.– Adding several tiers of suppliers & customers

complicates performance measurement.– Performance measures must be visible &

communicated to all members of the SC.

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Viewing the SC as a Competitive Weapon

Understanding End CustomersSupply chains need to look at each segment of the market they serve & determine the needs of those customers.

– Variety of products required– Quantity & delivery frequency needed– Service level desired– Product quality desired– Price of the products

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Viewing the SC as a Competitive Weapon (Cont.)

Understanding SC Partner RequirementsSupply chain strategies must consider the potential trade-offs existing between:

– Cost– Quality– Quantity– Service

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Viewing the SC as a Competitive Weapon (Cont.)

Adjusting SC Member Capabilities– SC members audit their capabilities &

partners’ to determine consistency with needs of end customers & SC.

– Firms & their partners must continually reassess performance with respect to requirements.

– The best SC performers are more responsive to customer needs, quicker to anticipate changes in the markets, & control costs much better.

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Traditional Performance Measures

Traditional Performance Measures– Traditional cost-based information does not

reflect the underlying performance of an organization’s productive systems; costs & profits can be hidden or manipulated.

– Decisions to maximize current stock prices do not necessarily reflect that the firm is performing well.

– Financial performance measures, while important, cannot adequately capture a firm’s ability to excel in these areas.

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Traditional Performance Measures (Cont.)

Use of Organization Costs, Revenue, & Profitability Measures

Problems associated with using costs & profits to gauge performance:

– Uncontrollable environmental forces (e.g., windfall profits that occur when prices rise due to supply interruptions)

– Accurate attribution of cost, revenue, or profit contributions to the various functional or business units

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Traditional Performance Measures (Cont.)

Use of Performance Standards & VariancesEstablishing standards for comparison purposes can be troublesome.

– Employees & managers do whatever it takes to reach the goal

– Shoddy work & “Cooking” the books.

Performance variance- the difference between the standard & actual performance.

– Managers can be pressured to find ways to make up these variances, resulting in poor decisions.

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Traditional Performance Measures (Cont.)

Use of Firm-Wide Productivity & Utilization MeasuresThese measures are useful but have the same problems as revenues, costs, & profits.

– Productivity decisions may actually increase costs & reduce quality.

– Tendency to continue producing & adding to inventory to keep machines & people busy.

– Less time is spent doing preventive maintenance & training for greater performance & profits in future.

– Traditional measures favor the short-term.

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World-Class Performance Measurement SystemsDeveloping World Class Performance Measures

• Identify the firm’s strategic objectives.• Develop an understanding of each functional

area’s role & the required capabilities.• Identify internal & external trends likely to affect

the firm & its performance over time.• For each functional area, develop performance

measures that describe each area’s capabilities.• Document current performance measures &

identify changes that must be implemented.• Assure the compatibility & strategic focus of the

performance measures to be used.• Implement the new performance system.• Periodically reevaluate the firm’s performance

measurement system.

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SC Performance Measurement Systems Performance measurement systems must:

– Link SC trading partners to achieve breakthrough performance in satisfying the end users.

– Overlay the entire supply chain to assure that all contribute to supply chain strategy.

In a successful chain, members jointly agree on a SC performance measurement system.

Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace

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SC Performance Meas. Systems (Cont.)Environmental sustainability-

– Addressing the need for protecting the environment & reducing greenhouse gas emissions as well business & consumer needs

Green supply chain management (GSCM)-– Sharing of environmental responsibility along the SC

such that sound environmental practices predominate, & adverse global environmental effects are minimized.

Carbon footprint- – Supply chains evaluate design configurations and

various options for reducing total carbon emissions

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SC Performance Meas. Systems (Cont.) Supply Chain Performance Measures1. Total SCM costs: cost to process orders; purchase &

manage inventories; & information systems.2. SC cash-to-cash cycle time: Avg. # of days between

paying for materials & getting paid by SC partners.3. SC production flexibility: avg. time required to provide

an unplanned 20% increase in production.4. SC delivery performance: avg. % of orders filled by

requested delivery date.5. SC perfect order fulfillment performance: average %

of orders that arrive on time, complete, & undamaged.6. Supply chain e-business performance: avg. % of

electronic orders received for all SC members.7. Supply Chain Environmental Performance: % of SC

w/ISO 14000 partners; avg. % env. goals met.

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The Balanced Scorecard

Developed by Kaplan & Norton to align an organization’s performance measures with its strategic plan & goals. The BSC framework consists of four perspectives:

– Financial perspective– Internal business process perspective– Customer perspective– Learning & growth perspective

Also referred to as scorecarding

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The Balanced Scorecard (Cont.)

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The Balanced Scorecard (Cont.)

Web-Based Scorecards

Dashboards– Web-based software applications used to design

scorecards, which also link via the Web to a firm’s enterprise software system.

– Provide managers a way to see real-time progress toward organizational milestones & help to ensure that decisions remain in sync with the firm’s overall strategies.

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Supply Chain Operations Reference (SCOR) Model

Developed by the Supply-Chain Council for SCM diagnostic benchmarking, & process improvement. The SCOR model separates supply chain operations into 5 process categories:

– Plan– Source– Make– Deliver– Return

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SCOR Model (Cont.)

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SCOR Model (Cont.)

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SCOR Model (Cont.)

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SCOR Model (Cont.)

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SCOR Model (Cont.)

Additions have been made to the SCOR model– Original SCOR model did not address sales &

marketing processes, some aspects of service, & support processes (i.e., HR & technology development).

Customer Chain Operations Reference model (CCOR)– Defines the customer part of the SC as the

integration of Plan, Relate, Sell, Contract, Service, & Enable processes.

Design Chain Operations Reference model (DCOR)– Defines the design portion of the SC as the

integration of Plan, Research, Design, Integrate, Amend, & Enable processes.