CHAPTER 14- PERFORMANCE MEASUREMENT ALONG THE SUPPLY CHAIN Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

© 2005 Thomson Business and Professional Publishing 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. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Chapter Fourteen Outline Viewing the Supply Chain (SC) as a Competitive Weapon Understanding End Customers Understanding SC Partner Requirements Adjusting SC Member Capabilities Traditional Performance Measures Use of Organization Costs, Revenue, & Profitability Measures Use of Performance Standards & Variances Use of Firm-Wide Productivity & Utilization Measures World-Class Performance Measurement Systems Developing World-Class Performance Measures SC Performance Measurement Systems Specific Chain Performance Measures The Balanced Scorecard The SC Operations Reference Model Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Introduction “You can’t improve what you can’t measure” Companies using performance measurement- 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. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Viewing the SC as a Competitive Weapon Understanding End Customers- SCs 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 Understanding SC Partner Requirements- SC strategies must consider the potential trade-offs existing between the: Cost Quality Quantity Service Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Viewing the SC as a Competitive Weapon- Cont. Adjusting SC Member Capabilities SC members audit their capabilities & those of their supply partners to determine if what they do is consistent with the needs of the end customers & the SC. Matching SC capabilities to end-customer requirements means that firms & their partners must continually reassess their performance with respect to requirements. The best SC performers are more responsive to customer needs, quicker to anticipate changes in the markets, & much better at controlling costs. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Traditional Performance Measures Financial statements & traditional cost-based information do not reflect the underlying performance of the productive systems of an organization; cost & profit information can be hidden or manipulated. Decisions made solely 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. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Traditional Performance Measures- Cont. Use of Organization Costs, Revenue, & Profitability Measures- Several problems are associated with using these measures to gauge performance, for example: windfall profits that occur when prices suddenly rise due to supply interruptions, caused for the most part by uncontrollable environmental conditions. Another problem is the difficulty, to attribute cost, revenue, or profit contributions to the various functional units or business units Allocating costs based on a department’s percentage of direct labor hours causes managers to waste time trying to reduce direct labor. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Traditional Performance Measures- Cont. Use of Performance Standards & Variances Establishing standards for comparison purposes can be trouble-some. 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 decisions that may not be in the long-term best interests of the firm. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Traditional Performance Measures- Cont. Use of Firm-Wide Productivity & Utilization Measures- useful but have the same problems as revenues, costs, & profits. Decisions made to increase productivity may prove to actually increase a firm’s 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 performance measures also tend to be short-term oriented. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

World-Class Performance Measurement Systems Developing 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. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

World-Class Performance Measurement Systems Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

SC Performance Measurement Systems Performance measurement systems must: Link SC trading partners to achieve breakthrough performance in satisfying the end users. Overlay the entire SC to assure that all contribute to SC strategy. In a successful chain, members jointly agree on a SC performance measurement system. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

SC Performance Measurement Systems- Cont. Specific Supply Chain Performance Measures Total SCM costs: cost to process orders; purchase & manage inventories; & information systems. SC cash-to-cash cycle time: Average # of days between paying for materials and getting paid by SC partners. SC production flexibility: average time required to provide an unplanned 20 % increase in production. SC delivery performance: average % of orders filled by requested delivery date. SC perfect order fulfillment performance: average % of orders that arrive on time, complete, and damage free. Supply chain e-business performance: average % of electronic orders received for all supply chain members. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Balanced Scorecard Balanced scorecard (BSC) developed by Kaplan and Norton to align an organization’s performance measures with its strategic plan and goals. The BSC framework consists of four perspectives: Financial perspective Internal business process perspective Customer perspective Learning and growth perspective Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Balanced Scorecard- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

The Balanced Scorecard- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supply Chain Operations Reference (SCOR) Model Developed by the Supply-Chain Council for supply chain management diagnostic benchmarking, and process improvement tool. The SCOR model separates supply chain operations into 5 process categories: Plan Source Make Deliver Return Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supply Chain Operations Reference Model- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supply Chain Operations Reference Model- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supply Chain Operations Reference Model- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing