1. Operational, Financial, and Performance Measurement
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Overview of operational and financial performance measurement
Measurement system objectives
Operational assessment
Financial assessment
“If you don’t measure it, you can’t manage it.”

3. Measurement system objectives related to logistical operations
Monitoring system performance by establishment of appropriate metrics to track and report
Controlling system performance by having appropriate standards of performance relative to metrics being monitored
Directing employee focus on system performance through motivation and reward
Improving shareholder value through superior logistics performance

4. Figure 15.1 The Balanced Scorecard
The Balanced Scorecard is a comprehensive system of performance assessment
Figure 15.1 The Balanced Scorecard

5. Measurement focus using a balance scorecard approach
Financial perspective
Profitability and return on investment
Internal operations perspective
Process quality, efficiency and productivity
Customer perspective
Logistics service, quality and satisfaction
Innovation and learning perspective
Process improvement, benchmarking and human resource development

6. Operational assessment
Functional perspectives
Measuring customer accommodation
Determining appropriate metrics
Supply chain comprehensive metrics
Benchmarking

7. Functional perspective on logistics measures includes these major categories
Cost
Customer service
Quality
Productivity
Asset management

8. Cost is the most direct reflection of logistics performance
Typically measured in total dollars spent
Total logistics cost (aka total landed cost)
Sum of order processing + inventory + transportation + warehousing and materials handling + facility network
Few organizations have ability to measure total cost
Common to report cost as a
Percentage of sales volume
E.g., transportation cost as 15% of sales volume
Cost per unit of volume
E.g., loading cost as $5.50 per order

9. Customer service requires specific measures for each element of the basic service platform
Availability
Organization’s fill rate
Item fill rate
Line fill rate
Value fill rate
Order fill rate
Operational performance
Average order cycle time is average number of days elapsed between order receipt and delivery to customer
Order cycle consistency is measured over a large number of order cycles and compares actual to plan
On-time delivery = the percentage of times the customers’ deliveries were met!

10. Quality measures often include service reliability performance
Accuracy of work activities performed
Damage frequency is the ratio of number of damaged units to the total number of units
Number of customer returns of damaged or defective goods
Number of instances when information is not available on request
Number of instances when inaccurate information is discovered

11. Productivity is measured in terms of output of goods compared with quantities of inputs
Labor productivity
Units shipped per employee
Units received per employee
Equipment downtime

12. Asset management considers utilization of capital investments in facilities, equipment and inventory
Facilities and equipment
Capacity utilization
E.g., warehouse utilization of 80% is not shipping all it is capable of shipping
Downtime is the percentage of hours that equipment is not utilized
E.g., forklift with a 2% annual downtime
Inventory
Inventory turnover rate is most common measure of performance
Days of supply is the amount available to meet forecasted sales volume
E.g., 50 days of supply (100 units per day forecast and 5000 units on hand)
Return on assets (ROAM) and return on investment (ROI)

13. Critical that average inventory use as many data points as possible
Inventory turnover rate is measured differently by different types of firms
Vast majority of firms use this metric
Some retail firms use this metric
This metric is used for products whose cost or selling price changes significantly during relatively short periods of time
E.g., gasoline inventory
Critical that average inventory use as many data points as possible

14. Example of common metrics by category
Table 16.1 Typical Performance Metrics

15. Measuring customer accommodation requires an additional set of metrics
Perfect order measures the effectiveness of the overall integrated logistical performance
Ratio of perfect orders to the total number of orders completed during the same time period
Absolute performance provides a better indication of how a firm’s performance impacts customers
“To us, 99.5 percent on-time delivery would mean that on a typical day, over 5,000 customers received late orders.”
Customer satisfaction measurement requires monitoring, measuring and collecting information from the customer

16. Determining appropriate metrics using the framework in Figure 15.2
Competitive basis reflects the fundamental choice between responsive or efficient logistics performance
Measurement focus is a continuum ranging from operational metrics to strategic metrics
Measurement frequency is the need to monitor day-to-day performance versus less frequent review to diagnose performance problems

17. Figure 15.2 Illustration of Measurement Framework
Illustration of framework use showing metric 2 is closer to measurement need
Figure 15.2 Illustration of Measurement Framework

18. Supply chain comprehensive metrics
Cash-to-cash conversion time
Time required to convert a dollar spent on inventory into a dollar of sales revenue
Inventory days of supply
Calendar days of sales available based on recent sales activity
Dwell time
Ratio of days inventory sits idle to the days it is productively used or positioned
On-shelf in-stock percentage
Percentage of time a product is available on the shelf in a store
Total supply chain cost
Sum of costs across all firms in the supply chain
Supply chain response time
Time required for all firms to recognize a fundamental shift in demand, internalize that finding, replan, and adjust output to meet that demand

19. Figure 15.3 Total Supply Chain Cost
Illustration of supply chain total cost extending beyond an individual firm
Figure 15.3 Total Supply Chain Cost

20. Benchmarking makes management aware of state-of-the-art business practice
Critical aspect of performance measurement
“Are we staying competitive?”
Considers metrics and processes
Which organizations should we benchmark against?
Internal groups are easier to identify
Johnsons & Johnson has 150+ business units with ample opportunity to share best practices
Provides little information about performance against the competition
Nonrestricted benchmarking compares metrics and processes to best practices regardless of where the practice is found
Belief that learning is possible from any firm with outstanding performance
Example: South West Airlines aircraft turnaround time at airports

21. High-achieving firms are more involved in benchmarking than average-achieving firms
Table 15.2 Performance Benchmarking Differential

22. Financial assessment is needed to link supply chain performance to financial results
Critical tools for financial assessment
Segmentation of data
By channel, territory, customer, product, and supplier
Cost-revenue analysis
Strategic profit model

23. Cost-revenue analysis is needed to provide a financial view of integrated logistics
Accounting deficiencies make this difficult
3 approaches are available to identify and control logistics expenses
Contribution
Net profit
Activity based costing

24. Accounting practices to prepare financial statements create some deficiencies
Costs are aggregated on a standard account basis rather than activity basis
Inbound freight expense is deducted from gross sales
Outbound freight is reported as an operating expense
Freight is not reported as a specific cost
i.e., Products purchased on a delivered price basis
Failure to specify and assign inventory cost

25. Fixed costs are those that do not directly change with volume
Contribution analysis requires all costs be identified as fixed or variable
Fixed costs are those that do not directly change with volume
Variable costs are those that change as a result of volume
Direct costs are those specifically incurred because of the existence of the segment of analysis
E.g., product, customer, channel
Indirect costs exist because of more than one segment of business

26. Example of contribution analysis
Table 15.3 Contribution Margin Income Statement for Two Customers

27. Net profit analysis requires all operating costs be charged or allocated to an operating segment
Each segment must be allocated its fair share of costs
Example from Table 15.3 would require indirect fixed cost of $41,000 to be allocated to each segment
E.g., allocate based on sales volume
Disagreements arise in determining how to allocate indirect costs
Allocations are arbitrary and may result in misleading financial assessment
But, many indirect expenses are not fixed
Rather they rise and fall based on business demand of operating segments

28. Activity-based costing is a partial solution to arbitrary allocations
Activity-based costing (ABC) suggests costs be traced to activities
Activities are then related to product, process or customer segments
Biggest challenge with the ABC approach is identifying the activities, related expenses and drivers of expense

29. Strategic profit model shows relationship of income and balance sheet to ROA
Return on investment (ROI) is critical measure of financial success
Return on net worth (RONW) measures profitability of funds invested by owners
Return on assets (ROA) measures profitability generated by managing operational assets

30. Illustration of strategic profit model with example data
Figure 15.4 Strategic Profit Model

31. Two fundamental ways to improve return on assets
Manage net profit margin improvements
Net profit margin is net profit divided by net sales
Measures portion of each sales dollar that is kept by the firm
Manage asset turnover improvements
Asset turnover is ratio of total sales divided by total assets
Measures efficiency of management utilization of assets

32. Applications of the strategic profit model (SPM)
Model is very adaptable to a spreadsheet
Can use SPM in combination with other methods to examine ROA for customer or product segments
Table 15.4 provides an example
Other segment profitability and ROI analyses can be conducted
Very useful framework for relating logistics activities to the overall financial objectives of the organization

33. Product B contributes a higher return even though its gross margin is lower
Table 15.4 CMROI for Two Products

34. Example showing ROA improvement if inventory cost is reduced to $300
Figure 15.5 Strategic Profit Model (Inventory Reduction)

35. Requirements for financial reporting provide more supply chain visibility to management
Sarbanes-Oxley Act of 2002 (SOX)
Section 404 requires an internal control report to be filed along with corporate annual report
Firms must have internal measurement capabilities that comply with SEC requirements
SOX requires disclosure of all off-balance-sheet liabilities that have material effect on financial reports
Vendor-managed inventories
Long-term purchase agreements
Slotting allowances
Also required to report any event that may have material effect on financial reports
E.g., shipments with long lead times that may be held at an international border

36. Example metrics to validate financial elements in columns 3 and 4
Adapted from Table 15.5

37. Example metrics to validate financial elements in columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)

38. Example metrics to validate financial elements in columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)