Supply Chain Performance measurement

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Importance of supply chain performance
measurement
•In contemporary business, supply chain management is a key strategic
factor for increasing organizational effectiveness and for achieving
organizational goals such as improved competitiveness, better customer
care, and increased profitably.
•It is important that strategic and tactical aspects of a supply chain are
well integrated so that the synchronization of demand and supply can be
ensured.
•Supply chain metrics should be aligned from the top level corporate strategy to the front line tactical operations.
Strategic issues in supply chain would include redesigning of both manufacturing facilities and distribution
centers to achieve optimization of sales and product innovations to meet customer needs. Such strategic initiatives
impact supply chain nodes and improve competitive advantage usually through cost cutting ,cycle time reduction
or supplier relationships.
•Tactical or operations aspects in supply chain management include the day to day management of the supply
demand conditions. For example, the assessment of whether the inventory for a given order is available or a
demand can be met if the order is placed within certain lead time could be an operational measure.
Question
Discuss the importance of supply chain performance measurement
Approaches to performance
measures
• Traditional

• Contemporary
Question
Discuss the fundamental differences between traditional and contemporary
methods of supply chain performance measurement
Traditional approach
It is based on the following operational and financial issues:

•Productivity
•Quality
•Customer service
•Cost factors
•Asset management
Productivity measures

•Productivity is measured in ratio of output to input. The output can be

measured by way of the amount of revenue earned and the volume of
goods produced. Inputs could be factors of production like man-hours,
number of persons employed, cost of labor and capital employed.
•Some commonly used productivity measures in supply chain include :
•Units shipped per employee ( the efficiency of employees in the delivery of goods)
•Units of labor cost ( employee cost efficiency)
•Equipment downtime ( loss of time due to machinery breakdown or the failure of a component)
•Space utilization ( measurement and control of capacity utilization)
•Order per sales person ( may reflect efficiency of sales personnel, estimation of probability of order)
•Order entry efficiency ( the ability to capture a customer order quicky and delight the customer on order
capture)
 Quality measures
•The essential distinction between quality indicators and quality measures is that quality measures take on
numeric values while quality indicators refer only to un quantified attributes of the supply chain function. For
example, an improvement in shipping efficiency which could be perceptional factor is a quality indicator while
shipping accuracy quantitatively reflected by a numeric value based on wrong deliveries or returns is a quality
measure. Some of the commonly used quality measures in supply chain are as follows :
•Number of faultless notes invoiced ( by comparing them with previous
agreement, it can be determined whether a perfect delivery has taken place or
not)
•Order entry accuracy ( a wrong order entry triggers a whole range of unwanted
activities across the supply chain)
•Picking/Shipping accuracy ( picking accuracy refers to the number of orders
that are picked accurately as per order fill requirement whereas shipping
accuracy is a measure of correct dispatches to the customer as per the order)
•Number of customer returns ( important from the perspective of
customer acceptance of products and dispatch efficiency)
•Damage frequency . Damages can occur while at manufacture,
warehousing, transportation and in delivery process
•Number of credit claims ( surrogate indicator of lost sales)
•Information availability (information available for tracking to the
customer or any of the supply chain partners in the system)
 Customer service measures
•Measures around availability, reliability, and operating parameters towards customer needs are important
to understand supply chain effectiveness.
•Order lead-time: the total order cycle time, which is also called ‘order lead time’, refers to the time that
elapses between the receipt of the customer’s order and the delivery of the goods.
•The order entry mode: the order entry method determines the way and the extent to which the customer
specifications are converted into useful information, and are passed down along the supply chain.
•The customer order path: the path that the orders traverse is yet another important measure whereby the time
spent in different routes and non-value adding activities can be identified and suitable steps can be taken to
eliminate them.
•Delivery metrics: This refers to the flexibility of delivery systems to
meet particular customer needs.

•Key Delivery Metrics:

Item fill rate = Number of items delivered to customers /
Number of items ordered by customers
Case fill rate = Number of cases delivered complete to
customers / Number of cases ordered by customers
Value fill rate = Total pecuniary value delivered to complete to
customers / Total pecuniary value of customers orders
Order fill rate = Number of orders delivered complete / Number
of customer orders
•Customer service and satisfaction metrics: The whole exercise of applying the supply chain strategy
could be costly and futile, if supply chain metrics are not linked to customer satisfaction.
•The customer query time: The customer query time refers to the time it takes for a firm to respond
to a customer inquiry with the required information.
•Measuring customer perception of service: This is done primarily through direct interviews with
customers what are their needs? What is the service level they receive versus what are their
expectations? These are the questions firms should ask the customers to improve their
products/services, and to increase their confidence in the firm’s supply chain.
Cost Measures
Inventory cost:
In a supply chain, the total cost associated with inventory consists of the
following:
Opportunity cost consisting of warehousing, capital and storage.
Cost associated with inventory as incoming stock level, work in
progress.
Service costs, consisting of cost associated with stock management and
insurance.
Cost held up as finished goods in transit.
Risk costs, consisting of cost associated with pilferage, deterioration, and
damage.
Cost associated with scrap and rework.
Cost associated with shortage of inventory, accounting for lost sales/lost
production.
 Cost Measures

Total distribution cost:

A thorough understanding and a good performance evaluation of total distribution costs are essential. A
profile consisting of various distribution cost elements should be developed so that appropriate trade-offs
can be applied as a basis for planning and reassessment of distribution systems, and thus, the overall cost
effectiveness can be achieved. For example, an increase in the number of depots and its effects on other
distribution costs can be estimated. Using economies of scale, the optimal number of depots that
corresponds to minimum total distribution cost can be obtained.
The distribution cost would include:

Inbound cost to regional distribution center's and any stock point.

Outbound cost from a distribution center to the next stage and from every stage to the ultimate customer.
Cost managing regional distribution center to the next stage and from every stage to the ultimate customer.
Stock holding cost, which inventory holding cost.
 Cost Measures
Finance and logistics cost:

The financial performance of a supply chain can be assessed by determining the total logistics cost. Sin logistics
cut across functional boundaries, care must be taken during decision making as the cost in one affect the cost in
other areas.
Cost Measures

•Other cost measures are:

Cost of goods returned

Wastages
Lost sales
Cost Measures
•Asset measure:

Supply chain assets include plant, equipment and current assets such as
accounts receivable and inventories. It is common that firms do their best
to make the most of capital assets they have deployed in business.

Some key asset management measures:

Inventory turnover = unites sold during a time period / Average units
inventory during the time period.
Inventory turnover = Cost of goods sold during a time period / Average
inventory valued at selling price during the time period.
(If average inventory is valued at cost, then numerator must be a cost of
goods sold)
 Cost Measures

•Inventory levels and number of days supply: Average inventory / Average sales per day:
•Thus, days of supply is measured as the total inventory in the supply chain - which is inbound, at plant and
all stocking locations in the channel – and expressed as calendar days of sales available based on recent sales
activity (or forecasted rate of sales).
 Cost Measures

•Cash-to-cash cycle time:

The cash-to-cash cycle time calculates the time operating capital (cash) is out of reach for use by your
business. The speedier your cash-to-cash cycle, the fewer days your cash in unavailable for use in
propelling your value stream. You can use this metric to gauge whether you are operating “lean” with
regard to cash. Also, good performance on the cash-to-cash measurement has been associated with
improved earnings per share.
Calculating Cash to Cash Cycle Time
•Cash to Cash =
• Days Cash is locked up as inventory
+ Days Cash is locked up in receivables
– Days Cash free because business has not paid its bills
 Example

• 105 Day Cash to Cash Cycle =

90 Days inventory + 45 Days Receivables – 30 Days Payables

•If the company can collect the payments faster (online), hold less inventory, and negotiate better (longer) payable term it can reduce the cash to cash time from 105 days to 30 days. This cash is

available 75 days sooner to support the supply chain.

• 30 Day Cash to Cash Cycle =
45 Days inventory + 30 Days receivable – 45 Days payables
 Question
Discuss the concept of cash to cash cycle time
 Question
Discuss the traditional methods of supply chain peformance
Drawback of Traditional Measures
•They are not linked to strategy.
•They have a silo approach.
•Many companies have realized the importance of financial and non-
financial performance measures. However, they have failed to understand
them in a balanced framework.
•Traditional metrics lack hierarchical approach.
 Contemporary Approach
•Contemporary measures are based on frameworks and practices driven largely by management accou practice to bring more
comprehensiveness and better range of techniques for relating cause and effects decision situations. Such approach is more
beneficial, especially for reporting to top management and resources allocated for achieving efficiency and effectiveness.
Comprehensive measures ensure multi- disciplinary approach to decision making in supply chain domain.
•The contemporary approach involves the application of following frameworks and tools from ma
accountant perspective:

Balanced score card

Process driven metrics – SCOR framework
Balanced score card
•It is a strategic planning and management system that is used extensively to align business activit
vision and strategy of the organization, improve internal and external factors, and monitoring the
organizatioal performance against strategic goals.

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Balanced score card
Balanced score card
 Question
Discuss the Balance scorecard and its application in supply chain management
SCOR Framework
•The Supply Chain operations Reference Model (SCOR) is a process reference model that has been and
endorsed by the Supply Chain Council as the cross-industry standard diagnostic tool for sup
management. It is a process reference model for supply chain management, spanning from the
supplier to the customers customer. The SCOR model has been developed to describe the business
associated with all phases of satisfying a customer’s demand.
SCOR Framework
Question
Discuss the SCOR model and its application in supply chain management
 Question
Explain the learning outcomes of today’s class