Logistics and Supply Chain Management

Module 5
Performance Measure Defined
Performance measures are a systematic attempt to learn how responsive an organization‟s products
and services are to the needs of the customer and the organization‟s ability to pay its suppliers,
employees and stakeholders. The companies have goals of satisfying their customers and make
reasonable profits in the process. Measuring performance offers an effective method of determining
whether or not an organization is meeting its goals and achieving its mission.

To achieve customer satisfaction, companies have to carryout several activities such as buying raw
materials and components, converting the inputs into finished products and delivering the finished
goods to the customer. All these activities must be performed efficiently and effectively so as to
achieve the company‟s goals and objectives.

The various approaches to measuring performances are: (i) Measuring inputs; (ii) Managing
processes; (iii) Measuring outputs and (iv) Measuring efficiency.

Measuring Inputs

Inputs are the resources that a company uses to produce goods and services. It includes human,
financial, facility and material resources. Measuring inputs involve measuring all the activities linked
to the inputs. This includes supplier‟s performance, i.e. timeliness of supply, quality of materials
supplied etc.

Managing Process

Conversion processes are the various activities that the businesses indulge in to convert the inputs
into the outputs desired by the customers. The process include manufacturing and supporting
processes such as inventory control, store keeping, packing and inspection and quality control and so
on. Performance measure of these processes include inventory turnover ratios, utilization of
production capacity, adherence to production and delivery schedules etc.

Output Measure

The volume of output produced, quality of this output, cost of output etc are some of the output
measures. It is a means of quantified comparison between actual result and the intended result.

Efficiency Measure

These indicate the measures of unit cost or productivity associated with a given outcome or output.
Performance Measurement in Supply Chain Management

Supply Chain management encompasses three types of measurement criteria:

a. Supplier Performance

b. Purchasing/materials management performance

c. Supply Chain Performance

Supplier Performance Measurement

It is the process of measuring, analyzing and managing supplier performance for the purpose of
reducing costs, mitigating risk and driving continuous improvement in value and operations.
Common and consistent measurements can be useful for companies to focus resources, identify
performance gaps, develop strategies for improvements of supply chain performance and determine
the total cost of ownership (TCO) for supply relationships, products and the entire supply chains.

Failure to accurately measure, evaluate and manage the performance of supply partners can increase
costs, damage product quality and hinder the competitiveness of the firm in the market place.

What to measure: After choosing which supplier to be measured, the next step is to choose the
parameters on which the supplier is to be measured. Obviously, quality is the most important
parameter. Since most of the firms choose their suppliers on the basis of a thorough analysis of their
ability to deliver quality products/services, regular and routine performance measurement regarding
quality is not a criterion of performance measurement system.

Initiative: It is considered to be one of the top criteria which indicates that more and more buying
firms want their suppliers to have the ability to demonstrate their initiative in all their dealings with
the buying firms.

Performance Categories:

Four major categories of Performance metrics are:

(i) Time;

(ii) Quality;

(iii) Cost and

(iv) Supporting measures

(i) Time:

It is considered to be an important parameter of logistics performance while measuring effectiveness.

Two elements of time-namely elapsed time for the activity and the reliability (or variability) are the
measures considered under the “time” category of metrics. It is important that time metrics need to
include both the absolute time measurement (say a five day cycle time) and variability measure (say
50 percent variation in the order cycle time).

(ii) Quality

Quality category has a number of dimensions that are important to logistics and supply chain
management. The “perfect order” criteria is a good example of the increased emphasis being placed
upon customer service.

(iii) Cost

This category indicates the measure of efficiency. Cost is crucial to the ability of majority of the firms
to compete in the market and earn reasonable profits and return-on-investment.

(iv) Supporting measures

Total delivered cost or landed cost has a direct impact on the prices that will be charged in the market.
Total delivered cost includes the cost of goods, transportation, inventory and materials handling,
inventory turns and days of sales outstanding. Inventory turns reflect how long a firm holds inventory
that impacts the inventory carrying cost. Days of sales outstanding impacts customer service levels.
The cash-to-cash-cycle is important because it measures cash flow.

Supply Chain Performance Measures

There are many measures or metrics, which relate to how well various aspects of the supply chain are
operating. The most important supply chain performance measures are:

(i) Inventory

(ii) Transportation

(iii) Customer orders

(i) Inventory:

There are multiple measures, which track aspects of a firm‟s investment in inventory. These measures
are common with physical supply systems as well as physical distribution systems. Examples of
inventory measures include: (a) rupee value of total inventory, (b) percentage of active to inactive
part numbers (items), (c) total number of part numbers (items), (d) working capital savings, (e) total
inventory investments, (f) days supply of inventory and (g) inventory investment based on type of
purchased items such as production items, maintenance items, packaging materials etc.

(ii) Transportation

These measures include actual transportation costs against some pre-established objective; (a) quality
of transportation carrier and delivery performance levels and (b) transportation lead-time indicators.

(iii) Customer orders

These measures evaluate the efficiency of the organisation in satisfying its commitment to
downstream customers. Examples of these measures are: (a) percentage of on-time delivery; (b) total
time from customer order to customer delivery, (c) returned orders and (d) warranty claims.

Supply Chain Operations Reference Model (SCOR)

SCOR Model is extensively used now a days to measure the performance the performance of supply
chain management operations of an organisation. This model was developed by Pittiglio, Rabin, Todd
and Mc-Garth and AMR research with about 70 companies and three universities, which voluntarily
participated in the research. Later the group organisations established the supply chain council (SCC)
to continue to develop and administer the SCOR model, as a non-for-profit organisation.
Organisations having interest in applying the model to their supply chain and advancing supply chain
management best practices can obtain the assistance of SCC in administering the SCOR model.
SCOR model is recognized by the 8000 companies, which are members of the SCC as an effective
“tool kit” for up-grading the supply chain for strategic advantages for companies that want the
improvement in their supply chain management performance.
SCOR model refers to an attempt at standardising processes for supply chain management. The idea
behind SCOR was to provide a language that can describe, measure and compare supply chain
operations.

Overview of the SCOR Model

Generally, process reference models integrate the well-known concepts of business process
reengineering, benchmarking and process measurement into a cross sectional framework or
relationship.

The SCOR model isolates key supply chain management process and matches their process elements
against industry-specific best practices, benchmarking performance data and appropriate software
applications. These provide users with a framework for understanding where they need to make
improvements.

The process reference model attempts to:

a. Capture the “as-is” state of a person and derive the desired “to-be” future state.

b. Quantify the operational performance of similar companies and establish internal targets which are
based upon “best-in-class” performance of “bench-mark” companies.

c. Characterise and describe the management practices and software solutions that result in “best-in-
class” performance.

Characteristics of SCOR Model

The SCOR model enables companies to communicate, compare and learn from competitors and firms
both within and outside of their industry. It helps to measure supply chain performance and also the
effectiveness of supply chain reengineering. Also, the future process improvements can be planned
and tested using the SCOR model.

Components of the SCOR model comprises the following:

i. Standard description of the process elements that make complex management processes.

ii. Benchmark metrics used to compare process performance to objective, external points of reference.

iii. Description of best-in-class management practices.

iv. Mapping of software products which enable best practices.

SCOR covers the following activities:

a. All customer interactions from order entry though paid invoice.

b. All physical material transactions, from the supplier to the customer‟s customer, including field
service logistics.

c. All market interactions, from the understanding of aggregate demand to the fulfilment of each
order.

SCOR model focuses upon five key processes for supply chain namely:

a. Plan;

b. Source

c. Make

d. Deliver

e. Return

a. Plan : The plan process encompasses demand and supply planning and management, which
requires balancing resources with requirements. It also involves establishing and communicating the
plans for all other processes in the supply chain.

The planning would include management of business rules, supply chain performance, data
collection, inventory, capital assets, transportation etc. It also includes aligning the supply chain unit
plan with the financial plan. In essence, the plan encompasses the processes that balance aggregate
demand and supply to develop a course of action which best meets sourcing, production and delivery
requirements.

b. Source : The “source” process encompasses sourcing various materials such as stocked, make-to-
order and engineer-to-order products or materials. This process would include scheduling deliveries,
receiving, verifying, transferring and authorizing vendor payments. It could also include the
identification and selection of new sources of supply.

c. Make : The “make” process encompasses make-to-stock, make-to-order and engineer-to-order

production activities, issuing materials for production, producing and testing the products, packing,
staging and realising. For engineer-to-order products, the „make‟ process includes finalizing the
design and engineering activities.
d. Deliver: The “deliver‟ process encompasses ordering, warehousing, transporting and installing
stocked, made-to-order and engineered-to-order products. It would include all order-management
activities, warehousing activities, invoicing and managing transportation related activities, which are
necessary to meet planned demand or actual demand.

e. Return: The “return” process encompasses the return of raw-materials to suppliers and receipt of
finished goods returned from customers. It would include activities such as authorizing, scheduling,
receiving, verifying and disposing of returns to maximize recapture of revenues for the company.

Levels of Processes in SCOR Model

The SCOR model has three levels of process:

i. Level 1: Top level (types of processes)

ii. Level 2: Configuration level (categories of processes)

iii. Level 3: Element level (decompose processes)

Level 1 defines the scope and extent of the model. Competition performance targets are set at this
level.

Level 2 provides the opportunity to configure to order a specific company‟s supply chain. The
companies can implement their operations strategy at this level.

Level 3 defines a company‟s ability to compete in its markets and would include process elements
such as definitions, information about inputs and outputs, performance metrics, best practices, system
capabilities to support best practices and systems and tools. Operations strategy of companies can be
fine-tuned at this level.
Supply Chain Performance Measures

Supply chain performance measure can be defined as an approach to judge the performance of supply
chain system. Supply chain performance measures can broadly be classified into two categories:

 Qualitative measures: For example, customer satisfaction and product quality.

 Quantitative measures: For example, order-to-delivery lead time, supply chain response time,
flexibility, resource utilization, delivery performance.

Here, we will be considering the quantitative performance measures only. The performance of a
supply chain can be improvised by using a multi-dimensional strategy, which addresses how the
company needs to provide services to diverse customer demands.

Quantitative Measures

Mostly the measures taken for measuring the performance may be somewhat similar to each other,
but the objective behind each segment is very different from the other.

Quantitative measures is the assessments used to measure the performance, and compare or track the
performance or products. We can further divide the quantitative measures of supply chain
performance into two types. They are:

 Non-financial measures
 Financial measures

Non-Financial Measures

The metrics of non-financial measures comprise cycle time, customer service level, inventory levels,
resource utilization ability to perform, flexibility, and quality. In this section, we will discuss the first
four dimensions of the metrics:

Cycle Time

Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a business
process. For supply chains, cycle time can be defined as the business processes of interest, supply
chain process and the order-to-delivery process. In the cycle time, we should learn about two types of
lead times. They are as follows:
  Supply chain lead time
 Order-to-delivery lead time

The order-to-delivery lead time can be defined as the time of delay in the middle of the placement of
order by a customer and the delivery of products to the customer. In case the item is in stock, it would
be similar to the distribution lead time and order management time. If the ordered item needs to be
produced, it would be the summation of supplier lead time, manufacturing lead time, distribution lead
time and order management time.

The supply chain process lead time can be defined as the time taken by the supply chain to transform
the raw materials into final products along with the time required to reach the products to the
customer‟s destination address.

Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the
logistics lead time for transport of raw materials from suppliers to plants and for shipment of semi-
finished/finished products in and out of intermediate storage points.

Lead time in supply chains is governed by the halts in the interface because of the interfaces between
suppliers and manufacturing plants, between plants and warehouses, between distributors and
retailers and many more.

Lead time compression is a crucial topic to discuss due to the time-based competition and the
collaboration of lead time with inventory levels, costs, and customer service levels.

Customer Service Level

The customer service level in a supply chain is marked as an operation of multiple unique
performance indices. Here we have three measures to gauge performance. They are as follows:

 Order fill rate: The order fill rate is the portion of customer demands that can be easily
satisfied from the stock available. For this portion of customer demands, there is no need to
consider the supplier lead time and the manufacturing lead time. The order fill rate could be
with respect to a central warehouse or a field warehouse or stock at any level in the system.
 Stockout rate: It is the reverse of order fill rate and marks the portion of orders lost because of
a stockout.
 Backorder level: This is yet another measure, which is the gauge of total number of orders
waiting to be filled.
  Probability of on-time delivery: It is the portion of customer orders that are completed on-time,
i.e., within the agreed-upon due date. In order to maximize the customer service level, it is
important to maximize order fill rate, minimize stockout rate, and minimize backorder levels.

Inventory Levels

As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient
inventory to meet the customer demands. In a supply chain system, inventories can be further divided
into four categories.

 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts

Every inventory is held for a different reason. It‟s a must to maintain optimal levels of each type of
inventory. Hence gauging the actual inventory levels will supply a better scenario of system
efficiency.

Resource Utilization

In a supply chain network, huge variety of resources is used. These different types of resources
available for different applications are mentioned below.

 Manufacturing resources: Include the machines, material handlers, tools, etc.

 Storage resources: Comprise warehouses, automated storage and retrieval systems.
 Logistics resources: Engage trucks, rail transport, air-cargo carriers, etc.
 Human resources: Consist of labor, scientific and technical personnel
 Financial resources: Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets or resources efficiently
in order to maximize customer service levels, reduce lead times and optimize inventory levels.

Financial Measures

The measures taken for gauging different fixed and operational costs related to a supply chain are
considered the financial measures. Finally, the key objective to be achieved is to maximize the
revenue by maintaining low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations, technology,
materials, and labor. Generally, the financial performance of a supply chain is assessed by
considering the following items:

 Cost of raw materials.

 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing, assembling rates etc.
 Inventory holding costs
 Transportation costs
 Cost of expired perishable goods
 Penalties for incorrectly filled or late orders delivered to customers
 Credits for incorrectly filled or late deliveries from suppliers
 Cost of goods returned by customers
 Credits for goods returned to suppliers

In short, we can say that the financial performance indices can be merged as one by using key
modules such as activity-based costing, inventory costing, transportation costing, and inter-company
financial transactions.