MEL751Module onPerformance Measurement System in SCM

Contents..

Imperatives Desirable characteristics Various frameworks Implementation Issues Concluding Remarks

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Evaluation & Measurement Evaluation is necessary What cannot be measured cannot be

controlled ! Why measurement

Support better decision making Support better communication Provide performance feedback Motivate and direct behavior

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Measurement Effectiveness: extent to which , by choosing a

certain course of action , a previously established goal or standard is being met.

Efficiency: Related to the resources which are required to realize the previously established goals. Relation between planned and actual costs !

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Effectiveness

Purchasing materials costs/prices Materials price/cost control Materials price/cost reduction

Product /quality Purchasing’s involvement in new product

development Purchasing and Total Quality Control

Purchasing logistics Adequate requisitioning Order and Inventory policy Supplier delivery reliability

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Efficiency Purchasing organization

Personnel Management Procedures and Policies Information system

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Typical Indicators… Average value of purchase order Stock-out frequency Rush Order Index =

Number of rush orders/Total Number of orders Obsolescence index =

Value of non-moving items/Total value of Inventory Lead time Inventory turnover ratio =

Annual Purchase Value/Average Stock Value

Remarks.. The objective of supply chain management (SCM) is to

make supply meet demand. SCM is the collection of actions required to coordinate and

manage all activities necessary to bring a product to market, including procuring raw materials, producing goods, transporting and distributing the goods and managing the selling process

Companies must always be concerned with their competition. Today's marketplace is shifting from individual company performance to supply chain performance: the entire chain's ability to meet end-customer needs through product availability and responsive, on-time delivery, cost and inventory !.

Supply chain performance crosses both functional lines and company boundaries. Functional groups (engineering/R&D, manufacturing, and sales/marketing) are all instrumental in designing, building, and selling products most efficiently.

Remarks… To achieve that goal, you need performance measures, or

"metrics", for global supply chain performance improvements. Performance measures must show not only how well you are

providing for your customers (service metrics) but also how you are handling your business (speed, asset/inventory, and financial metrics). Given the cross-functional nature of many supply chain improvements, your metrics must prevent "organizational silo" behavior which can hinder supply chain performance.

Remarks.. In supply chains with multiple vendors, manufacturers,

distributors and retailers, whether regionally or globally dispersed, performance measurement is challenging because it is difficult to attribute performance results to one particular entity within the chain.

There are difficulties in measuring performance within organizations and even more difficulties arise in inter-organizational environmental performance measurement.

The reasons for lack of systems to measure performance across organizations are multidimensional, including non-standardized data, poor technological integration, geographical and cultural differences, differences in organizational policy, lack of agreed upon metrics, or poor understanding of the need for inter-organizational performance measurement

What Is Performance Management? It is a systematic process of

Planning work and setting expectations Continually monitoring performance Developing the capacity to perform Periodically rating performance in a summary

fashion Rewarding good performance

Management Process Linkages The management process of discovering, defining and implementing business activities that will result in a value-enhanced future of the firm

A management process that is used to monitor business activities and thereby facilitate achievement of the firm’s objectives

A business process is a collection of linked business activities that enable or deliver goods, services, information or money

Descriptions of the “give and get” relationships between the firm and each of its stakeholders, relative to alternatives

PerformanceMeasurement

System

BusinessProcesses

StakeholderValue

Propositions

BusinessStrategy

Performance Management Cycle

Planning

Rewarding

Rating

Developing

Monitoring

Issues in performance measurement system

How well the organization is doing? Is the organization meeting its goals? Are the customers happy? Are the processes in control? If and where improvements are necessary?

Similar to the performance measurement used, the performance measurement system may be unique to each individual organization, or unit within an organization, reflecting its fundamental purpose and its environment

Objectives of Metrics Measuring the activity (volume) and the SC

performance Setting goals and comparing the actual

situation Following a plan Determining the levers that will help achieve

goals and single out the priority action programs

Revealing the degree of flexibility

Principles of metrics design

Speed, reliability , and simplicity are the main criteria for efficient metrics

Arranging indicators by priority Segmenting the metrics Visualizing the function content Classifying objectives of the function or team Selecting indicators that deal with quality Formatting the metrics effectively

Characteristics of Effective Metrics

Independence Appropriateness Objectivity Regularity

Linkage with other indicators

Coherence Simplicity Cumulative Realistic

Performance measurement system (PMS): Desirable Features

Transparent Simplicity and clarity Self-regulating Objective Motivating and stimulating to all stakeholders Creativity Dynamic over time

Performance measurement system (PMS): Desirable Features (contd.)

PMS should have multiple criteria Primary purpose should not be to reward or to punish Performance-to-schedule measures must use group, not

individual results Specific goals must be established and reviewed PM must be understood by those whose performance is being

measured. PM data must be available for constant review

Problems with just one measure of success

If you were to ask most anyone how they would measure company performance, they might give you a funny look and say, "How much money the company makes, of course! Isn't that obvious?" To a certain extent, they are right. Profitability, gross revenues, return on capital, etc. are the critical, "bottom line" kind of results that companies must deliver to survive.

Unfortunately, if senior management only focuses on the financial health of the organization, several unfortunate consequences arise. One of these is that financial measures are "lagging indicators" of success. This means that how high or low these numbers go depends on a wide variety of events that may have happened months or years before and that you have no immediate control of in the present.

Being in a plane falling from the sky is a bad time to realize that you should have done routine maintenance, and oh, by the way, filled it with fuel!

Quantitatively based performance management

Measurements of multiple performance factors occur frequently at each stage in the supply chain

Time and cost are key measures, but others are used as appropriate to the specific supply chain.

All measures must relate to the ultimate supply

chain goals.

Generic framework Decide what is needed Determine behavior Draw up a profile Review the current system Alignment Analyze the process Review

Some Indicators..1..

• Delivery performance • Order fulfillment performance • Fill rate (Make-to-stock) • Order fulfillment lead time • Perfect order fulfillment • Supply-chain response time

Some Indicators..2..,

• Total supply-chain management cost • Value-added productivity • Warranty cost or returns processing

cost • Cash-to-cash cycle time • Inventory days of supply • Asset turns

Some Indicators..3.. Financial : ROI, Turnover ratio Productivity: Total productivity Efficiency: Realized Production /Planned

Production Customer LT: Time from order to

delivery Production LT: Time from order relapse

to finished product

Commonly used measures for evaluating retail performance Service level; Lost sales; Product substitute percentage; Gross margin Stock-turn

PMS: Triggers Increasing customer/distributor

complaints followed by order cancellations

Increasing levels of stockholding Increasing levels of backorders periodic excesses and shortages of

storage space increasing levels of stock obsolescence

Operational performance Customer service levels over time inventory turnover performance :

product group, rate of sale category etc. inventory accuracy number of customers not supplied from

stock Number of stock outs per period

Financial performance

Return on inventory investment Inventory investment/working capital Percentage inventory increase(decrease) vs

percentage increase(decrease) in sales Percentage inventory increase(decrease) vs

percentage increase(decrease) in cost of sales

stock write-offs

Some more measures... Total transportation capacity used/total

transportation capacity paid for actual transportation cost/budgeted

transportation cost actual transit time/standard transit time

Depot service index Hits vs Misses DSI= hits/misses

Internal Performance Measurement

Cost { total cost,cost/unit, cost/sales, inbound freight, outbound freight, warehouse cost, admn, processing, direct labor etc.}

Customer service {fill rate, stock-outs, shipping errors, on-time delivery, back-orders, cycle time, customer feedback}

Productivity {units shipped/employee, units/labour Rs., ordes per sales person, etc.}

Asset Measurement {Inventory turns, Inv. Carry costs, obsolete Inv., ROI etc.}

Quality {frequency of damage, Rs of damage, Customer returns, Cost of returned goods etc.}

External Performance Measurement Customer Perception Measurement

Best Practices benchmarking World Class Logistic- CLM Logistics Excellence - Michigan State University

Various frameworks for measurement Function based measurement system Balanced scorecard system SCOR Framework

Framework 1: Function based measurement system

Covers detailed performance measures applicable at different linkages of SC Marketing, Operations, Finance etc.

Indicators: Inventory • ABC-analysis of the assortment categorized by stock

value/volume• mean throughput time of the product group• variance in throughput time of the product group in total• mean throughput time of the product group in total,

subdivided by the : activities loading, transit and receiving• reliability of the inventory regarding quantity and correct

place number of damages/claim• mean throughput time of the various products in stock in

total• variance in throughput time of the various products in

stock in total• mean throughput time of the various products in stock in

total, subdivided in the activities loading, transit and receiving

Indicators:Outbound logistics• cost structure of the warehouse operations (handling-in,

storage, and handling-out)• total investment • total cost of the warehouse• total capacity concerning output volume• costs warehouse operations per unit volume (m3 , ton)• total number of trucks loaded/unloaded per worked time

unit• labor hours per unit of output volume ( m3, ton)• labor costs per unit of output volume (m3, ton)• labor costs as percentage of sales

Indicators: Customer service Product availability

order lines delivered in turns and complete/order lines entered. orders delivered in time and complete/orders entered Rs value delivered in time and complete/dollar value entered real time vs planned lead time

Quality of delivery Flexibility Support to customer Information

Framework : Balanced scorecard Various perspectives such as the following

should be Balanced! Financial Innovation & learning Customer service Internal business

Balance scorecard balances and links financial and non-financial indicators, tangible and intangible measures, internal and external aspects, performance drivers and outcomes.

Balanced Scorecard Approach

Mission viewed from four perspectives:– Customer– Internal Processes – Financial – Learning, Growth and Innovation

Customer focus.. Satisfied customers is the desired end result

of any supply chain management strategy, as illustrated by a quote from Lee and Billington[*]: HP management has recognized that its

performance filling orders will cause it to win or lose the competitive battle.

*The Evolution of Supply-Chain-Management Models and Practice at Hewlett-Packard. Interfaces 25 (pp.42-63): 5 September-October, 1995.

Customer PerspectiveObjectives Measures Targets

Internal Business Innovation and Learning Objectives Measures Targets Objectives Measures Targets

Financial PerspectiveObjectives Measures Targets

How do our customers see

us?

How do we look to

stakeholders?

What must we excel at?

How can we continue to

improve and create value?

Vision and

Strategy

How do customer see us?

How can we continue to improve and create value

What must we excel at?

How do we Look to shareholder?

Four Perspectives

Remarks.. Once the company mission, strategy and measures have been defined

and agreed upon, the next step is to understand fully the drivers (causes) behind movement (up and down) of your balanced scorecard. Without the specific knowledge of what drivers will affect your scorecard, your organization just might spend much time, money and effort and achieve very little.

These drivers fall into four categories: · Environmental - those factors outside the influence of your

organization, such as governmental regulations, the economic cycle, local, national and global politics, etc.

· Organizational - systems inside the organization such as company strategy, human resource systems, policies, procedures, organizational structure, pay, etc.

· Group or departmental - work processes, group relationships, work responsibilities, work assignments

· Individual - personality, management style, skills, behaviors.

Various Measures..1..

Financial Perspective Return-on-capital-employed Cash Flow Project Profitability Sales Backlog

Innovation & Learning Perspective % revenue from New services Rate of improvement Index Staff Attitude survey Revenue per employee

Various Measures..2..Customer Perspective Customer ranking survey Customer satisfaction index Market share

Internal Business Perspective Hours with customer on New Work Tender success rate Project performance index Project closeout cycle

“The performance measurements become a driving force behind the change process.”— CEO of CFT

Some Issues…

Performance measurement system and its linkages with strategy

Behavioral issues related to performance measurement system

Development of Multi-criteria decision making framework

Role of information system in measurement Benchmarking and performance

measurement system

Concerns.. Overcoming mistrust . Tradit ional SCM practices have been adversarial. Trust

in data sharing, acquisition and monitoring needs to be built . Lack of understanding. Mult i-organizational measures are diff icult to

understand for managers focused on internal systems. Lack of control . Managers and organizations wish to be evaluated on

measures they can control. Inter-organizational measures are diff icult to manage and thus control.

Different goals and objectives. Differing organizations have different goals and thus would argue for differing measures.

Information systems. Most corporate information systems are incapable of gathering non-tradit ional information relating to supply chain performance.

Lack of standardized performance measures. Agreed upon measures in terms of units to use, structure, format, etc. may not exist.

Diff iculty in l inking measures to customer value. Linkage to stakeholder value (expanding to environmental issues) is becoming more complex. The definit ion of who the customer may be inside a supply chain also is not clear.

Deciding where to begin. Developing supply chain-wide performance is diff icult since it is not always clear where boundaries exist.

Source: Brewer and Speh (2001)

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Typical problems with measurement & evaluation

Too much data and wrong data Measures that are short term focused Lack of detail Drive the wrong performance

Implementation The development of new measures and the development of new

benchmarks, based on these measures; in developing the new measurement format, various aspects of the supply chain definition can be expected to affect the specific mix of measures used.

The position of players in the chain (supplier, manufacturer, wholesaler, service supplier) affects their contribution and relevant measures, the level of integration and the strategic approach may affect the relevance of measures. Creating benchmarks based on the new measurement systems may contribute to directing management effort in optimizing the supply chain.

The development of tools that can help support the implementation of the new measurement approach may be a crucial step leading to the actual application of new measurement approaches.

The tools cannot be limited to the measurement system itself; they also need to include strategic trade-off and planning frameworks in order to assure executive “buy-in” and commitment and initiate actual improvement processes in the supply chain.

Implementation..

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Measurement category..1.. Price performance

Actual price compared to plan Actual price to market Price comparisons between operations

Cost effectiveness Cost changes and cost avoidance

Workload

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Measurement category..2.. Material status and control Supplier performance

Quality, reliability , delivery flexibility etc. Strategic performance Purchasing planning and research

Implementation.. Industry view How much of improvement is due to measuring and

reporting performance, and how much is due to other factors “is a really good question,” he added. : “When we first started along this path, the global supply-chain task force said that performance measurement and measuring the right things and aligning measures across the organization could very well be the most important success factors in making sure that we deliver results. We’ve taken that at face value and really try to report the right supply-chain measures.”

Balance : a MUST As with too many measurements, using too few

performance metrics, or giving too much weight to one, also causes problems.

Try to encourage people to recognize control points in the process — where you get maximum value by taking the time measure —

And to use metrics in a collaborative fashion that helps people recognize the interdependencies in their organization or in the supply chain at large

That gives people some sensitivity as to what went on before them and what will happen next, so they can optimize their actions and decisions in a larger context.

Inventory ManagementInventory ManagementThe Indian Scenario Source: Sahay(2004), Presentation for FICCII

Inventory Overall Industry Sector Averages [as number of days of sales] Average Lowers Highers Lowers Highers

Raw Material 33.41 1 120 CDs 25.0 Engg 42.2

Work in Progress 14.25 0.1 210 FMCG 4.4 Engg 20.7

Finished Goods 16.09 1 40 Auto 9.9 CDs 23.3

Goods in Transit 6.44 - 85 Auto 4.08 Elec 11.0

Accounts Receivables 46.51 2 145 FMCG 16 Engg 72.0

Accounts Payables 45 2 127 Elec 25 CDs 60.0

Inv. at DCs 14.48 2 50 Elect 10 CDs 24.7

Inv. at Distributors 16.77 3 45 Elec 3.0 Engg 23.4

Inv. at Retailers 13.48 1 45 Chem 8.6 Auto 30.0

Summary PMS is necessary in any Supply chain l inking

planning with actual action! Typical Measures: inventories, lead t imes, costs,

customer service, f inancial performance etc. Triggers : increased costs, Increased inventory,

stock-outs etc., poor customer service, lost sales and more.

Frameworks: Functional, Balanced score card, SCOR etc.

Typical Problems: Motivational, Not capturing what is supposed to capture, overkill etc.

Solutions : PMS should be Specific, Measurable, Agreed-upon, Realistic and Time-bound

In short :SMART

Concluding Remarks

PMS helps in assessing the strength as well as identifying the ‘weak spots’

It directs improvement process It motivates variety of stakeholders Guides in implementing strategy Businesses rarely want to design

performance measurement systems from scratch. Usually managers are interested in eliminating any weaknesses in their existing system.

Useful resources

BooksChopra, S. and P. Meindl, Supply Chain Management, Prentice-Hall

Web site www.supplychainmetric.com Supply Chain Council (http://www.supply-chain.org) LogisticsWorld (www.logisticsworld.com ) Links for Best Practices Best Practices in Management (www.bpmanagement.com) Best Change Practices

(www.changecentral.com/changepractices.html) Best Practices in Business Process Re-engineering (

www.prosci.com/bpr_ah1.htm) amrresesrch.com