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UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
DPS 401(DAY): CONTEMPORARY ISSUES IN SUPPLY CHAIN
MANAGEMENT
TOPIC: PERFORMANCE MEASUREMENT IN SUPPLY CHAIN
INSTRUCTOR: S. NYAMWANGE
DATE: 10th Feb 2012
GROUP 6 MEMBERS:
1. GEOFFREY OKONGO D33/28025/2009
2. CHRISTINE KANINI D33/27089/2009
3. DEKA MUSA D33/30604/2010
4. ROBERT MUGO D33 /31995/2010
5. ROSEMARY MUASYA D33/32449/20106. KWAMESA AGGREY D33/31712/2010
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INTRODUCTION
Performance measurement in a supply chain is the ability to meet end-customer needs through
efficiency in terms of minimizing costs involved and effectiveness, product availability and
effectiveness in terms of responsiveness (on-time delivery)of customers demand. Performance
measurement is an evaluation of supply chain activities based on various attributes and describes
the feedback.
The basis of performance measurement is changing and that there are certain characteristics that
have been deemed necessary in order to produce what is relevant for improving world-class
manufacturing performance.
Traditional performance measures based on productivity are no longer appropriate or
representative of the information needs of todays competitive global market. Alternative
performance systems have been proposed that range from time as the basis of all measures to the
integration of a variety of performance measures.
Definition
Performance measurement is defined as the evaluation of the ability of the organization to meet
its objectives. It therefore deals with measuring the effectiveness and efficiency of the supply
chain and establishing the parameters within which programs and investments reach the desired
results.
There are several key terms used in this definition.
Measurement:
This refers to evaluation of what has been set out, for instance the objectives, standards, targets
etc. Measurements are criteria to gauge results. Organizations undertake measuring function to
identify process improvement opportunities, ensure compliance to organizational standards,
identify cost saving opportunities or to benchmark against future performances.
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Performance
This implies measuring how well a particular activity has been carried out. Performance is
therefore grading how somebody is doing. E.g. bad, good fair or excellent.
Efficiency
This is the extent to which the organization resources are utilized to produce a given level of
customer satisfaction. It is basically a measure of productivity derived from the formula
Production = Output/ Input
Effectiveness
This is the extent to which the organization meet its objectives or requirements of its customers.
Importance of measuring performance of a supply chain.
Ensure that all members of the supply chain are working towards a common goal. Promote clear understanding of the job roles To improve performance by noting key areas that requires more effort. Identify areas of improvement Support decision making. Performance measurement leads to better decisions as
performance and results are more visible.
To support better communication across the supply chain. Ensure Customer satisfaction and quality compliance and maintenance. Cost leverage
KEY PERFORMANCE INDICATORS (KPI)
KPIs are metrics, goals or targets commonly used by an organization to evaluate its success or
the success of a particular activity in which it is engaged. KPIs are therefore targets that measure
how well an organization is doing on achieving its overall operational objectives or critical
success factors for a particular project. KPIs evaluate factors that are crucial to the success of an
organization. E. g
delivery time, cost, transportation, efficiency, effectiveness etc
Principles of good performance measurements
1 Measure what is important: An organization should consider measuring what isstrategic so that they can be in a position to meet their goals and targets.
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2 Simplicity or Keep it simple stupid (KISS): It is important to use measurementapproaches or tools that are easy to apply and require fewer resources.
3 Acceptability: the methods or tools of measuring the performance should be acceptableby all stakeholders.
4 Achievability: use methods that must achieve realistic standards of performance so thatthe targets must be achieved.
5 Flexibility: The organization should use flexible methods of measurements that arecapable of being adopted to meet changing circumstances.
6 Appropriateness: The methods of measurement and factors must be relevant to theneeds of the shareholders and the business. For instance, it is important to measure key
areas like quality, delivery performance and cost reduction.
7 Communication: The result of performance measurement should be communicated tothe staff and the departments concerned.
8 Cost: The cost measuring performance should not out weigh the benefit of the exercise.9 Robust/ Strong: This means that the measurement being used should be able to work
again and again.
10 Comparison: The method used should be retained for a reasonable period of time tofacilitate comparison between the past and present performance
Performance measurement process
1 Identify the process flow2 Identify the critical activities to be measured3 Establish performance goals or standards to be achieved by the performance
measurement exercise
4 Establish the performance measurement matrix whether qualitative, quantitative or thebalance score card model
5 Identify the responsible parties to conduct the performance measurement6 Collect data on what is being measured7 Analyze the data and report the actual performance8 Compare the actual data to the set goals and objectives and determine the variations.9 Determine whether corrective actions are necessary after comparing performance.
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10 Make changes where necessary to bring back the organization with predeterminedtargets.
11 Set new goals or targets if necessary.
CATEGORIES OF SUPPLY CHAIN PERFORMANCE MEASUREMENT
Supply chain measures can be broadly divided into three categories:
1.QUANTITATIVE MEASURES
These measures provide numerical targets and findings. They can be classified into financials
and non-financials.
a)financial measures
Financial measures include cost of operations
Cost
It is important to measure the various costs in the supply chain as they directly affect the
profitability of the organization. The various costs are:
Distribution costs- Transport and handling costs Manufacturing costs- Cost of machine maintenance, Labor costs, cost of re-works,
purchase of raw materials and equipments Inventory costs- cost of storing raw materials, WIP, finished goods Incentive costs/ subsidiary costs Taxes Intangible costs/ quality costs Overhead costs- costs incurred when the organizations over or under produce.
b) Non-financials measures
They include;
Resource utilization
This is minimizing cost by using effective resources, methods and minimizing wastes. We
measure resource utilization by terms such as machine hours, machine costs, labor hours, and
delivery time etc
customer service level
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Customer service level in supply chain is fraction of different performance indexes such as;
order fill rate stock out rate back order level probability on time delivery
Cycle time or lead time
Two categories of lead time are considered in performance measurement;
1) Order to delivery lead time that elapses between placement of an order and receipt of the same
order.
2) The supply chain lead time process is the time spent by the supply chain to convert raw
materials into final products and the time it takes to reach the end users.
2. QUALITATIVE PERFORMANCE MEASURES
Performance measures are descriptions of situations or conditions which cannot be recorded
numerically. These are performance measures that describe situations not measureable
numerically. The various qualitative measures include Quality, flexibility, visibility, trust and
innovativeness.
QUALITY
This is a standard of a product or service which is related to customer satisfaction level. Quality
may be measured through:
Customer dissatisfaction- complaint from customers, losing customer to your competitor Customer response time- time between placing and receiving an order. Also called order
cycle time. Can be measured by reaction time (time it takes to receive a special order),
manufacturing time and delivery time.
Lead time- Time required when the product starts to be manufactured until the time itleaves production unit
On time delivery- Delivery performance is calculated by;Number of orders/ total number of orders * 100
Fill rate- The extent to which the customer order quantities are met Stock out probability- This is a probability that a requested item is out of stock
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Accuracy- How accurate in meeting specifications given by the customer. Measured bythe percentage of accurate goods/ services delivered.
FLEXIBILITY
This is the extent to which an organization can adapt to change. Flexibility can be measured at
the input level, process level and at the out put level.
Input level:
Labor flexibility- workers who are cross trained
Machine flexibility- Extent to which a Machine can provide different services. Its measured by
efficiency of switching.
Process level flexibility
Material handling flexibility
Routing flexibility- Different ways of manufacturing a product of offering a service e.g. having
many lines
Volume flexibility- How to vary volume production depending on demand
Mix flexibility- measures the number or variety of products which can be produced without
incurring a loss. It also measured by the duration of time required to produce a new product.
Improvement flexibility
Modification flexibility- How flexible the organization can modify the product to meet differenttastes and preferences.
Expansion flexibility- How fast/ slow the organization can expand capacity.
VISIBILITY, TRUST AND INNOVATIVENESS
Visibility
Information flow is critical in supply chain and should not be distorted as it passes along the
supply chain. Organizations can measure the time it takes for information to pass across the
members of a supply chain as well as the accuracy of information passed. Visibility of supply
chain is assisted by information technology
Trust
It is the extent to which the organization keeps its word. This is measured by the consistency of
quality and delivery.
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Innovativeness
This is how efficiently an organization comes up with new products and services or new ways of
operations. It is measured by the Launch of new products and the use of technology.
3) ENVIRONMENTAL PERFORMANCE MEASURES
This is a way of measuring the extent to which the supply chain adopts green concept. This is
measured by the level of Emissions to the natural environment i.e. air, water, land. It is also
measured by the extent of Resource use in the organization such as use of renewable energy,
recycled water etc.
Environmental performance indicators have been zeroed in to four key categories that are also
considered to be significant to various businesses. These are;
Emission to air Emissions to water Emission to land and Resource useExample of performance measurement.
1) Purchasing performance evaluation that can be evaluated using; Accounting approach,management by objective, comparative approaches and purchasing management audit
approach.
2) Supplier performance evaluation.Why evaluate supplier performance
Evaluation can significantly improve supplier performance Assist in decision making regarding when a supplier is retained or removed from an
approved list.
Evaluation provides suppliers with an incentive for continuous improvements Help in deciding which supplier should specific order is placed
Supplier performance rating methods
Subjective
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Survey method Comparative method Percentage based methods
Example of supplier performance measurement
Cost escalation against targets Technology roadmaps Compliance to environmental and social responsibilities standards Ability to integrate into supply chain Attainment of customer satisfaction
Problems with purchasing and supply chain performance measurement
Too much data and wrong data Measures are short term focused Lack of details Drive the wrong performance Setting unachievable targets Problems of accurate measurement.
APPROACHES TO PERFORMANCE MEASUREMENT.
Measurement will identify on the part of the supplier. It will allow the supplier the opportunity
to improve their performance (assuming that the cause of the weakness lies with the supplier).
It will also allow the buying organization to seek compensation for poor performance.
Feedback obtained during the measurement process may also be used to develop staff and
organizational measurement skills, helping to ensure continuous improvements in overall
supplier performance.
Below is a summary of several different methods we can use to measure suppliers
Type Description
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1. Statistics based
2. Perception based
3. Research based
4. Standards and accreditations
5. Self assessment
Relies heavily on the availability of statistics, and
is therefore oriented to measurable or
transactional activities.
There can be different levels of complexity in
terms of content and statistical analysis.
Is concerned with perceptions and opinions.
It can be an easy way to undertake a simple
review of suppliers performance.
Opinions are usually often converted to figures
for positioning purposes.
Checking out a suppliers performance through
research.
Using supplies accreditations as a basis for
performance.ISO standards are recognized
worldwide, but there may be a company or
national scheme that could be used, e.g. KEBS
Using suppliers existing or proposed self
assessment of performance to avoid introducing
a new performance measurement system in the
buyers organization.
1.ACCOUNTING APPROACH
a) The profit center approachIn this approach, the purchasing function is regarded as part of the company that controls assets
and is responsible not only for expenditure but also income. The objective of this approach is to
demonstrate that the purchasing function is a profit rather than a cost center. The approach
involves establishing a centralized purchasing organization that controls assets such that
purchasing sells to other functions at what is termed as transfer price. The executive of the
purchasing is therefore expected to base any decision on profit criteria and performance is
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measured in terms of the profits generated by the function. The critic of this approach argues that
this approach is more theoretical than practical although it is advocated on the ground that it:
Provides a measure of efficiency of the supplies function Allows supplier managers to control their budgets and spend to save money.
b) Activity based costing (ABC)ABC costing contributes to performance measurement in the following ways:
Together with JIT, ABC distinguish between value adding and non value addingactivities and ultimately seek to eliminate all wasteful activities by using fewer suppliers,
improved reliability, minimal paper work, reduced inventory etc.
Analysis of cost drivers. A cost driver is an activity that creates a cost. ABC highlightsthe fact that complicated products require enhanced negotiation expenses, more suppliers
and purchasing orders, increased administrative costs and similar cost drivers. The
following measures indicate the opportunities for cost savings by simplifying supplier-
driven activities.
Number of suppliers per product= Number of suppliers
Number of products
Number of orders per product= Purchase orders
Number of productsCost savings can be made by:
Reducing the complexities of bought out items by means of standardization Reducing the amount of negotiation and number of suppliers by the introduction of single
sourcing or an approved source list
Improved design using standard, simplified or fewer parts Elimination of unprofitable products. Allocation of overheads to products. If an ABC analysis shows that product X requires
the purchase of items from 12 suppliers while product Y only involves purchase from 2
suppliers, then product X would incur higher proportion of the purchasing cost than
product Y.
c) Standard costing and budgetary control
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This is a control technique which compares costs and revenues with actual results to obtain
variances which are used to stimulate improved performance. Standard costing can monitor
performance by variance analysis while budgetary control assists performance measurement by:
Defining the results to be achieved by functions and their staff for the purpose ofrealizing overall objectives.
Indicate the extent to which actual results have exceeded or fallen below those budgeted. Establish the extent and causes of budget variations. Appraising budgets to correct adverse trends or take advantage of favorable conditions Exercising centralized control in circumstances of decentralized activity Providing a basis for future policies and where necessary, the revision of current policiesa) Economic value added (EVA)
This is a value based financial measure. This measure is calculated by;
Calculating the net operating profit after tax Identifying the organizations capital Determine a reasonable capital cost rate Calculate the organizations economic value added.
EVA therefore is a net operating profit minus an appropriate charge for the opportunity cost of
all capital invested in an organization. Alternatively, the amount by which earnings exceed or fall
short of the required minimum return investors could get by investing in other organizations
offering a comparable risk. EVA therefore reduces all financial performance to a single measure
of ways to improve EVA. EVA can be improved by;
Improving returns with little or only minimal capital investment Investing new capital only in processes or equipments that will at least recover their
capital costs, while avoiding investments with lower than capital cost returns
Identifying and eliminating processes or operations where the return is below capital costand where there is no possibility of improving the returns.
EVA concept is relevant to purchasing as supplies and their procurement are importantoperation costs. A reduction in such costs by reducing prices, more effective procedures
or outsourcing will increase profitability.
.
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2. SIMPLE VENDOR RATING.Vendor rating is the process of measuring performance of a vendor (supplier): its usually
implies the use of a process or system. Its a tool that will act as a control on
performance. Problems will be highlighted, allowing corrective action to be taken by
either or both parties as appropriate.
At a simplistic level, suppliers performance is typically measured by:
Quality-could be the number of acceptable deliveries in relation to the totalnumber of deliveries received.
Delivery-could be the number of deliveries delivered on time in relation to thetotal number of deliveries received
After sales service-could be the time taken in hours or days for queries to beresolved, measured against a target.
Price-could be measured as the delivery price quoted by the supplier against thelowest delivery price for the same article by any one supplier.
Factor Score target Score
Quality(by
delivery)
15 15 1
Delivery timing(by
delivery)
13 15 0.87
After sales service 10 20 0.5
Price 290 300 0.97
Total 3.33
target 4.00
actual 3.33
Overall
assessment
83%
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*compare the actual with the target and express as a percentage.
From this we can say that the suppliers performance over the measured period of time was 83%
of that required. Clearly, this information supported by the raw data can form the basis for
serious discussions on service improvements.
3.COMPARATIVE APPROACH
Bench marking
Bench marking can be defined as a measurement standard for comparison that is recognized as
the standard of excellence for a specific business process. This is a measured best in class
achievement. There are four types of bench marks namely:
Internal benchmarks- Method of comparing the performance of an operating unit or
function within an organization with those of a similar business within the same industry
Functional bench marks (Genuine or operational benchmarks) - Comparing internal
function with those of the external practitioners of those functions irrespective of the industry
they are in.
Competitive benchmarks- Comparing organizational performance against that of the
competing organizations.
Strategic benchmarks- evaluating alternatives, implementing strategies and improving
performance by understanding and adapting successful organizations that may be competitors or
partners.
Benchmarking improves supply chain in that;
It provides a gap analysis tool- gap between where we are and best in class organization Motivates in that it provides objectives achieved by others Experience and knowledge base of employees is enhanced Bench marks are not static. Benchmark performance result in ever higher levels of
achievement by competitive market forces. The original target set is therefore a moving
target and must be subject to continuous reassessment.
3. PERCEPTION BASED RATING.An alternative to vendor rating is the category mode, in which the buyer can assess the
supplier in some depth. Very often this will be centered on a checklist
Performance categories ratings
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good acceptable poor
Delivery performance( correct quantities)
Delivery performance( on time)
Price( performance over time)
Quality and compliance to specifications
Invoicing and financial performance
Good accurate documentations
Problem solving when difficulties occur
In this example a good, acceptable, and poorrating has been used. Another common method
is to allocate numerical positions for example 1=poor and 5=excellent. This then allows some
basic calculations to be made, which makes it easier to compare suppliers.
4. THE BALANCE SCORECARD
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It was developed in the early 1990s by Robert Kaplan and David Norton of the Harvard
business school. According to them, balance score card retains the financial measures but
financial measures only indicate past events and therefore inadequate. Thus it is important forcompanies to make future values through investment in customers, suppliers, employees,
processes, technology and innovation.
The balanced scorecard is a strategic planning and management system that is used extensively
in business and industry, government, and nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals.
The balanced scorecard has evolved from its early use as a simple performance measurement
framework to a full strategic planning and management system. The "new" balanced scorecard
transforms an organization's strategic plan from an attractive but passive document into the
"marching orders" for the organization on a daily basis. It provides a framework that not only
provides performance measurements, but helps planners identify what should be done and
measured. It enables executives to truly execute their strategies.
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The balanced scorecard approach provides a clear prescription as to what companies should
measure in order to 'balance' the financial perspective. The balanced scorecard is a management
system (not only a measurement system) that enables organizations to clarify their vision and
strategy and translate them into action. It provides feedback around both the internal business
processes and external outcomes in order to continuously improve strategic performance and
results. When fully deployed, the balanced scorecard transforms strategic planning from an
academic exercise into the nerve center of an enterprise.
The balanced scorecard suggests that we view the organization from four perspectives; customer,
financial, internal business process and learning and growth and to develop metrics, collect data
and analyze it relative to each of these perspectives:
The Learning & Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self-improvement. In a knowledge-worker organization, people -- the
only repository of knowledge -- are the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers to be in a continuous
learning mode. Metrics can be put into place to guide managers in focusing training funds where
they can help the most. In any case, learning and growth constitute the essential foundation for
success of any knowledge-worker organization.
Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things likementors and tutors within the organization, as well as that ease of communication among
workers that allows them to readily get help on a problem when it is needed. It also includes
technological tools; what the Baldrige criteria call "high performance work systems."
The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the
managers to know how well their business is running, and whether its products and services
conform to customer requirements (the mission). These metrics have to be carefully designed by
those who know these processes most intimately; with our unique missions these are not
something that can be developed by outside consultants.
The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of
customer focus and customer satisfaction in any business. These are leading indicators: if
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customers are not satisfied, they will eventually find other suppliers that will meet their needs.
Poor performance from this perspective is thus a leading indicator of future decline, even though
the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of kinds of
customers and the kinds of processes for which we are providing a product or service to those
customer groups.
The Financial Perspective
Timely and accurate funding data will always be a priority, and managers will do whatever
necessary to provide it. In fact, often there is more than enough handling and processing of
financial data. With the implementation of a corporate database, it is hoped that more of the
processing can be centralized and automated. But the point is that the current emphasis on
financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps
a need to include additional financial-related data, such as risk assessment and cost-benefit data.
5. THIRD PARTY INVOLVEMENT AND TESTING PROCEDURES.This involves the inclusion of another party in what is usually a two-party relationship,
for example, in third party quality testing the work is undertaken by someone who is not
the buyer or seller.
Ultimately, the success of any measurement system depends on the skills of the peoplewho operate and use it
Additional support and training may be needed, which may be available either from
internal or external sources. Supply and purchasing management must decide this, based
on their estimate of in-house capabilities and resources. This will include the assessment
of:
Available finance Available time Staffing levels and staffing skills Organizational policies and procedures Quality of internal relationships Size and technical content of the project or purchase
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Following this assessment a decision can be made on the potential for involving third party
organizations. Typical areas of involvement include the following:
The provision of skilled labor or a project manager for a period of time. Specialist consultants can provide advice and guidance on how to implement a suppliers
measurement project The provision of IT services Market and supplier research External testing houses can test specific components, assesses a suppliers total capability,
or assesses for compliance with international standards such as ISO 9000
On building projects a whole range of performance measurement can be carried out viaarchitects and surveyors
For some service contracts, third party suppliers w ill provide mystery shoppers whowill test performance
The principle disadvantages of using third parties include:
Cost, especially over long periods. Regular changes of the contracts personnel which often make continuity different. Loss of interest by contractor. Consultants often offer high level personnel at the
beginning , but gradually change this over the life of the contract.
The need to monitor the contracts services.6. THE PURCHASING MANAGEMENT AUDIT APPROACHScheuing defines audit approach as a comprehensive, systematic, independent and periodic
examination of a companys purchasing environment, objectives and tactics to identify problems
and opportunities and facilitate the development of appropriate action plans. Purchasing audits
helps to; Police the extent to which the purchasing policies laid down by senior management are
adhered to Help to ensure that the organization is using techniques, procedures and methods that
conform to best working practice Monitor and measure the extent to that resources are used
effectively Assist in the prevention and detection of fraud and malpractice Purchasing audits are
carried out by external and internal auditors, a central purchasing function, a purchasing research
function and external management consultants. Purchasing management audits covers such areas
as; Purchasing perspective problems and opportunities- perception of purchasing staff on their
contribution to profitability, decision making and status in the organization.
Purchasing organization- Rank of the chief purchasing officer in the organization hierarchy is the
function centralized or decentralized, the interfaces, improvements of the purchasing function
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etc.
Purchasing personnel- number of staff, their qualifications, duties etc.
Purchasing policies- written or not, supplier relationship manual, purchasing manual
Purchasing procedures- are all procedures computerized?
Inventory- does company use ABC analysis, Rate of turn over etc.
When preparing the report to be presented to senior management auditors should highlight
policies, procedures and personnel where efficiency and effectiveness can be improved,
commend good practice and performance and support constructive proposals made by
purchasing staff that may receive greater attention if made by the outside source.
*process audit-
-on any measurement process that runs for a long time it is useful to check that the systems are
working as intended. Typically this might be done once, as the system becomes live, and at
regular intervals thereafter during its life.
*value for money audit-
-v.f.m. audit sets out to establish whether the organization is gaining value from the processes,
and would typically focus on benefits:
Can we show what we have saved relative to wh at we have spent?
Are there cash savings? If theres no cash savings, have we gained in other areas, such as better quality of product
service
*audit trail-
- the audit trail is an important part of any management process of this kind. Much of it will be
documentation, but the key principles should be transparency and openness
It should start with a well documented plan that sets out what is to be achieved and howits to be carried out. This is helpful, because it allows better planning, facilities audit,
and acts as a benchmark for assessing progress.
It will include all necessary documents, files, records, data, and minutes generated byactivity as the process is running. This is particularly important, because the intention is
to continuously improve, and this cannot be measured without data
It will include regular reports to senior management as required
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It will act as a valuable training for other projects, and for inducting new members.7. MANAGEMENT BY OBJECTIVES (MBO)The aim of the MBO is to identify the objectives that a manger or function should be expected to
achieve within a given time, at the end of which the actual performance will be compared with
the desired results. One approach to MBO, known as key result analysis requires functional
heads to identify their key tasks, performance standards and control information with a view to
suggesting how their individual performance and the performance of their function can be
improved. There are three main types of objectives;
Improvement objectives that seek to improve performance in specific ways in relation tospecific factors such as to reduce the prices paid for all costing used in the assembly of
conveyor rollers by 5 per cent in the financial year.
Personal development objectives that relate to personal growth objectives or theacquisition of the expanded job knowledge, skill and experience e.g. to commence by
the next financial year a business degree course.
Maintenance objectives which express intentions to maintain performance at its currentlevel e.g. maintain zero defect level in production
Supply chain operations reference model (SCOR)
SCOR integrates Business Process Reengineering, Benchmarking, and Process Measurementinto a cross-functional framework.The Primary Use of SCOR is to describe measure andevaluate supply chain configurations. The model contains; standard descriptions of management
processes, a framework of relationships among the standard processes, standard metrics to
measure process performance and management practices that produce best-in-class performance.
Importance of SCOR model
Determine what processes to improve and by how much to improve them Guide the consolidation of internal supply chains (which results in significant cost
reductions from eliminating duplicative assets)
Create standard processes and common information systems across business units(which generates major cost savings, cycle-time and quality improvements)
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Develop a common scorecard by which customers can measure their performance and bywhich SCC members can measure suppliers performance (which can lead to major
cross-organizational process improvements).
Evaluate and compare their performances with other companies effectively Identify and pursue specific competitive advantages Identify software tools best suited to their specific process requirements
SUPPLY CHAIN OPERATIONS REFERENCE MODEL (SCOR): BASIC MANAGEMENT
PROCESSES
Plan (Processes that balance aggregate demand and supply to develop a course of action which
best meets sourcing, production and delivery requirements)
Balance resources with requirements Establish/communicate plans for the whole supply chain
Source (Processes that procure goods and services to meet planned or actual demand)
Schedule deliveries (receive, verify, transfer)Make (Processes that transform product to a finished state to meet planned or actual demand)
Schedule productionDeliver(Processes that provide finished goods and services to meet planned or actual demand,
typically including order management, transportation management, and distribution
management)
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Warehouse management from receiving and picking product to load and ship product.Return (Processes associated with returning or receiving returned products)
Manage Return business rulesCONTEMPORARY ISSUES IN PERFORMANCE MEASUREMENT
Performance measurement has evolved in two main phases. The first phase began in the late
1880s and went through the 1980s. In this phase the emphasis was on financial measures such as
profit, return on investment and productivity. The second phase started in the late 1980s as a
result of changes in the world market. Companies began to lose market share to overseas
competitors who were able to provide higher-quality products with lower costs and more variety.
To regain a competitive edge companies not only shifted their strategic priorities from low-cost
production to quality, flexibility, short lead time and dependable delivery, but also implemented
new technologies and philosophies of production management (i.e. computer-integrated
manufacturing (CIM), flexible manufacturing systems (FMS), just in time (JIT), optimized
production technology (OPT) and total quality management (TQM)). The implementation of
these changes revealed that traditional performance measures have many limitations and the
development of new performance measurement systems is required for success.
TRADITIONAL PERFORMANCE MEASURES
Traditionally, performance measures have been primarily based on management accounting
systems. This has resulted in most measures focusing on financial data (i.e. return on investment,return on sales, price variances, sales per employee, productivity and profit per unit production).
Of these performance measures productivity has been considered the primary indicator of
performance.
General limitations of traditional performance measures
There are eight common limitations of traditional performance measures and traditional
management accounting system.
1. Traditional management accounting systems. The most significant limitation oftraditional performance measures is that they are based on traditional management
accounting systems that were initially developed for the purpose of attributing the total
costs of manufacturing operations. During this period labor was the major cost driver that
management accounting systems emphasized and other costs were de-emphasized by
putting them together in one overhead category. However, today the average labor cost
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component is lower compared to the manufacturing cost. Since in this case overhead is
allocated based on the minor cost element of direct labor this allocation approach is not
valid.
2. Lagging metrics. Financial reports are usually closed monthly. Therefore, they arelagging metrics that are a result of past decisions. As result operators, supervisors,
operational managers consider financial reports too old to be useful for operational
performance assessment.
3. Corporate strategy. Traditional performance measures have not incorporated strategy.Rather the objectives have been to minimize costs, increase labour efficiency and
machine utilization.
4. Relevance to practice. Traditional performance measures try to quantify performanceand other improvement efforts in financial terms. Yet, most improvements efforts are
difficult to quantify in monetary terms (i.e. lead time reduction, adherence to delivery
schedule, customer satisfaction and product quality). In addition, operators find typical
financial reports difficult to understand which leads to frustration and dissatisfaction. As
a result, traditional performance measures are often ignored in practice at the factory shop
floor level.
5. Inflexible. Traditional financial reports are inflexible in that they have a predeterminedformat which is used across all departments. However, even departments within the same
company have their own characteristics and priorities. Thus, performance measures that
are used in one department may not be relevant for others.
6. Expensive. The preparation of traditional financial reports requires an extensive amountof data which is usually expensive to obtain.
7. Continuous improvement. Fisher (1992),) argues that setting standards for performancemeasures in general conflicts with continuous improvement. If standards were not
carefully set, they had the effect of setting norms rather than motivating improvement.
Workers may hesitate to perform to their maximum if they realize that the standard for
upcoming periods may be revised upward by current results.
8. Customer requirements and management techniques. Maskell (1992) argues thattraditional performance measures are no longer useful since in order to meet customer
requirements of higher-quality products, shorter lead time and lower cost management
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have given shop floor operators more responsibility and authority in their work.
Consequently, traditional financial reports used by middle managers do not reflect a more
autonomous management approach.
There three main emerging performance measurement metrics namely: Balance score card,
SCOR model and Time. Balance score card and SCOR models have been discussed earlier. This
section will only deal with time as a strategic performance measure.
The characteristics of emerging performance measures include:
measures related to manufacturing strategy; primarily non-financial measures (i.e.operational) so they can provide managers, supervisors, and operators with information
required for daily decision making;
Simple measures so that shop floor operators can easily use and understand them;measures should foster improvement versus just monitor it; and measures should change
as is required by a dynamic marketplace.
CONCLUSIONS.
Performance measurement is important to every organization as it provides insight to the
operations of the organizations and analyzes the weaknesses and threats that the
organization faces.
Performance measurement provides opportunities for new ventures and improvements inoperations hence giving an organization competitive advantage over its competitors
REFERENCES
1. Lysons k and Farrington B (2006), purchasing and supply chain management, seventhedition, Pearsons education ltd pg 671
2. Chan F.T.S (2001), performance measurement in supply chain, the international Journalof advanced manufacturing technology vol. 21, no. 7, retrieved October 11, 2011.
www.emeraldinsight.com.
3. Hervani, A. A., Helms, M. M., & Sarkis, J. (2005). Performance measurement for greensupply chain management. International journal vol. 12. No. 4. Retrieved March 29,
2011. www.emeraldinsight.com/1463-5771.htm
4. Kaplan, R.S. (1983), "Measuring manufacturing performance: a new challenge formanagerial accounting research".
