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Agenda
• Motivation for Performance Measurement
• Traditional Performance Measurements
Supply Chain Performance
Lecture 12
TIØ 4285 Production- and network economics
• Different Perspectives on Supply Chain Management and
Performance Measures
• Supply Chain Performance Measures
• Latest Developments in Performance Measurement Systems
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SCM and Performance Measurement
• The purpose of Supply Chain Management is improving the long term
performance of individual companies and of the supply chain as a
whole!
• SCM provides member organizations with an opportunity to optimize
logistics performance at the highest level, which is the interorganizational level
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Motivation
Business strategy
Overall cost leadership
Supply chain strategy
Operational excellence
Supply chain capabilities
and combinations
Cost and productivity versus
customer service and
proactive quality
Supply chain
performance
3
Low logistics costs, availability,
coverage, etc
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Motivation (cont.)
Traditional Performance Measures
• A system of supply chain metrics can be used to:
• Supply-focused performance
– Increase the chances for success by aligning processes across multiple
firms
– Targeting the most profitable market segments
– Obtaining a competitive advantage through differentiated services and
lower costs
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– Logistic costs
– Productivity
• Demand-focused performance
– Customer service
– Quality
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Importance of Performance Measures
Examples of Performance Measures
• The following slides will display importance of different performance
measurements for supply chain success
•
1.
2.
3.
4.
5.
• The study of these measurements are based on a survey of
approximately 1500 US and Canadian firms
– Including 111 companies regarded as exhibiting world class best practices
in supply chain management and logistics
• Determined by an expert panel
– See: Edward A. Morash “Supply Chain Strategies, Capabilities, and
Performance”, Transportation Journal, Vol. 41, Iss. 1, Fall 2001
Customer service measures (sorted by importance)
•
Stockouts
Fill rate
On-time deliveries
Overall satisfaction
Customer complaints
Less important:
–
–
–
–
–
–
Backorders
Cycle time
Complete orders
Sales force complaints
Response time to inquiries
Response accuracy
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Examples of Performance Measures
Examples of Performance Measures
•
• Cost measures (sorted by importance):
Quality measures (sorted by importance):
1.
2.
3.
4.
5.
•
1.
2.
3.
4.
5.
Picking/ shipping accuracy
Overall reliability
Delivery consistency
Document/ invoicing accuracy
Shipping errors
• Less important:
Less important:
–
–
–
–
–
Total cost
Cost trend analysis
Outbound freight cost
Cost per unit
Comparison of actual versus budget
–
–
–
–
–
–
Number of customer returns
Number of customer returns
Number of credit claims
Damage frequency
Order entry accuracy
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Administrative cost
Cost of backorder
Cost of damage
Inventory carrying cost
Cost of returned goods
Cost of service failures
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Examples of Performance Measures
Conclusion from the Study
•
• Supply chain strategy, capability and performance must be congruent,
i. e. focusing either on the demand side or the supply side
Productivity measures (sorted by importance):
1.
2.
3.
4.
5.
•
Total productivity index
Warehouse labor productivity
Units shipped per employee
Comparison to historical std.
Order entry productivity
• Choose capabilities and performance measures according to the
focus
• Demand-side capabilities are related to customer closeness
strategies, whereas supply-side capabilities are related to operational
excellence strategies
Less important:
–
–
–
–
Orders per salesperson
Units per labor dollar
Equipment downtime
Transport labor productivity
• Demand-side measures (Customer service and quality ) are viewed by
the top third firms as more important than supply-side measures
(logistical cost and productivity)
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Traditional Supply Chain Metrics
• Many traditional supply chain metrics are primarily internally focused
logistics measures
• Single-company performance is not translated into supply chain
performance and vice versa
• These metrics fail to capture how the overall supply chain has
performed
– Fail to identify where opportunities exist to increase competitiveness,
customer value and shareholder value for each firm in the supply chain
Different Perspectives on Supply Chain
Management
• System Dynamics
• Operations research
• Logistics
• Marketing
• Organization
• Strategy
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Short Description of the Different
Companies
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An Example from the Automotive Industry
The Supply Chain:
• Robbie Busch AG
– One of the world’s biggest automotive suppliers
– Develops and manufactures electronic systems, e. g. ABS-systems
• Ødi AG
– Manufacturing cars for the more exclusive market segment, i. e. highpriced cars
– Producing in-house with one exception: a supplier for electronics
Supplier
Manufacturer
Distributor /
Retailer
Robbie
Busch AG
Ødi AG
Bøller Bil
Inventory
Inventory
• Bøller Bil
– Offical importer for Ødi AG’s cars to Norway
– Selling Ødi’s to end-customers all over the country
Information
Funds
Goods
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System Dynamics
description
System Dynamics
standard problems and solutions
• Views the supply chain as a chain of consecutive, sequentially
interdependent local transaction systems
•
–
–
–
–
–
• Each local system optimizes the conversion of customer orders into
material requirements and finished products
• The systems are connected bilaterally through the exchange of orders
• The goal of SCM is to equate customer demand with product supply,
thereby balancing the conflicting goals of customer service, stock
levels and manufacturing costs
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Problems:
•
Distortion of demand pattern
Uncoordinated ordering behavior
Uncoordinated demand planning and demand forecasting
Poor inventory visibility
Uncoordinated manufacturing control
Solutions:
–
–
–
–
–
–
–
Eliminate local system/ reduce complexity
Demand transparency – flow of information
Collaborative demand planning
Pipeline transparency (inventory visibility)
Re-ordering discipline
Collaborative production
Collaborative capacity planning
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The System-Dynamics Perspective
Supplier
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
Robbie
Busch AG
Inventory
•
•
•
•
•
•
Inventory
Capacity Utilization
Cumulative Inventory Levels
Stock-Outs
Time Lags
Time to Adapt
Phantom Ordering
Operations Research / IT
description
• Models the supply chain as a configurable and flow-programmable
resource network
– Moving material objects from the sources of production to end customers
– Adhering to various restrictions (constraints)
• Elements within the optimization scope include
–
–
–
–
–
–
Plants
Distribution centers
Suppliers
Customers
Orders
Products, etc.
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OR/IT
standard problems and solutions
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The OR/IT Perspective
Supplier
• Problems:
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
– Manufacturing
• Number of plants, degree of integration, etc.
– Distribution/ transportation
– Supplier
– Spare parts
Robbie
Busch AG
Inventory
• Solutions:
– IT-based identification of the optimal algorithm
– Heuristics to adapt to the real-life problems
Inventory
• Logistics Cost per Unit
• Service Level
• Time to Deliver
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Logistics
description
Logistics
standard problems and solutions
• Analyzing the supply chain from a conceptual base
• Problems:
– Interfaces
• Views the chain as a set of business processes, which for
management purposes are compared to generic business process
models
• Internal and external
– “Shape” of the internal supply chain
– Cycle time
• Solutions:
• 4 generic processes are suggested:
–
–
–
–
“idea to market”
“prospect to sale”
“order to payment”
“record to plans”
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–
–
–
–
Sequential integration
Vertical integration
Horizontal integration
Order penetration point
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The Logistics Perspective
Supplier
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
• Seeing the supply chain as a pipeline connecting products and
customers
– Segment customers and connect them with the “right” channel
Robbie
Busch AG
Inventory
•
•
•
•
•
Marketing
description
Inventory
Integration
Lead Times
Order Cycle Times
Inventory Level
Flexibility
• A marketing channel is the result of the process of connecting
independent institutions between a point of origin and a point of
consumption
• Outputs of the supply chain from a marketing perspective are primarily
costs and customer service
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Marketing
standard problems and solutions
The Marketing Perspective
Supplier
• Problems:
–
–
–
–
–
–
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Marketing strategy
Determining customer service
Balancing the order cycle time and lead time gap
Segmentation of customers and differentiation
Product characteristics
Internal and external interface management
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
Robbie
Busch AG
Inventory
Inventory
• Customer Satisfaction
• Distribution Cost per Unit
• Market Share / Channel Cost
• Solutions:
– Do not segment the markets
• Undifferentiated approach
– Do segment the markets
• Differentiated approach
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Organization
description
Organization
standard problems and solutions
• Perceiving the chain as a set of inter-organizational relationships
• Problems:
• Doing business in an open system requires relationships between a
company and its environment
– The relations may be manifold (chain, vertical, horizontal)
– Vertical relations dominate the analysis
• SCM defined as relationship-management (upstream and
downstream)
– Integration, density and interlocks
– Structures of control
– Conflict management
• Solutions:
– Quality check of the relationships
– Identify the complexity of the relationship
– Replace power by trust
• Seen as management approach to overcome functional barriers and
to coordinate inter-organizational relationships
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The Organization Perspective
Supplier
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
Robbie
Busch AG
Inventory
Strategy
description
•
Perceiving the supply chain as an arrangement of competencies and
profits
•
Strategies answer 2 fundamental questions:
1. In which fields of the market should we act? What is our domain?
2. Given the domain, how should we act?
Inventory
•
•
•
•
•
Transaction Costs
Time to Network
Flexibility
Density of Relationships
Very often, SCM is seen as dealing with the “How”, but not with
“Where”, e. g. success through
–
–
–
–
integration,
optimization of the whole chain
close collaboration with customers and suppliers
etc.
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Strategy
standard problems and solutions
The Strategy Perspective
Supplier
• Problems:
– Different opportunities in time to market
– Moving target – anticipation of profitable locations
– Supply chain flexibility
• Solutions:
–
–
–
–
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Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
Robbie
Busch AG
Inventory
Virtual vertical integration
Vertical hedging
Flexibility, re-configuration
Product design
Inventory
• Time to Network
• Time to Market
• ROI of Focal Organizations
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Problems with these Metrics
Example
• Single-company metrics, supply chain as a whole is not really
analyzed
• Consider inventory turn in this value chain
• Managers can only determine whether they have met their corporate
goals after the fact, by diagnosing financial results or when they lose a
key customer
• Metrics from different approaches can be competing,
Service Level ↔ Inventory Level
• The complexity of supply chain management is not captured
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– Normal traditional performance measure
– Does not qualify as a supply chain metric
• As inventory moves closer to the point of consumption, it increases in
value
– If opportunity cost of money and the inventory turns are similar, inventory
carrying costs are much higher at the retail level
– Improvements in inventory turns at the end of the supply chain will thus
improve performance more than changes at the beginning
– Inventory (or better: inventory ownership) should be moved backwards in
the supply chain
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Example
Supplier
Robbie
Busch AG
Variable cost
of product: $5
Full manufactured
cost: $ 7
Selling price: $ 10
Comparing Inventory Carrying Costs (ICC)
Manufacturer
Distributor /
Retailer
Ødi AG
Bøller Bil
Supplier
Cash value of inventory
Variable cost of material: $10
Acquisition cost: $1
Other variable costs: $14
Total variable cost
of product: $ 25
Full manufactured cost: $40
Selling price: $60
Manufacturer
Distributor /
Retailer
$5
$25
$62
Inventory carrying costs %
36%
36%
36%
ICC/unit with
Variable cost of
material: $60
Acquisition cost: $2
Total variable cost
of product: $ 62
Selling price: $80
1 turn
$1.80
$9.00
$22.32
2 turns
$0.90
$4.50
$11.16
3 turns
$0.60
$3.00
$7.44
4 turns
$0.45
$2.25
$5.58
5 turns
$0.36
$1.80
$4.46
6 turns
$0.30
$1.50
$3.72
7 turns
$0.26
$1.29
$3.19
8 turns
$0.23
$1.13
$2.79
9 turns
$0.20
$1.00
$2.48
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Evaluating Inventory Turns
The Need for Supply Chain Metrics
• Assuming the same number of inventory turns at every level in the
supply chain, the biggest potential lies at the end of the supply chain
• What if the number of inventory turns is not equal, but already
increasing towards the end of the supply chain?
• The requirement to go beyond internal metrics and take a supply
chain perspective
• The requirement to align activities and share joint performance
measurement information to implement strategy that achieves supply
chain objectives
• The desire to expand the “line of sight” within the supply chain
• The requirement to allocate benefits and burdens resulting from
functional shifts within the supply chain
• The need to differentiate the supply chain to obtain a competitive
advantage
• The goal of encouraging cooperative behavior across corporate
functions and across firms in the supply chain
• Assume that the manufacturer has 7 inventory turns whereas the
supplier has only 2
• An increase in inventory turns at the manufacturer level results then
only in an improvement of $0.16 per unit, whereas an improvement at
supplier level level will result in $0.30 per unit lower ICC
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Short Repetition: The Bullwhip Effect
Possible Causes
Increasing variability of orders up the supply chain
• Promotional sales
• Volume and Transportation discounts
– Batching
• Inflated orders
• Demand Forecast
• Long cycle times
• Lack of Visibility to demand information
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Possible Ways to Cope with the Problem
• Reduce Variability and Uncertainty
The Bullwhip Effect and
Performance Measurement
• What would be the requirements to a performance measurement
system that helps avoiding the Bullwhip effect?
– POS
– Sharing Information
– Year-round low pricing
• Based on inventory levels, sales, lead times, …
• Information about the performance indicator must be available to all
partners
• Consequences to the single-company due to changes in the
performance indicator must be shown
• Managers must be able to derive actions from the information
provided by the perfmance indicator
• Reduce Lead Times
– EDI
– Cross Docking
• Alliance Arrangements
– Vendor managed inventory
– On-site vendor representatives
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Supply Chain Performance and
Single-Company Performance
How to Select Indicators
Indicators have to be SMART:
Supply Chain Level
•
•
Supply Chain Performance
Indicators and Single-Company
Indicators have to be connected
Customer
Competitive
Requirements Priorities
Management
Priorities
• Specific: Specific and targeted to the area being measured
• Measurable: Accurate and complete data is collected and correlated
against a standard
Indicators have to be choosen such
that they induce congruent actions
among the member organizations
• Actionable: Allowing for corrective or mainting actions
• Relevant: A common downfall is to measure everything, which
Single Company Level
produces many meaningless measures
Customer
Competitive
Requirements Priorities
Management
Priorities
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Supply Chain Performance Measurement:
State-of-the-art
• Timely: Timely metrics are those for which data is available when it is
needed
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Graphical Support to the User
Multi-dimensional KPI (Key Perfomance Indicator) dashboard
• Controlling the process performance towards the set objectives
requires attention towards several indicators simultaneously
• PI dashboard: The following issues have to be considered
– Which graphical representation is more efficient? How should it look like
to facilitate non-expert users?
– Which indicators have to be shown at the same time
– Should different users have different dashboards based on the indicators
they need to use?
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Conclusions I
Conclusions II
• THE performance indicator does not exist
• Supply Chain Performance Measurement is still under development,
but metrics integrating perfomance measurement across multiple
companies are emerging
• Single performance indicators fail to capture the complexity of supply
chain performance
• Satisfying customer requirements must be an important component in
performance measurement systems
• The performance measurement system and all necessary information
must be shared along the supply chain
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Unanswered Questions
• Who determines the ”right” performance measure?
• How does one determine the ”right” actions to improve performance?
• What if profits resulting from one supply chain member’s actions end
up with a different member?
• …
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• There some attemps in the field of Logistics to develop Supply Chain
Performance Measurement Systems
–
–
–
–
TOPP
AMBITE
ENAPS
SCOR (Supply Chain Operations Reference model)
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