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Supply Chain Management:
From Vision to Implementation
Chapter 13: Performance Measurement
Chapter 13: Learning Objectives
1. Describe the role of measurement in shaping
a company’s culture and achieving results.
2. Discuss the strengths and weaknesses of
traditional measurement practices.
3. Explain how world-class SC measurement
improves alignment, emphasizes customer
orientation, promotes process integration,
and facilitates collaboration.
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Chapter 13: Learning Objectives
4. Identify and implement appropriate measures
to manage and monitor important processes
and relationships. Create unique, tailored
measures.
5. Benchmark performance measures and
leading-edge SC practices.
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Role of Performance Measurement
When performance is measured, performance
improves. When performance is measured and
reported, the rate of improvement accelerates.
- Thomas Monson
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Measurement Creates Understanding
 Performance measurement systems provide
insight into the nature and workings of valueadded processes.
 A well defined performance measurement
system provides feedback regarding:
1. Customer requirements
2. Company and supplier capabilities
3. Probable success of collaborative initiatives
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Measurement Drives Behavior
 Measurement is more critical than
communication, training, or perhaps anything
else when it comes to managing human behavior.
 Measurement’s influence on behavior is
pervasive because people pay attention to how
they are measured.
 Managers must adopt measures that truly
promote collaborative behavior.
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Measurement Leads to Results
 Measurement is a prerequisite for high level
execution and attainment of world-class
results.
 Well-designed measurement systems must
provide accurate and relevant information in a
timely manner.
 Incorrect measurement systems lead to nonaligned strategies, poor understanding, and
inconsistent if not counterproductive behavior.
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Traditional Measurement
Areas that are essential to measure to accomplish
customer service and profitability goals:
1. Asset Management
2. Cost
3. Customer Service
4. Productivity
5. Quality
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Measures of Asset Management
 Capital investments are made in facilities,
equipment, technology, and inventory.
 Asset management measures give managers
means to judge the efficient and effective use
of capital.
 Recent advances have changed conventional
wisdom with regard to asset management.
 JIT/Lean
 Theory of Constraints
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Measures of Asset Management
Sourcing
 Raw material
inventory levels
 Raw material
inventory turns
 Inventory
obsolescence
 Return on Assets
 Economic value
added
Operations
 Work in process
inventory
 Inventory
obsolescence
 Return on Assets
 Return of
Investment
 Economic value
added
Logistics
 Inventory turns
 Inventory
obsolescence
 Return on Assets
 Inventory days
supply
 Economic value
added
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Measures of Cost
 Cost performance is critical and tracked more
carefully and comprehensively than any other
aspect of competitive performance.
 Cost-cutting cannot be done at the expense of
core capabilities.
 Best practice requires companies to identify
activities that most impact total cost, adopt
appropriate metrics, and manage to those
metrics.
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Measures of Cost
Sourcing
 Unit price
 Acquisition cost
 Total cost of
ownership
 Cost as a percent of
sales
 Administrative
Operations
Logistics
 Direct labor costs
 Manufacturing
overhead
 Costs per unit
 Inventory carrying
cost
 Warranty costs
 Inventory
carrying cost
 Total landed cost
 Outbound
freight
 Warehousing
labor costs
 Administrative
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Measures of Customer Service
 Customer service metrics measure the ability
of the firm to produce the right quantity of
product and deliver when and where it is
needed.
 Time metrics are used as benchmarks for
flexibility and responsiveness.
 Customer complaints are also tracked.
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Measures of Customer Service
Sourcing
 On-time delivery
 Order to delivery
cycle
 Percent shipments
expedited
 Response time to
inquiry
Operations
Logistics
 Production to due
date
 Manufacturing
cycle time
 Backorders
 New product lead
time
 Customer
complaints
 Fill Rate
 On-time
delivery
 Order cycle time
 Complete orders
 Customer
complaints
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Measures of Productivity
 Productivity is the ratio of total output to total
input.
 Productivity growth must not come at the
expense of quality or customer satisfaction.
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Measures of Productivity
Sourcing
 Purchase orders per
employee
 Dollar spend per
employee
 Commodity teams
per employee
 Percent transactions
automated
Operations
Logistics
 Labor productivity
 Equipment
downtime
 Changeover time
 Engineering
change orders
 Total factor
 Productivity
 Units shipped
per employee
 Equipment
downtime
 Order
productivity
 Warehouse labor
productivity
 Transportation
labor
productivity
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Measures of Quality
 Measures of quality track the functionality or
reliability of a product or service.
 Six Sigma targets a quality level which
achieves defect rates of less than 3.4 ppm
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Measures of Quality
Sourcing
 Shipments rejected
 Defect rate—parts
per million
 Percent suppliers
certified
 Percent orders from
certified suppliers
 Response to inquiry
Operations
Logistics
 Defect rate—parts
per million
 Percent rework or
scrap
 Statistical process
control
 Total hours quality
training per year
 Percent employees
six sigma trained
 Damage
frequency
 Order entry
accuracy
 Picking/shipping
accuracy
 Document/invoi
cing accuracy
 Number of
customer returns
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Traditional Measurement - Caveats
 Traditional measurement systems are not
holistic, they are designed to capture and
communicate primarily functional
information.
 Traditional measures are primarily oriented to
short-term financial results and cost-cutting.
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Contemporary Supply Chain Measures
Measurements consistent with supply chain
management core principles emphasize:
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Goal alignment
Customer satisfaction
Process integration
Total costs
Inter-organizational collaboration
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SC Measures - Alignment
What gets measured, gets done!
- Tom Peters
 Often there is little relationship between
strategic intent and measurement.
 Leads to dysfunctional behavior
 Supply chain managers must align key
measures within their own organization as
well as within the supply chain.
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SC Measure Alignment - Traditional
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SC Measures – Customer Satisfaction
 Traditional customer service measurements
often do not provide a clear understanding of
customer expectation or satisfaction levels.
 Internal service measures do not identify what
the customer values or their perception of the
value they receive.
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Customer Satisfaction Metrics
Traditional Practice
 Internal service measures
over satisfaction measures
 Measures that are
expressed as averages
 Measures that treat all
customers the same
Best-In Class Practice
 External assessment that
reveals what customers
really think is important
 Absolute measure
expressed in customer
centric terms
 Measures that recognize
unique needs of individual
customers
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SC Measures – Total Cost
 Total costing is a prerequisite to good process design
and management
 Total cost is the sum of all the costs incurred in
planning, designing, sourcing, making, and
delivering a product from raw material to the final
customer.
 Managers lacking accurate total cost information
make decisions that favor their own company’s
financial performance when making trade-offs
within the supply chain.
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Availability Of Logistics Information
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Total Supply Chain Cost
Total supply chain costs are the sum of all costs incurred
in planning, designing, sourcing, making, and delivering a
product from raw materials to the final customer.
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SC Measures – Activity Based Costing
 Activity based costing links costs directly to
the activities that drive them.
 ABC costing requires process transparency
and detailed information on products,
customers, activities, and resource costs.
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Activity-Based Costing
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Supply Chain Performance Measures
 Superior supply chain performance moves
beyond simple functional excellence.
 New measures are required to facilitate
collaboration throughout the entire supply
chain.
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Characteristics of Effective Measures
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Aligned with organizational
goals
Aligned with project goals
Customer oriented
Meaningful to workers,
managers, & customers
Consistent across appropriate
functions or departments
Promotes cooperative behavior
both horizontally & vertically
Communicated to all relevant
individuals
Simple, straightforward, &
understandable
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Easy to collect the needed data
Easy to calculate
Available on a timely basis—real
time when possible
Strategic and tactical
Quantifiable
Designed to drive appropriate
behavior
Designed to drive learning &
continuous improvement
Designed to provide information
that is actually used in decisionmaking
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Supply Chain Performance Measures
SC Inventory Days
of Supply
Total number of days of inventory required to support the supply chain—from raw
materials to the final customer acquisition. Expressed as calendar days of supply
based on recent actual daily cost of sales
Supply-Chain
Response Time
The theoretical number of days required to recognize a major shift in market
demand and increase production by 20 percent
Total Supply Chain
Cost
The sum of all the costs incurred in planning, designing, sourcing, making, and
delivering a product broken down for each member of the supply chain
Cash-to-Cash
Cycle Time
The time required to convert a dollar spent to acquire raw materials into a dollar
collected for finished product. (Total Inventory Days of Supply + Days Sales
Outstanding – Days Payables Outstanding).
Perfect Order
Fulfillment
A perfect order is an order that is delivered complete, on time, in perfect
condition, and with accurate and complete documentation. Fulfillment is the
percent of orders that are perfect (Perfect orders/Total orders).
Inventory Dwell
Time
The ratio of days inventory sits idle to days inventory is being productively used
or positioned
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Supply Chain Performance Measures
Source/Make Cycle
Time
The cumulative time to build a shippable product from scratch—if you start with
no inventory on hand or on order. Consists of total sourcing lead time, release-tostart build, total build cycle time, and complete build-to-ship time
Customer Inquiry
Response Time
The average elapsed time between receipt of a customer call and connection with
the appropriate company representative
Customer Inquiry
Resolution Time
The average elapsed time required to completely resolve a customer inquiry
Order Fulfillment
Cycle Time
The average actual lead times consistently achieved, in calendar days, from
customer order to customer delivery. Includes, order authorization to entry, entry
to release, release to shippable, shippable to customer receipt, and receipt to
customer acceptance
On-Shelf In-Stock
Percentage
The percentage of time that a product is available on the shelf, rack, or wherever
the customer expects to find and buy it. Measures the supply chain’s ultimate
ability to satisfy the end customer
Value-Added
Productivity
Total company revenues generated less the value of externally sourced materials
expressed as a ratio of total company headcount
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Supply Chain Performance Measures
 Measures of supply chain performance:
 Supply chain inventory days supply
 Supply chain response time
 Total supply chain costs
 These measures allow for identification of
inefficiencies throughout the entire supply
chain.
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Cash-to-Cash Cycle Time
Cash-to-Cash Cycle = Total Inventory Days of Supply + Days Receivables – Days Payables
Sales
Inventory
Receivables
Payables
Inventory
Days
Days
Receivable
Days
Payables
C2C
Cycle
Dell
$39,667
$358
$3,142
$10,201
3.29
28.91
93.87
-61 days
HP
$73,061
$6,065
$19,030
$21,893
30.30
95.07
109.37
16 days
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Perfect Order Busters
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Order-entry error
Ordered item is unavailable
Incomplete paperwork
Picking error
Customer deduction
Damaged shipment
Overcharge error
Error in payment
processing
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Missing information
Late shipment
Inability to meet ship date
Early arrival
Inaccurate picking
paperwork
 Invoice error
 Credit hold
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SC Measures - Scorecards
 Process encompasses objectives, measures,
targets, and action plans.
 Typical scorecard emphasizes cost, quality,
delivery, responsiveness, and innovation.
 Provide mechanism for evaluation and
communication of performance along critical
dimensions.
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SC Measures - Scorecards
1. Help companies select and monitor both
suppliers and customers
2. Support recognition programs
3. Benchmark leading-edge practices
4. Disseminate best practices throughout the
supply chain
5. Identify deficiencies that can be overcome
through continuous improvement efforts
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Supplier Scorecard
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Benchmarking
 The formal process of comparing the attributes
of one organization to those of another.
 Process consists of:
1. Define attribute to be benchmarked and identified a
best in class comparison company.
2. Document the best in class process at strategic and
operational levels. Compare with current practice
specifying any and all differences.
3. Develop a strategy, complete with specific methods,
for adopting best practices.
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Benchmarking - Types
 Competitive Benchmarking – evaluating best
practices of leading competitors within
industry.
 Noncompetitive Benchmarking – evaluating
best practices regardless of industry.
 Internal Benchmarking - large global firms
may find opportunities to disseminate best
practices within the organization.
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Benchmarking - Caveats
1. Effective benchmarking depends on the
competitive attitude of management.
2. Benchmarking alters manager’s perception of
their own company’s performance.
 Active benchmarkers are more likely to recognize
deficiencies.
3. High performing SC companies are likely to be
active benchmarkers.
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A Return to the Opening Story
Based on what you have now read and discussed:
1. What issues have led to Olympus’ measurement
problems? Are these unique to Olympus?
2. What else needs to be on the list? What are the
important roles of a measurement system?
3. How would you suggest the task force create a
world-class measurement system?
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