MEASURING PERFORMANCE IN SUPPLY CHAIN - A FRAMEWORK.

Santos, Sónia Gouveia, J. Borges Gomes, Paulo

Master Student, Research Full Professor Assistant Professor

Degei, Universidade de Aveiro Degei, Universidade de Aveiro Fac. Economia, U. Nova de Lisboa
Campus Universitário de Santiago Campus Universitário de Santiago Campus de Campolide
3810-193 Aveiro Portugal 3810-193 Aveiro-Portugal 1099-032 Lisboa-Portugal

ABSTRACT

In this paper we propose a framework model to help companies measure and evaluate the performance of their supply chains. Once that
actually, companies operate their business in an increasingly changeable and unpredictable environment, where competition assumes a
global scale, they need to look for new ideas, new tools and new methods. The proposed framework grounds on the methodology of
performance measuring systems, applying to the measurement of both tangible and intangible assets, and also measuring supply chain
performance internally and externally. The framework developed enhance the use of a group of metrics across all organization, this
metrics are a fundamental part of a measuring system adapted to strategy, goals, key performance areas, process elements and activities,
enabling evaluating defined goals, leading to decision making and the implementation of improvement actions.

Keyword(s): Performance measurement; Supply chain management, Balanced Scorecard.

A PERFORMANCE MEASUREMENT FRAMEWORK

With this framework we intend to identify and explore the factors to obtain higher levels of performance in the context of the supply
chain model.
According to Christopher, actually the biggest challenge of companies is the need to answer to increasing levels of uncertainty from
customers. Reduced product and technology lifecycles, and competitive pressures are forcing continuous changes in products in an even
more frequent way, along with customers demanding as much innovation as possible.
Increase supply chain performance, is being seen as a challenge for organizations and to win this battle it is necessary to know the past,
understand the present and define the future.
“Revolutions begin long before they are officially declared. For several years, senior executives in a broad range of industries have been
rethinking how to measure the performance of their business. They have recognized that new strategies and competitive realities demand
new measurement systems.
At the heart of this revolution lies a radical decision: to shift from treating financial figures as the foundation for performance
measurement to treating them as one among a broader set of measures” (Eccles, 1991).
Organizations, today, manage their performance improvement efforts based on real facts and figures, sort out from measures,
performance measures.
These measures allows organizations to have a closer look to actual state of business and gave them a feedback to the future, through the
definition of performance baselines, performance indicators and goal definitions.
Cohen (2004), have argued that the definition of a correct set of measures allows measuring the performance of supply chain activities,
plan, source, make, deliver and return. Enhancing space to improvements and making possible earlier diagnostics and helping on
decision making.
The process of performance measurement is fundamental for actual business environment, once that, strategy development, action plan
development, programs and operations of continuous improvement, go trough the creation of metrics that monitors actual and future
state.
Measuring performance on Supply chain can be a difficult task on definition and on evaluation; however we should attend on, translate
financial goals on effective measures of operational performance, and translate operational measures on financial goals like; increase of
sales and in future gains, guiding the supply chain behaviour and supporting the business global strategy.
Supply chain is becoming a concept of competitive advantage, once that the focus is on the management of organizational relations
downstream and upstream with suppliers and customers, in order to give value to customers at lower cost to the whole supply chain,
promoting activities coordination and searching performance improvement.
“The supply chain is the network of organizations that are involved, through upstream and downstream linkages, in the different
processes and activities that produce value in the form of products and services in the hands of ultimate consumer.”(Christopher, 1998)
Supply chain management is an integrated function with full responsibility on linking business functions and process, with and trough
companies, managing the dynamic of financial, material and information flows, between the different stages of supply chain, developing
tight business models of rising performance.
Measuring performance supply chain performance is a powerful tool to evaluate the answer availability to actual global markets.
The framework developed should allow integration through the organization especially at hierarchical levels, encouraging congruency of
goals and actions, and supplying a comprehensive perspective of the organization with the possibility of laying out all possible
performance metrics.
According to Cohen, (2004) is important to distinguish performance measurement from performance management. Performance
measurement is about the use of right metrics in the right place in order to know supply chain vitality. Managing performance uses
metrics to support organization strategic goals.

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To implement an effective performance measurement system is necessary:, link metrics to business strategy; integrate quantitative goals
in plans and in operations; establish comprehensive goals at all individual department levels related to the global goals defined by he
organization; create mechanisms and processes clearly defined to track progress and manage performance.
The developed set of metrics is focused on some key recommendations that help organizations identifying ways of evaluating
performance.
First of all we have to identify a balanced set of Key performance indicators; this set of metrics should give a balanced business image
and strategy. According to Kaplan,(1996), this set should reproduce financial and non financial measures, internal and external measures
and efficiency metrics.
The metrics should form a multi-dimension set, measuring all relevant performance areas, structured to give a general view of the
success of the organization, aligned with business goals.
So an effective set of metrics should include in a balanced way: Internal metrics customer oriented; Financial and non financial metrics;
Functional and cross functional metrics; and Metrics developed to evaluate innovation and continuous improvement.
The development of the key performance indicators should be SMART (specific, measurable, action-oriented, relevant, e timely),
forming a balanced set, aligned with strategies, philosophies and incentives, comprehensive and consistent.
Then the identification of Key performance areas, related with value creation factors for customers, a composition of competitive
dimensions, processes and activities to achieve expected performance.
Finally we should identify Supply chain business processes.
We developed this framework on a cost leadership strategy, which means product low costs, grind profits and a dependence of high
production volumes and a tight activity control.
Porter, (1985), argued that competitive strategy is defined as taking defensive and offensive actions to create a business defensible
position, in order to successfully compete with competitive forces and even increase return on investments.
A cost leadership strategy demands: efficient scale companies, chasing reduction costs, and tight cost control and minimization
investments on areas like innovation, service sales and marketing.
To reach this goals it is necessary to have focus on cost control, once that the low costs to face competitors is becoming a current theme
on global organizations strategy, however companies can not forget or ignore quality and service.
This low cost position gives companies a defensive position against competition, even with low cost this companies kept having profits.
According to Porter (1985), an organization that adopts a cost leadership strategy turns it’s product in lower cost one of it segment,
searching and exploring all sources of cost advantage. Typically, these producers sell a generic product, looking for scale economies in
all possible ways.
In our study we define the set of measures according to the four Balance Scorecard perspectives, financial, customer, internal processes
and innovation and learning. We also made an approach to the supply chain business processes, using Porter value chain to define key
business areas.

F irm in fra s tru c tu re

H u m a n R e so u rc e m a n a g e m en t
S u p p o rt a c tiv itie s
T e c h n o lo g y d e v e lo p m e n t
P ro c u re m en t M a rg in

In b o u n d O u tb o u n d M a rk e tin g a n d
O p e ra tio n s S e rv ic e
lo g is tic s L o g is tic s s a le s

P rim a ry a c tiv itie s

Figure 1 – Value Chain (Adapted from Porter, 1985)

The primary activities defined to the framework were: Sales/ customer service, Planning, Supplies, Operations, and logistics. The support
activities defined to evaluate performance were Information systems and Human resource management.
This framework is divided in a six set of measures: Customer, Financial, Internal processes, Innovation and Learning and a Supply chain
Vision.

Customer Perspective
In this set of metrics we look for the interface with customers, evaluating: Sales/Customer Support and Logistics once these are the
activities that directly interact with customer in the sale and delivery processes.
The activities of Sales and Customer Support will be measured by product quality and market share. Quality is associated with good
condition and good manufacturing that in the final is what customer need and want, market share means the position that the company
occupies along with is competition and shows how well the market receive their products.
Logistics is associated to product delivery, strongly connected with lead time, service level. Actually beyond cost, service level and
quality are the cornerstones of customer satisfaction.

Perspective Primary and support Activities Metrics

Customer Perspective
Sales/Customer Support
Logistics
Quality- % non conformity
Forecast accuracy
Market share
On time Delivery
Number of products /distribution channel

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 Damaged shipments

Table 1 – Customer Perspective

Financial Perspective
The financial perspective was developed to evaluate costs and profits of organizations. Once that this framework was developed under a
cost leadership strategy supported on tight costs and severe cost control of financial indicators, the performance measures should go
through all organization activities.
These measures due to its importance upon strategic goals must be accessible to all organization, at different levels of hierarchy, allowing
constant monitoring and control.
The activities to measure should be: Supplies; manufacturing/ operations; storing; logistics and accounting processes.
For Supplying activity is crucial to measure costs of acquisition once that it permits to evaluate fluctuations, deviations from suppliers.
Production and quality costs are associated to manufacturing and operations. Associated with operations, logistics and inventory cost
represents a considerable part of the final product cost so it monitoring and follow up can represent a competitive advantage. Finally
measuring accounting processes allows a rigorous tracking of the financial evolution of the company, this measures are associated to the
top management of organizations.

Perspective Primary and support Activities Metrics

Sourcing Material acquisition costs
Non-quality costs
Manufacturing Warehousing costs
Manufacturing unit costs
warehousing Cost of carrying inventory
Logistics cost
Logistics
Transportation costs
Financial Perspective Cash Flow
EBITDA
Income
EVA (economic value added)
Accounting processes
Operating ratio
Return on Investment- ROI
Revenue per employee
Return on asset

Table 2 – Financial Perspective

Internal Business Process Perspective

Internal business process perspective relies on primary activities of value chain, like: Sourcing, planning, operation and delivery.
Sourcing activity must evaluate supplier’s quality and responsiveness, the metrics related to planning should quantify the downstream
and upstream operations of productive process.
Process operations are quantified in metrics of produced quantities, production ratios, cycle times and usage. Warehousing uses space
and storing capacities associated with time and product rotation.
The metrics associated with manufacturing process we found a strong relation quality/time; quality has a high impact on customer
satisfaction, time is a measure of efficiency and effectiveness of resources.

Perspective Primary and support Activities Metrics

Internal business Process Supplier On-time Delivery
Perspective
Material inventories
Sourcing
Material quality

Supplier cycle time

Planning % of orders delivered according to plan

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 Schedule changes

BOM accuracy

Adherence to schedule

% defect products

Number of finished products/SKU’s

Manufacturing
Manufacturing cycle time

Setups/ Changeovers

Plant utilization

Finished goods inventory turn

Delivering/storing
Stock keeping units

Table 3 –– Internal Process Perspective

Innovation and learning perspective

The perspective of innovation and learning represents the human side of organizations and shows the integration of organizations in
society.
Organizations should measure the health of organizational culture installed. Kotter,(1992), exposed that culture represents a set of
interdependent values of behaviour of a community that tends to perpetuate for long periods of time, this continuity is the product of a
large variety of social forces, frequently invisible, a group of rules and values that people learn, being reward when follow it and
ostracized when reject it. This phenomenon is recognized in organizations al organizational culture.
To measure Innovation and learning perspective we will define metrics to evaluate Innovation, social responsibility and human resources.
Innovation and social responsibility are related with interactions between organizations and society. Human resources metrics are
introduced to identify the employee satisfaction in their working environment.
Human capital is actually a sustainable competitive advantage, once that it affects performance, so organizational culture must be aligned
with business goals.

Perspective Primary and support Activities Metrics

Innovation % new product development
Social Responsibility Social programs investments
Absenteeism
Innovation and learning
% Employee training
Perspective
HR Employee productivity
Motivation
Employee turnover

Table 4 –Innovation and Learning perspective

Since this framework intend to measure performance in a supply chain environment, metrics must evaluate supply chain behaviour in
terms of efficiency and effectiveness.
Supply chain measures, were divided into two categories internal and external. Internal vision of supply chain enhances cost and
management efficiency and externally reliability, responsiveness and flexibility.

Supply chain- Internal Vision

Supply chain costs Total Supply Chain Management Costs

Cash-to-cash cycle time

Supply Chain Asset Management Efficiency
Asset Turns

Table 5 –Supply chain metrics – Internal Vision

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 Supply chain-Customer/External Vision

Supply Chain Delivery Reliability Fill Rates

Supply Chain Responsiveness Delivery Performance

Supply Chain Flexibility Supply Chain Response Time

Table 6 –Supply chain metrics – Customer/External Vision

With this set of measures organizations that adopt a cost leadership strategy and organize their operations according to supply chain
model can easily have a performance measurement system that allows decision making.

Implementation plan proposal

To implement the developed metrics companies should follow the defined plan:

1- Business model and strategy

Use strategy to define Business goals

Analyse progress and defined

goals to confirm strategy.

2- Business Goals Use business goals to identify KPI

Use metrics to track progress 3- Performance measures

against defined goals.

Use scorecard to verify goals 4-Implementation

achievement and rectify KPI.

Figure 2 – Implementation plan of a Performance measurement system

The implementation of a performance measurement system is a complex task once that need the involvement of all organization, to
perform a set of rules to make the system effective.
Once the strategic goals for supply chain are defined, according to business strategy, it’s necessary to define the metrics that best suit the
objectives and connect them with company information systems.
To implement this metrics it is necessary set rules to collect, analyse, and distribute gather data and develop appropriate tools to help
decision making. According to the developed analysis organization has to develop improvement initiatives to achieve strategic goals
initially defined.

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