Unit 6

Supply Chain Performance Management

 A system of organization, people, activities, information and process
involved in moving a product from pint of production to point of
consumption is known as supply chain management.
 Supply chain performance management depicts the elements in supply
chain management cycle.
 The process consists of detailed analysis in order to determine whether the
proper process was followed and desired outcomes were achieved.
 An effective performance management system should be developed and
implemented on accordance with the departmental policies and
procedures and applicable legal requirement in order to meet the
objectives of the organization as well as satisfy customer need and wants.
 In other word, performance management system should be responsive and
cost efficient. SCM performance can be measured in terms of following:
- Suppliers of goods and services
- The SCM units
- Service delivery realization and value of money
It is the performance measurement of various supply chain drivers such as;
- Logistical: Inventory, transportation, facilities (c&p)
- Cross functional: Informing, pricing, sourcing (c&p)
The supply chain performance management measures the goal of the supply
chain in terms of responsiveness and cost efficiency, the goals of the supply chain
management can be:
I. Profit maximization
II. Wealth maximization
III. Survival
IV. Growth
V. Recognition
VI. Customer Satisfaction
VII. Market Leadership
 Importance of Supply Chain Performance Management
- Supply chain performance management plays a vital role in organizational
activities and essential elements to operational efficiency which can be
applied for customer’s satisfaction and company’s success.
- It is like the backbone of organization which manages critical issue of the
business organization such as rapid growth of multinational operations,
effect of globalization, throat-cut competition and environmental concern
which directly or indirectly affect the performance of supply chain (.i.e.
organization).
- SCM collects, analyzes and evaluates different variables, factors which
directly or indirectly influence the performance and activities if the supply
chain.

Importance of SCM Performance Management:

- Reduces production cost
- Provides better medium for information sharing among parties
- Maintain better trust among parties
- Improves process (operation) integration (better co-ordination)
- Provides efficient manufacturing strategy
- Increases cash inflow and decreases outflow
- Improves quality and provides higher profit margin.
Supply Chain Performance Measures (Metrics) /Tools/Techniques
1. Qualitative Measure: It is the measurement of supply chain performance in
term quality such as product quality, customer satisfaction, customer’s loyalty
(retention) etc.
2. Quantitive Measure: It is the measurement of supply chain performance in
term of numeric value such as order to delivery, lead time, supply chain response
time, profit margin rate, amount of resources etc. It can be divided into two
types:
a. Non-Financial Measures: non-financial measures consist of cycle time,
customer service level, (.i.e. service order fill rate, maximize stock) inventory
level, inventory management: LIFO, FIFO, resources utilizes etc.
The metrics of non-financial measures comprise cycle time, customer service
level, inventory levels, resource utilization ability to perform, flexibility, and
quality. In this section, we will discuss the first four dimensions of the metrics −

Cycle Time: Cycle time is often called the lead time. It can be simply defined as
the end-to-end delay in a business process. For supply chains, cycle time can be
defined as the supply chain process and the order-to-delivery process.
In order to maximize the customer service level, it is important to maximize
order fill rate, minimize stockout rate, and minimize backlogs.

Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential
to carry sufficient inventory to meet the customer demands. In a supply chain
system, inventories can be further divided into four categories.

 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts
Resource Utilization
In a supply chain network, huge variety of resources is used. These different types
of resources available for different applications are mentioned below.

 Manufacturing resources − Include the machines, material handlers, tools,

etc.

 Storage resources − Comprise warehouses, automated storage and retrieval

systems.

 Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.

 Human resources − Consist of labor, scientific and technical personnel.

 Financial resources − Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets or
resources efficiently in order to maximize customer service levels, reduce lead
times and optimize inventory levels.
b. Financial Measures: Financial measures are related with different fixed and
operational cost related with supply chain. Such as cost of raw material, cost of
labor, revenue from goods sold, inventory cost, transportation cost, cash inflow
and cash outflow related with supply chain.
There is a hike in prices because of the inventories, transportation, facilities,
operations, technology, materials, and labor. Generally, the financial
performance of a supply chain is assessed by considering the following items −

 Cost of raw materials.

 Revenue from goods sold.

 Activity-based costs like the material handling, manufacturing, assembling

rates etc.

 Inventory holding costs.

 Transportation costs.

 Cost of expired perishable goods.

 Penalties for incorrectly filled or late orders delivered to customers.

 Credits for incorrectly filled or late deliveries from suppliers.

 Cost of goods returned by customers.

 Credits for goods returned to suppliers.

Why is Performance Measurement Important?

Supply Chain Performance Measurement is important, as it affects behavior that

impacts supply chain performance, activities and profitability position.
Performance measurement provides the means by which a company can assess
whether its supply chain has improved or degraded. The importance of using
measures to help ensure that a supply chain is performing well.

Importance of SCM Performance Management:

 - Reduces production cost
- Provides better medium for information sharing among parties
- Maintain better trust among parties
- Improves process (operation) integration (better co-ordination)
- Provides efficient manufacturing strategy
- Increases cash inflow and decreases outflow
- Improves quality and provides higher profit margin.

Approaches to Measure Supply Chain Performance

1. Balance score card: The Balanced Scorecard recommends the use of

executive information systems.

(EIS) that track a limited number of balanced metrics that are closely aligned
to strategic objectives.

The approach was initially developed by Robert S. Kaplan

and David P. Norton. Balanced Scorecard principles provide excellent guidance to
follow when doing it.

The approach would recommend that a small number of balanced supply chain
measures be tracked based on four perspectives:

- Financial perspective (cost of manufacturing, warehousing,)

- Customer perspective (on time delivery, order fill sale)
- Internal business perspective (manufacturing adherence to plan and
forecasting error)
- Innovative and learning perspective (employee and new product
development.)
2. Supply Chain Council Score Model: The SCOR model approach advocates a
set of supply chain performance measures combination of following.
- Cycle time metrics (production cycle time)
- Cost metrics (cost per shipment, cost per warehouse pickup)
- Service quality metrics (on time shipment, quality or interior product,
responsiveness)
- Assets metrics: inventory

3. The Logistics Scoreboard

The another approach to measuring supply chain performance was developed by
Logistics Resources International Inc. (Atlanta, GA), a consulting firm specializing
primarily in the logistical (i.e., warehousing and transportation) aspects of a supply
chain. The company recommends the use of an integrated set of performance
measures falling into the following general categories:

 Logistics financial performance measures (e.g., expenses and return on

assets )
 Logistics productivity measures (e.g., orders shipped per hour and transport
container utilization)
 Logistics quality measures (e.g., inventory accuracy and shipment damage)
 Logistics cycle time measures (e.g., in-transit time and order entry time)

These measures, however, are skewed toward logistics, having limited

focus on measuring the production and procurement activities within a supply
chain.

4. Activity Based Costing (ABC Costing)

The Activity-Based Costing (ABC) approach was developed to overcome some of
the shortcomings of traditional accounting methods in tying financial measures
to operational performance.

The method involves breaking down activities into

individual tasks or cost drivers, while estimating the resources (i.e., time
and costs) needed for each one.

Costs are then allocated based on these cost

drivers rather than on traditional cost-accounting methods, such as allocating
overhead either equally or based on less-relevant cost drivers.
This approach
allows one to better assess the true productivity and costs of a supply chain
process. For example, use of the ABC method can allow companies to more
accurately assess the total cost of servicing a specific customer or the cost of
marketing a specific product.

ABC analysis does not replace traditional financial accounting,

but provides a better understanding of supply chain performance by looking at
the same numbers in a different way.

5. Economic Value-Added (EVA)

The one of the criticisms of traditional accounting is that it focuses on short-term

financial results like profits and revenues, providing little insight into the
success of an enterprise towards generating long-term value to its shareholders
thus, relatively unrelated to the long-term prosperity of a company.

To correct this deficiency in traditional methods, some financial analysts

advocate estimating a company’s return on capital or economic value-added.

These are based on the premise that shareholder value is increased when a
company earns more than its cost of capital. One such measure, EVA, developed
by Stern, Stewart & Co., attempts to quantify value created by an enterprise, basing
it on operating profits in excess of capital employed (through debt and equity
financing).

Some companies are starting to use measures like EVA within their
executive evaluations. Similarly, these types of metrics can be used to measure
an enterprise’s value-added contributions within a supply chain.

The End

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