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CHAPTER 15:
Performance Measurement
Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Measurement system
objectives
Operational
assessment
Financial assessment
Overview of performance measurement
If you dont measure it,
you cant manage it.
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Monitoring system performance by establishment
of appropriate metrics to track and report
Controlling system performance by having
appropriate standards of performance relative to
metrics being monitored
Directing employee focus on system performance
through motivation and reward
Improving shareholder value through superior
logistics performance
Measurement system objectives related
to logistical operations
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The Balanced Scorecard is a comprehensive
system of performance assessment
Figure 15.1 The Balanced Scorecard
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Financial perspective
Profitability and return on
investment
Internal operations
perspective
Process quality, efficiency and
productivity
Customer perspective
Logistics service, quality and
satisfaction
Innovation and learning
perspective
Process improvement,
benchmarking and human
resource development
Measurement focus using a balance
scorecard approach
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Functional perspectives
Measuring customer
accommodation
Determining appropriate
metrics
Supply chain
comprehensive metrics
Benchmarking
Operational assessment
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Cost
Customer service
Quality
Productivity
Asset management
Functional perspective on logistics
measures includes these major categories
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Typically measured in total dollars spent
Total logistics cost (aka total landed cost)
Sum of order processing + inventory + transportation +
warehousing and materials handling + facility network
Few organizations have ability to measure total cost
Common to report cost as a
Percentage of sales volume
E.g. transportation cost as 15% of sales volume
Cost per unit of volume
E.g. loading cost as $5.50 per order
Cost is the most direct reflection of
logistics performance
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Availability
Organizations fill rate
Item fill rate
Line fill rate
Value fill rate
Order fill rate
Operational performance
Average order cycle time is
average number of days elapsed
between order receipt and
delivery to customer
Order cycle consistency
On-time delivery
Customer service requires specific measures for
each element of the basic service platform
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Accuracy of work activities
performed
Damage frequency is the ratio
of number of damaged units to
the total number of units
Number of customer returns of
damaged or defective goods
Number of instances when
information is not available on
request
Number of instances when
inaccurate information is
discovered
Quality measures often include service
reliability performance
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Labor productivity
Units shipped per employee
Units received per
employee
Equipment downtime
Productivity is measured in terms of output
of goods compared with quantities of inputs
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Facilities and equipment
Capacity utilization
E.g. warehouse utilization of 80% is not shipping all it is capable of shipping
Downtime is the percentage of hours that equipment is not utilized
E.g. forklift with a 2% annual downtime
Inventory
Inventory turnover rate is most common measure of performance
Days of supply is the amount available to meet forecasted sales volume
E.g. 50 days of supply (100 units per day forecast and 5000 units on hand)
Return on assets and return on investment
Asset management considers utilization of capital
investments in facilities, equipment and inventory
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Vast majority of firms use this
metric

Some retail firms use this
metric

This metric is used for products
whose cost or selling price
changes significantly during
relatively short periods of time
E.g. gasoline inventory
Inventory turnover rate is measured
differently by different types of firms
Critical that average inventory use as
many data points as possible
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Example of common metrics by
category
Table 15.1 Typical Performance Metrics
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Perfect order measures the effectiveness of the
overall integrated logistical performance
Ratio of perfect orders to the total number of orders
completed during the same time period
Absolute performance provides a better
indication of how a firms performance impacts
customers
To us, 99.5 percent on-time delivery would mean that
on a typical day, over 5,000 customers received late
orders.
Customer satisfaction measurement requires
monitoring, measuring and collecting information
from the customer
Measuring customer accommodation
requires an additional set of metrics
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Competitive basis reflects the fundamental choice
between responsive or efficient logistics performance
Measurement focus is a continuum ranging from
operational metrics to strategic metrics
Measurement frequency is the need to monitor day-to-day
performance versus less frequent review to diagnose
performance problems
Determining appropriate metrics using
the framework in Figure 15.2
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Illustration of framework use showing
metric 2 is closer to measurement need
Figure 15.2 Illustration of Measurement Framework
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Supply chain comprehensive metrics
Cash-to-cash conversion time
Time required to convert a dollar
spent on inventory into a dollar of
sales revenue
Inventory days of supply
Calendar days of sales available
based on recent sales activity
Dwell time
Ratio of days inventory sits idle to
the days it is productively used or
positioned
On-shelf in-stock percentage
Percentage of time a product is
available on the shelf in a store
Total supply chain cost
Sum of costs across all firms in
the supply chain
Supply chain response time
Time required for all firms to
recognize a fundamental shift in
demand, internalize that finding,
replan, and adjust output to meet
that demand
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Illustration of supply chain total cost
extending beyond an individual firm
Figure 15.3 Total Supply Chain Cost
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Critical aspect of performance measurement
Are we staying competitive?
Considers metrics and processes
Which organizations should we benchmark against?
Internal groups are easier to identify
Johnsons & Johnson has 150+ business units with ample opportunity to
share best practices
Provides little information about performance against the competition
Nonrestricted benchmarking compares metrics and processes to
best practices regardless of where the practice is found
Belief that learning is possible from any firm with outstanding performance
Benchmarking makes management aware of
state-of-the-art business practice
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High-achieving firms are more involved in
benchmarking than average-achieving firms
Table 15.2 Performance Benchmarking Differential
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Critical tools for financial
assessment
Segmentation of data
By channel, territory,
customer, product, and
supplier
Cost-revenue analysis
Strategic profit model
Financial assessment is needed to link supply
chain performance to financial results
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Accounting deficiencies
make this difficult
3 approaches are available
to identify and control
logistics expenses
Contribution
Net profit
Activity based costing
Cost-revenue analysis is needed to provide a
financial view of integrated logistics
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Costs are aggregated on a standard account
basis rather than activity basis
Inbound freight expense is deducted from gross
sales
Outbound freight is reported as an operating
expense
Freight is not reported as a specific cost
i.e. Products purchased on a delivered price basis
Failure to specify and assign inventory cost
Accounting practices to prepare financial
statements create some deficiencies
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Fixed costs are those that do not directly change
with volume
Variable costs are those that change as a result of
volume
Direct costs are those specifically incurred
because of the existence of the segment of analysis
E.g. product, customer, channel
Indirect costs exist because of more than one
segment of business
Contribution analysis requires all costs
be identified as fixed or variable
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Example of contribution analysis
Table 15.3 Contribution Margin Income Statement for Two Customers
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Net profit analysis requires all operating costs be
charged or allocated to an operating segment
Each segment must be
allocated its fair share of
costs
Example from Table 15.3
would require indirect fixed
cost of $41,000 to be
allocated to each segment
E.g. allocate based on
sales volume
Disagreements arise in
determining how to
allocate indirect costs
Allocations are arbitrary
and may result in
misleading financial
assessment
But, many indirect
expenses are not fixed
Rather they rise and fall
based on business demand
of operating segments
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Activity-based costing (ABC)
suggests costs be traced to
activities
Activities are then related to
product, process or customer
segments
Biggest challenge with the ABC
approach is identifying the
activities, related expenses and
drivers of expense
Activity-based costing is a partial
solution to arbitrary allocations
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Return on investment
(ROI) is critical measure of
financial success
Return on net worth
(RONW) measures
profitability of funds
invested by owners
Return on assets (ROA)
measures profitability
generated by managing
operational assets
Strategic profit model shows relationship of
income and balance sheet to ROA
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Illustration of strategic profit model with
example data
Figure 15.4 Strategic Profit Model
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Manage net profit margin
improvements
Net profit margin is net profit
divided by net sales
Measures portion of each sales
dollar that is kept by the firm
Manage asset turnover
improvements
Asset turnover is ratio of total
sales divided by total assets
Measures efficiency of
management utilization of assets
Two fundamental ways to improve
return on assets
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Model is very adaptable to a
spreadsheet
Can use SPM in combination
with other methods to examine
ROA for customer or product
segments
Table 15.4 provides an example
Other segment profitability and
ROI analyses can be conducted
Very useful framework for
relating logistics activities to
the overall financial objectives
of the organization
Applications of the strategic profit
model (SPM)
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Product B contributes a higher return
even though its gross margin is lower
Table 15.4 CMROI for Two Products
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Example showing ROA improvement if
inventory cost is reduced to $300
Figure 15.5 Strategic Profit Model (Inventory Reduction)
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Sarbanes-Oxley Act of 2002 (SOX)
Section 404 requires an internal control report to be filed along with corporate
annual report
Firms must have internal measurement capabilities that comply with
SEC requirements
SOX requires disclosure of all off-balance-sheet liabilities that have
material effect on financial reports
Vendor-managed inventories
Long-term purchase agreements
Slotting allowances
Also required to report any event that may have material effect on
financial reports
E.g. shipments with long lead times that may be held a international border
Requirements for financial reporting provide
more supply chain visibility to management
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Example metrics to validate financial
elements in columns 3 and 4
Adapted from Table 15.5
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Example metrics to validate financial
elements in columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)
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Example metrics to validate financial
elements in columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)