Performance Measures in Supply Chain Management

7/29/2019 Performance Measures in Supply Chain Management

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PERFORMANCE MEASURESIN SUPPLY CHAIN

MANAGEMENTBy:

Vignesh V Ramani

09117064

B. Tech, Mech


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INTRODUCTION

The definition of SCM has been explained multiple times in the course ofthe previous presentations, so lets assume we all know what it is.

How do you define system performance?

Words like good, bad, poor, etc. are vague.

We prefer quantitative measures over such qualitative measures

Preferably numerical performance measures

But at the same time, these measures must be appropriate for the SCMin question

The more complex a given SC, the tougher it is to choose anappropriate performance measure


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PURPOSES OF A PERFORMANCEMEASUREMENT SYSTEM

Identifying success

Identifying whether customer needs are met

Better understanding of processes

Identifying bottlenecks, waste, problems and improvement opportunities

Providing factual decisions

Enabling and tracking progress

Facilitating a more open and transparent communication and co-operation.


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PERFORMANCE MEASURE SELECTION

How to choose a performance measurement system?

Each has a few basic characteristics

The following are the required properties:

Inclusiveness (measurement of all pertinent aspects)

Universality (allow for comparison under various operating conditions)

Measurability (data required are measurable)

Consistency (measures consistent with organization goals)

Benchmarkingimportant method used in performance evaluation


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SUPPLY CHAIN PERFORMANCEMEASURES

Supply chain models have predominantly utilized two differentperformance measures:

Cost

A combination of cost and customer responsiveness

Other measures are also considered, but these are qualitative and notquantitative in nature:

Customer Satisfaction

Information Flow

Supplier Performance

Risk Management


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EVALUATION

Cost, activity time, customer responsiveness, and flexibility have all beenused as supply chain performance measures either singly or jointly.

These possess significant weaknesses

Single Supply Chain Performance Measures

Only one measure is used -> Simplicity!

But this must adequately describe the system.

But the most significant drawback was that inclusiveness was not present

Ex: Assume measure is cost. Company might operate at minimum cost,but it may simultaneously demonstrate poor customer response timeperformance, or lack flexibility to meet random fluctuations in demand.


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STRATEGIC GOALS

Type of performance measures required for a manufacturingorganization are directly related to the manufacturing strategy chosenby the company.

Why?

The company may determine if its performance is meeting its strategic goals;and

People in the organization will concentrate on what is measured; thus theperformance measure will steer company direction.

Strategic goals may point to one or many performance measure

Might be difficult to choose the individual performance measures, but itis vital that the strategic goals be related to them.


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NEW FRAMEWORK

Strategic goals involve key elements that include the measurement ofresources, output and flexibility.

The use of resources, the desired output and flexibility (how well thesystem reacts to uncertainty) have been identified as vital componentsto supply chain success.

Each of these three types of performance measures has different goals

Type Goal Purpose

Resources High level of efficiency Efficient resource management is critical to profita

Output High level of customer service Without acceptable output, customers will turn toother supply chains

Flexibility Ability to respond to a changing

environment

In an uncertain environment, supply chains must b

able to respond to change


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NEW FRAMEWORK

Therefore, the supply chain performance measurement system mustcontain at least one individual measure from each of the three

identified types. Individual measures must coincide with the strategic goals.

This measurement system can then allow study of the interactionsamong the measures or can at least ensure a minimum level ofperformance in different areas.


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RESOURCES

Resource measures include:

inventory levels,

personnel requirements,

equipment utilization,

energy usage, and

cost.

Resources are generally measured in terms of the minimum requirements(quantity)

Too few resources can negatively affect the output and the flexibility of thesystem, while the deployment of too many resources artificially increases thesystem's requirements.


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RESOURCES

The following is an example list of supply chain resource performance measures:

(1) Total cost. Total cost of resources used.

(2) Distribution costs. Total cost of distribution, including transportation and handling costs.

(3) Manufacturing cost. Total cost of manufacturing, including labor, maintenance, andre-work costs.

(4) Inventory. Costs associated with held inventory:

Inventory investment. Investment value of held inventory.

Inventory obsolescence. Costs associated with obsolete inventory;

Work-in-process. Costs associated with work-in-process inventories.

Finished goods. Costs associated with held finished goods inventories.

(5) Return on investment (ROI). Measures the profitability of an organization. The return oninvestment is generally given by the ratio of net profit to total assets.


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OUTPUT

Output measures include: customer responsiveness, quality, and the quantityof final product produced.

Output performance measures are easily represented numerically, such as:

Number of items produced; Time required to produce a particular item or set of items;

Number of on-time deliveries (orders).

But some such as customer satisfaction and quality are not quantitative.

A minimum level of output is often specified.

Resources affect the output of a supply chain, which in turn affects flexibility.


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OUTPUT

Output measures must correspond to the customers goals and values

The following is an example list of supply chain output performancemeasures:

(1) Sales. Total revenue.

(2) Profit. Total revenue less expenses.

(3) Fill rate. Proportion of orders filled immediately:

Target fill rate achievement. To what extent a target fill rate has been achieved.

Average item fill rate. Aggregate fill rate divided by the number of items.

(4) On-time deliveries. Measures item, order, or product delivery performance:

Product lateness. Delivery date minus due date.

Average lateness of orders. Aggregate lateness divided by the number of orders.

Average earliness of orders. Aggregate earliness divided by the number of orders. Percent on-time deliveries. Percent of orders delivered on or before the due date


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OUTPUT

(5) Backorder/stockout. Measures item, order, or product availabilityperformance:

Stockout probability. Instantaneous probability that a requested item is out ofstock.

Number of backorders. Number of items backordered due to stockout.

Number of stockouts. Number of requested items that are out of stock. Average backorder level. Number of items backordered divided by the number

of items

(6) Customer response time. Amount of time between an order and itscorresponding delivery.

(7) Manufacturing lead time. Total amount of time required to produce aparticular item or batch.

(8) Shipping errors. Number of incorrect shipments made.

(9) Customer complaints. Number of customer complaints registered.


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FLEXIBILITY

Flexibility can measure a system's ability to accommodate volume andschedule fluctuations from suppliers, manufacturers, and customers.

It is vital to the success of the supply chain, since the supply chain exists in anuncertain environment.

Two types of flexibility: range flexibility and response flexibility.

Range flexibility is defined as to what extent the operation can be changed.

Response flexibility is defined as the ease (in terms of cost, time, or both) withwhich the operation can be changed.

Although there will be a limit to the range and response flexibility of a supplychain, the chain can be designed to adapt adequately to the uncertainenvironment.


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FLEXIBILITY

Some advantages of flexible supply chain systems are:

Reductions in the number of backorders.

Reductions in the number of lost sales.

Reductions in the number of late orders.

Increased customer satisfaction. Ability to respond to and accommodate demand variations, such as seasonality.

Ability to respond to and accommodate periods of poor manufacturingperformance (machine breakdowns).

Ability to respond to and accommodate periods of poor supplier performance.

Ability to respond to and accommodate periods of poor delivery performance.

Ability to respond to and accommodate new products, new markets, or newcompetitors.


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SUMMARY/CONCLUSION

Performance measurement selection is a critical step in the design andevaluation of any system.

More complex the SC, the tougher it is to measure effectively.

Many existing models are limited in scope (non-inclusive)

We identified three types of performance measures that are necessarycomponents in any supply chain performance measurement system:resource, output and flexibility

Each was discussed in detail and their individual benefits werediscussed.


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SUMMARY/CONCLUSION

When a measurement model is selected, characteristics from each ofthe three types must be carefully chosen

The appropriate characteristics will adequately describe the SC and, atthe same time, reflect strategic goals

Supply chain models that utilize this framework can more completelycharacterize the supply chain system and the resulting reconfigurationeffects, thus enabling the development of models that are morecomplete, accurate, and therefore more effective.


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BIBLIOGRAPHY

Beamon, B. M., Measuring supply chain performance, InternationalJournal of Operations & Production Management, Vol. 19 No. 3, 1999,pp. 275-292.

Halme, J. et al, Global supply chain management and performancemeasurement, LEKA Literature Review.

Bhadwat R. et al, Performance measurement of supply chainmanagement: A balanced scorecard approach, Computers & IndustrialEngineering 53 (2007) 4362.

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Performance Measures in Supply Chain Management