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Measuring Supply Chain Performance
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Supply Network and Value Chain for a Manufacturing Company
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POPULAR SAYING
“Anything measured improves.”
“What you measure is what you get.”
“Anything measured gets done.”
“You can’t manage what you do not measure.”
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Importance of performance measurement
Measurements are important for directly controlling behaviour and
indirectly performance of system.
Tracks company’s progress towards achieving its supply chain
improvement objectives
Be careful :
Seemingly relevant, but cumbersome, measurements are of little use, and
are possibly a hindrance, in helping to improve supply chain performance
Picking the wrong measures and leaving out important ones could lead to
supply chain performance degradation
Driving a supply chain based only on after the-fact measures e.g. losing an
important customer or having poor financial performance is not very
effective
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Why Financial accounting measure not sufficient?????
The measures do not relate to important strategic, non-
financial performance, like customer service/ loyalty
and product quality.
The measures do not directly tie to operational
effectiveness and efficiency.
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Supply Chain Performance Measurement Approaches
The Balanced Scorecard
The Supply Chain Council’s SCOR Model
The Logistics Scoreboard
Activity-Based Costing (ABC)
Economic Value Analysis (EVA)
Balanced Scorecard & Its
Applications
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BSC Hall of Frame: Success Story One
Bob McCool became head of Mobil NAM&R in 1992 when the past performance was not acceptable. Mobil launched its Balanced Scorecard project in 1994.
From 1994 to 1998. The productivity strategy created a 20-percent reduction in the cost of refining, marketing, and delivering a gallon of gasoline.
The growth strategy, with its new value proposition for targeted segments, produced increased customer satisfaction led to increased revenue that exceeded industry averages by more than 2 percent per year. Kaplan and Norton, 2001
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BSC Hall of Frame: Success Story Two
Chrysler Group, the US automobile
division of DaimlerChrysler, which faced
a forecast loss of $5.1 billion in 2001.
The division brought in a new CEO, who
used the BSC to communicate a
turnaround strategy.
Despite continued weakness in the US
automobile market, Chrysler generated
$1.9 billion in profits in 2004.Kaplan and Norton, 2006
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BSC: Strategic Measuring for Performance (Robert S. Kaplan & David P. Norton)
Four Management Functions : Planning, Organizing, Staffing, Controlling
If you can’t measure, you can’t managedIf you can’t measure, you can’t improved
What gets measure, gets done
Measurement is core of the Balanced Scorecard
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The Balanced Scorecard expands the set of business unit objective beyond summary financial measures.
Balanced Scorecard is a set of measures that give top managers a fast but comprehensive view of the business.
A set of cause-and-effect performance measures linkage among four distinct perspectives— finance, customer, internal business process, and learning & growth —used to translate strategy into desired results.
The main focus of initial Balanced Scorecard is as an innovative strategic measurement tool, delivering strategy by emphasising control and communication.
Balanced Scorecard (BSC)
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Financial Perspective
• Objectives• Key Performance Indicators• Targets• Initiatives
STRAEGY
Innovative Learning & Growth Perspective• Objectives• Key Performance Indicators• Targets• Initiatives
CustomerPerspective
• Objectives• Key Performance Indicators• Targets• Initiatives
Internal business/ Process Perspective• Objectives• Key Performance Indicators• Targets• Initiatives
Balance Scorecard Perspectives
Kaplan and Norton, 1996
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Four Perspectives of BSC
Financial: What are our shareholders expectations for financial performance?
Customer: To each our financial objective, how create value for our customers?
Internal Process: What processes must we excel at to satisfy our customers and shareholders?
Innovative Learning & Growth: How do we align out intangible assets—people, systems, and culture—to improve the critical processes?
Kaplan and Norton, 2006
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What is Financial Strategy? [to satisfy shareholders]
Productivity strategyImprove cost structure/yieldsIncrease asset utilization
Growth strategyExpand revenue opportunitiesEnhance customer Value
How to reach the financial goals?
Financial Perspective
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Financial Perspective
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Performance Measures in Financial Perspective
Return on investment
Sales growth rate by segment
Percentage revenue from new product, service, or customer
Share targeted customer an account
Customer and product line profitability
Revenue/employee Cost reduction rate Unit cost Payback Return on Capital
Employed Working capital
ratios (cash-to-cash cycle)
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Information about market & customer
Customer selection, acquisition, retention & growth
Who are profitable customers? — Target Segmentations
What do they need? [same as the thing we serve them]— Customer Values Propositions
Lead Time Quality – defect level of incoming product as
perceived and measured by customer, accuracy of company delivery forecast
Performance and service Cost
Customer Perspective
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Performance Measures in Customer Perspective
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Performance Measures in Customer Perspective
Market Share: Reflects the proportion of business in a given
market (in term of number of customer, dollar spent, or unit volume sold) that a business unit sells.
Customer Acquisition: Measures, in absolute or relative, the
rate at which a business unit attracts wins new customers or business.
Customer Retention: Measures, in absolute or relative, the rate
at which a business unit retains or maintains ongoing relationships with its customers.
Customer Satisfaction: Assesses the satisfaction level of
customers along specific performance criteria within the value proposition.
Customer Profitability: Measures the net profit of a customer,
after allowing for the unique expenses required to support customer.
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Internal Process Perspective
In order to serve customers’ need and satisfy other stakeholders, what process the organization need to be excellent. The nature of the customer value proposition
determines the kind of internal processes
How to build excellent process to serve customer and other stakeholders.
Managers need to focus on those critical operations that enable them to satisfy customers need
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Internal Process Perspective
Production Management Processes Customer Management Processes Regulatory & Social processes
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Production management processes
Developing and sustaining supplier relationships
Producing products and services Distributing and delivering products
and services to customers Managing risks
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Customer management processes
Customer selection Customer acquisition Customer retention Customer growth
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Regulatory & social processes
Environment: Issues such as energy and resource consumption, and emissions into the air, water and soil
Safety and health: Safety hazards to employees
Employment practices: Diversity of employees
Community investment: Community-based organizations
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Performance Measures in Internal Process Perspective
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Performance Measures in Internal Process Perspective
Quality Response time Cost Yields Waste Scrap Productivity
Rework New product
introduction Service error rate Product
development cycle Hours with
customer Time to market Employee skill
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Innovative Learning & Growth Perspective
What competencies the organization need in order to obtain or sustain competitiveness? Competencies’ Gap Analysis
How to fill the gap between ‘what organization what to be’ and ‘its current position’ Competencies, Employee Satisfaction and
Retention Management Information System Corporate Culture and Motivations
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Innovation processes
Identifying opportunities for new products and services
Managing the research and development portfolio
Design and developing the new products and services
Delivering the new products and services into the market
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Learning & Growth Perspective
Human Capital —E mployees' skills, talent, and knowledge.
Organization Capital —C ulture, le adership, employee alignment, teamwo
rk, and knowledge management Information Capital — Databases,
information systems, network, and tech nology infrastructure
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Performance Measures in Learning & Growth Perspective
Employee satisfaction Employee retention/turnover rate Employee productivity Information system availability Personal Goals Alignment Index Staff development
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Innovation and Learning Perspective
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Key Performance Indicators
Derived from strategy Clearly defined/explicit purpose Mixed performance driver and
outcome measures Optimum number of measures (from
15 to 25 measures)
Construct Strategy Map (causal model—cause-and-effect relationships)
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Characteristics of good performance indicators
Relevant Accurate Understandable To measure things that can be
measured within certain time. Comprehensive Vs The main
things
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How to set targets
Stretch Target Benchmarking – External or Internal Stakeholders requirement Capacity
Incremental Target Comparing with baseline/last year
Baseline Target Natural number/Normal rate
Theoretical targets
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Contribution of BSC
Provide information to management and create accountability
Influence behaviors Facilitate development (learn and
adapt) Achieve goal congruence and make a
system self-correcting Encourage continuous improvement
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Implement Plan for Performance measurement System
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How to use the Balanced Scorecard
Strategic Measurement Systems
Framework for Implementing Strategy
Strategic Management System
39
BSC Strategic Measurement Systems
Strategy
Key Performance Indicators
Targets
40
BSC Framework for Implementing Strategy
Strategy
KPIs & Targets
Initiatives & Resources
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BSC Strategic Management System
BSC & KPIsBSC & KPIs
ImplementationImplementation
Strategic Learning
Performance Performance ReportReport
QuarterlyQuarterly
YearlYearlyy
Strategic Initiatives Strategic Initiatives & Resources& Resources
StrategyStrategy
Supply Chain Operations
Reference Model (SCOR)
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Supply Chain Operations Reference Model (SCOR)
SCOR: Integrates Business Process Reengineering,
Benchmarking, and Process Measurement into a cross-functional framework.
Benchmarking Best Practices Analysis
Process Reference Model
Business Process Reengineering
Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results
Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results Characterize the
management practices and software solutions that result in “best-in-class” performance
Characterize the management practices and software solutions that result in “best-in-class” performance
Capture the “as-is” state of a process and derive the desired “to-be” future state
Capture the “as-is” state of a process and derive the desired “to-be” future state
Capture the “as-is” state of a process and derive the desired “to-be” future state
Capture the “as-is” state of a process and derive the desired “to-be” future state
Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results
Characterize the management practices and software solutions that result in “best-in-class” performance
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Supply Chain Operations Reference Model (SCOR)
The Primary Use of SCOR:To describe, measure and evaluate supply chain configurations.
SCOR contains:Standard descriptions of management processesA framework of relationships among the standard processesStandard metrics to measure process performanceManagement practices that produce best-in-class performance
Enables the companies to:Evaluate and compare their performances with other companies effectively Identify and pursue specific competitive advantagesIdentify software tools best suited to their specific process requirements
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Supply Chain Operations Reference Model (SCOR)
The SCOR Model approach advocates a set of supply chain performance measures comprised of a combination of:
Cycle time metrics (e.g., production cycle time and cash-to-cash cycle)
Cost metrics (e.g., cost per shipment and cost per warehouse pick)
Service/quality metrics (on-time shipments and defective products)
Asset metrics (e.g., inventories )
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Supply Chain Operations Reference Model (SCOR): Boundaries
SCOR spans:• All customer interactions, from order entry
through paid invoice.• All product (physical material and service)
transactions, from supplier’s supplier to customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.
• All market interactions, from the understanding of aggregate demand to the fulfillment of each order
Supplier’sSupplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliverSource
Customer’s Customer
Plan
Supplier (Internal or External)
Your Company
Customer (Internal or External)
ReturnReturn ReturnReturn
ReturnReturn
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Supply Chain Operations Reference Model (SCOR): Boundaries
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Operation domain KPI’s
Source 1) Inward Material Quality
2) Quantity and Timely Delivery
3) Procurement Unit Cost
4) Material Inventory Level
5) Vendor Development Capability
Plan 1) Adherence to Production Target
2) Sample Conversion Rate
3) Material Utilization
4) Cost Adherence
Make 1) Capacity Utilization
2) Production Cost Efficiency
3) Quality Capability
4) Change Over Time
5) Operator Training Effectiveness
Deliver 1) On Time Shipment
2) Order Fulfillment
3) Claims and Discounts
4) Quality at Delivery
5) Transit time
The Logistics Scorecard
successfully implemented in a variety of industries and
organizations including:
Coca-Cola, Honda, Pepsi-Cola, and Walt Disney World.
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The Logistics Scoreboard
The Logistics Scoreboard is 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)
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The Logistics Scoreboard is prescriptive and
actually recommends the use of a specific set
of supply chain performance measures.
These measures, however, are
skewed toward logistics, having limited focus
on measuring the production and
procurement activities within a supply chain.
The Logistics Scoreboard
Activity Based Costing
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Activity Based Costing
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.
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1. Identify and classify each activity. Estimate the
cost of resources for each activity.
2. Identify a cost driver for each activity and
estimate the quantity of each cost driver.
3. Calculate an activity cost rate.
4. Assign costs to cost objects based on the level of
activity required to make the product or provide
the service.
To implement ABC, managers:
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Cost Hierarchy
Many companies use a cost hierarchy to
manage the assignment of activity-
based costs to the level at which costs
are incurred.
A cost hierarchy for a manufacturer
typically has four levels:
1. Unit level.
2. Batch level.
3. Product level.
4. Facility level.
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Unit-Level Activities
Unit-level activities are performed each
time a unit is produced.
These activities vary with the number of
units produced. Insertion of a component during assembly.
Examples: assembling engine
subassemblies, connecting engines to car
frames
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Batch-Level Activities
Batch-level activities are performed
each time a batch of goods is
produced. These activities vary with the number
of batches prepared.
Examples: setup, scheduling, and
materials handling.
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Product-Level Activities
Product-level activities are
performed to support the diversity of
products in a manufacturing plant. Examples: implementing engineering
change notices,
redesigning the installation process.
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Facility-Level Activities
Facility-level activities are
performed to support a facility’s
general manufacturing process. Examples: lighting the manufacturing
plant,
Security of the manufacturing plant,
insuring the manufacturing plant.
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Sample Activities in Cost Hierarchies
Activity LevelCar Manufacturer:Engine Installation
Direct Mail Service:Preparing BankCustomer Mailing
Unit level Install engineTest engine
Print and fold letterInsert letter and other information into envelopeSeal and meter envelope
Batch level Set up installation processMove engines
Retool machinesVerify correct postageBill client
Product orservice level
Redesign installation process
Train employeesDevelop and maintain computer systems and databases
Facility oroperations level
Provide facility management, maintenance, lighting, security, and space
Provide facility management, maintenance, lighting, security, and space
Inspect engines
Economic Value Added
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Economic Value Added
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.
EVA estimates the increase in value of
shareholder when a company earns more than
its cost of capital
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Possible Supply Chain Performance Measures
Customer Service Measures
Process, Cross-Functional Measures
Purchasing Related Measures
Order Fill Rate Line Item Fill RateQuantity Fill RateBackorders/stockoutsCustomer satisfaction% Resolution on first customer callCustomer returns Order track and trace performanceCustomer disputes Order entry accuracy Order entry times
Forecast accuracyPercent perfect ordersNew product time-to-marketNew product time-to-first makePlanning process cycle timeSchedule changes
Material inventories Supplier delivery performance Material/component quality Material stockoutsUnit purchase costsMaterial acquisition costs Expediting activities
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Extended Enterprise Measures
Manufacturing Related Measures
Logistic Related Measures
Total landed cost Point of consumption product availabilityTotal supply chain inventory Retail shelf displayChannel inventories EDI transactionsPercent of demand/supply on VMI/CRP Percent of customers sharing forecasts Percent of suppliers getting shared forecast Supplier inventoriesInternet activity to suppliers/customersPercent automated tendering
Product qualityWIP inventoriesAdherence-to-scheduleYieldsCost per unit produced Setups/Changeovers Setup/Changeover costsUnplanned stockroom issuesBill-of-materials accuracyRouting accuracyPlant space utilizationLine breakdownsPlant utilization Warranty costsSource-to-make cycle timePercent scrap/reworkMaterial usage varianceOvertime usageProduction cycle timeManufacturing productivityMaster schedule stability
Finished goods inventory turnsFinished goods inventory days of supplyOn-time delivery Lines picked/hourDamaged shipmentsInventory accuracyPick accuracy Logistics costShipment accuracyOn-time shipment Delivery timesWarehouse space utilization End-of-life inventoryObsolete inventoryInventory shrinkageCost of carrying inventoryDocumentation accuracyTransportation costsWarehousing costsContainer utilizationTruck cube utilizationIn-transit inventories Premium freight chargesWarehouse receipts
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Administration/Financial Measures
Marketing Related Measures
Other Measures
Cash flow IncomeRevenuesReturn on capital employedCash-to-cash cycle time Return on investmentRevenue per employeeInvoice errorsReturn on assets
Market sharePercent of sales from new products Time-to-marketPercent of products representing 80% of salesRepeat versus new customer sales
APICS trained personnelPatents awarded Employee turnoverNumber of employee suggestions
Possible Supply Chain Performance Measures
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