Transcript of "Scm performance measurement_frame_work_2007_ijpe"
ARTICLE IN PRESS Int. J. Production Economics 87 (2004) 333–347 A framework for supply chain performance measurement A. Gunasekarana,*, C. Patelb, Ronald E. McGaugheyca Department of Business Administration, University of Illinois at Springﬁeld, One University Plaza, Springﬁeld, IL 62703-5407, USA b Ace InfoTech, Inc., 406 Wellington Drive, Streamwood, IL 60107, USA c Department of Management Information Systems, The University of Central Arkansas, Conway, AR 72035-0001, USAAbstract Supply chain management (SCM) has been a major component of competitive strategy to enhance organizationalproductivity and proﬁtability. The literature on SCM that deals with strategies and technologies for effectivelymanaging a supply chain is quite vast. In recent years, organizational performance measurement and metrics havereceived much attention from researchers and practitioners. The role of these measures and metrics in the success of anorganization cannot be overstated because they affect strategic, tactical and operational planning and control.Performance measurement and metrics have an important role to play in setting objectives, evaluating performance,and determining future courses of actions. Performance measurement and metrics pertaining to SCM have not receivedadequate attention from researchers or practitioners. We developed a framework to promote a better understanding ofthe importance of SCM performance measurement and metrics. Using the current literature and the results of anempirical study of selected British companies, we developed the framework presented herein, in hopes that it wouldstimulate more interest in this important area.r 2003 Elsevier B.V. All rights reserved.Keywords: Supply chain; Performance measurements; Metrics; Empirical analysis; Framework1. Introduction in many industries, especially those in manufactur- ing, are trying to better manage supply chains. By the late 1980s, outsourcing in US industries Important techniques/methodologies like just-in-contributed to nearly 60% of the total product time (JIT), total quality management, lean pro-cost (Ballou, 1992). In the UK, a survey showed duction, computer generated enterprise resourcethat 40% of the UK’s gross domestic product was planning schedule (ERP) and Kaizen have beenspent on distribution and logistics related activities embraced. The concept of supply chain manage-(Department of Trade and Industry, UK, 1990). ment (SCM), according to Thomas and GrifﬁnSuch ﬁndings and developments present signiﬁcant (1996) represents the most advanced state in thevisible impact of distribution, purchasing, and evolutionary development of purchasing, procure-supply management on company assets. Managers ment and other supply chain activities. At the operational level, this brings together functions that are as old as commerce itself—seeking goods, *Corresponding author. Tel.: +1-217-206-7927; fax: +1-217-206-7543. buying them, storing them and distributing them. E-mail address: Gunasekaran.email@example.com At the strategic level, SCM is a relatively new and(A. Gunasekaran). rapidly expanding discipline that is transforming0925-5273/$ - see front matter r 2003 Elsevier B.V. All rights reserved.doi:10.1016/j.ijpe.2003.08.003
ARTICLE IN PRESS334 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347the way that manufacturing and non-manufactur- European market, and the guidelines of GATTing operations meet the needs of their customers. and WTO have provided the stimulus for devel- Development of cross-functional teams aligns opment of and existing trends in SCM. Supplyorganisations with process oriented structure, chain integration is needed to manage and controlwhich is much needed to realise a smooth ﬂow of the ﬂow in operating systems. Such ﬂow control isresources in a supply chain. As suggested by Trent associated with inventory control and activityand Monczka (1994), such teams promote im- system scheduling across the whole range ofproved supply chain effectiveness. They minimise resource and time constraints. Supplementing thisor eliminate functional and departmental bound- ﬂow control, an operating system must try to meetaries and overcome the drawbacks of specialisa- the broad competitive and strategic objectives oftion, which according to Fawcett (1995), can quality, speed, dependability, ﬂexibility and costdistribute the knowledge of all value adding (Slack et al., 1995; Gunasekaran et al., 2001; Deactivities such that no one, including upper level Toni and Tonchia, 2001). Control is also essentialmanagers, has complete control over the process. as both customer needs and supply chain perfor-Such teams helped in the formation of modern mance might change with time.supply chains by promoting greater integra- To meet objectives, the output of the processestion of organisations with their suppliers and enabled by the supply chain must be measured andcustomers. compared with a set of standards. In order to be Supplier partnerships and strategic alliances controlled, the process parameter values need to berefer to the co-operative and more exclusive kept within a set limit and remain relativelyrelationships between organisations and their up- constant. This will allow comparison of plannedstream suppliers and downstream customers. To- and actual parameter values, and once done, theday many ﬁrms have taken bold steps to break parameter values can be inﬂuenced throughdown both inter and intra ﬁrm barriers to form certain reactive measures in order to improve thealliances, with the objective of reducing uncer- performance or re-align the monitored value totainty and enhancing control of supply and the deﬁned value. For example, an analysis of thedistribution channels. Such alliances are usually layout of facilities could reveal the cause of longcreated to increase the ﬁnancial and operational distribution time, high transportation and move-performance of each channel member through ment costs and inventory accumulation. Usingreductions in total cost and inventories and suitable approaches like re-engineering facilities,increased sharing of information (Maloni and problems can be tackled and close monitoring andBenton, 1997). Rather than concerning themselves subsequent improvements can be possible fromonly with price, manufacturers are looking to analysis of the new design. Thus, control ofsuppliers to work co-operatively in providing processes in a supply chain is crucial in improvingimproved service, technological innovation and performance and can be achieved, at least in part,product design. This development has produced a through measurement. Well-deﬁned and con-signiﬁcant impact by expanding the scope of SCM trolled processes are essential to better SCM.through greater integration of suppliers with There are number of conceptual frameworksorganisations. and discussions on supply chain performance The growth and development of SCM is not measurements in the literature; however, there isdriven only by internal motives, but by a number a lack of empirical analysis and case studies onof external factors such as increasing globalisation, performance metrics and measurements in areduced barriers to international trade, improve- supply chain environment. We will discuss thements in information availability, and environ- background for the research, review the selectedmental concerns. Furthermore, computer gene- literature on supply chain performance metricsrated production schedules, increasing importance and measurements, develop a framework based onof controlling inventory, government regulations the literature and an empirical analysis, andand actions such as the creation of a single ﬁnally, summarize the ﬁndings and conclusions.
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 3352. Background for research tion (Schroeder et al., 1986). Performance studies and models should be created so that organisa- In this section, the literature is used in describ- tional goals and achievement of those goals can being the general context within which measurement measured, thus allowing the effectiveness of theof supply chain performance is undertaken. The strategy or techniques employed to be accessed.works of various authors are used in establishing Most companies realise the importance ofthe need for supply chain performance measurement ﬁnancial and non-ﬁnancial performance measures,and to describe in general terms how it should be however they have failed to represent them in aaddressed—emphasis is on measurement systems balanced framework. According to Kaplan andand approaches as opposed to speciﬁc measures. Norton (1992), while some companies and re- The strategic, operational and tactical levels are searchers have concentrated on ﬁnancial perfor-the hierarchies in function, wherein policies and mance measures, others have concentrated ontrade-offs can be distinguished and suitable con- operational measures. Such an inequality doestrol exerted (Ballou, 1992). According to Rushton not lead to metrics that can present a clear pictureand Oxley (1989), such a hierarchy is based on the of organisational performance. For a balancedtime horizon for activities and the pertinence of approach, Maskell (1991) suggests that companiesdecisions to and inﬂuence of different levels of should understand that, while ﬁnancial perfor-management. The strategic level measures inﬂu- mance measurements are important for strategicence the top level management decisions, very decisions and external reporting, day to dayoften reﬂecting investigation of broad based control of manufacturing and distribution opera-policies, corporate ﬁnancial plans, competitiveness tions is often handled better with non-ﬁnancialand level of adherence to organisational goals. The measures. Another area where inequality persists istactical level deals with resource allocation and deciding upon the number of metrics to be used.measuring performance against targets to be met Quite often companies have a large number ofin order to achieve results speciﬁed at the strategic performance measures to which they continue tolevel. Measurement of performance at this level add based on suggestions from employees andprovides valuable feedback on mid-level manage- consultants. They fail to realise that performancement decisions. Operational level measurements assessment can be better addressed using a trivialand metrics require accurate data and assess the few—they are not really trivial, but instead areresults of decisions of low level managers. Super- those few areas most critical to success.visors and workers are to set operational objec- The metrics that are used in performancetives that, if met, will lead to the achievement of measurement and improvement should be thosetactical objectives. that truly capture the essence of organizational Many ﬁrms look to continuous improvement as performance. A measurement system should facil-a tool to enhance their core competitiveness using itate the assignment of metrics to where theySCM. Many companies have not succeeded in would be most appropriate. For effective perfor-maximizing their supply chain’s potential because mance measurement and improvement, measure-they have often failed to develop the performance ment goals must represent organisational goalsmeasures and metrics needed to fully integrate and metrics selected should reﬂect a balancetheir supply chain to maximize effectiveness and between ﬁnancial and non-ﬁnancial measures thatefﬁciency. Lee and Billington (1992) observed that can be related to strategic, tactical and operationalthe discrete sites in a supply chain do not maximize levels of decision making and control.efﬁciency if each pursues goals independently.They point to incomplete performance measuresexisting among industries for assessment of the 3. Performance measurements and metrics in SCMentire supply chain. Measurements should beunderstandable by all supply chain members and In this section, the literature on performanceshould offer minimum opportunity for manipula- measurements and metrics in SCM is reviewed.
ARTICLE IN PRESS336 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347The metrics and measures are discussed in the Strategic level measures include lead timecontext of the following supply chain activities/ against industry norm, Quality level, Costprocesses: (1) plan, (2) source, (3) make/assem- saving initiatives, and supplier pricing againstble, and (4) delivery/customer (Stewart, 1995; market.Gunasekaran et al., 2001). Tactical level measures include the efﬁciency of purchase order cycle time, booking in procedures,3.1. Metrics for order planning cash ﬂow, quality assurance methodology and capacity ﬂexibility.3.1.1. The order entry method Operational level measures include ability in day This method determines the way and extent to to day technical representation, adherence towhich customer speciﬁcations are converted into developed schedule, ability to avoid complaintsinformation exchanged along the supply chain. and achievement of defect free deliveries. Purchasing and supply management must ana-3.1.2. Order lead-time lyze on a periodic basis their supplier abilities to The total order cycle time, called order to meet the ﬁrm’s long-term needs. The areas thatdelivery cycle time, refers to the time elapsed in need particular attention include the supplier’sbetween the receipt of customer order until the general growth plans, future design capability indelivery of ﬁnished goods to the customer. The relevant areas, role of purchasing and supplyreduction in order cycle time leads to reduction in management in the supplier’s strategic planning,supply chain response time, and as such is an potential for future production capacity andimportant performance measure and source of ﬁnancial ability to support such growth (Fisher,competitive advantage (Christopher, 1992)—it 1997). Supply chain partnership is a collaborativedirectly interacts with customer service in deter- relationship between a buyer and seller whichmining competitiveness. recognises some degree of interdependence and co- operation on a speciﬁc project or for a speciﬁc3.1.3. The customer order path purchase agreement (Ellram, 1991; van Hoek, The path that an order traverses is another 2001). Such a partnership emphasises direct,important measure whereby the time spent in long-term association, encouraging mutual plan-different channels can be determined. By analyzing ning and problem solving efforts (Maloni andthe customer order path, non-value adding activ- Benton, 1997). Supplier partnerships have at-ities can be identiﬁed so that suitable steps can be tracted the attention of practitioners and research-taken to eliminate them. ers (Macbeth and Ferguson, 1994; Ellram, 1991; Graham et al., 1994). All have contended that3.2. Evaluation of supply link partnership formation is vital in supply chain operations and as such for efﬁcient and effective Traditionally supplier performance measures sourcing. Partnership maintenance is no lesswere based on price variation, rejects on receipt important. Performance evaluation of buyers orand on time delivery. For many years, the selection suppliers is simply not enough—relationships mustof suppliers and product choice were mainly based be evaluated.on price competition with less attention afforded The parameters that need to be considered in theto other criteria like quality, reliability, etc. More evaluation of partnerships are the ones thatrecently, the whole approach to evaluating suppli- promote and strengthen them. For example, theers has undergone drastic change. level of assistance in mutual problem solving is Evaluation of suppliers: The evaluation of indicative of the strength of supplier partnerships.suppliers in the context of the supply chain Partnership evaluation based on such criteria will(efﬁciency, ﬂow, integration, responsiveness and result in win–win partnerships leading to morecustomer satisfaction) involves measures impor- efﬁcient and more thoroughly integrated supplytant at the strategic, operational and tactical level. chains.
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 3373.3. Measures and metrics at production level 3.4. Evaluation of delivery link After the order is planned and goods sourced, The link in a supply chain that directly impactsthe next step in to make/assemble products. This is customers is delivery. It is a primary determi-the activity carried out by organisations that own nant of customer satisfaction; hence, measuringproduction sites, and their performance has a and improving delivery is always desirable tomajor impact on product cost, quality, speed of increase competitiveness. Delivery by its verydelivery and delivery reliability, and ﬂexibility nature takes place in a dynamic and ever-changing(Mapes et al., 1997; Slack et al., 1995). As it is environment, making the study and subsequentquite an important part of the supply chain, improvement of a distribution system difﬁcult. Itproduction needs to be measured and continu- should be noted that it is not an easy matter toously improved. Suitable metrics for the produc- anticipate how changes to one of the majortion level are as follows: elements within a distribution structure will affect the system as a whole (Rushton and Oxley,Range of product and services: According to Mapes 1989).et al. (1997), a plant that manufactures a broadproduct range is likely to introduce new products 3.4.1. Measures for delivery performancemore slowly than plants with a narrow product evaluationrange. Plants that can manufacture a wide range of According to Stewart (1995), an increase inproducts are likely to perform less well in the areas delivery performance is possible through a reduc-of value added per employee, speed and delivery tion in leadtime attributes. Another importantreliability. This clearly suggests that product range aspect of delivery performance is on-time delivery.affects supply chain performance. On-time delivery reﬂects whether perfect delivery has taken place or otherwise and is also a measure of customer service level. A similar concept, onCapacity utilization: From the above assertion, it is time order ﬁll, was used by Christopher (1992),clear that the role-played by capacity in determin- describing it as a combination of delivery relia-ing the level of activities in a supply chain is quite bility and order completeness. Another aspect ofimportant. According to Slack et al. (1995), of the delivery is the percentage of ﬁnished goods inmany aspects of production performance, capacity transit, which if high signiﬁes low inventoryutilization directly affects the speed of response to turns, leading to unnecessary increases in tied upcustomer demand through its impact on ﬂexibility, capital. Various factors that can inﬂuence deli-leadtime and deliverability. very speed include vehicle speed, driver reli- ability, frequency of delivery, and location ofEffectiveness of scheduling techniques: Scheduling depots. An increase in efﬁciency in these areas canrefers to the time or date on or by which activities lead to a decrease in the inventory levels (Novich,are to be undertaken. Such ﬁxing determines the 1990).manner in which resources will ﬂow in an Number of faultless notes invoiced: An invoiceoperating system, the effectiveness of which has shows the delivery date, time and conditionan important impact on production and thus under which goods were received. By comparingsupply chain performance. For example, schedul- these with the previously made agreement, iting techniques such as JIT, MRP and ERP have can be determined whether perfect delivery hasimplications on purchasing, throughput time and taken place or not, and areas of discrepancybatch size. In case of the supply chain, since can be identiﬁed so that improvements can bescheduling depends heavily on customer demands made.and supplier performance, the scheduling tools Flexibility of delivery systems to meet particularshould be viewed in that context (Little et al., customer needs: This refers to ﬂexibility in meeting1995). a particular customer delivery requirement at an
ARTICLE IN PRESS338 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347agreed place, agreed mode of delivery and with small quantities of wider range (e.g. JIT lot size)—agreed upon customised packaging. This type of and (iv) number of Inventory turns.ﬂexibility can inﬂuence the decision of customersto place orders, and thus can be regarded as 3.5.2. Customer query timeimportant in enchanting and retaining customers Customer query time relates to the time it(Novich, 1990). takes for a ﬁrm to respond to a customer query with the required information. It is not unusual3.4.2. Total distribution cost for a customer to enquire about the status Perhaps the most important research concerning of order, potential problems on stock avail-logistics is going on in the area of design of ability, or delivery. A fast and accurate responseefﬁcient and cost effective distribution systems. to those requests is essential in keeping customersFor this, an understanding of total distribution satisﬁed.cost is essential, so that proper trade-offs can beapplied as a basis for planning and reassessment of 3.5.3. Post transaction measures of customerdistribution systems. The urgency of dealing with servicetransportation cost was highlighted by Thomas The function of a supply chain does not endand Grifﬁn (1996), who argued that since trans- when goods are provided to the customer. Postportation cost accounts for more than half of the transaction activities play an important role intotal logistics cost, more active research is needed customer service and provide valuable feedbackin the area. To deal with distribution costs, that can be used to further improve supply chainmeasuring individual cost elements together with performance.their impact on customer service encourages trade-offs that lead to a more effective and efﬁcient 3.6. Supply chain and logistics costdistribution system. The efﬁciency of a supply chain can be assessed using the total logistics cost—a ﬁnancial3.5. Measuring customer service and satisfaction measure. It is necessary to assess the ﬁnancial impact of broad level strategies and practices To a world class organisation, a happy and that contribute to the ﬂow of products in asatisﬁed customer is of the utmost importance. In supply chain. Since logistics cut across func-a modern supply chain customers can reside next tional boundaries, care must be taken to assessdoor or across the globe, and in either case they the impact of actions to inﬂuence costs in onemust be well served. Without a contented custo- area in terms of their impact on costs associ-mer, the supply chain strategy cannot be deemed ated with other areas (Cavinato, 1992). Foreffective. Lee and Billington (1992) and van Hoek example, a change in capacity has a major effectet al. (2001) emphasised that to assess supply chain on cost associated with inventory and orderperformance, supply chain metrics must centre on processing.customer satisfaction. 3.6.1. Cost associated with assets and return on3.5.1. Flexibility investment Of the factors by which supply chains compete, Supply chain assets include accounts receivable,ﬂexibility can be rightly regarded as a critical one. plant, property and equipment, and inventories.Being ﬂexible means having the capability to With increasing inﬂation and decreased liquidity,provide products/services that meet the individual pressure is on ﬁrms to improve the productivity ofdemands of customers. Some ﬂexibility measures capital—to make the assets sweat. In this regard itinclude: (i) product development cycle time, (ii) is essential to determine how the cost associatedmachine/tool set up time, (iii) economies of scope with each asset, combined with its turnover, affects(Christopher, 1992)—refers to the production of total cash ﬂow time. One way to address this is by
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 339expressing it as an average days required to 4. The research methodologyturn cash invested in assets employed intocash collected from a customer (Stewart, 1995). The framework presented by Gunasekaran et al.Thus, total cash ﬂow time can be regarded (2001) was used in developing a survey used toas a metric to determine the productivity of study performance measures and metrics used in aassets in a supply chain. Once the total cash supply chain environment. A seven-page ques-ﬂow time is determined, this can be readily tionnaire1 was developed for collecting data. Thecombined with proﬁt to provide insight into questionnaire was divided into four basic sections.the rate of return on investment (ROI). This They are as follows: plan (including strategy),determines the performance by top management source/supply (order), produce (make/assemble),is terms of earnings on the total capital invested and delivery (to customer). These four categoriesin a business. correspond to the four basic activities or processes With customer service requirements constantly in a supply chain—plan–source–make/assemble–increasing, effective management of inventory in delivery. The questionnaires were mailed with athe supply chain is crucial (Slack et al., 1995). In a cover letter and addressed to the CEO of eachsupply chain, the total cost associated with ﬁrm. Targeted recipients were instructed to com-inventory can be broken down into the following plete the survey themselves or refer it to an(Stewart, 1995; Christopher, 1992; Slack et al., appropriate person for the same. Participants were1995; Lee and Billington, 1992; Levy, 1997): identiﬁed using the ‘Kompass Register’ for UKOpportunity cost, consisting of warehousing, industries (Volumes I and II) published by thecapital and storage; Cost associated with inventory Reed Business Information Ltd., West Sussex,at the incoming stock level and work in progress; UK. A total of 150 large companies were selectedService costs, consisting of cost associated with from a wide range of industry settings.stock management and insurance; Cost of ﬁnishedgoods including those in transit; Risk costs,consisting of cost associated with pilferage, 5. Empirical analysisdeterioration, and damage; Cost associated withscrap and rework; and Cost associated with too Of the 150 questionnaires mailed, 21 werelittle inventory accounting for lost sales/lost completed and returned. A breakdown of theproduction. survey response is shown in Fig. 1. Nearly all the responses were received within 4 weeks of mailing.3.6.2. Information processing cost Twelve companies said that because of the larger This includes costs such as those associated with number of such enquiries they were unable toorder entry, order follow/updating, discounts, and reply. Ten companies returned the questionnaireinvoicing. On the basis of survey results from stating that they were not suitable candidates forvarious industries, Stewart (1995) identiﬁed in- the survey because of changes in their operations.formation processing cost as the largest contribu- The response rate was only 14%, but we felt that ittor to total logistics cost. The role of information was adequate to assist us in developing ourtechnology is shifting from a general passive framework.management enabler through databases, to ahighly advanced process controller that can 5.1. Planning performance evaluation metricsmonitor activities and decide upon an appropriateroute for information. Modern information tech- This section deals with ﬁnancial and non-nology, through its power to provide timely, ﬁnancial strategic level performance measures.accurate, and reliable information, has led to a The importance of these parameters was estab-greater integration of modern supply chains than lished by calculating the mean of all responses andpossible by any other means (Naim, 1997; 1Benjamin and Wigand, 1995). Available upon request from authors
ARTICLE IN PRESS340 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 Responded with Said were not Table 1 completed questionnaire Ratings strategic planning metrics 14% able to reply 8% Assessment Strategic performance Percentage metrics importance Highly important Level of customer 16.42 perceived value of 7% product Returned the 71% questionnaire Moderately Variances against 14.23 without important budgetDid not respond to completing it Order lead time 13.50the questionnaire Information processing 12.68 Fig. 1. Breakdown of response for the survey. cost Net proﬁt Vs 12.46 productivity ratio Total cycle time 11.80ranking them accordingly. The ranks were con- Total cash ﬂow time 10.27verted to relative percentages by dividing eachrank, by the total of all ranks for the group of Less important Level of energy 8.64measures/metrics. This approach is similar to the utilisationmethod used in Pareto analysis wherein problemfrequencies are converted to percentages to showrelative importance. The percentages better high- to validate the framework should employ a betterlight differences in the importance of performance sample and more rigorous statistical techniques.measures in each group (we used this approach in The ﬁrst set of measures (ﬁve non-ﬁnancial andanalysing performance measures in all groups three ﬁnancial) pertain to planning, but morediscussed herein). We further categorized the speciﬁcally to strategic planning. Table 1 showsmeasures based on importance (highly important, the measures and their relative importance asmoderately important and less important). The determined by our analysis of the survey data.methodology employed for such was similar to the The importance rating survey results show thatmethodology used in ABC inventory (inventory the level of customer perceived value of product isitem’s annual cost is stated as a percent of total of the utmost importance. It was deemed highlyinventory costs) to prioritize inventory manage- important which clearly reﬂects the perception ofment decisions (item cost percentages sorted in practitioners that customer satisfaction is para-descending order and grouped into A—most mount in importance in increasing competitive-important, B—moderate importance, and C—less ness. The measures considered moderatelyimportant based on their contribution to total important in descending order include variancescosts). We used this approach in analysing against budget, order lead-time, information-performance measures in all groups discussed processing cost, net proﬁt vs. productivity ratio,herein. Please note that categorizing a measure as total cycle time and total cash ﬂow time. Variancesless important does not mean it is unimportant, against budget, information-processing cost andbut rather it seems less important compared to net proﬁt vs. productivity are of course ﬁnancialothers in the measurement group. We believe a measures and reﬂect the importance of ﬁnancialsimilar approach could be used by managers in measures in strategic planning and control—setting priorities in the development of a measure- ﬁnancial stability is essential to organizationalment system for supply chain performance. Our success. The other three moderately importantsmall sample size precluded the use of more measures were order lead time, total cycle time andpowerful statistical techniques. We believe our total cash ﬂow time. Their rating further highlightsapproach is adequate for our use of the data in the importance of non-ﬁnancial measures inframework development. A more rigorous study strategic planning and control and to subsequent
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 341Table 2 warrant monitoring by management and improve-Importance of order planning metrics ment effort. Cross-functional teams, rapid proto-Assessment Metrics Percentage typing, and concurrent engineering involving importance suppliers would seem appropriate in efforts to improve product development cycle time. ManyHighly important Customer query time 19.11 alternative techniques are available for forecasting.Moderately Product development 17.37 If forecasting accuracy is a concern, ﬁrms mightimportant cycle time examine the techniques employed with an eye toward improvement. Because the forecasts of allLess important Accuracy of forecasting 16.59 supply chain links can inﬂuence supply chain Planning process cycle 15.90 time performance, a concerted effort by all should be Order entry methods 15.51 made to assure accurate forecasts. This is empha- Human resource 15.51 sized by a survey participant (a machine tool productivity manufacturer) who said that supply chain partners should ‘‘Use better forecasting techniques to remove uncertainties in supply chain.’’ Many under-organizational success. The only strategic planning stand the consequences of weak forecastingmeasure deemed less important was level of energy performance and recognize the need to measureutilisation which may suggest that it is not of and improve it.strategic signiﬁcance. That, of course, could vary By benchmarking their forecasting methodsfrom ﬁrm to ﬁrm, depending on energy cost as a with those of the best, a better understanding thepercent of total manufacturing cost and on energy techniques might be gained and greater accuracyprice levels relative to the prices of other manu- achieved. Also, by integrating production sche-facturing inputs. dules with others in the supply chain, more The percentage importance (relative impor- accurate day to day demand forecast might betance) of the strategic performance metrics clearly possible for all links in the supply chain. Planningsuggests that non-ﬁnancial measures of perfor- process cycle time, order entry methods, andmance are considered by practitioners to be human resource productivity were the less im-important in assessing the competitiveness of an portant order planning measures. Planning processorganization. This is not to say that ﬁnancial cycle time and order entry methods could bemeasures are no longer important, but rather that improved through reengineering efforts that in-non-ﬁnancial measures are important and neces- clude multiple links in the supply chain, becausesary in assessing a ﬁrm’s ability to compete. the actions of multiple participants interact to In Table 2, the order of priority for the order inﬂuence performance in these areas. Improve-planning level metrics is presented. At the order ments in customer query time, product develop-planning level, customer query time was highly ment cycle time and planning process cycle timeimportant, which would seem to emphasize the might be brought about by greater humanimportance of customer service. Product develop- resource productivity, so although it was ratedment cycle time and forecasting were moderately last in importance, human resource productivityimportant. These two factors relate to meeting should not be dismissed as unimportant. Improve-customer needs and doing so in a timely fashion. ment in order entry methods, customer query time,Although there is no statistical evidence contained forecasting accuracy and customer query timeherein to prove such a link, common sense might be brought about through the application ofsuggests a link between these and the perceived information technology to increase accuracy andcustomer value of the product, rated number one expedite the ﬂow of information throughout theamong the strategy performance measures. The supply chain. Process cycle time can be tackled byimportance ratings of product development cycle using techniques like single minute exchange of dietime and forecasting measures suggests that they and group technology, whereby similar facilities
ARTICLE IN PRESS342 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347for production will be grouped to reduce manu- Table 3facturing lead-time. Importance of supplier metrics Assessment Metrics Percentage5.2. Supply link evaluation metrics importance Highly important Supplier delivery 23.20 Due to the growing importance outsourcing, performancewhereby ﬁrms outsource a major part of theirproducts, evaluation of supply link performance is Moderately Supplier lead-time 19.69very important in managing the supply chain for important against industry norm Supplier pricing against 18.30peak efﬁciency and effectiveness. In this section, marketthe importance of performance measures/metrics Efﬁciency of purchase 15.42in a supply chain link (includes purchasing and order cycle timesupplier management activities) are rated inimportance. Based on the literature, six key Less important Efﬁciency of cash-ﬂow 12.38 methodperformance indicators (KPI) pertaining to the Supplier booking in 11.01supplier link were included in the survey and proceduresranked by participants. These measures include:supplier delivery performance, lead-time againstindustry norm, supplier pricing against market, schedules and terms of the order as well as promptefﬁciency of purchase order cycle time, efﬁciency delivery of goods have become order winners.of cashﬂow method, and supply booking proce- Firms would do well to not just use supplierdures. The main objective here is to identify the metrics for selection of suppliers, but rather theyKPI in supply link performance evaluation. The should work closely with suppliers to see that theyKPI can be deﬁned as the performance indicators have in place within their organizations, measure-that have signiﬁcant impact on the overall ment systems that will foster signiﬁcant improve-performance of an organization in the areas of ment in all of these areas. Such improvementstrategic, tactical and operational planning and contributes to the overall success of a supplycontrol. The percentage importance ratings of the chain.six measures are included in Table 3. As can be seen in Table 3, supplier delivery 5.3. Production performance evaluation metricsperformance emerged as the most importantmeasure pertaining to the evaluation of supplier In this section, supply chain production linkperformance. It was the only highly important metrics/measures are rated in importance. Themeasure. One can see from the table that it is literature provided the production link measures,clearly set apart from the others by its percentage and as with other metrics evaluated in this paper,importance rating. The moderately important the survey responses provided the basis for ratingmeasures in descending order are supplier lead- the importance of these measures. The perfor-time against industry norm, supplier pricing mance measures for the production link includedagainst market and efﬁciency of purchase order percentage of defects (a measure of productcycle time. The less important supplier measures quality), cost per operation-hour, capacity utiliza-were efﬁciency of cash ﬂow method and supplier tion, range of product and services, and utilizationbooking in procedures. Most notable about the of economic order quantity. Table 4 contains thesupplier metrics is that ﬁrms regard the supplier’s measures and their percentage importance ratings.capability to reliably deliver goods in a timely From the table one can see that the percentage offashion as more important than price. Price has defects emerged to be the most importantincreasing become an order qualiﬁer rather than (24.27%), but two others, cost per operation houran order winner. Other aspects of supplier and capacity utilization, were also highly impor-performance such as adherence to agreed upon tant. The latter two are essentially measures of the
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 343Table 4 5.4. Delivery performance evaluation metricsImportance of production metricsAssessment Metrics Percentage After the orders are planned and goods sourced, importance produced and assembled, the remaining task is to deliver them to customer. Table 5 shows the orderHighly important Percentage of defects 24.27 Cost per operation hour 22.51 of importance of delivery performance measures. Capacity utilization 21.61 Quality of delivered goods is ﬁrst in importance, followed by on time delivery of goods andModerately Range of products and 18.01 ﬂexibility of service systems to meet customerimportant services needs. These three measures are highly important.Less important Utilization of economic 13.60 Note that there is very little difference in the rating order quantity of quality of delivered goods and on time deliver of goods. Here again, we believe that these three are related to the perceived customer value of the product, the top ranking strategic planning mea-efﬁciency with which resources are used in sure. Providing the customer with a qualitymanufacturing (produce/assemble), and good per- product in a timely fashion, and maintainingformance in these two areas translates into lower customer satisfaction with a service system de-cost per unit to manufacture products/provide signed to ﬂexibly respond to customer needs areservices. Efﬁciency of operations is important for key in producing value for the customer.all supply chain partners, if the elusive goal of The effectiveness of the enterprise distributionsupply chain optimization is to be achieved. Notethat the percentage importance of each of thesethree clearly sets them apart from the moderately Table 5important and less important measures. We should Importance of delivery performance measurescaution that maximum efﬁciency of each partner Assessment Delivery performance Percentagein all areas might not be a desirable because metrics ratingtradeoffs are necessary in order to achieve a global Highly important Quality of delivered 12.34optimum for the supply chain—local optimums in goodsall parts do not necessarily lead to global On time delivery of 12.20optimization for a system. goods The only measure rated moderately important Flexibility of service 11.43 systems to meetwas range of products and services. As noted in the customer needsliterature, a broader range of products tends toresult in fewer new products being introduced and Moderately Effectiveness of 10.31a more narrow range is associated with greater important enterprise distributionproduct innovation. For this reason, the measure planning schedule Effectiveness of delivery 10.23does seem worthy of the attention of managers, invoice methodsespecially in making decisions about the breadth Number of faultless 10.05and depth of product lines. The least important delivery notes invoicedmeasure in the production link measures was Percentage of urgent 9.32utilization of economic order quantity. It was the deliveries Information richness in 8.76only measure rated less important. It may be that carrying out deliverythe participants, in assigning their ratings, re-garded the use of EOQ as a means to an end rather Less important Percentage of ﬁnished 7.76than an end in and of itself. In short, quality and goods in transitefﬁciency seem to be more important considera- Delivery reliability 7.70 performancetions in evaluating production performance.
ARTICLE IN PRESS344 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347planning schedule, effectiveness of delivery invoice mid-level managers who are generally the onesmethods, number of faultless delivery notes responsible for tactical decisions.invoiced, percentage of urgent deliveries and The items in each cell are listed in the order ofinformation richness in carrying out the delivery importance based on percentage importance rat-are moderately important. According to the rating ings. Those ratings can be seen in Tables 1–5.of measures, while unquestionably important, Readers can refer to those tables in order to morethese measures are not as important as the quality closely examine the importance ratings of indivi-of the delivered product and on time delivery. It dual measures/metrics. Some measures appear inwould seem, at least on the surface that on time more than one cell, indicating that measures maydelivery would result from an effective enter- be appropriate at more than one managementprise distribution planning schedule, so it level. Measures used at different managementwould probably be unwise to ignore the obvious levels will most assuredly require adjustment toimportance of the enterprise distribution plan- tailor them to planning and control needs of thening schedule—one is the means and the other different levels. For example, appropriate mea-the end. surement may require that data used by the lower In the survey, companies were asked to express level of management be aggregated in some formtheir views on reducing the cost of a delivery or fashion to make the data appropriate for thesystem. Their responses tended to emphasize next higher level (convert data into informationtechniques like JIT and the application of auto- appropriate for the context). There is nothingmation alternatives to reduce costs. Trade-offs novel about this approach, as it has been usedbetween centralisation of the distribution system for years in management planning and controland decentralisation of the system were mentioned systems.as was third party logistics. The approach we used in organizing the measures for the framework could be used by organizations in development of a performance6. A framework for performance measurement in measurement program for SCM. Managers and/ora supply chain consultants could identify measurements (we recommended many such measurements herein), In this section, a framework for performance rate their importance using the methodology wemeasures and metrics is presented (see Table 6), used for rating importance, and construct a matrixconsidering the four major supply chain activities/ like our own to identify the supply chain activity/processes (plan, source, make/assemble, and de- process to be measured, the measurement, andliver). These metrics were classiﬁed at strategic, level of management to which the measure shouldtactical and operational to clarify the appropriate be applied. More detail could be added to ﬁxlevel of management authority and responsibility personal responsibility for measures with indivi-for performance. This framework is based in part dual managers, or management positions.of a theoretical framework discussed by Gunase- Readers should keep in mind that this frame-karan et al. (2001) and on the empirical analysis work is based largely on metrics discussed in thereported herein. Measures are grouped in cells at literature. Individual ﬁrms will certainly havethe intersection of the supply chain activity and performance measurement needs that reﬂect theplanning level. For example, Supplier delivery unique operations of their business and of courseperformance can be found at the intersection of not all supply chains are identical. Thus otherthe Source activity and Tactical planning level measures may be desirable and should be devel-indicating that it pertains to sourcing activities oped by ﬁrms and supply chain participants to(source) and the tactical planning level. Supplier reﬂect their unique needs. This framework shoulddelivery performance would thus be a measure be regarded as a starting point for an assessmentuseful in analyzing the performance of mid-level of the need for supply chain performance mea-managers as they undertake sourcing activities— surement. It is likewise important to understand
ARTICLE IN PRESS A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 345Table 6Supply chain performance metrics frameworkSupply Strategic Tactical Operationalchainactivity/processPlan Level of customer perceived value of Customer query time, Product Order entry methods, Human product, Variances against budget, development cycle time, Accuracy of resource productivity Order lead time, Information forecasting techniques, Planning processing cost, Net proﬁt Vs process cycle time, Order entry productivity ratio, Total cycle time, methods, Human resource Total cash ﬂow time, Product productivity development cycle timeSource Supplier delivery performance, Efﬁciency of purchase order cycle supplier leadtime against industry time, Supplier pricing against norm, supplier pricing against market market, Efﬁciency of purchase order cycle time, Efﬁciency of cash ﬂow method, Supplier booking in proceduresMake/ Range of products and services Percentage of defects, Cost per Percentage of Defects, Cost perAssemble operation hour, Capacity utilization, operation hour, Human resource Utilization of economic order productivity index quantityDeliver Flexibility of service system to meet Flexibility of service system to meet Quality of delivered goods, On time customer needs, Effectiveness of customer needs, Effectiveness of delivery of goods, Effectiveness of enterprise distribution planning enterprise distribution planning delivery invoice methods, Number schedule schedule, Effectiveness of delivery of faultless delivery notes invoiced, invoice methods, Percentage of Percentage of urgent deliveries, ﬁnished goods in transit, Delivery Information richness in carrying out reliability performance delivery, Delivery reliability performancethat the rated importance of metrics in this expected levels after implementing contemporaryframework is based on a relatively small sample, supply chain management (SCM) practices. Theand thus, care should be taken in generalizing 76% afﬁrmative response to that question clearlyresults to all supply chains. The importance of showed that effort focused on carefully managingindividual metrics presented herein might not supply chains produced ﬁnancial beneﬁts forapply to all supply chains in all industries. Again, participating ﬁrms. From a ﬁnancial perspectivethe framework is only a starting point. It is hoped alone, a proactive approach to SCM is advisablethat this framework will assist practitioners in for ﬁrms wanting to enhance competitiveness.their efforts to assess supply chain performance. The SCM literature suggests that effective SCM help to win customers and improve customer service. Some 66% of the respondents in our7. Conclusions survey noted the positive impact of SCM on market share, providing more evidence of the In our survey participants were asked whether strategic importance of successful SCM. Thetheir return on investment had increased to potential beneﬁts of SCM make it attractive, but
ARTICLE IN PRESS346 A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347improved performance is not automatic. As with come together to discuss how they will addressany other organisational undertaking, it must be the measurement and improvement of SCMdone well to yield positive results. This is why we performance. Industry consortiums, consultants,believe it is important to assess performance in and researchers could be helpful in promotingSCM and the reason we developed the SCM SCM performance measurement generally, and inperformance measurement framework. developing measures and measurement techniques To bring about improved performance in a speciﬁcally. They could play a signiﬁcant role insupply chain and move closer to attainment of the helping ﬁrms address the present and futureillusive goal of supply chain optimization, perfor- challenges of managing supply chains. Clearlymance measurement and improvement studies tremendous opportunity exists to develop mea-must be done throughout the supply chain. All sures that facilitate progress and promote greaterparticipants in the supply chain should be involved supply chain integration.and committed to common goals, such as custo-mer satisfaction throughout the supply chain andenhanced competitiveness. A performance mea- Acknowledgementssurement program for a supply chain should becomplete—important aspects of performance in The authors gratefully acknowledge the con-any link are not ignored—and they must be structive and helpful comments of two anonymoustailored to varying needs of participants. A good referees on the earlier version of the manuscript.SCM program will bring about improved cross-functional and intra-organisational process plan-ning and control and more complete supply chain Referencesintegration. A supply chain wide performancemeasurement initiative would seem most appro- Ballou, R.H., 1992. Business Logistics Management. Prentice-priate. This is not to suggest that one party dictate Hall, Inc., Englewood Cliffs, NJ. Benjamin, R., Wigand, R., 1995. Electronic markets and virtualmeasurement programs for all supply chain value chains on the information superhighway. Sloanparticipants, but rather that all participants take Management Review 36 (2), 62–72.part in developing a well planned, well coordi- Cavinato, J.L., 1992. Total cost value model for supply chainnated, supply chain-wide performance measure- competitiveness. Journal of Business Logistics 13ment initiative to which all can and will be (2), 285–291. Christopher, M., 1992. Logistics and Supply Chain Manage-committed. A comprehensive control system will ment. Pitman Publishing, London.be necessary in order to assure effective and De Toni, A., Tonchia, S., 2001. Performance measurementefﬁcient performance measurement all along the systems: Models, characteristics and measures. Interna-supply chain, but it must not be done in such a tional Journal of Operations & Production Management 21 (1/2), 46–70.way as to unduly limit the decision making Ellram, L.M., 1991. A managerial guide for the developmentauthority of managers in participating organiza- and implementation of purchasing partnerships. Interna-tions. Care must be exercised in developing such a tional Journal of Purchasing and Materials Management 27system in order that it promotes mutually advan- (3), 2–8.tageous exchange among participants, so that Fawcett, S.E., 1995. Using strategic assessment to increase therelationships endure the test of time. value-added capabilities of manufacturing and logistics. Production and Inventory Management Journal 36 (2), Additional research and practitioner-driven in- 33–37.itiatives are needed in the area of SCM perfor- Fisher, L.M., 1997. What is the right supply chain for yourmance measurement. Creative efforts are needed product? Harvard Business Review 75 (2), 105–116.to design new measures and new programs for Graham, T.S., Dougherty, P.J., Dudley, W.N., 1994. The longassessing the performance of the supply chain as a term strategic impact of purchasing partnerships. Interna- tional Journal of Purchasing and Materials Management 30whole as well as the performance of each (4), 13–18.organization that is a part of the supply chain. Gunasekaran, A., Patel, C., Tirtiroglu, E., 2001. PerformanceOrganisation, suppliers and customers should measure and metrics in a supply chain environment.
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