PERFORMANCE MEASUREMENT ANDTOOLSPresented byJilsiya aSaranya raj c v
OBJECTIVES There are number of operational aspects of supply chain, suchas movement of goods, storage efficiency, facility operations,inventory parameters, supplier efficiency, and so on. There isa need to track performance against operating plans and toidentify opportunities for enhanced efficiency andeffectiveness. Supply chain management involves a number of inwardfacing activities as well as outward facing activities. Theinternal and external categorization make it easier to measureand analyse functions, and addresses issues for improvements. Supply chain performance measurement system mustfacilitate benchmarking across peers, best of the industry, andacross industries. Temporal benchmarking would also help inconstantly striving for improvements.
It must be consolidate and not focus on isolated issues oflogistic drivers. This is were the contemporary approachto performance management as viewed by managementaccountants is helpful.
APPROACHES TO PERFORMANCE MEASURES1) Traditional approachIt consists ofa) Productivity measuresIt is measured as a ratio of output to input. The outputcan be measured by way of the amount of revenue earned andthe volume of goods produced. Inputs could be the factors ofproduction like man-hours, number of persons employed, costof labour, capital employed and so on. To measureproductivity, one should first define the time window and unitof measurement.Some commonly used productivity measures in supplychain include:
Units shipped per employeesEmployee productivity is one of the key measures as itcaptures employee efficiency and effective span of operation. Units to labour costsEmployee cost efficiency could be an important factor. Thedifference between productivity per employee and employeecost efficiency is that while the former is the number of unitsproduced or served per employee, the latter is a measure ofproductivity vis-a vis employee costs which includesalaries, rentals, and running costs. Equipment downtimeIt refers to the loss of time due to machinery breakdown orthe failure of a component. This could critically effect supplychain productivity both directly and indirectly.
Capacity utilizationThe importance of measuring and controlling capacityutilization, which directly effects the speed of response tocustomers demands. Hence, by measuring capacity, gains inflexibility, lead-time, and deliverability will be achieved. Order per sales personA supply chain manager coordinate between the sales teamand operations team for planning and scheduling theproduction function. Oder entry efficiencyThis is a measure of both productivity and quality. Orderentry efficiency measures the ability to capture a customerorder quality and delight the customer on order capture.
b) Quality measuresA quality indicator refers to an attribute of a logisticalor cross-functional driver that can be used to gauge thequality of supply chain performance in a specific area. Aquality measures is in effect a rule that assigns numericvalues to a specific quality indicator. The essentialdistinction between quality indicators and quality measuresis that quality measures take on numeric values, whilequality indicators refer only to unquantified attributes of thesupply chain function.Some of the commonly used quality measures insupply chain are as follows. Number of faultless notes invoicedAn invoice shows the delivery date, time, and thecondition under which goods are received. This is alsoreferred to as document/ invoice accuracy. By comparingthese with the previous agreement, it can be determinedwhether a perfect delivery has taken place or not.
Order entry accuracyThis is an important measure for order management at thewarehouse level. With increased automation, this error is beingaddressed largely. Yet the scope of order entry error is high because ofmanual feed and improper understanding of product features. A wrongorder entry triggers a whole range of unwanted activities across thesupply chain. Picking/ shipping accuracyIt refers to the number of orders that are picked accurately as perorder fill requirement. This is important because picking accuracycaptures the service level at picking activity level. This can becommonly seen in component stores and warehouses, pharmaceuticalstores, and finished goods warehouses were customer order needs to bepicked for delivery. Number of customer returnsNumber of customer returns as a quality measure is important from theperspective of customer acceptance of products and dispatch efficiency,ie, the product is delivered without being damaged.
Damaged frequencyThis is a related measure of quality. Damages can occur whileat manufacture, warehousing, transportation, and in deliveryprocess. Any supply chain manager would focus on achievingzero damages. One of the cases where this kind of measure canbe critical is where customer requirement is unique and customerservice is hampered for want of proper care. Information availabilitySupply chain partners such as suppliers, after completing theirphysical flow, wait for financial flow and keenly trackinformation on financial transaction. Hence it is a critical qualitymeasure which a focal organisation must provide to its stakeholders.
C) customer service measurescustomer service measures are some of the critical performancemeasures of supply chain effectiveness. A supply chain network isorganised for serving an ultimate customer and hence measuresaround availability, reliability, and operating parameters towardscustomer needs would be important to understand supply chaineffectiveness. Order lead timeThe total order cycle time, which is also called ‘order lead time’,refers to the time that elapses between the receipt of thecustomer’s order and the delivery of the goods. The customer order pathThe path that the orders traverse is yet another important measureswhere by the time spend in different routes and non-value addingactivities can be identify and suitable steps can be taken toeliminate them.
The order entry methodit determines the way and the extent to which the customerspecification are converted in to useful information, andare passed down along the supply chain. Suchinformation connects all levels of supply chain andeffects the scheduling of all activities. The customer query timeIt refers to the time it takes for a firm to respond to acustomer inquiry which the requierd information
d) Cost measuresThe most important efficiency measure is the cost factor asit is direct and simple to calculate and easy to interpret. Total inventory costsIn a supply chain, the total cost associated with theinventory consist of following• Opportunity cost consisting of warehousing, capital andstorage• Cost associated with inventory as incoming stocklevel, working progress• Cost held up as finished goods in transit• Cost associated with scrap and re work
Total distribution costIt include: Inbound cost to regional distribution centres and anystock point Outbound cost from a distribution centre to the nextstage and from every stage to the ultimate customer Cost of managing regional distribution centres, whichwill include wages and salaries, rent, insurance and soon. stock holding cost, which is inventory holding cost.
Finance and logistics costThe financial performance of a supply chain can beassist by determining total logistic cost. Since logistic cutacross functional boundaries, care must be taken duringdecision-making as the cost in one area effects the cost inother areas. Asset measureSupply chain asset include plant, equipments, andcurrent assets such as account receivable and inventories. Itis common that firms do their best to make the most ofcapital assets they have deployed in business.
2) Contemporary approachThe contemporary supply chain measurement approachmust have three capabilities:An analytical framework; a process orientation; and linkages.The measurement must facilitate rout cause analysis, suggestapproach for improvement areas, and monitor actionimplemented for validation of corrective actions. Analytical frameworkA frame work is one which brings structure to an analysisand would work if certain fundamentals are well laid out. Thisinclude Explicit statement of supply chain objectives. Identification of key metrics that effect the objectives. The description, targets, and acceptable range for each metric. List of reports were the metric can be found.
Process orientationas supply chain management has deep-rooted processorientation, performance measurement system must capturethe same. Also, since supply chain management cuts acrossfunction, it is important to capture these inter-relations. Whenthere is a delink among departments, there is a tendency toobserve local optimization at the cost of overall processorientation. Typically, a supply chain analyst must enable allround process-based metrics with a focus on current andfuture requirements. LinkagesAn ideal system should use the analytical framework to definelinkages between two metrics that are related to businessprocess but associated with different departments. Inaddition, the system should be able to show linkages of anymetric with different hierarchies with in the same department.
TOOLS OF PERFORMANCE MEASUREMENT Balance score cardIt is a strategic planning and management system thatis used extensively to align business activities to thevision strategy of the organization, improve internal andexternal factors, and monitor organization performanceagainst strategic goals. A true balanced score card mustinclude metrics that provide both historical and futureinsights. Activity-based management and costing(ABC)it is a costing model that identifies activities in anorganization and assigns the cost of each activityresource to all products and services according to theactual consumption by each product. It assign indirectcosts into direct costs.
Economic Value added(EVA)it is an estimate of true economic profit after making correctiveadjustments to accounting provisions and charges oncapital, including deducting the opportunity cost of equitycapital. EVA can be measured as Net Operating Profit AfterTaxes less the money cost of capital. This can be applied tosupply chain function and asset. Process driven metrics-Score frame workThe supply-chain operations refers-model is a process referencemodel that has been developed and endorsed by the supply-chaincouncil as the cross-industry standard diagnostic tool or supplychain management. It is a process reference model for supplychain management, spanning from the supplier’s supplier to thecustomer’s customer. The score model has been developed todescribe the business activities associated with all faces ofsatisfying a customers demand.