SCM

1. Chapter Thirteen:
Performance Measurement
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

2. Overview of Performance Measurement
• Measurement system objectives
• Operational assessment
• Financial assessment
“If you don’t measure it,
you can’t manage it.”

3. Measurement System Objectives Related to Logistical
Operations
• Monitoring system performance by establishment of appropriate
metrics to track and report
• Controlling system performance by having appropriate standards of
performance relative to metrics being monitored
• Directing employee focus on system performance through motivation
and reward
• Improving shareholder value through superior logistics performance
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

4. The Balanced Scorecard is a Comprehensive System of Performance
Assessment
The Balanced Scorecard
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

5. Operational Assessment
• Functional perspectives
• Measuring customer accommodation
• Determining appropriate metrics
• Supply chain comprehensive metrics
• Benchmarking
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

6. Functional Perspective on Logistics Measures includes these
Major Categories
• Cost
• Customer service
• Quality
• Productivity
• Asset management
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

7. Example of Common Metrics by Category
Table 13.1 Typical Performance Metrics
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

8. Cost is the Most Direct Reflection of Logistics Performance
• Typically measured in total dollars spent
• Total logistics cost (aka total landed cost)
• Sum of order processing + inventory + transportation + warehousing and
materials handling + facility network
• Few organizations have ability to measure total cost
• Common to report cost as a
• Percentage of sales volume
• E.g. transportation cost as 15% of sales volume
• Cost per unit of volume
• E.g. loading cost as $5.50 per order
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

9. Customer Service Requires Specific Measures for each Element
of the Basic Service Platform
• Availability
• Organization’s fill rate
• Item fill rate
• Line fill rate
• Value fill rate
• Order fill rate
• Operational performance
• Average order cycle time is average
number of days elapsed between order
receipt and delivery to customer
• Order cycle consistency
• On-time delivery
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

10. Quality Measures often Include Service Reliability
Performance
• Accuracy of work activities performed
• Damage frequency is the ratio of number of damaged units to
the total number of units
• Number of customer returns of damaged or defective goods
• Number of instances when information is not available on
request
• Number of instances when inaccurate information is
discovered
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

11. Productivity is Measured in Terms of Output of Goods Compared
with Input Quantities
• Labor productivity
• Units shipped per employee
• Units received per employee
• Equipment downtime
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

12. Inventory Turnover Rate is Measured Differently by
Different Types of Firms
• Vast majority of firms use this metric
• Some retail firms use this metric
• This metric is used for products whose
cost or selling price changes
significantly during relatively short
periods of time
• E.g. gasoline inventory
Critical that average inventory use as
many data points as possible
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

13. Measuring Customer Relationships Requires an Additional Set
of Metrics
• Perfect order measures the effectiveness of
the overall integrated logistical performance
• Ratio of perfect orders to the total number of
orders completed during the same time period
• Absolute performance provides a better
indication of how a firm’s performance
impacts customers
• “To us, 99.5 percent on-time delivery would mean
that on a typical day, over 5,000 customers
received late orders.”
• Customer satisfaction measurement
requires monitoring, measuring and
collecting information from the customer
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

14. Determining Appropriate Metrics using the Framework
• Competitive basis reflects the fundamental choice between
responsive or efficient logistics performance
• Measurement focus is a continuum ranging from operational metrics
to strategic metrics
• Measurement frequency is the need to monitor day-to-day
performance versus less frequent review to diagnose performance
problems
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

15. Illustration of Framework use Showing Metric 2 is Closer to
Measurement Need
Figure 13.2 Illustration of Measurement Framework
Copyright
©
2020
by
The
McGraw-Hill
Companies,
Inc.
All
rights
reserved.

16. Supply Chain Comprehensive Metrics
• Cash-to-cash cycle time
• Time required to convert a dollar spent
on inventory into a dollar of sales
revenue
• Inventory days of supply
• Calendar days of sales available based on
recent sales activity
• Dwell time
• Ratio of days inventory sits idle to the
days it is productively used or positioned
• On-shelf in-stock percentage
• Percentage of time a product is available
on the shelf in a store
• Total supply chain cost
• Sum of costs across all firms in the supply
chain
• Supply chain response time
• Time required for all firms to recognize a
fundamental shift in demand, internalize
that finding, replan, and adjust output to
meet that demand
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

17. Illustration of Supply Chain Total Cost
Extending Beyond an Individual Firm
Figure 13.3 Total Supply Chain Cost

18. Benchmarking Makes Management Aware of State-of-the-art
Business Practice
• Critical aspect of performance measurement
• “Are we staying competitive?”
• Considers metrics and processes
• Which organizations should we benchmark against?
• Internal groups are easier to identify
• Johnsons & Johnson has 150+ business units with ample opportunity to share best
practices
• Provides little information about performance against the competition
• Nonrestricted benchmarking compares metrics and processes to best
practices regardless of where the practice is found
• Belief that learning is possible from any firm with outstanding performance
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

19. Financial Assessment is Needed to Link Supply Chain
Performance to Financial Results
• Critical tools for financial assessment
• Segmentation of data
• By channel, territory, customer, product, and supplier
• Cost-revenue analysis
• Strategic profit model
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

20. Cost-revenue Analysis is Needed to Provide a Financial View of
Integrated Logistics
• Accounting deficiencies make this
difficult
• 3 approaches are available to
identify and control logistics
expenses
• Contribution
• Net profit
• Activity based costing
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

21. Accounting Practices to Prepare Financial Statements
Create some Deficiencies
• Costs are aggregated on a standard
account basis rather than activity basis
• Inbound freight expense is deducted
from gross sales
• Outbound freight is reported as an
operating expense
• Freight is not reported as a specific cost
• i.e. Products purchased on a delivered price
basis
• Failure to specify and assign inventory
cost
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

22. Contribution Analysis Requires All Costs be Identified as Fixed
or Variable
• Fixed costs are those that do not directly change with volume
• Variable costs are those that change as a result of volume
• Direct costs are those specifically incurred because of the existence of
the segment of analysis
• E.g. product, customer, channel
• Indirect costs exist because of more than one segment of business
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

23. Example of Contribution Analysis
Table 13.3 Contribution Margin Income Statement for Two
Customers
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

24. Activity-based Costing is a Partial Solution to
Arbitrary Allocations
• Activity-based costing (ABC) suggests
costs be traced to activities
• Activities are then related to product,
process or customer segments
• Biggest challenge with the ABC
approach is identifying the activities,
related expenses and drivers of expense
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

25. Strategic Profit Model Shows Relationship of Income and
Balance Sheet to ROA
• Return on investment (ROI) is
critical measure of financial
success
• Return on net worth (RONW)
measures profitability of funds
invested by owners
• Return on assets (ROA) measures
profitability generated by managing
operational assets
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

26. Illustration of Strategic Profit Model with
Example Data
Figure 13.4 Strategic Profit Model
Copyright
©
2020
by
The
McGraw-Hill
Companies,
Inc.
All
rights
reserved.

27. Example Showing ROA Improvement if Inventory Level is
Reduced to $300
Figure 13.5 Strategic Profit Model (Inventory Reduction)
Copyright
©
2020
by
The
McGraw-Hill
Companies,
Inc.
All
rights
reserved.

28. Two Fundamental Ways to Improve Return on
Assets
• Manage net profit margin
improvements
• Net profit margin is net profit divided by
net sales
• Measures portion of each sales dollar that
is kept by the firm
• Manage asset turnover improvements
• Asset turnover is ratio of total sales divided
by total assets
• Measures efficiency of management
utilization of assets
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

29. Impact of Logistics
net sales
total assets
STRATEGIC PROFIT MODEL
X
$
$
$
$
$
$
%
Net Profit
Margin
net profit
net sales
¸
Net Profit
Sales
_
Gross Margin
Total Expenses
Sales
_
Cost of
Goods Sold
Variable
Expenses
- Sales increase due to better
customer service
- Fewer LTL shipments
- Fewer freight claims
- Lower freight costs
- Insurance
- Taxes
- Variable Storage costs
- Inventory risk costs
$
$
$
$
$
$
$
¸
Sales
Total Assets
+
Fixed Assets
Current Assets
Inventory
+
Accounts
Receivable
+
Other
Current Assets
%
Return on
Net Worth
Net profit
net worth
Total assets
net worth
Net profit
total assets
=
=
Financial
Leverage
Return on
Assets
X
X
- Fewer employees required
- Lower third-party warehousing costs
Reduced IS costs
Reduced cost of supervision
Reduced inventory investment
Reduced due to more prompt
paying customers (reduced errors)
General and
Administrative
Information
Systems
Warehousing
Costs
Inventory
Carrying
Costs
Transportation
Costs
- Lower cost due to new or more
efficient manufacturing facilities
Logistics’ Impact
Lot Quantity
Costs
- Reduced order management costs
- Fewer last minute production changes
Less warehouse space required
Increase investment in modernized
production facilities
- Lower cost of purchased materials
Asset
Turnover
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.

30. Product B Contributes a Higher Return even Though
its Gross Margin is Lower
CMROI for Two Products
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

31. Applications of the Strategic Profit Model (SPM)
• Model is very adaptable to a
spreadsheet
• Can use SPM in combination with other
methods to examine ROA for customer
or product segments
• Other segment profitability and ROI
analyses can be conducted
• Very useful framework for relating
logistics activities to the overall financial
objectives of the organization
Copyright © 2020 by The McGraw-Hill Companies,
Inc. All rights reserved.

32. Requirements for Financial Reporting Provide More Supply Chain
Visibility to Management
• Sarbanes-Oxley Act of 2002 (SOX)
• Section 404 requires an internal control report to be filed along with corporate annual report
• Firms must have internal measurement capabilities that comply with SEC
requirements
• SOX requires disclosure of all off-balance-sheet liabilities that have material effect
on financial reports
• Vendor-managed inventories
• Long-term purchase agreements
• Slotting allowances
• Also required to report any event that may have material effect on financial
reports
• E.g. shipments with long lead times that may be held a international border
Copyright © 2020 by The McGraw-Hill Companies, Inc. All
rights reserved.