Week 12 - Chapter 14

Principles of Supply Chain Management (5e)
Chapter 14
PERFORMANCE
MEASUREMENT ALONG
THE SUPPLY CHAIN
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LEARNING OBJECTIVES
You should be able to:
• Discuss why managers need to assess the performance
of their firms as well as their supply chains.
• Discuss the merits of financial and nonfinancial
performance measures.
• List and describe a number of traditional and world-class
performance measures.
• Describe how the balanced scorecard and the supply
chain operations reference models work.
• Describe how to design a supply chain performance
measurement system.
Introduction
“You can’t improve what you don’t measure”
• Firms with best supply chains create hierarchies of
precise performance measures at the execution level.
• Designing standards & monitoring them provides better
information for decision-making.
• Adding several tiers of suppliers & customers
complicates performance measurement.
• Firms aim toward achieving adequate performance and
continually improving on those measures.
• Performance measures must be visible &
communicated to all members of the Supply Chain.
Viewing the Supply Chain as a Competitive Force,

Part 1
Understanding End Customers
Supply chains must look at each segment of the market they
serve & determine needs of those customers including:
• Variety of products required
• Quantity & delivery frequency needed
• Sustainability level desired
• Product quality desired
• Price of the products

Part 2
Understanding SC Partner Requirements
• Supply chain strategies must consider potential trade-offs
existing between:
• Cost
• Quality
• Sustainability
• Service
• Companies along supply chain must become more responsive.

Part 3
Adjusting Supply Chain Member Capabilities
• Audit their capabilities to determine consistency with needs of end
customers & Supply Chain.
• Continually reassess performance with respect to requirements.
• Be more responsive to customer needs, quicker to anticipate
changes in the markets, & control costs.
Traditional Performance Measures, Part 1

Cost-based and financial statistics reported to shareholders in
annual report, balance sheet, and income statement data.
Problems:
• This information does not reflect the underlying
performance of an organization’s productive systems.
• Costs & profits can be hidden or manipulated.
• Maximizing current stock prices does not mean firm is
performing well.
• Financial performance measures cannot adequately
capture a firm’s ability to excel in these areas.

Use of Organization Costs, Revenue, &
Profitability Measures
Problems using costs & profits to gauge performance:
• Uncontrollable environmental forces (e.g., windfall
profits that occur when prices rise due to supply
interruptions).
• Difficulty attributing financial contributions to various
functional units or business units.
Use of Performance Standards & Variances

Establishing standards for comparison purposes can
be troublesome.
• Employees & managers do whatever it takes to
reach the goal.
• Shoddy work & “Cooking” the books.

Use of Performance Standards & Variances
Performance variance - the difference between the standard &
actual performance.
• Managers are pressured to find ways to make up
variances, resulting in poor decisions.
• Standards can reinforce the idea of functional silos
(departments only concerned with what is going on in their
department).

Productivity & Utilization Measures
Examples:
• Overall total productivity measure
• Single-factor productivity measure
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Productivity & Utilization Measures
Useful but have same problems as revenues, costs, & profits.
• Productivity decisions may actually increase costs &
reduce quality.
• Tendency to continue producing & adding to inventory to
keep machines & people busy.
• Less time spent doing preventive maintenance & training
for greater performance & profits in future.
• Traditional measures favor the short-term.

Example 14.1 - Productivity Measures at the Ultra Ski
Emporium
The Ultra Ski company makes top-of-the-line custom snow skis for
high-end ski shops as well as their own small retail shop, and
employs fifteen people. The owner has been adamant about
finding a way to increase productivity because her sales have
been flat for the past two seasons. The table contains her
company data.
Inputs and Outputs Last Year
Skis produced 1,000
Labor hours 10,800
Materials purchased $18,000
Lease payments $24,000

Example 14.1 (Continued)
She calculated the annual single-factor and total productivity values as:
She calculates their total productivity by multiplying the labor hours by their
average wage of $17 per hour, and finds:
14

The owner figures she can get some great improvements in productivity by finding
a low-cost supplier, moving to a cheaper location and laying off six workers
(reducing her workforce by 40 percent), making the new single-factor
productivities:
15

The new total productivity:
Consequently, the owner decided to make the changes

for the coming year. Unfortunately, they went out of
business in six months due to poor-quality materials, a
bad location and overworked, low-morale employees.
16
World-Class Performance Measurement Systems,

Part 1
Developing World Class Performance Measures
• Identify the firm’s strategic objectives.
• Develop an understanding of each functional area’s
requirements for achieving strategic objectives.
• Design and document performance measures for each
functional area that adequately track each required capability.
• Assure compatibility and strategic focus of performance
measures to be used.
World-Class Performance Measurement Systems,

Part 2
Developing World Class Performance Measures
• Implement the new performance monitoring system.
• Identify internal and external trends likely to affect firm and
functional area performance over time.
• Periodically re-evaluate the firm’s performance measurement
system as trends and changes occur.
World-Class Performance Measurement Systems, Part 3
Table 14.1 World-Class Performance Measures

Capability Areas Performance Measures
1. No. of defects per unit produced and per unit

Quality purchased
2. No. of product returns per units sold
3. No. of warranty claims per units sold
4. No. of suppliers used
5. Lead time from defect detection to correction
6. No. of work centers using statistical process control
7. No. of suppliers who are quality certified
8. No. of quality awards applied for; No. awards won
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Capability Performance Measures
Areas
1. Scrap or spoilage losses per work center
Cost 2. Average inventory turnover
3. Average setup time
4. Employee turnover
5. Avg. safety stock levels
6. No. of rush orders required for meeting delivery dates
7. Downtime due to machine breakdowns
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Capability Areas Performance Measures
Customer Service Flexibility
1. Average number of labor skills
2. Average production lot size
3. No. of customized services available
4. No. of days to process special or rush orders
Dependability
1. Average service response time or product lead time
2. % of delivery promises kept
3. Avg. no. of days late per shipment
4. No. of stockouts per product
5. No. of days to process a warranty claim
6. Avg. number of hours spent with customers by engineers
Innovation
1. Annual investment in R&D
2. % of automated processes
3. No. of new product or service introductions
4. No. of process steps required per product
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Supply Chain Performance Measurement Systems, Part 1
Performance measurement systems must:

• Link SC trading partners to achieve breakthrough
performance in satisfying end users.
• Overlay the entire supply chain to assure that all contribute
to supply chain strategy.
Members must jointly agree on a Supply Chain performance
measurement system.
Focus of system should be on value creation for end customers.
Supply Chain Performance Measurement Systems, Part 2

Environmental sustainability
• Include assessments of environmental performance.
Green supply chain management (GSCM)
• Design of an effective green supply chain
performance system and discuss with all key supply
chain members.
Carbon footprint
• Supply chains evaluate design configurations and
various options for reducing total carbon emissions.
Supply Chain Performance Meas. Systems, Part 3

Specific measures to adopt:
1. Total SCM costs - costs to process orders; purchase &
manage inventories; & information systems.
2. Supply Chain cash to cash cycle time - avg. # of days
between paying for materials & getting paid by SC
partners.
3. Supply Chain production flexibility - avg. time required
to provide an unplanned 20% increase in production.
4. Supply Chain delivery performance - avg. % of orders
filled by requested delivery date.
Supply Chain Performance Meas. Systems, Part 4

Measures to adopt (continued)
5. Supply Chain perfect order fulfillment performance -
average % of orders that arrive on time, complete, &
undamaged.
6. Supply chain e-business performance - avg. % of
electronic orders received for all SC members.
7. Supply Chain Environmental Performance - % of SC
w/ISO 14000 partners, avg. % env. goals met, avg. # of
policies adopted to reduce greenhouse gas emissions,
or avg. % of carbon footprints offset.
The Balanced Scorecard, Part 1
BSC framework consists of four perspectives:

• Financial perspective
• Internal business process perspective
• Customer perspective
• Learning & growth perspective
Also referred to as scorecarding

Web-Based Scorecards & Dashboards
• Web-based software applications use scorecards, and
link via the Web to a firm’s enterprise software system.
• Performance dashboards let managers track “big
picture” corporate objectives, core process
performance & more tactical detailed data.
• Managers see real-time progress toward
organizational milestones.
• Help ensure decisions remain in sync with the firm’s
overall strategies.
Supply Chain Operations Reference (SCOR) Model, Part 1
SCOR model helps integrate operations of supply chain members by linking

the delivery operations of a seller to the sourcing operations of a buyer.
Separates supply chain operations into 6 process categories:
1. Plan 4. Deliver
2. Source 5. Return
3. Make 6. Enable
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SCOR Model, Part 2
SCOR Model, Part 3

Table 14.2 SCOR Performance Categories and Attributes
Performance Category Performance Attribute
Reliability 1. On-time delivery performance

2. Order fill rates
3. Order accuracy rates
Responsiveness 1. Order lead times or speed
Agility 1. Response times for unforeseen events
2. Production flexibility
Cost 1. Supply chain management and logistics costs
2. Cost of goods sold
3. Warranty and returns processing costs
Asset Management 1. Cash-to-cash cycle time
2. Inventory days of supply
3. Asset turns
otherwise on a password-protected website or school-approved learning management system for classroom use. 31
SCOR Model, Part 4
SCORmark is a new tool which allows member firms to

benchmark performance against peer companies.
Companies use SCOR-based benchmarking to:
 Set reasonable performance goals based on the SCOR model.
 Calculate performance gaps against a global database.
 Develop company-specific roadmaps for supply chain competitive
success.
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End of Chapter 14
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Principles of Supply Chain Management (5e)

Viewing the Supply Chain as a Competitive Force,

Viewing the Supply Chain as a Competitive Force,

• Companies along supply chain must become more responsive.

Viewing the Supply Chain as a Competitive Force,

Traditional Performance Measures, Part 1

Traditional Performance Measures, Part 2

Traditional Performance Measures, Part 3

Use of Performance Standards & Variances

Traditional Performance Measures, Part 4

Traditional Performance Measures, Part 5

• Overall total productivity measure

• Single-factor productivity measure

Traditional Performance Measures, Part 6

Traditional Performance Measures, Part 7

Traditional Performance Measures, Part 8

Traditional Performance Measures, Part 9

Traditional Performance Measures, Part 10

Consequently, the owner decided to make the changes

World-Class Performance Measurement Systems,

World-Class Performance Measurement Systems,

World-Class Performance Measurement Systems, Part 3

Table 14.1 World-Class Performance Measures

1. No. of defects per unit produced and per unit

World-Class Performance Measurement Systems, Part 4

Table 14.1 World-Class Performance Measures

World-Class Performance Measurement Systems, Part 5

Supply Chain Performance Measurement Systems, Part 1

Performance measurement systems must:

Supply Chain Performance Measurement Systems, Part 2

Supply Chain Performance Meas. Systems, Part 3

Supply Chain Performance Meas. Systems, Part 4

The Balanced Scorecard, Part 1

BSC framework consists of four perspectives:

The Balanced Scorecard, Part 2

The Balanced Scorecard, Part 3

Supply Chain Operations Reference (SCOR) Model, Part 1

SCOR model helps integrate operations of supply chain members by linking

SCOR Model, Part 2

SCOR Model, Part 3

Reliability 1. On-time delivery performance

SCOR Model, Part 4

SCORmark is a new tool which allows member firms to

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