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Internal Benchmarking of Supply Chain Performance Measures Evidence from

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 Internal Benchmarking of Supply Chain
Performance Measures Evidence
from Selected Organizations

Kottala Sriyogi*

The paper aims at interpreting and expressing the internal supply chain performance measures, internal
benchmarking of selected organizations with quantitative as well as qualitative perspective. The paper also
discusses the financial metrics and linkage with supply chain performance measures for selected organizations.
The main objective of this paper is to suggest a methodology for calculating the performance measures and
their qualitative interpretation, constancy of conducting internal supply chain benchmarking in financial
perspective with reference to the organizations of the same group. The results of this paper exhibit that there
is a strong nexus between the SCM and financial success of companies practising predominant SCM.

Introduction
Supply Chain Management (SCM) aims at building trust, exchanging information on
market needs, developing new products and reducing the supplier base to particular
original equipment manufacturer so as to release the management resources for developing
meaningful, long-term relationship (Berry et al., 1994).
In order to meet the performance levels demanded by today’s customers in terms of
quantitative and qualitative flexibility of service in demand fulfillment, delivery
consistency and reduction of lead times related to fulfilling orders, firms have developed
repertoires of abilities and knowledge that are used in their organizational process (Day,
1994; and Lockamy and McCormack, 2004).
Quantifying supply chain maturity and performance is an opportunity for a company
to align its Performance Measurements (PMs) and process improvement actions with its
broader policies and strategies (McCormack, 2008). This is a problem that is being
addressed and discussed as relevant by both academic communities and practitioners in
the field of logistics and SCM. Since actual performance data is difficult to gather and
compare between companies, the use of this approach has been validated in several
previous research studies in an organizational self-assessment and business management
(Neely et al., 1997; and Beamon, 1999).

* Research Scholar, Department of Management Studies, Indian Institute of Technology, Roorkee, Uttarakhand
247667, India. E-mail: kottalasriyogi@gmail.com

40
© 2012 IUP. All Rights Reserved. The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
Literature Review
Definitions of Performance Measurement (PM): The literature concerning PM has
changed over the past few decades (Ghalayini and Noble, 1996). The definitions of PM
have also changed in different perspectives (Kaplan, 1990; Neely, 1994; Ghalayini and
Noble, 1996; Beamon and Ware, 1998; Parker, 2000; Schermerhorn and Chappell, 2000;
Gunasekaran et al., 2001; and Kennerley and Neely, 2002). Different authors view PM
differently. The systematic perspectives for example, as traditional PM System (PMS)
began in the late 1880s and went through the 1980s, focused on financial measures such
as return on investment, liquidity ratio (Ghalayini and Noble, 1996; and Schermerhorn
and Chappell, 2000). However, modern PMS started in the late 1980s as a result of changes
which focused on nonfinancial measures such as time, quality and flexibility (Kaplan,
1990; Parker, 2000; Gunasekaran et al., 2001; and Kennerley and Neely, 2002).
Neely (1994) pointed out that the definition of PM remains a broad topic and rarely
defined. However, the authors define PM as follows:
• PM can be defined as the process of quantifying the efficiency and effectiveness
of action (Neely, 1994).
• A PM can be defined as metric used to quantify the efficiency and/or
effectiveness of an action (Kaplan, 1990; and Gunasekaran et al., 2001).
• A PMS can be defined as the set of metrics used to quantify both the efficiency
and effectiveness of actions (Neely, 1994).
• PM is a process of assessing and evaluating the effective and efficiently
utilization of people, resources and technology of an organization (Schermerhorn
and Chappell, 2000).
Efficiency and effectiveness can be used interchangeably in the above circumstance.
The authors define the words ‘effectiveness’ and ‘efficiency’ in different aspects and
contexts; for example, when they are used in marketing area, effectiveness refers to the
extent to which customer requirements are met, while efficiency is a measure of how
economically the firm’s resources are utilized when providing a given level of customer
satisfaction (Neely, 1994). On the one hand, if they are used in management area,
effectiveness is an output measure of task or goal accomplishment, and efficiency is a
measure of the resource cost associated with goal accomplishment (Schermerhorn and
Chappell, 2000).

Classification of Performance Measures

To regain a competitive edge, companies not only shifted their strategic priorities from
low-cost production to quality, flexibility and short lead time, as nonfinancial measures
(Bower and Hout, 1988; Rushton and Oxley, 1989; Kaplan, 1990; Wiley et al., 1993;
Graham et al., 1994; Stewart, 1995; Harrington, 1996; Fisher, 1997; Parker, 2000;
Gunasekaran et al., 2001; Toni and Tonchia, 2001; and Kennerley and Neely, 2002), but

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 41
also implemented new technologies and philosophies of production (Maskell, 1988;
Gelders et al., 1994; Wild, 1995; and Levy, 1997), and total quality management (Juran and
Gryna, 1980; Feigenbaum, 1961; Berger and Pzydek, 1992; and Beamon and Ware, 1998).
Referring to previous research studies, PMs have generally been classified at strategic,
tactical and operational levels (Gunasekaran et al., 2001). Table 1 shows different
performance metrics corresponding to different levels and further putting them as
financial metric or nonfinancial metric. Thus, it gives a framework for the performance

Table 1: A Framework for the Performance Evaluation of a Supply Chain

Level Performance Metric Finance Nonfinance

Strategic Total cash flow time *
Rate of return on investment •
Flexibility to meet particular customer needs *
Delivery lead time *
Total cycle time *
Level and degree of buyer-supplier partnership • *
Customer query time *
Tactical Extent of cooperation to improve quality *
Total transportation cost •
Truthfulness of demand predictability/forecasting methods *
Product development cycle time *
Operation Manufacturing cost •
Capacity utilization *
Information carrying cost •
Inventory carrying cost •
Source: Adapted from Gunasekaran et al. (2001)

evaluation of supply chain. This framework lacks a clear distinction between measures at
strategic, tactical and operational levels (Ghalayini and Noble, 1996). Gunasekaran et al.
(2001) stated that metrics would be used in PM to influence the decisions to be made at
levels.
The issue is to determine the suitability of a PMS for measuring performance in a
firm or an organization. It is hard to exactly point out, as many companies have realized
the importance of both financial and nonfinancial performance measures (Kaplan and
Norton, 1992; Stewart, 1995; and Gunasekaran et al., 2001). Each PMS and its

42 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
dimensions may be appropriate under a specific circumstance and functional role.
Traditional performance measures should not compete with more nontraditional
measures, rather it should complement them by providing knowledge about complex
phenomena within their context. Further, they would also facilitate continuous
improvement and process control (Beamon and Ware, 1998).
However, companies always fail to include financial and nonfinancial performance
measures in a balanced framework (Gunasekaran et al., 2001). Maskell (1991) pointed out
that for a balanced approach, companies should bear in mind that while financial PMs are
important for strategic decisions and external reporting, day-to-day control of
manufacturing and distribution operations are better handled with nonfinancial measures.
He also suggested that companies should carefully consider and decide on using a few good
metrics.
In this paper, the interpretation of benchmarking is internal to different companies of
one group (owner).

Supply Chain Performance Measure

Performance measurement is very important as a strategic tool and also provides
a means to achieve the objectives required, fulfilling a firm’s mission/strategy statement.
Many firms have been observed to evaluate performance primarily on the basis of cost and
efficiency (Skinner, 1971). Therefore, traditional performance measures have been
primarily based on management accounting systems and financial measures (Alaa and
James, 1996). This has resulted in most measures focusing on financial data such as
return on investment, return on sales, price variances, sales per employee, productivity
and profit per unit production, etc.
As a result of globalization and competition, the organizations have started adopting
innovative business practices and performance improvement initiatives such as TQM, JIT
and SCM. The traditional cost-based measures are found to be inadequate as they
fail to incorporate the basic principles of continuous improvement and intangible
aspects of performance. Therefore, firms cannot manage properly if they cannot measure
the intangible and nonfinancial performance also. And hence, PM incorporating
nonfinancial measures has been a topic of great interest throughout most of the 1990s.

Performance Measures: Classification

Toni and Tonchia (2001) conceptually classified the performances of the operations into two
broad categories of ‘cost performances’ (financial measures) and ‘noncost performances’,
(nonfinancial measures) which have further divisions (Figure 1).

Nonfinancial Performance Measures

Nonfinancial performances include measures related to time, flexibility and quality. It is
an important move towards a multicriteria approach which can correspond to the need
of a holistic and strategic approach. Nonmonetary units of measures generally measure the

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 43
 Figure: 1: Classification of Performance Measures

Cost of Purchase,
Manufacturing,
Distribution, etc.

Cost of Waste,
Financial Measures Returns,
Obsolescence, etc.

Productivity
Supply Chain
Performance
Measures

Time
Nonfinancial
Measures Quality

Flexibility

Source: Toni and Tonchia (2001)

noncost performances, and as far as they influence the economic and financial
performances (net income and profitability), the link with them cannot be calculated in
a precise manner as for the cost performances. For example, an average delivery time five
days shorter or a product of better quality (which consumes 4% less) surely has a positive
impact on the economic and financial performances, but such an impact cannot be
quantified in terms of increment in net income and/or profitability. As discussed earlier,
noncost measures are divided into three categories, namely, quality, time and flexibility
related measures.

Time-Related Measures
Time element has strategic importance in business and hence ‘time’ has to be used as a
strategic metric in PM (Stalk and Hout, 1990). They argued that measuring, controlling
and compressing time shall improve quality, reduce costs, improve responsiveness to
customer orders, enhance delivery, increase productivity, increase market share and
increase profits. Time is not a lagging metric and it is always beneficial to reduce time.
Supporting this view, Krupka (1992) argued that ‘time’ is a more important metric than
cost and quality since it can be used to drive improvements in both of them. Earlier,
Azzone et al. (1991) suggested that time measures have to be applied in research and
development, operations and sales and marketing as well.

44 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
Flexibility-Related Measures
Flexibility (to measure the ability to deal with the dynamic nature of the business) is a
performance apart, since it is an ability to change something (for example, the
production volume or mix) in relation to all the three performances of cost, time and
quality (Toni and Tonchia, 1998). Being flexible refers to making available the
products and services to meet the individual demands of the customers. This has
been made possible by the technological developments such as flexible manufacturing
systems, group technology, computer integrated manufacturing and also ICT systems
development. Various kinds of flexibility include volume flexibility, product mix flexibility,
product modification flexibility, process modification flexibility and expansion flexibility.
Gunasekaran et al. (2001) outlined six sets of performance metrics. The emphasis is also
on the importance of measuring the nonfinancial aspects and the nonquantifiable and
intangible aspects of performance. These parameters and metrics include the measures at
strategic, operational and tactical level and these metrics are aligned to the four basic links
that constitute the supply chain: plan, source, make and deliver. The measure sets
incorporate measures for the issues related to supplier’s relations.
The financial performance of a supply chain can be evaluated by looking into the
following items (Bagchi and Buckley, 1998):
• Cost of raw material;
• Revenue from goods sold;
• Activity-based costs such as material handling, manufacturing and
assembling;etc.;
• Inventory holding costs;
• Transportation costs;
• Cost of expired perishable goods;
• Penalties for incorrectly filled or late orders delivered to customers;
• Credits for incorrectly filled or late deliveries from suppliers;
• Cost of goods returned by customers; and
• Credits for goods returned to suppliers.
Companies must not only view SCM for improving efficiency but also as a way to bring
about increase in sales, boost competitive advantage increase shareholder value
(Vlasimsky, 2003). The first universal performance measures that were used in supply
chain PM are generated by Pittglio, Rabin, Todd and Mcgrath (PRTM) (Stewart, 1995).
The PRTM’s concept of supply chain benchmarking has been extended to be the Supply
Chain Operations Reference (SCOR) model by the supply chain council (Stewart, 1997).
Chan and Qi (2002, 2003a and 2003b) and Chan et al. (2003) proposed an
innovative PMS for SCs which includes a conceptual performance model, a PM and

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 45
aggregation method. The model can quantify the relative importance of both SC
processes and measures with respect to SC strategies. Liljenberg (1996) found that
better allocation lowers supply chain costs by 0% to 3.9%. Chen (1998) found that
supply chain costs are lowered up to 9%, and on an average by 1.8%. Aviv and
Federgruen (1998) reported the benefits of 0%-5%. Raghunatahan (2003) reported on
the study by Lee et al. (2000) that benefits can be negligible if the supplier knows the
parameters of the retailer’s (accounts receivable) process. Economists disagree about
the use of accounting data to measure firm performance because it ignores opportunity
costs and the time value of money (Chen and Lee, 1995). Proposed the benchmarking
as an internal supply chain performance for a paint industry (Shah and Singh, 2001).
However, a few parameters like days payable outstanding and days sales outstanding have
not been considered in their study.
From Figure 2, cost factors like total cost, capital, distribution cost, inventory cost,
sales and profit have been considered to calculate different parameters adopted in the
methodology used for internal supply chain benchmarking. This has an effect at different
levels of PMS like resources linked with inputs and transformation process, and outputs.
However, there is a lot of scope for future research by considering some other factors from
Figure 2 like OTD, fill rates, number of orders, items produced, personnel, equipment,
energy usage in different directions for calculating the supply chain performance measure.

Figure 2: A Framework for Supply Chain Performance Measurement System

Transformation Output
Input
Process

Items Produced
Time Required to
Resources Produce
Number of Orders

Performance
Measures
Inventory Performance Cost Factors
Personnel Measures Total Cost Sales
Equipment Distribution Cost Profit
Energy Usage Manufacturing Cost Fill Rate
Capital Inventory Cost ROI On Time Deliveries
Stock Out
Customer Response Time
MLT
Shipping Errors
Customer Complaints

46 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
Financial Linkage with SCM Performance Measures
An organization’s value can be enhanced in four different ways, i.e., increasing revenue,
reducing operating cost, reducing working capital and increasing asset efficiency. But long-
term growth requires revenue enhancement and need for managers’ focus on all four ways
to increase value (Lambert et al., 2005). Some of the important strategies to be adopted for
maximizing the wealth organization are operating, investment and financial strategies
(Table 2). As operating strategies improve economic efficiency by lowering operating costs
or through improvements in the efficient utilization of resources, thus leading to improved
profitability. Many recent researchers have proposed sets of measures used to evaluate supply
chain performance (Beamon, 1999; Gunasekaran et al., 2001; Otto and Kotzab, 2003;
Banker et al., 2004; and Gunasekaran et al. 2004). David (1999) has identified the
implications of shareholder value planning for logistics decisions and the belief that the
shareholders’ return is important has always been an implicit objective manifested through
financial objectives. Sridharan et al. (2005) have concluded that the supply chain
implementation issues can have a major impact on the value of firms.

Table 2: Performance Management for Supply Chain Management

Supply Chain Process Performance Measure

Plan Order entry method (Gunasekaran et al., 2004)
Order lead-time (Christopher, 1992)
Customer order path
Source Supplier selection
Buyer-supplier relationship
Manufacturing Product cost, quality, speed of delivery, delivery reliability, flexibility
(Slack et al., 1995; and Mapes et al., 1997)
Range of product and services (Mapes et al., 1997);
Capacity utilization (Slack et al., 1995)
Effectiveness of scheduling techniques (Little et al., 1995)
Delivery Delivery performance (Stewart, 1995)
Number of faultless notes invoiced; flexibility of delivery systems to
meet particular customer needs (Novich, 1990)
Total distribution cost (Thomas and Griffin, 1996)
Customer Product development cycle time; machine/toolset up time;
economies of scope (Christopher, 1992)
Number of inventory turns; customer query time post transaction
measures of customer service
Overall Chain Total supply chain costs (Cavinato, 1992)
Total cash flow time
ROI
Total cost of inventory (Christopher, 1992; Lee and Billington,
1992; Slack et al., 1995; Stewart, 1995; and Levy, 1997)
Information processing cost (Stewart, 1995)

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 47
 From Figure 3, under the revenue and cost component, the impact is top-down
approach, i.e., impact of sales revenue, on cost of goods sold, operating profit and
interest expenses in which parallely has its consequence on company decisions
variables which are grouped in different sets, i.e., at first price, volume, volume
discounts, customer service packages also gets effected due to one of the logistics
variable set, i.e., delivery, flexibility and cost. The second cost of goods sold has its effect
from one side on set of sourcing, purchasing, manufacturing, selling, administration,
distribution, depreciation and impact from the logistics variables set, i.e., SCM
(inbound) materials management, SCM (outbound), order processing, transportation,
storage, inventory management packaging and facility utilization. At last, the interest
expenses effect from one side on the set i.e., inventory carrying costs, own or lease
facilities and vehicles. Impact from logistics variables set, i.e., the released capital,
flexibility of services. Finally, from the above discussion it can be understood that those
items from P&L account statement has its effect on company decisions or competitive
variables impact by logistics variables influence.

Figure 3: Impact of Logistics on P&L Account

Revenue and Cost Company Decisions/ Logistics

Component Competitive Variables Variable/Influence

Price Delivery
Volume Flexibility
Sales Revenue Cost
Volume Discounts Customer
Service Packages
SCM (In Bound)
Sourcing Materials Management
Cost of Goods Sold Purchasing SCM (Out Bound)
Manufacturing Order Processing
Selling and Sales Transportation
Administration Storage
Distribution Invetory Management
Depreciation Investment Packaging
Management Facility Utilization
Operating Profit

Leasing Facilities Released

Invetory Carrying Costs
Interest Expenses Own/Lease Facilities and
Vehicles
Capital for Use Elsewhere
in the Business
Improves Flexibility
Alternatively Service
Companies may be Used

48 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 From Figure 4, it can be interpreted that the corporate performance and logistics
variables’ impact on a common variable affects the performance. At first, the sales
revenue, cost of goods sold, operating cost impact by the customer service, SCM
activities like inbound and outbound logistics and order processing explicitly have an
impact on profit which is an indicator of corporate performance. Second, the SCM
outbound activities, optimal asset deployment and productivity under the logistics
variables affect the inventory, account receivables, cash, fixed assets, trade creditors,
which has an impact on capital employed, which is a corporate financial performance
indicator.

Figure 4: Impact on Corporate Financial Performance

Corporate Performance Variables Logistics Variables

Performance

Customer Service SCM

(Inbound + Outbound)
Profit Sales Revenue
Order Processing
Cost of Goods Sold
(Management and
Operating Cost
Handling)

Inventory
Capital Employed Account Receivables SCM (Outbound)
Cash Optimal Asset
Fixed Assets Deployment and
Trade Creditors Productivity

As the cash flow analysis provides new information, it uses period by period estimation
by forecasting to estimate when the firm will receive money and when it will pay out
money. From Figure 5, it can be interpreted that the different logistics variables and its
impact under different parameters considered in this study like 3PL, 4PL service providers,
suppliers and vendors under the fund flow components like operating profit, as the trucks
are being used its depreciation cost decreases. Use of service company facilities and
transport in turn releases capital which influences the changes in fixed assets, optimizing
stock holding, i.e., minimum cost and minimum stock levels and less working capital effect
debtors, lower raw material component stocks by improved SCM activity i.e., inbound
logistics. As it is one of the key drivers in the value chain of a company which influences
the creditors. Similarly, matching material flow with currency values offset fluctuations on
average variance.

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 49
 Figure 5: Impact of Logistics on Cash Flow

Fund Flow Component Logistics Variables

Operating Profit 3PL, 4PL, Suppliers, Vendors

Depreciation Usage of transportation facilities (trucks)

Use service company facilities and transport in

Changes in Fixed Assets
turn release capital

Optimize stockholding – (lower cost, stock levels,

Change in Debtors
lower working capital)

Lower raw material/components stocks by

Change in Creditors
improved SCM (Inbound)

Matching material flow with currency values offset

Average Variance
fluctuations

Benchmark Key Financial Metrics and Value Gaps

KPIs for Supply Chains: Eight measures are identified, and six of them are inherited from
the BSC and reconfirmed by the SCM literature: customer response time, on-time
delivery, finished goods inventory, finished goods stock-out, repeat versus new customer
sales, and order fill rate. Two new measures are derived from SCM: order tracking
performance and percentage of resolving the customer’s first call. Finished goods
inventory, finished goods stock-out, and order fill rate are the measures which are
closely related to CPFR (Park et al., 2005).
Inventory (an asset) is measured by value by time supply (days of inventory) or by
inventory turns (Turns = Cost of Goods Sold (COGS)/Inventory value). All three metrcis
are interconnected. If firms’ annual COGS is in hand, one can find any inventory metric
from either of the others.
General practice by the suppliers in the supply chain is postponement of payments to
put the organization in profitability margin. However, automated payment solutions

50 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
should be integrated as a competitive business tool to reduce the uncertainity of A/P and
A/R flows which has siginificant value in the entire chain.
Other important characteristics of financial flows are:
• Reliability of payment methods;
• Predictability of payment inflows and outflows; improving cash flow; and
• Information Management (invoice level data with financial data).
The major challenge to most of the companies in the SCM is forecasting the demand
accuracy as a critical element. Three key constructive elements in the supply chain are
metric framework, appropriate processes and incentives. Companies’ overall supply chain
performance can be improved by effective forecasting.
Supply chain performance measures can also be improved by precision in forecast
accuracy, as forecast is a substratum with supply chain performance measures (Figure 6).

Figure 6: Supply Chain Performance Impact

Forecast Methodology Programs

Supply Chain Excellence Programs

Small ROI
Forecast
Accuracy

Forecast Process Improvement

Reduce Dependency
High ROI
on the Forecast

Supply Chain Performance Impact

Source: Rick and Shruthi (2005)

Research Gap Evidence from the Literature

A few important points can be drawn from the review of supply chain performance
benchmarking problems:

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 51
 • Research gap in PM in supply chain is not viewed as a whole entity. Major
difficulty in evaluating the performance arises when there are multiple inputs
and multiple outputs to the system and complex relationships between the
inputs and outputs as there is a lot of uncertainty in tradeoffs.
• Past work had failed to address the collaborative relationships involving joint
decision making. Mathematical models are insufficent.
• SCOR needs a more dynamic platform to address the integration and
synchronization when it involves collaboration in joint decision making in
supply chain (Wong and Wong, 2008).
Another research gap in supply chain performance is consideration of financial data
to find the presence of linkage between SCI, operational performance and financial
performance (Nathalie et al., 2008).
Qualitative metrics and nonfinancial measures of innovativeness and customer
satisfaction should also be addressed. Design of PMS considering HRM, modern
manufacturing practices, including JIT, TQM and BPR, should be navigated. Investigation
of factors influencing the success or failure in implementing measurements systems for
supply chain should be addressed. Another research gap is how to integrate PMS with
HRM and modern manufacturing practices such as TQM, BPR, JIT or new IT tools. The
business environment is always dynamic but the existing measurement system for
measuring supply chain performance is static. Hence the frequency in measurement of
supply chain performance should be evaluated. There is a pressing need for international
benchmarking of supply chain performance in market sectors (Craig, 2006).
Research gaps as proposed model and application of case study are scarce. From past
literature, a theoretical framework is addressed in integration of supply chain. Supply
chain benchmarking using mathematical models, tools to be used are to be investigated.
The suitability of the tools in addressing the supply chain benchmarking in an integrated
perspective needs to be explored (Wong and Wong, 2008).

About the Case Company

The case company is one of the largest business groups in India having a presence in seven
business sectors like chemicals, consumer products, energy, services, materials, engineering,
information technology and communications, besides operations in global market
covering UK, South America, North America, Middle East, Europe, China, Asia Pacific,
and Africa.
For this study, methodology developed, as shown in Figure 7 for internal supply chain
benchmarking we have considered eight companies of this group operating in India
obtaining the balance sheet of these companies from Prowess database developed by
Center for Monitoring Indian Economy (CMIE), Bombay, India. Companies are named as
Company A, Company B, Company C, Company D, Company E, Company F, Company G,
and Company H.

52 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 Figure 7: A Methodology for Internal Supply Chain Benchmarking

Stage 1: Calculating the Length of Various Stages of the Chain

1. DRMi = (RMi * 365)/CRMi
2. DWIP i = (SFGi * 365)/CPi
3. DFG i = (FGi * 365)/CSi

Stage 2: Calculating Cost Addition at Various Stages

Cost at the beginning of the raw material stage CRMi
Cost addition in the raw material stage • (RM)i = RMi * ICCi
Cost at the end of the raw material stage CRMSi
Cost at the end of WIP stage, i.e., CWIPSi = CPi
Cost addition in the finished goods stage, i.e., • (FG)i = FGi * ICCi
Cost at the end of the finished goods stage CFGSi = CWIPSi + • (FG)i

Stage 3: Normalization
Normalized cost of raw materials = CRMi/CFGSi
Normalized cost at the end of the raw material stage = CRMSi/CFGSi
Normalized cost at the end of the WIP stage = CWIPSi/CFGSi
Normalized cost at the end of the finished goods = CFGSi/CFGSi

Stage 4: Analysis of Internal Supply Chain Management Efficiency

Cost of holding inventory for time period i, CIi = Ii * ICCi
Internal supply chain management costs for time period i, ISCCi = DCi + CIi
Internal supply chain inefficiency ratio ISCIi = ISCCi/NSi

Stage 5: Analysis of Internal Supply Chain Working Capital Productivity

Internal supply chain working capital (C-2-C cycle) ISWCi = Ii + ARi – APi
Internal supply chain working capital productivity ISWCPi = NSi/ISWCi
Days payables outstanding = (APi/ARi) * 365
Days sales outstanding = (ARi/Annual Revenues) * 365

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 53
Results and Discussion
For DRM, the following observations are made from the analysis (Figure 8). The raw
material inventory for Company A was stable for two years, then there was a rise and
fall; the inventory for Company B has uniform decrease, and then there was a sudden
rise and fall; as for Company C uniform, decrease was observed which was desirable;
Company D—uniform decrease and sudden rise, Company E—fluctuating fall and rise,
Company F—fluctuating fall and rise, Company G—fluctuating rise, and Company H—
rise and fall. In the context of holding raw materials inventory (DRM), it was found that
Company C exhibited favorable conditions which can be used for internal benchmarking
in DWIP perspective. However, other companies may follow the inventory and
procurement policy depending on the dynamic market situations, which may not be
applicable to all kinds of companies within the group.

Figure 8: Raw Material Inventory from 2005-2009

300
Raw Material Inventory in Days

250

200

150

100

50

0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

For DWIP, the following observations are made from the analysis (Figure 9): Company
A uniform decrease, Company B fall and rise, Company C fall and rise, Company D fall,
Company E uniform decrease, Company F sudden rise and fall, Company G fall and rise,
and Company H uniform decrease. The longer the WIP stage reflects that company
attempting to delay in product differentiation to the last stage of the production process.
In the context of days of work in process inventory, it was found that three Companies
A, E and H exhibited good trend, i.e., decrease in days of work in process inventory for
the time period of study considered, which would reflect decrease in inventory holding
cost and explicit effect on the total cost of inventory, where Company E can be chosen
for internal benchmarking practice.

54 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 Figure 9: Days Work in Process for Time Period 2005-2009

200
Days Work in Process

150

100

50

0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

For DFG, the following observations are made from Table 3: Company A stable,
Company B uniform decrease, Company C rise and fall, Company D uniform decrease,
Company E fall and drastic rise, Company F fluctuating, Company G fluctuating, and
Company H uniform decrease and sudden rise. In the context of days of finished goods
inventory, it was found that Company B maintained consistency along the period of study
considered which is desirable, and the remaining companies followed different patterns of
rise and fall. Here the favorable condition is the less number of days the company holding
the finished goods inventory, which has a direct relation with the sales generated, in
which it affects the revenue generated and profits earned in short period of time.
So Company B can be chosen for internal benchmarking tool in DFG context.

Table 3: Days of Finished Goods Inventory for Time Period 2005-2009

2005 2006 2007 2008 2009
Company A 10 13 14 14 12
Company B 23 23 21 17 22
Company C 18 24 21 22 14
Company D 190 136 132 85 88
Company E 204 265 372 444 464
Company F 23 32 24 19 27
Company G 0 3 2 0 0
Company H 33 23 22 56 47

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 55
For Second Stage in the Methodology Adopted for Internal Supply Chain
Benchmarking
From Figure 10, it can be observed that Company A has rise and fall, Company B deep
fall, Company C rise and fall, Company D continuous fall, Company E fluctuating fall
and rise, Company F fall and rise, Company G rise and fall, and Company H rise and
fall. It was observed from Figure 10 that all companies do not follow any particular
uniform trend. It can be concluded that cost addition in the raw material cannot be
predicted as market conditions are stochastic. But this parameter has a significant effect
in calculating all the other parameters in the methodology considered in this present
work as well as it cannot be considered as a single yardstick in internal supply chain
benchmarking. But it is necessary to keep cost addition in raw material stage as low as
possible by focusing on Vendor-Managed Inventory (VMI), low cost procurement and
inventory strategies.

Figure 10: Cost Addition in the Raw Material Stage

45,000
Cost Addition in Raw Material

40,000
35,000
30,000
Stage ( cr)

25,000
20,000
15,000
10,000
5,000
0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

Table 4 represents interpretation of total length of the stages is the sum of the days
of raw material stage, days of work in process inventory and days of finished goods
inventory. Company A has minimum total length of the stages, which can be chosen for
internal benchmarking tool from the perspective of the total length of the stages.
However, for calculating the cost profile of the said companies, the most recent year of
the study (i.e., 2009) was considered.
From Figure 11, the cost at the end of the raw material stage (CRMSi) for Company
A increased heavily, Company B stable, Company C rise and fall pattern, Company D rise
and fall, Company E uniform decrease and sudden rise, Company F fluctuating rise, and

56 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 Table 4: Profiles of the Different Raw Material Stages for the Companies

Length of Raw Length of WIP Length of Finished Total

Material Stage Stage Goods Stage Length
Company A 20 3 11 34
Company B 71 1 21 93
Company C 52 1 14 67
Company D 8 0 88 96
Company E 78 9 463 550
Company F 49 0 26 75
Company G 189 72 0 261
Company H 67 3 47 117

Company H rise, fall and rise pattern. Due to less inventory levels, company's unable to meet
market demands to ensure customer satisfaction, to avoid such kind of situations inventory
control policies should be redesigned such that correct levels of supplies at order and reorder
points should be maintained. As inventory levels reflect the critical day-to-day operation
of organizations and to sustain the high levels of customer satisfaction. So maintaining
the cost at the end of the raw material stage is the critical issue in SCM which depends
on the process orientation and market conditions. If a high number of customer orders
are promised, the CRMSi should be high, and vice versa.

Figure 11: Cost at the End of the Raw Material Stage from 2005-2009

6,000,000
Cost at the End of the Raw

5,000,000
Material Stage ( cr)

4,000,000

3,000,000

2,000,000

1,000,000

0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 57
 From Figure 12, it can be observed that Company A rise and fall, Company B uniform
decrease, Companies C and D rise and fall, Company E fall and rise, Company F
fluctuating, Company G steep fall, and Company H fluctuating fall. It is desirable for a
company to keep the cost addition low or consistent as seen in Company B, which can
be used as an internal benchmarking tool for the cost addition in the finished goods stage
• (FGi) for time period considered for this study. If the cost addition increases in the
finished goods stage, then the inventory carrying cost will increase, which results in
increase in the total cost.

Figure 12: Cost Addition in the Finished Goods Stage from 2005-2009

60,000
Finished Goods Stage ( cr)
Cost Addition in the

40,000

20,000

0
2005 2006 2007 2008 2009

Company Company B Company Company D

Company E Company F Company Company H

From Figure 13, it can be observed that Company A rise and fall, Company B
uniform increase, Companies C, D, E and F fluctuating rise and fall, Company G
fluctuating, and Company H fluctuating decrease. In the above two cases, i.e., • (FG)i
and CFGSi, the pattern observed in graphs is not so favorable to choose any company
for internal benchmarking tool as the fluctuation in demand of dynamic market varies
depending upon the type of product the company manufactures. A change in pattern
was observed after the third year in all the parameters considered during the period
of study of five years, i.e., 2005-2009. This is due to the recession in the market where
the cost of labor and raw material has some explicit relationship with the above-said
parameters.

Stage 3: Normalization
From Table 5, Company F has exhibited low normalized cost of raw materials compared
to other companies for two years alternatively and consecutively, Company H also for two
years but not at a regular interval.

58 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 Figure 13: Cost at the End of the Finished Goods Stage from 2005-2009

90,000
Cost at the End of the Finished

80,000
70,000
Goods Stage ( cr)

60,000
50,000
40,000
30,000
20,000
10,000
0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

Table 5: Normalized Costs of Raw Materials

2005 2006 2007 2008 2009

Company A 0.61776 0.36591 0.23987 0.27604 0.25681
Company B 0.14126 0.19768 0.29029 0.24259 0.36927
Company C 0.15554 0.11774 0.16096 0.36235 0.25098
Company D 1.75986 1.21126 0.63087 1.02516 1.56570
Company E 0.09941 0.14893 0.14633 0.07948 0.07498
Company F 0.02437 0.20693 0.03824 0.04396 0.02918
Company G 0.90341 0.27885 0.29213 0.42889 0.51199
Company H 0.03118 0.01540 0.16024 0.16877 0.01868
Minimum 0.02437 0.01540 0.03824 0.04396 0.01868
Maximum 1.75986 1.21126 0.63087 1.02516 1.56570
Mean 0.46660 0.31784 0.24487 0.32840 0.38470

From Table 6, Company H and Company F have demonstrated low normalized costs
at the end of raw material stage for two years and Company B for one year.

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 59
 Table 6: Normalized Cost at the End of the Raw Material Stage

2005 2006 2007 2008 2009

Company A 0.7952 0.7961 0.7425 0.6721 0.8813
Company B 0.3726 0.3374 0.3481 0.2743 0.3915
Company C 1.3068 0.9013 0.7511 0.7262 0.9678
Company D 2.0873 1.6720 1.3247 2.1811 2.9642
Company E 1.3953 0.9675 0.6682 0.7337 1.0278
Company F 0.1765 0.2431 0.1102 0.2951 0.1665
Company G 2.4688 1.6560 2.2255 17.0121 10.3207
Company H 0.1688 0.1911 0.3206 0.3352 0.2410
Minimum 0.1688 0.1911 0.1102 0.2743 0.1665
Maximum 2.4688 1.6720 2.2255 17.0121 10.3207
Mean 1.0964 0.8456 0.8114 2.7787 2.1201

From Table 7, Company H has demonstrated low normalized cost at the end of the WIP
stage for three years, and Company D and Company F for one year each. It can be
concluded that normalization factor helps in making cost profile for the companies for a
particular period of time.

Table 7: Normalized Cost at the End of the WIP Stage

2005 2006 2007 2008 2009
Company A 0.84610 0.50607 0.32573 0.37970 0.38245
Company B 0.66002 0.80245 0.91350 0.96222 0.97890
Company C 0.32111 0.24039 0.32113 0.72455 0.54787
Company D 0.48042 0.29237 0.11832 0.23986 0.29503
Company E 0.17567 0.26951 0.29944 0.18919 0.18357
Company F 0.10876 0.70668 0.15030 0.13699 0.08730
Company G 1.00000 0.33508 0.37576 1.00000 1.00000
Company H 0.10221 0.05223 0.57788 0.52113 0.05952
Minimum 0.10221 0.05223 0.11832 0.13699 0.05952
Maximum 1.00000 0.80245 0.91350 1.00000 1.00000
Mean 0.46179 0.40060 0.38526 0.51920 0.44183

60 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
Stage 4: Analysis of Internal Supply Chain Management Efficiency
From Figure 14, it was observed that Company A has rise and fall, Company B steep fall
and Company C rise and fall and rise, Company D marginal rise and fall, Company E fall
and rise, Company F fall and rise, Company G steady fall, and Company H rise and fall.
It can be concluded that if the cost of holding inventory is high, the company may be
anticipating more demand from market. It is either the market demand is low or marketing
strategy is poor, both of which have an implicit relation. In choosing this parameter as
internal supply chain benchmarking tool, the company which exhibits consistency in
holding the inventories should be chosen, i.e., Company C satisfies the criteria.

Figure 14: Cost of Holding Inventory CIi from 2005-2009

120,000
cr)

100,000
Cost of Holding Inventory (

80,000

60,000

40,000

20,000

0
2005 2006 2007 2008 2009

Company A Company B Company C Company D

Company E Company F Company G Company H

The firms that have the lowest internal SCM inefficiency ratio are selected as the best
in terms of performance. From Table 8, Company B has exhibited the lowest ratio from
0.790206 to 0.084252, following the integrated logistics strategy, thereby achieving the
cost efficiency and optimization in the internal supply chain process. Company B can be
treated as internal benchmarking tool in terms of internal supply chain inefficiency ratio.
However, other factors like market niche and competitive focus should also be considered
as parameters in the internal supply chain benchmarking process.

Stage 5: Analysis of Internal Supply Chain Working Capital Productivity

In the classical example of restaurant business, one should consider interpreting the
negative working capital. As customers pay in right time as products are delivered and sold

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 61
 Table 8: Internal Supply Chain Management Inefficiency Ratio (ISCIi)
from 2005-2009
2005 2006 2007 2008 2009
Company A 0.420202 1.819807 3.451541 2.525665 3.187252
Company B 0.790206 0.442966 0.202035 0.125381 0.084252
Company C 5.499713 6.134983 3.723699 0.791089 2.238123
Company D 1.336541 3.204424 10.218820 6.678050 6.905468
Company E 12.695720 6.284614 4.872885 8.510300 10.163560
Company F 7.659078 0.495498 5.577947 7.892828 12.917300
Company G 44.742100 6.537535 10.472980 38.845460 18.263060
Company H 16.472870 36.525200 1.606793 1.659249 30.524670
Maximum 44.742100 36.525200 10.472980 38.845460 30.524670
Minimum 0.420202 0.442966 0.202035 0.125381 0.084252
Mean 11.202050 7.680629 5.015837 8.378502 10.535460

to customer instantaneously, there is no problem in raising cash. However, negative

working capital is a positive sign sometimes, because some companies can generate the
cash so quickly. Researchers argue that a negative working capital is a symbol of managerial

Figure 15: Internal Supply Chain Working Capital from 2005-2009

1,000
Internal Supply Chain Working

500
Capital ( cr)

0
2005 2006 2007 2008 2009
–500

–1,000

–1,500

Company A Company B Company C Company D

Company E Company F Company G Company H

62 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
efficiency in a business with low inventory and accounts receivables. From Figure 15,
Company A and Company B have exhibited a negative working capital, where Company
A has shown more compared to Company B; so, Company A can be chosen for internal
benchmarking tool in internal supply chain working capital productivity. Sourcing
strategies should be linked with specific business units (Narasimhan and Carter, 1998).
In the development of supplier using process oriented approach (Hartley and Jones, 1997),
firms should focus on defining the objectives for improving the transaction process with
their suppliers and distributors.
Accounting practitioners argue that cash flow difficulties are due to an upward trend
in Day’s Payable Outstanding (DPO). A question arises whether DPO is a comfort sign
or an alert sign. The more cash in hand, the higher the DPO. Company has to maintain
a tradeoff between preserving cash and keeping suppliers satisfied. From Table 9, it iss
observed that Company G has shown upward trend which indicates favorable condition;
so, Company G can be used as an internal supply chain benchmarking tool in days payable
outstanding perspective.

Table 9: Days Payables Outstanding

2005 2006 2007 2008 2009

Company A 39 40 46 50 59
Company B 52 53 56 51 51
Company C 51 41 33 42 63
Company D 51 50 51 61 66
Company E 51 49 45 38 44
Company F 35 18 25 18 18
Company G 563 77 48 92 165
Company H 70 70 90 38 41
Minimum 35 18 25 18 18
Maximum 563 77 90 92 165
Mean 114 50 49 49 63

Days Sales Outstanding (DSO) represents the average length of time that a firm
must wait after making a credit sale before receiving cash, that is, its average
collection period. DSO can also be evaluated by comparing it with the terms on which
the company sells its goods. Whenever there is a trend of rise in DSO observed from
past data and credit policy of company has to redesign the credit policy in collecting
the account receivables. As a general practice, the collection of account receivables
should be less than 32 days.

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 63
 From Table 10, it is observed that Company A has shown consistency in DSO which
can be chosen as internal supply chain benchmarking tool in DSO perspective, whereas
Company G has high DSO days compared to other companies, in which credit policy
should be changed.

Table 10: Days Sales Outstanding

2005 2006 2007 2008 2009

Company A 9 10 8 12 19
Company B 13 11 11 9 8
Company C 50 58 57 48 42
Company D 11 17 18 16 21
Company E 70 83 90 88 71
Company F 53 49 42 62 29
Company G 270 160 31 125 189
Company H 36 32 96 72 61
Minimum 9 10 8 9 8
Maximum 270 160 96 125 189
Mean 64 53 44 54 55

Conclusion
Factors affecting or influencing the success of the implementation of measurement
systems for supply chains, from a financial perspective, considering the data from financial
statements were investigated. A key performance indicator for supply chain, financial
flows have a significant role in internal benchmarking. Forecasting accuracy is also one
of the success factors affecting supply chain performance. By using the suggested
methodology for internal benchmarking of supply chain performance measures, it has been
found that the frequency of conducting the internal benchmarking of supply chain
performance is at least for every three years with reference to the organization considered;
however, the quantitative analysis of data cannot be considered in managerial decision
making, as many factors affect underground reality. The impact of logistics variables on
P&L account, corporate financial performance, and cashflow have prominent effect on the
supply chain financial performance and can be used as internal benchmarking templates.
With reference to the organizations considered in this study as a financial perspective days
payables outstanding, days sales outstanding which are financial performance metrics fall
under the category of sourcing and pricing respectively. As sourcing and pricing are the
two key logistics drivers plays a significant role in internal supply chain decision-making
framework. 

64 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
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70 The IUP Journal of Supply Chain Management, Vol. IX, No. 1, 2012
 Appendix

List of Parameters Considered and Obtained from the Financial Statements

Terms Expressed as
Cost of raw materials CRMi
Cost of distribution DC i
Cost of production CPi
Cost of sales CS i
Net sales NS i
Inventories
(Inclusive of raw materials, semi finished goods and finished goods) Ii
Raw materials inventory RMi
Semi finished goods inventory SFGi
Finished goods inventory FGi
Accounts receivables AR i
Accounts payable AP i

Reference # 34J-2012-03-03-01

Internal Benchmarking of Supply Chain Performance Measures Evidence from Selected Organizations 71
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