Research paper Measuring the unmeasurable measuring and improving performance in the supply chain

Remko I. van Hoek

Introduction
In measuring performance in the supply chain, where control is no longer based on ownership only, but rather on networking across interfaces, the measurement system may reect a system of measuring the unmeasurable. Activities not under the direct control of an individual company (i.e. a manufacturer) have to be measured and controlled (by the manufacturer and its supply chain partners), making the supply chain transparent, to a level not experienced before and leading the way for performance improvements. The purpose of this research note is to outline the relevance of research into supply chain measurement systems. Suggestions are developed about the specic content and approach that research may need to take in aiming to contribute to the improvement of the competitiveness of supply chains. Apart from management control studies, this notes uses studies in the logistics area. The area of logistics is used as an example of a set of activities that need to be measured on a different basis, following the emergence of supply chain management.

The author Remko I. van Hoek is at the Erasmus University, Rotterdam, The Netherlands. Abstract The supply chain concept fundamentally changes the nature of organizations; control is no longer based on direct ownership and control, but rather based on integration across interfaces between functions and companies. This has consequences for the measurement of performance. Traditional measurement approaches may have to be abolished and a supply chain measurement system developed. Traditional performance measures may limit the possibilities to optimize supply chains, as management does not see supply chain wide areas for improvement. This note raises issues critical to measuring supply chain performance. A new measurement approach should lead the way for supply chain competitiveness and should direct management attention to areas for supply chain optimization. A preliminary framework for measuring unmeasurable performance is developed.

Background
Supply chain management is characterized by control based on networking and integration of processes across functional, geographical and organizational interfaces (van Hoek, 1998a). The perspective of supply chain management is its view of the nal customer (van Dierdonck, 1997; Womack and Jones, 1996). This focus on interfaces in the operational process opposes the traditional approach of control based on ownership and vertical integration with a view of the person one step higher in the hierarchy. The adoption of the supply chain approach holds numerous consequences for individual sets of business activities, like logistics activities, as well as for the (now horizontal and not vertical) measurement and control of activities in the supply chain. Figure 1 displays a number of these challenges to the organization. Logistics optimization is based on the notion that suboptimization at one point in the logistics organization is permitted as long as that contributes to overall optimization. In a supply chain approach this notion is expanded across functional, geographical and

Supply Chain Management Volume 3 Number 4 1998 pp. 187192 MCB University Press ISSN 1359-8546

187

Measuring and improving performance in the supply chain

Supply Chain Management Volume 3 Number 4 1998 187192

Remko I. van Hoek

Figure 1 Changes in organizations resulting from the adoption of supply chain management
Based on ownership Vertical/Hierarchy Cost saver Companies Position Static Control Integration Logistics Competitive unit Authority basis Organization Based on networking Across interfaces Value adder Supply chain Contribution to competitiveness Partial, temporal

organizational interfaces to a chain-wide level. Of course, this may cause implementation difculties, as this implies that individual companies may have to sacrice internal efciencies to overall chain-optimization. The question then also becomes how to divide supply chain revenues among players in the chain, when, additionally, there may not be one leading player in the supply chain to determine the division of benets. Driven by the customer focus, logistics can evolve from a cost-saving function (as in Duckers statement from the 1960s about the last frontier in cost savings being physical distribution) to a value adding function as logistics services are fundamental in delivering value to customers. Another challenge for organizations is the dominant focus of competitive strategy. Companies are no longer the units in the competitive battle; supply chains compete with each other (Christopher, 1992). A complexity in that respect is that it is often complex to dene what the supply chain is. Complexity may result from the fact that: Supply chains consist of multiple layers of companies. While companies may be involved in multiple supply chains (Cooper et al., 1997) and the network, thus, is partial. As integration is no longer based on large investments in vertical integration, but rather on interfaces, the network also become temporal; exit and entry barriers are lowered as capital investments can be shared among players. Indeed, the format of the supply chain may change over time (Cooper et al., 1997). Not all interfaces in the supply chain deserve the same amount of integration, and close co-ordination. Determining the

amount of management attention needed for a particular interface is dependent on various factors (Cooper et al., 1997). These new characteristics of organizations have their effect on the measurement of performance of activities in the chain. It is well known that managers tend to search for the answer to the question: Whats in it for me? It can be questioned to what extent existing measurement systems can help answer this question. As a general statement, traditional measures may no longer apply and new supply chain measurement may be needed. An indication of this fact may be found in the fact that the World Class Logistics study published by the CLM (1995) was able to develop extensive insights into what logistics operations and competitiveness in the modern market-environment is all about. The study did not succeed, however, in relating these world class logistics capabilities to the (traditional) performance measures such as ROI and gross margin used in the study. A critical challenge for organizations may thus be to develop and implement new measurement systems that can direct management attention and effort to the areas for improvement in the modern supply chain operating format.

The need for a new approach to performance measurement

Numerous studies have developed indications of how supply chain integration can contribute to the growth of multiple and individual players in the chain. Van Hoek (1998b) for example, indicated that the contribution to customization of individual logistics service suppliers can be expanded if they integrate

188

Measuring and improving performance in the supply chain

Supply Chain Management Volume 3 Number 4 1998 187192

Remko I. van Hoek

upstream into the chain of their manufacturing clients by offering postponed nal manufacturing and related activities as an extension of transport and warehousing services. SMART (the new mini-car developed by Mercedes and Swatch) provides an even more drastic indication of how measurement and control has to be adjusted or changed under the supply chain format. Figure 2 shows how the operational role of the automotive OEM decreases in the value adding process (horizontal bar) as suppliers and distributors take over larger shares of operational activities and cross-functional and organizational integration is extended. SMART suppliers manufacture super-modules, like complete steering wheel and steering columns and assemble them into the car, working from a workshop within the OEMs factory. Distributors perform nal manufacturing and product modications based on customer orders. As a result the OEM is almost entirely squeezed out of the operations and control by the OEM now is based on managing interfaces, relations and contracts with supply chain players. In this case the OEM cannot measure performance based on traditional measures like ROI and headcount only. However, control becomes a critical concern as ownership and operational control are no longer limited to the OEM. What then should the measurement system look like?

Towards a new measurement approach

Many authors have studied measurement in a supply chain context (see for example, Cavinato, 1992; Ellram and Feitzinger, 1997 and Hergert and Morris, 1989 for publications in various disciplines). Ploos van Amstel

and Dhert (1996) have indicated that the specic type of measures used for (logistics) activities differs, depending on the level of measurement (activity, functional area, between functions or between organizations) and the operational context. Bechtel and Jayaram (1997) state that measurement in the supply chain may use integrated measures that are cross-functional and can be applied to the entire process (for example, time from cash to cash) in order to avoid optimization at one point in the chain without considering potential consequences at other points in the chain. This may cause some difculty in practice as LaLonde and Pohlen (1996) indicated, that existing and widely-published measurement systems like total costs of ownership and direct product protability, are focused at particular segments of the chain and are not explicitly focused at, or intended to be used for chain-wide measurement. Additionally, Bechtel and Jayaram (1997) state that available integrated measures such as time from cash to cash, percentage of ll rate against customer specications and total response times, sometimes make it difcult to incorporate cross-organizational interfaces, whereas there are no measures addressing a combination of integrated and non-integrated measures. This combination may allow a player in a supply chain to assess the overall competitiveness of the chain as a whole, using integrated measures, while enabling it to focus improvement efforts on its own performance, based on non-integrated measures. Scapens (1998) stated that modern measurement systems should support innovative strategies like teamwork and that non-nancial measures, such as lead times, are to be further developed. Also, they can supplement nancial measures

Figure 2 The squeeze out of the OEM calls for a different type of control
Inputs/ modules/ products in progress

Suppliers

OEM

Distributors

Stage:

Purchasing/ Primary manufacturing

Final manufacturing Distribution Outputs

In progress: Inputs

Modules Supply chain

189

Measuring and improving performance in the supply chain

Supply Chain Management Volume 3 Number 4 1998 187192

Remko I. van Hoek

in approaches like the balanced scorecard. Modern ICT (e.g. ERP systems) are expected to enable this development. In short, it is not strange that Cooper et al. (1997) state that more research is needed on measurement in the supply chain. They call for the development of metrics and an assessment of implementation barriers to overcome in implementing these metrics. In that respect they call for a practical and action-oriented research that aims to contribute to the actual application of new measurement systems. This may be supplemented with the purpose of letting this measurement system actually contribute to the optimization of supply chains. This can be related to the fact that control (operationalized using performance measurement in the chain) is mentioned, together with planning, in the set of management components of the supply chain by Cooper et al. (1997). This suggests that the purpose of measurement and control in the supply chain is to provide management with a set of actions that can be taken in improving performance and planning competitivenessenhancing efforts. This approach is called the design-oriented approach in management control literature (Vosselman, 1997). In that respect three steps may be fundamental to the development of a new measurement approach to provide input to the control of supply chains: (1) The extension of the supply chain denition to provide a context for measurement. Existing denitions do not explicitly provide a basis for measurement. Cooper et al. (1998), for example, only point at measurement as one of the management components in their supply chain denition framework. (2) The development of new measures and the development of new benchmarks, based on these measures; in developing the new measurement format, various aspects of the supply chain denition can be expected to affect the specic mix of measures used. The position of players in the chain (supplier, manufacturer, wholesaler, service supplier) affects their contribution and relevant measures, the level of integration and the strategic approach may affect the relevance of measures. Creating benchmarks based on the new measurement systems may contribute

to directing management effort in optimizing the supply chain. (3) The development of tools that can help support the implementation of the new measurement approach may be a crucial nal step leading to the actual application of new measurement approaches. The tools cannot be limited to the measurement system itself; they also need to include strategic trade-off and planning frameworks in order to assure executive buy-in and commitment and initiate actual improvement processes in the supply chain.

A rst step up to the new approach

In management control literature, a number of aspects relevant for a new measurement approach are specied (see Figure 3). In particular, Kaplan and Cooper (1997) point out the need for performance measurement to start to drive performance improvement and move away from the passive administrative tradition. Using information in a feed-forward approach, as opposed to a feed-back approach, can help in directing management attention towards areas for strategic improvement. In that set-up, attention in performance measurement shifts from short to longer term. Finally, and most relevant in this respect, they point out the need to include the entire chain in the measurement system (integrated measures). As a rst step to the development of such a new supply chain measurement format, Figure 4 was developed. It sheds some initial light on the selection of relevant measures and a measurement approach, depending on the strategic context and operational contribution of players in the supply chain competitiveness. The vertical bar reects possible contributions of players in the chain to overall chain competitiveness. Cost savings, customer service and overall chain integration are used, as they may reect basic strategies for players in the chain. The horizontal bar reects the stage of development of logistics in an organization, as developed by Bowersox and Closs (1996), from logistics as a cost-saver to logistics as a set of activities that can contribute to market creation. The framework may work as follows. When logistics is (still) dominantly used as a cost saver and the contribution of players is in the area of costs (left bottom segment) relevant

190

Measuring and improving performance in the supply chain

Supply Chain Management Volume 3 Number 4 1998 187192

Remko I. van Hoek

Figure 3 Evolution in management control

Passive administration Feedback Operational Short term Units (partial measures) Approach Information use Application Time span Scope Proactive performance improvement Feedforward Strategic Long term Whole chain (integrated measures)

Figure 4 Preliminary framework for a supply chain measurement system

Contribution of organization to supply chain competitiveness

Integration Customer service CostEx: Traditional effectiveness suppliers Cost saver Market penetration/ Market extension Ex: Retailer

Ex: SMART

Market creation

Strategy/Strategic Sophistication

measures may be part per minute, percentage of logistics costs as a share of total costs, as traditionally used by suppliers. A retailer that has reached the second stage of market penetration/market extension and is focused on delivering customer service (middle segment) may benet from a measurement approach that, instead, uses ll rates and response times. SMART, nally, uses logistics to create new markets, based on an innovative supply chain format (as described above) and is focused on integrating the entire chain (top right segment). Relevant measures used by SMART may be level of commitment of individual players in the chain and percentage of customization achieved with respect to customer orders and specic activities in the chain.

system may differ, depending on the supply chain operating format and the strategy approach or the evolution of strategies. Of course, the challenge now is to develop ndings that can contribute to the actual generation of a supply chain measurement system. If successful, the result may be that managers could see the areas where supply chain performance could be improved, so that they could focus attention, leading to dramatically high new standards of performance, unmeasurable at present. It is promising that the Council of Logistics Management has launched such an initiative.

References
Bechtel, C. and Jayaram, J. (1997), Supply chain management: a strategic perspective, The International Journal of Logistics Management, Vol. 8 No. 1, pp. 15-34. Bowersox, D.J. and Closs, D.J. (1996), Logistical Management, the Integrated Supply Chain Process, Macmillan, New York, NY.

Conclusion
Figure 4 provides a rst indication of how, in a supply chain approach to performance measurement, the content of a measurement

191

Measuring and improving performance in the supply chain

Supply Chain Management Volume 3 Number 4 1998 187192

Remko I. van Hoek

Cavinato, J.L. (1992), A total cost/value model for supply chain competitiveness, Journal of Business Logistics, Vol. 13 No. 2, pp. 285-301. Christopher, M. (1992), Logistics and Supply Chain Management, Pitman, London. CLM (1995), World Class Logistics, the Challenge of Managing Continuous Change, CLM, Oak Brook. Cooper, M.C., Douglas, D.M. and Pagh, J.D. (1997), Supply chain management: more than a new name for logistics, The International Journal of Logistics Management, Vol. 8 No. 1, pp. 1-14. Ellram, L.M. and Feitzinger, E. (1997), Using total prot analysis to model supply chain decisions, Journal of Cost Management, Vol. 11, July-August, pp. 12-21. Hergert, M. and Morris, D. (1989), Accounting data for value chain analysis, Strategic Management Journal, Vol. 10, March-April, pp. 175-88. Kaplan, R.S. and Cooper, R. (1997), Cost & Effect, Harvard Business School Press, Boston, MA. La Londe, B.J. and Pohlen, T.L. (1996), Issues in supply chain costing, The International Journal of Logistics Management, Vol. 7 No. 1, pp.1-12.

Ploos van Amstel, R. and Dhert, G. (1996), Performance indicators in distribution, The International Journal of Logistics Management, Vol. 7 No. 1, pp. 73-82. Scapens, R.W. (1998), Management accounting and strategic control, implications for management accounting research, Bedrijfskunde, Vol. 70 No. 1, pp. 11-17. Van Dierdonck, R. (1997), Supply chain management, Management Jaarboek Trends, Roularta Books, Zellik. Van Hoek, R.I. (1998a), Postponed Manufacturing in European Supply Chains. A Triangular Approach, KNAG, Utrecht, The Netherlands. Van Hoek, R.I. (1998b), The role of account management in expanding the scope and depth of third party logistics relations, Proceedings of the World Conference on Transportation Research, 12-17 July. Vosselman, E.G.J. (1997), Innovaties and immitaties in management accounting en control, inaugural speech, Erasmus University, Rotterdam, The Netherlands. Womack, J.P. and Jones, D.T. (1996), Lean Thinking, Simon & Schuster, London.

192