Measuring Supply

Chain Performance

Supply Network and Value Chain

for a Manufacturing Company

POPULAR SAYING
Anything measured improves.
What you measure is what you get.
Anything measured gets done.
You cant manage what you do not measure.

Importance of
performance measurement

Measurements are important for directly controlling behaviour and

indirectly performance of system.

Tracks companys progress towards achieving its supply chain

improvement objectives

Be careful :

Seemingly relevant, but cumbersome, measurements are of little use, and

are possibly a hindrance, in helping to improve supply chain performance

Picking the wrong measures and leaving out important ones could lead to
supply chain performance degradation

Driving a supply chain based only on after the-fact measures e.g. losing an
important customer or having poor financial performance is not very
effective
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Why Financial accounting

measure not sufficient?????

The measures do not relate to important strategic, nonfinancial performance, like customer service/ loyalty
and product quality.

The measures do not directly tie to operational

effectiveness and efficiency.

Supply Chain Performance

Measurement Approaches

The Balanced Scorecard

The Supply Chain Councils SCOR Model

The Logistics Scoreboard

Activity-Based Costing (ABC)

Economic Value Analysis (EVA)

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Balanced
Scorecard & Its
Applications

BSC Hall of Frame: Success Story One

Bob McCool became head of Mobil NAM&R in 1992

when the past performance was not acceptable.
Mobil launched its Balanced Scorecard project in
1994.

From 1994 to 1998. The productivity strategy

created a 20-percent reduction in the cost of
refining, marketing, and delivering a gallon of
gasoline.

The growth strategy, with its new value proposition

for targeted segments, produced increased
customer satisfaction led to increased revenue
that exceeded industry averages by more than 2
8
percent per year.

Kaplan and Norton, 2001

BSC Hall of Frame: Success Story Two

Chrysler Group, the US automobile

division of DaimlerChrysler, which faced
a forecast loss of $5.1 billion in 2001.

The division brought in a new CEO, who

used the BSC to communicate a
turnaround strategy.

Despite continued weakness in the US

automobile market, Chrysler generated
$1.9 billion in profits in 2004.

Kaplan and Norton, 2006

BSC: Strategic Measuring for Performance

(Robert S. Kaplan & David P. Norton)

Four Management Functions :

Planning, Organizing, Staffing,

Controlling

If you cant measure, you cant managed

If you cant measure, you cant improved
What gets measure, gets done

Measurement is core of the Balanced

Scorecard

10

Balanced Scorecard (BSC)

The Balanced Scorecard expands the set of
business unit objective beyond summary
financial measures.
Balanced Scorecard is a set of measures that
give top managers a fast but comprehensive
view of the business.
A set of cause-and-effect performance
measures linkage among four distinct
perspectives finance, customer, internal
business process, and learning & growth
used to translate strategy into desired
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results.

Balance Scorecard Perspectives

Financial
Perspective
Objectives
Key Performance
Indicators
Targets
Initiatives

Customer
Perspective
Objectives
Key Performance
Indicators
Targets
Initiatives

Kaplan and Norton, 1996

STRAEGY

Innovative
Learning & Growth
Perspective
Objectives
Key Performance
Indicators
Targets

Internal business/
Process
Perspective
Objectives
Key Performance
Indicators
Targets
Initiatives

12

Four Perspectives of BSC

Financial: What are our shareholders
expectations for financial performance?
Customer: To each our financial
objective, how create value for our
customers?
Internal Process: What processes must
we excel at to satisfy our customers and
shareholders?
Innovative Learning & Growth: How do
we align out intangible assetspeople,
systems, and cultureto improve the
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critical processes?

Kaplan and Norton, 2006

Financial Perspective

What is Financial Strategy?

[to satisfy

shareholders]
Productivity

strategy
Improve cost structure/yields
Increase asset utilization
Growth strategy
Expand revenue opportunities
Enhance customer Value
How to reach the financial goals?

14

Financial Perspective

15

Performance Measures in
Financial Perspective

Return on
investment
Sales growth rate
by segment
Percentage
revenue from new
product, service,
or customer
Share targeted
customer an
account

Customer and
product line
profitability
Revenue/employee
Cost reduction rate
Unit cost
Payback
Return on Capital
Employed
Working capital
ratios (cash-tocash cycle)
16

Customer Perspective

Information about market & customer

Customer selection, acquisition, retention & growth

Who are profitable customers?

Target Segmentations

What do they need? [same as the thing we serve

them]
Customer Values Propositions

Lead Time
Quality defect level of incoming product as
perceived and measured by customer, accuracy of
company delivery forecast
Performance and service
Cost

17

Performance Measures in
Customer Perspective

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Performance Measures in
Customer Perspective

Market Share: Reflects the proportion of business in a given

market (in term of number of customer, dollar spent, or unit volume
sold) that a business unit sells.

Customer Acquisition: Measures, in absolute or relative, the

rate at which a business unit attracts wins new customers or
business.

Customer Retention: Measures, in absolute or relative, the rate

at which a business unit retains or maintains ongoing relationships
with its customers.

Customer Satisfaction: Assesses the satisfaction level of

customers along specific performance criteria within the value
proposition.

Customer Profitability: Measures the net profit of a customer,

after allowing for the unique expenses required to support customer.
19

Internal Process Perspective

In order to serve customers need and

satisfy other stakeholders, what process
the organization need to be excellent.

The nature of the customer value proposition

determines the kind of internal processes

How to build excellent process to serve

customer and other stakeholders.
Managers need to focus on those critical
operations that enable them to satisfy
customers need

20

Internal Process Perspective

Production Management Processes

Customer Management Processes
Regulatory & Social processes

21

Production management processes

Developing and sustaining supplier

relationships
Producing products and services
Distributing and delivering products
and services to customers
Managing risks

22

Customer management processes

Customer
Customer
Customer
Customer

selection
acquisition
retention
growth

23

Regulatory & social processes

Environment: Issues such as energy and

resource consumption, and emissions
into the air, water and soil
Safety and health: Safety hazards to
employees
Employment practices: Diversity of
employees
Community investment: Communitybased organizations
24

Performance Measures in Internal Process

Perspective

25

Performance Measures in Internal

Process Perspective
Rework
Quality
New product
Response time
introduction
Cost
Service error rate
Yields
Product
Waste
development cycle
Hours with
Scrap
customer
Productivity
Time to market
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Employee skill

Innovative Learning & Growth

Perspective

What competencies the organization need in

order to obtain or sustain competitiveness?

Competencies Gap Analysis

How to fill the gap between what

organization what to be and its current
position

Competencies, Employee Satisfaction and

Retention

Management Information System

Corporate Culture and Motivations

27

Innovation processes

Identifying opportunities for new

products and services
Managing the research and development
portfolio
Design and developing the new products
and services
Delivering the new products and
services into the market
28

Learning & Growth Perspective

Human

Capital E mployees' skills,

talent, and knowledge.

Organization

Capital Culture,

leadership, employee alignment, teamwork, and

knowledge management

Information

Capital
Databases,

information systems, network, and technology i

nfrastructure
29

Performance Measures in Learning &

Growth Perspective
Employee satisfaction
Employee retention/turnover rate
Employee productivity
Information system availability
Personal Goals Alignment Index
Staff development

30

Innovation and Learning Perspective

31

Key Performance Indicators

Derived from strategy
Clearly defined/explicit purpose
Mixed performance driver and
outcome measures
Optimum number of measures (from
15 to 25 measures)

Construct Strategy Map (causal model

cause-and-effect relationships)
32

Characteristics of good
performance indicators
Relevant
Accurate
Understandable
To measure things that can be
measured within certain time.
Comprehensive Vs The main
things

33

How to set targets

Stretch Target
Benchmarking External or Internal

Stakeholders requirement
Capacity

Incremental Target
Comparing with baseline/last year

Baseline Target

Natural number/Normal rate

Theoretical targets

34

Contribution of BSC
Provide information to management
and create accountability
Influence behaviors
Facilitate development (learn and
adapt)
Achieve goal congruence and make a
system self-correcting
Encourage continuous improvement

36

Implement Plan for Performance

measurement System

37

How to use the Balanced Scorecard

Strategic Measurement Systems
Framework for Implementing Strategy
Strategic Management System
38

BSC Strategic Measurement Systems

Strategy
Key Performance Indicators
Targets

39

BSC Framework for Implementing

Strategy

Strategy
KPIs & Targets
Initiatives & Resources
40

BSC Strategic Management System

Strategy
BSC & KPIs

Yearl
y

Strategic Initiatives
Quarterly
& Resources
Implementation

Strategic
Learning

Performance
Report
41

Supply Chain
Operations
Reference Model
(SCOR)

Supply Chain Operations

Reference Model (SCOR)

SCOR:

Integrates Business Process Reengineering,

Benchmarking, and Process Measurement into
a cross-functional framework.
Capture the as-is state

Capture
the
as-is
Capture
the
as-is
state
of
a
process
state
of
a
process
and
the
andderive
derive
the
desired
to-be
desired
to-be
future
futurestate
state

Business Process
Reengineering

Quantify
Quantifythe
the
operational
operational
performance
of
performance
of
similar
companies
similar
companies
and
andestablish
establish
internal
targets
internal
targets
based
on
best-inbased
on
best-inclass
results
class results

Benchmarking

Capture
the and
as-is
state
of
aaprocess
derive
of
process
and
derive
the
to-be
thedesired
desired
to-be
future
state
future state

Characterize
Characterizethe
the
management
management
practices
and
practicessolutions
and
software
software
solutions
that
thatresult
resultinin
best-in-class
best-in-class
performance
performance
Best Practices
Analysis

Quantify the operational

performance of similar
companies and establish
internal targets based on
best-in-class results
Characterize the
management
practices and
software solutions
that result in best-inclass performance
Process Reference
43
Model

Supply Chain Operations

Reference Model (SCOR)
The Primary Use of SCOR:
To describe, measure and evaluate supply chain
configurations.

SCOR contains:
Standard descriptions of management processes
A framework of relationships among the standard processes
Standard metrics to measure process performance
Management practices that produce best-in-class performance

Enables the companies to:

Evaluate and compare their performances with other
companies effectively
Identify and pursue specific competitive advantages
Identify software tools best suited to their specific process
requirements

44

Supply Chain Operations Reference

Model (SCOR)

The SCOR Model approach advocates a

set of supply chain performance
measures comprised of a combination of:
Cycle time metrics (e.g., production cycle
time and cash-to-cash cycle)
Cost metrics (e.g., cost per shipment and
cost per warehouse pick)
Service/quality metrics (on-time
shipments and defective products)
Asset metrics (e.g., inventories )
45

Supply Chain Operations Reference

Model (SCOR): Boundaries

SCOR spans:
All customer interactions, from order entry

through paid invoice.

All product (physical material and service)
transactions, from
suppliers supplier to
customers customer, including equipment,
supplies, spare parts, bulk product, software, etc.
All market interactions, from the understanding
of aggregate
demandPlan
to the fulfillment of each
order
Deliver

Suppliers
Supplier

Source
Return

Make

Deliver
Return

Supplier
(Internal or
External)

Source

Make

Return

Deliver
Return

Your Company

Source
Return

Make

Deliver

Source

Return

Customer
(Internal or
External)

Customers
Customer
46

Supply Chain Operations Reference

Model (SCOR): Boundaries

47

Operation domain

KPIs

Source

1) Inward Material Quality

2) Quantity and Timely Delivery
3) Procurement Unit Cost
4) Material Inventory Level
5) Vendor Development Capability

Plan

1) Adherence to Production Target

2) Sample Conversion Rate
3) Material Utilization
4) Cost Adherence

Make

1) Capacity Utilization
2) Production Cost Efficiency
3) Quality Capability
4) Change Over Time
5) Operator Training Effectiveness

Deliver

1) On Time Shipment
2) Order Fulfillment
3) Claims and Discounts
4) Quality at Delivery
5) Transit time

48

The Logistics
Scorecard
successfully implemented in a variety of industries and
organizations including:
Coca-Cola, Honda, Pepsi-Cola, and Walt Disney World.

The Logistics Scoreboard

The Logistics Scoreboard is an integrated set

of performance measures falling into the
following general categories:
Logistics financial performance measures
(e.g., expenses and return on assets )
Logistics productivity measures (e.g. orders
shipped per hour and transport container
utilization)
Logistics quality measures (e.g., inventory
accuracy and shipment damage )
Logistics cycle time measures (e.g., in transit
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time and order entry time)

The Logistics Scoreboard

The Logistics Scoreboard is prescriptive and
actually recommends the use of a specific set
of supply chain performance measures.
These measures, however, are
skewed toward logistics, having limited focus
on measuring the production and
procurement activities within a supply chain.
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Activity Based
Costing

Activity Based Costing

The method involves:

breaking down activities into individual tasks or cost

drivers,

while estimating the resources (i.e., time and costs)

needed for each one.

Costs are then allocated based on these cost drivers

rather than on traditional cost-accounting methods,
such as allocating overhead either equally or based
on less-relevant cost drivers.

This approach allows one to better assess the true

productivity and costs of a supply chain process.

53

To implement ABC, managers:

1.

Identify and classify each activity. Estimate the

cost of resources for each activity.

2.

Identify a cost driver for each activity and

estimate the quantity of each cost driver.

3.

Calculate an activity cost rate.

4.

Assign costs to cost objects based on the level of

activity required to make the product or provide
the service.
54

Cost Hierarchy

Many companies use a cost hierarchy to

manage the assignment of activitybased costs to the level at which costs
are incurred.

A cost hierarchy for a manufacturer

typically has four levels:
1.

Unit level.

2.

Batch level.

3.

Product level.

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Unit-Level Activities

Unit-level activities are performed each

time a unit is produced.

These activities vary with the number of

units produced.

Insertion of a component during assembly.

Examples: assembling engine

subassemblies, connecting engines to car
frames
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Batch-Level Activities

Batch-level activities are performed

each time a batch of goods is
produced.

These activities vary with the number

of batches prepared.

Examples: setup, scheduling, and

materials handling.
57

Product-Level Activities

Product-level activities are

performed to support the diversity of
products in a manufacturing plant.

Examples: implementing engineering

change notices,

redesigning the installation process.

58

Facility-Level Activities

Facility-level activities are performed

to support a facilitys general
manufacturing process.

Examples: lighting the manufacturing

plant,

Security of the manufacturing plant,

insuring the manufacturing plant.

59

Sample Activities in Cost Hierarchies

Activity Level

Car Manufacturer:
Engine Installation

Direct Mail Service:

Preparing Bank
Customer Mailing

Unit level

Install engine
Test engine

Print and fold letter

Insert letter and other
information into envelope
Seal and meter envelope

Batch level

Set up installation process

Move engines
Inspect engines

Retool machines
Verify correct postage
Bill client

Product or
service level

Redesign installation
process

Train employees
Develop and maintain
computer systems and
databases

Facility or
operations level

Provide facility management,

maintenance, lighting,
security, and space

Provide facility
management,
maintenance, lighting, 60
security, and space

Economic Value
Added

Economic Value Added

Criticisms of traditional accounting is that it
focuses on short-term financial results like
profits and revenues, providing little insight into
the success of an enterprise towards generating
long term value to its shareholders thus,
relatively unrelated to the long-term prosperity
of a company.
EVA estimates the increase in value of
shareholder when a company earns more than its
cost of capital

63

Possible Supply Chain

Performance Measures
Customer Service
Measures
Order Fill Rate
Line Item Fill Rate
Quantity Fill Rate
Backorders/stockouts
Customer satisfaction
% Resolution on first
customer call
Customer returns
Order track and trace
performance
Customer disputes
Order entry accuracy
Order entry times

Process, CrossFunctional Measures

Forecast accuracy
Percent perfect orders
New product time-tomarket
New product time-to-first
make
Planning process cycle
time
Schedule changes

Purchasing Related
Measures
Material inventories
Supplier delivery
performance
Material/component
quality
Material stockouts
Unit purchase costs
Material acquisition costs
Expediting activities

64

Extended Enterprise
Measures

Manufacturing Related
Measures

Logistic Related
Measures

Total landed cost

Point of consumption product
availability
Total supply chain inventory
Retail shelf display
Channel inventories
EDI transactions
Percent of demand/supply on
VMI/CRP
Percent of customers sharing
forecasts
Percent of suppliers getting
shared forecast
Supplier inventories
Internet activity to
suppliers/customers
Percent automated tendering

Product quality
WIP inventories
Adherence-to-schedule
Yields
Cost per unit produced
Setups/Changeovers
Setup/Changeover costs
Unplanned stockroom issues
Bill-of-materials accuracy
Routing accuracy
Plant space utilization
Line breakdowns
Plant utilization
Warranty costs
Source-to-make cycle time
Percent scrap/rework
Material usage variance
Overtime usage
Production cycle time
Manufacturing productivity
Master schedule stability

Finished goods inventory turns

Finished goods inventory days
of supply
On-time delivery
Lines picked/hour
Damaged shipments
Inventory accuracy
Pick accuracy
Logistics cost
Shipment accuracy
On-time shipment
Delivery times
Warehouse space utilization
End-of-life inventory
Obsolete inventory
Inventory shrinkage
Cost of carrying inventory
Documentation accuracy
Transportation costs
Warehousing costs
Container utilization
Truck cube utilization
In-transit inventories
Premium freight charges
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Warehouse receipts

Possible Supply Chain

Performance Measures
Administration/Financi
al Measures

Marketing Related
Measures

Other Measures

Cash flow
Income
Revenues
Return on capital
employed
Cash-to-cash cycle time
Return on investment
Revenue per employee
Invoice errors
Return on assets

Market share
Percent of sales from new
products
Time-to-market
Percent of products
representing 80% of sales
Repeat versus new
customer sales

APICS trained personnel

Patents awarded
Employee turnover
Number of employee
suggestions

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