Operational, Financial, and
Performance Measurement
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of operational and financial
performance measurement
• Measurement system
• Operational
• Financial assessment
“If you don’t measure it,
you can’t manage it.”
Measurement system objectives related to
logistical operations
• Monitoring system performance by establishment
of appropriate metrics to track and report
• Controlling system performance by having
appropriate standards of performance relative to
metrics being monitored
• Directing employee focus on system performance
through motivation and reward
• Improving shareholder value through superior
logistics performance
The Balanced Scorecard is a comprehensive
system of performance assessment
Figure 16.1 The Balanced Scorecard
Measurement focus using a balance
scorecard approach
• Financial perspective
– Profitability and return on
• Internal operations
– Process quality, efficiency and
• Customer perspective
– Logistics service, quality and
• Innovation and learning
– Process improvement,
benchmarking and human
resource development
Operational assessment
• Functional perspectives
• Measuring customer
• Determining appropriate
• Supply chain
comprehensive metrics
• Benchmarking
Functional perspective on logistics measures
includes these major categories
Customer service
Asset management
Cost is the most direct reflection of logistics
• Typically measured in total dollars spent
• Total logistics cost (aka total landed cost)
– Sum of order processing + inventory + transportation +
warehousing and materials handling + facility network
• Few organizations have ability to measure total cost
• Common to report cost as a
– Percentage of sales volume
• E.g. transportation cost as 15% of sales volume
– Cost per unit of volume
• E.g. loading cost as $5.50 per order
Customer service requires specific measures for
each element of the basic service platform
• Availability
– Organization’s fill rate
Item fill rate
Line fill rate
Value fill rate
Order fill rate
• Operational performance
– Average order cycle time is
average number of days elapsed
between order receipt and
delivery to customer
– Order cycle consistency
– On-time delivery
Quality measures often include service reliability
• Accuracy of work activities
• Damage frequency is the ratio
of number of damaged units to
the total number of units
• Number of customer returns of
damaged or defective goods
• Number of instances when
information is not available on
• Number of instances when
inaccurate information is
Productivity is measured in terms of output of
goods compared with quantities of inputs
• Labor productivity
– Units shipped per employee
– Units received per
• Equipment downtime
Asset management considers utilization of capital
investments in facilities, equipment and inventory
• Facilities and equipment
– Capacity utilization
• E.g. warehouse utilization of 80% is not shipping all it is capable of shipping
– Downtime is the percentage of hours that equipment is not utilized
• E.g. forklift with a 2% annual downtime
• Inventory
– Inventory turnover rate is most common measure of performance
– Days of supply is the amount available to meet forecasted sales volume
• E.g. 50 days of supply (100 units per day forecast and 5000 units on hand)
• Return on assets and return on investment
Inventory turnover rate is measured differently by
different types of firms
• Vast majority of firms use this
• Some retail firms use this
• This metric is used for products
whose cost or selling price
changes significantly during
relatively short periods of time
– E.g. gasoline inventory
Critical that average inventory use as
many data points as possible
Example of common metrics by category
Table 16.1 Typical Performance Metrics
Measuring customer accommodation requires an
additional set of metrics
• Perfect order measures the effectiveness of the
overall integrated logistical performance
– Ratio of perfect orders to the total number of orders
completed during the same time period
• Absolute performance provides a better
indication of how a firm’s performance impacts
– “To us, 99.5 percent on-time delivery would mean that
on a typical day, over 5,000 customers received late
• Customer satisfaction measurement requires
monitoring, measuring and collecting information
from the customer
Illustration of framework use showing metric
2 is closer to measurement need
Figure 16.2 Illustration of Measurement Framework
Supply chain comprehensive metrics
• Cash-to-cash conversion time
– Time required to convert a dollar
spent on inventory into a dollar of
sales revenue
• Inventory days of supply
– Calendar days of sales available
based on recent sales activity
• Dwell time
– Ratio of days inventory sits idle to
the days it is productively used or
• On-shelf in-stock percentage
– Percentage of time a product is
available on the shelf in a store
• Total supply chain cost
– Sum of costs across all firms in
the supply chain
• Supply chain response time
– Time required for all firms to
recognize a fundamental shift in
demand, internalize that finding,
replan, and adjust output to meet
that demand
Illustration of supply chain total cost
extending beyond an individual firm
Figure 16.3 Total Supply Chain Cost
Benchmarking makes management aware of stateof-the-art business practice
• Critical aspect of performance measurement
– “Are we staying competitive?”
– Considers metrics and processes
• Which organizations should we benchmark against?
– Internal groups are easier to identify
• Johnsons & Johnson has 150+ business units with ample opportunity to
share best practices
• Provides little information about performance against the competition
– Nonrestricted benchmarking compares metrics and processes to
best practices regardless of where the practice is found
• Belief that learning is possible from any firm with outstanding performance
High-achieving firms are more involved in
benchmarking than average-achieving firms
Table 16.2 Performance Benchmarking Differential
Financial assessment is needed to link supply
chain performance to financial results
• Critical tools for financial
– Segmentation of data
• By channel, territory,
customer, product, and
– Cost-revenue analysis
– Strategic profit model
Cost-revenue analysis is needed to provide a
financial view of integrated logistics
• Accounting deficiencies
make this difficult
• 3 approaches are available
to identify and control
logistics expenses
– Contribution
– Net profit
– Activity based costing
Accounting practices to prepare financial
statements create some deficiencies
• Costs are aggregated on a
standard account basis rather
than activity basis
• Inbound freight expense is
deducted from gross sales
• Outbound freight is reported as
an operating expense
• Freight is not reported as a
specific cost
– i.e. Products purchased on a
delivered price basis
• Failure to specify and assign
inventory cost
Contribution analysis requires all costs be
identified as fixed or variable
• Fixed costs are those that do not directly change
with volume
• Variable costs are those that change as a result of
• Direct costs are those specifically incurred
because of the existence of the segment of analysis
– E.g. product, customer, channel
• Indirect costs exist because of more than one
segment of business
Example of contribution analysis
Table 16.3 Contribution Margin Income Statement for Two Customers
Net profit analysis requires all operating costs be
charged or allocated to an operating segment
• Each segment must be
allocated its fair share of
• Example from Table 16.3
would require indirect fixed
cost of $41,000 to be
allocated to each segment
– E.g. allocate based on
sales volume
• Disagreements arise in
determining how to
allocate indirect costs
– Allocations are arbitrary
and may result in
misleading financial
– But, many indirect
expenses are not fixed
• Rather they rise and fall
based on business demand
of operating segments
Activity-based costing is a partial solution to
arbitrary allocations
• Activity-based costing (ABC)
suggests costs be traced to
– Activities are then related to
product, process or customer
• Biggest challenge with the ABC
approach is identifying the
activities, related expenses and
drivers of expense
Strategic profit model shows relationship of
income and balance sheet to ROA
• Return on investment
(ROI) is critical measure of
financial success
– Return on net worth
(RONW) measures
profitability of funds
invested by owners
– Return on assets (ROA)
measures profitability
generated by managing
operational assets
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Illustration of strategic profit model with
example data
Figure 16.4 Strategic Profit Model
Two fundamental ways to improve return on
• Manage net profit margin
– Net profit margin is net profit
divided by net sales
– Measures portion of each sales
dollar that is kept by the firm
• Manage asset turnover
– Asset turnover is ratio of total
sales divided by total assets
– Measures efficiency of
management utilization of assets
Applications of the strategic profit model (SPM)
• Model is very adaptable to a
• Can use SPM in combination
with other methods to examine
ROA for customer or product
– Table 16.4 provides an example
– Other segment profitability and
ROI analyses can be conducted
• Very useful framework for
relating logistics activities to
the overall financial objectives
of the organization
Product A vs Product B
Table 16.4 CMROI for Two Products
Product A vs Product B
Table 16.4 CMROI for Two Products
Product B contributes a higher return even though
its gross margin is lower
Table 16.4 CMROI for Two Products
Example showing ROA improvement if inventory
cost is reduced to $300
Figure 16.5 Strategic Profit Model (Inventory Reduction)
Requirements for financial reporting provide more
supply chain visibility to management
• Sarbanes-Oxley Act of 2002 (SOX)
– Section 404 requires an internal control report to be filed along with corporate
annual report
• Firms must have internal measurement capabilities that comply with
SEC requirements
• SOX requires disclosure of all off-balance-sheet liabilities that have
material effect on financial reports
– Vendor-managed inventories
– Long-term purchase agreements
– Slotting allowances
• Also required to report any event that may have material effect on
financial reports
– E.g. shipments with long lead times that may be held a international border