"Measuring the unmeasurable" - measuring and improving
performance in the supply chain
Remko I. van Hoek
The Authors
Remko I. van Hoek, 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.
Article type: Theoretical with Worked Example.
Keywords: Company Performance, Organizational Behaviour, Performance Measurement, Supply
Chain.
Content Indicators: Research Implications** Practice Implications** Originality** Readability**
Supply Chain Management
Volume 3 Number 4 1998 pp. 187-192
Copyright © MCB University Press ISSN 1359-8546
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 reflect 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 specific 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.
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 final 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 sub-optimization 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 organizational interfaces to a chain-wide level. Of course, this may cause
implementation difficulties, as this implies that individual companies may have to sacrifice internal
efficiencies 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 benefits. Driven by the customer focus, logistics can evolve from
a cost-saving function (as in Ducker's 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 define 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 coordination. 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:
"What's 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
upstream into the chain of their manufacturing clients by offering postponed final 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 OEM's factory.
Distributors perform final manufacturing and product modifications 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 D'hert (1996) have indicated that the specific 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
difficulty in practice as LaLonde and Pohlen (1996) indicated, that existing and widely-published
measurement systems like total costs of ownership and direct product profitability, 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 fill rate against customer specifications and total response times,
sometimes make it difficult 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 nonintegrated measures. Scapens (1998) stated that modern measurement systems should support
innovative strategies like teamwork and that non-financial measures, such as lead times, are to be further
developed. Also, they can supplement financial measures 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 competitiveness-enhancing 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 definition to provide a context for measurement. Existing
definitions 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 definition
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 definition
can be expected to affect the specific 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 final 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 first step up to the new approach
In management control literature, a number of aspects relevant for a new measurement approach are
specified (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 first 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 reflects possible contributions of players in the chain to overall chain
competitiveness. Cost savings, customer service and overall chain integration are used, as they may
reflect basic strategies for players in the chain. The horizontal bar reflects 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 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 benefit from a measurement approach that, instead, uses fill
rates and response times. SMART, finally, 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 specific activities in
the chain.
Conclusion
Figure 4 provides a first indication of how, in a supply chain approach to performance measurement, the
content of a measurement 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 findings 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.
Figure 1 Changes in organizations resulting from the adoption of supply chain management
Figure 2 The "squeeze out" of the OEM calls for a different type of control
Figure 3 Evolution in management control
Figure 4 Preliminary framework for a supply chain measurement system
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