Supply chain performance evaluation
Abstract
The following article is aimed at gaining an understanding of what
the supply-chain performance evaluation is and its poignant
implementation along the supply chain process.
Introduction
"Performance" implies predetermined parameters and
"measurement" implies on ability to monitor events and activities
in a meaningful way. Performance measurement can be defined
as the process of quantifying the effectiveness and efficiency of
action . A number of approaches for measuring performance are:
balanced scorecard (Kaplan and Norton, 1992), the performance
measurement matrix (Keegan et al, 1989) performance
measurement questionnaire (Dixon et al, 1990), criteria for
measurement system design (Globerson, 1985) and computer
aided manufacturing approaches. However utilizing them
highlights a range of limitations including, lack of strategic focus,
forcing managers to encourage local optimization rather than
seeking the continuous improvement and also they are disable to
provide adequate information about competitors.
The idea of supply chain performance evaluation have been
around from since the early 20th century. Literature review of
supply management performance evaluation shows that early
performance evaluation measures mainly focuses on cost-based
measures, evaluation data was over emphasized and most of the
time incorrect, measures were short-termed focused, and there
was a lack of pertinent detail, just to name a few.
However modern day type of supply chain performance measure
evaluation are more advanced and precise and they include:
Balanced scorecard
The Balanced Scorecard recommends the use of executive
information systems (EIS) that track a limited number of
balanced metrics that are closely aligned to strategic
objectives.The approach was initially developed by Robert S.
Kaplan and David P. Norton and was discussed in an article, titled
“The Balanced Scorecard – Measures That Drive Performance,”
published in the Harvard Business Review,January-February 1992.
While not specifically developed for supply chain performance
measurement, Balanced Scorecard principles provide excellent
guidance to follow when doing it. The approach would
recommend that a small number of balanced supply chain
measures be tracked based on four perspectives:
• Financial perspective (e.g., cost of manufacturing
and cost of warehousing )
• Customer perspective (e.g., on-time delivery and order fill rate)
• Internal business perspective (e.g., manufacturing adherenceto-plan and forecast errors)
• Innovative and learning perspective (e.g.,APICS-certified
employees and new product development cycle time) An industry
has grown around the Balanced Scorecard approach with a
variety of firms that provide consulting and solutions for
implementing performance measurement,such as:
 Renaissance Worldwide, Inc. (Newton, MA) got its start
doing this Balanced Scorecard consulting and grew to be
one of the 30 largest consulting firms.
The Supply Chain Council’s SCOR Model provides guidance on the
types of metrics one might use to get a balanced approach
towards measuring the performance of one’s overall supply chain.
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-tocash 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 )
In contrast to the Balanced Scorecard, which is focused on
executive enterprise-level measurement, the SCOR Model
approach directly.
The Logistics Scoreboard
Another approach to measuring supply chain performance was
developed by Logistics Resources International Inc. (Atlanta, GA),
a consulting firm specializing primarily in the logistical (i.e.,
warehousing and transportation) aspects of a supply chain.The
company recommends the use of 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., intransit
time and order entry time)
Logistics Resources sells a spreadsheet-based, educational tool
called The Logistics Scoreboard that companies can use to pilot
their supply chain performance measurement processes and to
customize for ongoing use.The tool and a monograph (Logistics
Performance, Cost, and Value Measures that documents the tool
and its use) are distributed by The Penton Institute (Cleveland,
OH). In contrast to the other approaches discussed, 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.
Activity Based Costing
The Activity-Based Costing (ABC) approach was developed to
overcome some of the shortcomings of traditional accounting
methods in tying financial measures to operational performance.
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.
For example, use of the ABC method can allow companies to
more accurately assess the total cost of servicing a specific
customer or the cost of marketing a specific product. ABC
analysis does not replace traditional financial accounting, but
provides a better understanding of supply chain performance by
looking at the same numbers in a different way. ABC methods are
useful in conjunction with the measurement approaches already
discussed as their use allows one to more accurately measure
supply chain process/task productivity and costs by aligning the
metrics closer to actual labor,material, and equipment usage.
Economic Value-Added
One of the 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
longterm value to its shareholders – thus, relatively unrelated to
the long-term prosperity of a company. For example, a company
can report many profitable quarters, while simultaneously
disenfranchising its customer base by not applying adequate
resources towards product quality or new product innovation. To
correct this deficiency in traditional methods, some financial
analysts advocate estimating a company’s return on capital or
economic value-added. These are based on the premise that
shareholder value is increased when a company earns more than
its cost of capital. One such measure, EVA, developed by Stern,
Stewart & Co., attempts to quantify value created by an
enterprise, basing it on operating profits in excess of capital
employed (through debt and equity financing). Some companies
are starting to use measures like EVA within their executive
evaluations. Similarly, these types of metrics can be used to
measure an enterprise’s value added contributions within a
supply chain. However, while useful for assessing higherlevel
executive contributions and longterm shareholder value,
economic-value added metrics are less useful for measuring
detailed supply chain performance. They can be used, however,
as the supply chain metrics within an executive-level performance
scorecard, and can be included in the measures recommended as
part of The Logistics Scoreboard approach.
Supply Chain performance measures categories include inventory,
transport and customer orders.
Inventory
Modern day company utilizes the inventory-turn over model to
analyze their inventory performance.
Inventory turn over
Between 1999 and 2000, McDonald's had an inventory turn rate
of 96.1549, incredible for even a high-turn industry such as fast
food. This means that every 3.79 days, McDonald's goes through
its entire inventory. Wendy's, on the other hand, has a turn rate
of 40.073 and clears its inventory every 9.10 days.
This difference in efficiency can make a tremendous impact on
the bottom line. By tying up as little capital as possible in
inventory, McDonald's can use the cash on hand to open more
stores, increase its advertising budget, or buy back shares. It
eases the strain on cash flow considerably, allowing management
much more flexibility in planning for the long term.
Inventory turnover reflects how frequently a company flushes
inventory from its system within a given financial reporting period.
The measure can be computed for any type of inventory—
materials and supplies used in manufacturing or service delivery,
work in progress (WIP), finished products, or all inventory
combined. With the exception of finished product inventory, the
measure applies to service and manufacturing businesses.
Inventory Turnover can be calculate by dividing the cost of goods
sold (COGS) for the reporting period by average value of
inventory on hand during the period. The reporting period can be
any time interval preferred —monthly, quarterly, or annually, for
example.
Inventory Turnover = COGS / Average Dollar Value of
Inventory On-hand
For example
If cost of goods sold at company X during the period is $100
and average finished products inventory during the month is $10,
then finished products inventory turnover ratio is 10 ($100 / $10
= 10). This implies that Company X is able to sell out inventory
ten times during the reporting period.
Counting the units sold and multiplying them by the cost to
produce one unit could compute COGS. However, accountants
may compute COGS in a different manner that approximates the
same result but is simpler to execute. They take the dollar value
of inventory on hand at the beginning of the period, add
purchases of production materials and supplies, and subtract the
dollar value of inventory remaining at the end of the period.
Transportation
In this functional area, employees are measured by
transportation and warehousing costs, and inventory levels.
Measured in this context only, Logistics personnel tend to keep
inventories low and batch customer orders to ensure that trucks
are shipped full and picking operations are minimized. On the
inbound side, these employees will want to receive full truckloads
at their warehouse docks to minimize receiving costs, usually at
the expense of increased inventories
Freight cost per unit shipped: Calculated by dividing total freight
costs by number of units shipped per period. Useful in
businesses where units of measure are standard (e.g.,
pounds). Can also be calculated by mode (barge, rail,ocean,
truckload, less-than-truckload, small package, air freight,
intermodal, etc.).
Outbound freight costs as percentage of net sales: Calculated by
dividing outbound freight costs by net sales. Most accounting
systems can separate "freight in" and "freight out." Percentage
can vary with sales mix, but is an excellent indicator of the
transportation financial performance.
Inbound freight costs as percentage of purchases. Calculated by
dividing inbound freight costs by purchase dollars. It is important
to understand the underlying detail. The measurement can vary
widely, depending on whether raw materials are purchased on a
delivered, prepaid, or collect basis.
Transit time: Measured by the number of days (or hours) from
the time a shipment leaves your facility to the time it arrives at
the customer's location. Often measured against a standard
transit time quoted by the carrier for each traffic lane.
Claims as % of freight costs: Calculated by dividing total loss
and damage claims by total freight costs. Generally measured in
total and for each carrier. A high number generally indicates
packaging problems, or process problems at the carrier.
Freight bill accuracy. Calculated by dividing the number of errorfree freight bills by the total number of freight bills in the period.
Errors can include incorrect pricing, incorrect weights, incomplete
information,etc. Generally measured in total and for each carrier.
Accessorials as percent of total freight: Calculated by dividing
accessorial and surcharges by total freight expenditures for the
period. Many freight carriers will charge extra fees for trailer
detention/demurrage, re-delivery, fuel increases, and other
expenses or extra services. Often, these are extra costs incurred
due to inefficient processes.
Percent of truckload capacity utilized: Generally used for
shipments over 10,000 lbs. Calculated by dividing the total
pounds shipped by the theoretical maximum. For example,
assume your trucks can hold 40,000 lbs. of product. During the
prior month, there were 675 shipments totaling 22.95MM
lbs. The percentage utilization was 85%. The 15% unused
capacity is an opportunity for more efficiency.
Mode selection vs. optimal: This is calculated by dividing the
number of shipments sent via the optimal mode by the total
number of shipments for the period. To measure this, each traffic
lane must have a designated optimal mode, based on freight
costs and customer service requirements.
Truck turnaround time: This is calculated by measuring the
average time elapsed between a truck's arrival at your facility and
its departure. This is an indicator of the efficiency of your lot and
dock door space, receiving processes, and shipping
processes. This also directly affects freight carrier profits on your
business.
Shipment visibility/traceability percent: Calculated by dividing
the total number of shipments via carriers with order tracking
systems, by the total number of shipments sent during a
period. This is an indicator of the relative sophistication of
carrier base, and one measure of the non-price value available
from carrier base.
Number of carriers per mode: Calculated by counting the total
number of freight carriers used in a given period, by mode (ocean,
barge, rail, intermodal, truckload, LTL, small package, etc.). This
is an indication of volume leverage and control over the
transportation function.
On-time pickups: Calculated by dividing the number of pick-ups
made on-time (by the freight carrier) by the total number of
shipments in a period. This is an indication of freight carrier
performance, and carriers' affect on shipping operations and
customer service.
Customer order
Perfect Order Measurement: As with most other Supply Chain
Metrics, there are many variations to this measurement.
The Perfect Order Measure calculates the error-free rate of each
stage of a Purchase Order. This measure should capture every
step in the life of an order. It measures the errors per order line.
But how do you capture errors? For example, your warehouse
picks and ships the wrong item. Once the customer receives the
order and notices the error, they contact the manufacturer and
notify them of the mistake. The manufacturer then enters a credit
for the item not shipped and an invoice for the item shipped in its
place. For almost all errors that occur, a corrective credit is issued.
It is through an analysis of these credits that the metric is
derived. Most systems require a "reason code" to be used when
entering a credit. Tracking these reason codes and assigning
them to a category creates grounds for the Perfect Order
Measure.
Example:
Order Entry Accuracy: 99.95% Correct (5 errors per 10,000 order
lines)
Warehouse Pick Accuracy: 99.2%
Delivered on Time: 96%
Shipped without Damage: 99%
Invoiced Correctly: 99.8%
Therefore, the Perfect Order Measure is 99.95% * 99.2% * 96%
* 99% * 99.8% =
94.04%
There may be other fields used such as "The Sales Representative
recommending the correct item" or the "FillRate.”
Conclusion
It may be said that one of the most important activities in the
entire supply chain procedures includes evaluating. Since
evaluating serves he need of creating a platform by which
suppliers maybe able to judge their performance which will lead
to their overall development and competitive advantage on the
global market.