CHAPTER 15:
Performance Measurement
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of performance measurement
• Measurement system
objectives
• Operational
assessment
• Financial assessment
“If you don’t measure it,
you can’t manage it.”
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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
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The Balanced Scorecard is a comprehensive
system of performance assessment
Figure 15.1 The Balanced Scorecard
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Measurement focus using a balance
scorecard approach
• Financial perspective
– Profitability and return on
investment
• Internal operations
perspective
– Process quality, efficiency and
productivity
• Customer perspective
– Logistics service, quality and
satisfaction
• Innovation and learning
perspective
– Process improvement,
benchmarking and human
resource development
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Operational assessment
• Functional perspectives
• Measuring customer
accommodation
• Determining appropriate
metrics
• Supply chain
comprehensive metrics
• Benchmarking
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Functional perspective on logistics measures
includes these major categories
•
•
•
•
•
Cost
Customer service
Quality
Productivity
Asset management
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Cost is the most direct reflection of logistics
performance
• 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
15-8
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
15-9
Quality measures often include service
reliability performance
• Accuracy of work activities
performed
• 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
request
• Number of instances when
inaccurate information is
discovered
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Productivity is measured in terms of output of
goods compared with quantities of inputs
• Labor productivity
– Units shipped per employee
– Units received per
employee
• Equipment downtime
15-11
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
15-12
Inventory turnover rate is measured
differently by different types of firms
• Vast majority of firms use this
metric
• Some retail firms use this
metric
• 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
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Example of common metrics by category
Table 15.1 Typical Performance Metrics
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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
customers
– “To us, 99.5 percent on-time delivery would mean that
on a typical day, over 5,000 customers received late
orders.”
• Customer satisfaction measurement requires
monitoring, measuring and collecting information
from the customer
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Determining appropriate metrics using the
framework in Figure 15.2
• Competitive basis reflects the fundamental choice
between responsive or efficient logistics performance
• Measurement focus is a continuum ranging from
operational metrics to strategic metrics
• Measurement frequency is the need to monitor day-to-day
performance versus less frequent review to diagnose
performance problems
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Illustration of framework use showing metric
2 is closer to measurement need
Figure 15.2 Illustration of Measurement Framework
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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
positioned
• 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
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Illustration of supply chain total cost
extending beyond an individual firm
Figure 15.3 Total Supply Chain Cost
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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
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High-achieving firms are more involved in
benchmarking than average-achieving firms
Table 15.2 Performance Benchmarking Differential
15-21
Financial assessment is needed to link supply
chain performance to financial results
• Critical tools for financial
assessment
– Segmentation of data
• By channel, territory,
customer, product, and
supplier
– Cost-revenue analysis
– Strategic profit model
15-22
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
15-23
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
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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
volume
• 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
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Example of contribution analysis
Table 15.3 Contribution Margin Income Statement for Two Customers
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Net profit analysis requires all operating costs be
charged or allocated to an operating segment
• Each segment must be
allocated its fair share of
costs
• Example from Table 15.3
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
assessment
– But, many indirect
expenses are not fixed
• Rather they rise and fall
based on business demand
of operating segments
15-27
Activity-based costing is a partial solution to
arbitrary allocations
• Activity-based costing (ABC)
suggests costs be traced to
activities
– Activities are then related to
product, process or customer
segments
• Biggest challenge with the ABC
approach is identifying the
activities, related expenses and
drivers of expense
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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
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Illustration of strategic profit model with
example data
Figure 15.4 Strategic Profit Model
15-30
Two fundamental ways to improve return on
assets
• Manage net profit margin
improvements
– 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
improvements
– Asset turnover is ratio of total
sales divided by total assets
– Measures efficiency of
management utilization of assets
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Applications of the strategic profit model
(SPM)
• Model is very adaptable to a
spreadsheet
• Can use SPM in combination
with other methods to examine
ROA for customer or product
segments
– Table 15.4 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
15-32
Product B contributes a higher return even
though its gross margin is lower
Table 15.4 CMROI for Two Products
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Example showing ROA improvement if
inventory cost is reduced to $300
Figure 15.5 Strategic Profit Model (Inventory Reduction)
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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
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Example metrics to validate financial
elements in columns 3 and 4
Adapted from Table 15.5
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Example metrics to validate financial elements in
columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)
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Example metrics to validate financial
elements in columns 3 and 4 (continued)
Adapted from Table 15.5 (continued)
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