26

Performance Measurement and Controls

“If management is a science of measurement, adequate supply chain measures will be one of the keys to successful supply chain management

 

—Dr. Octavio Carranza”

INTRODUCTION

The fundamental performance measure of a supply chain operation is to produce products to match customers’ demand cycle to deliver maximum value to the customers. The competitive environment calls for speedy, cost efficient, accurate and reliable supply chains. Hence, a number of technologies and managerial attention has gone into improving supply chain performance. Supply chain management, today, is a strategic issue calling attention of top-level management. The supply chain is a source of competitive advantage and creation of customer value. Hence, the measurements around the supply chain performance are critical of importance to the organization to keep its health intact. To measure the performance, organizations have to develop key performance indicators (KPI) to track progress and to achieve desired goals in supply chain. The control of the supply chain system is not possible through one measure; it requires both financial and non-financial measures to direct the operations for efficiency and effectiveness.

The system performance is judged by its output with respect to the inputs. The higher output to input ration is a measure of the system's efficiency. However, the above ratio is also to be reviewed with respect to the time period. In today's competitive environment, industries are being forced to focus on the effective and efficient use of the scare resources. For that, the companies have to deploy lot of resources for movement of goods and information across their supply chain. Hence, it becomes necessary to monitor, control and improve the performance of the supply chain operation so as to attain the set goals of cost reduction and customer satisfaction. The performance measurement system ultimately helps in either reducing or eliminating the non-value added activities from the system. In today's competitive business scenario, the importance of accurately measuring and controlling the supply chain performance cannot be denied as the level of competency has become more critical in enhancing the competitiveness of the business process.

PERFORMANCE MEASUREMENT SYSTEM

Measurement is the first step that leads to control and eventually to improvement. If the firm cannot measure performance, it can not be controlled improved upon. The performance measurement system shall have the following objectives in general.

Decisions on Metrics

The first objective in designing a performance measurement system is to decide upon the parameters, which are to be continuously or periodically reviewed and controlled. With the known parameters for performance monitoring, the benchmarking task becomes easier.

Monitoring

With a monitoring system in place, the reporting on the current status of the operations can be made available to decision-makers. For example, the monitoring system in marketing will report on the total orders booked, orders cancelled and the orders completed (sales effected). The information may be monitored on a daily, weekly or monthly basis depending on the volumes and the criticality. In case of supply chain, the monitoring system reports on the cost breakup across the various activities like procurement, manufacturing, warehousing, transportation, packaging, material handling, etc. It also indicates the service level parameters such as delivery status, transit damages, wrong dispatches, etc.

Controlling

The controlling metrics compares the actual performance with the set standard or objectives. It reports the deviations from the set goals. For example, the control system will report on the current order fill rate in warehouse as 75 per cent and will indicate the deviation of 25 per cent with the set standard of 100 per cent, so that corrective action can be initiated for inventory replenishment. Similarly, the percentage increase product damages during handling, will prompt the management to change the logistical packaging or go in for mechanization in product handling as against the manual one, which is being currently practised. The decrease in warehouse productivity, shall help in identifying the cause and help to improve on the storage layout, material handling methods and the product unitization, etc.

Directing

The major objective of the performance measurement system is to motivate individuals in the system to enhance individual performance resulting into improvement in overall system performance. The performance measure system will help management to evolve the incentive scheme for the operating people who have crossed the targeted productivity level. For example, the workforce engaged in dispatches may be motivated through rewards for crossing the targeted tonnage of goods dispatched in the assigned time frame or reducing wrong dispatches (due to errors in dispatch documents) in the current year as compared to the last year.

The metrics that are used in performance measurement and improvement should be those that truly capture the essence of organizational performance. A measurement system should facilitate the assignment of metrics to where they would be most appropriate. For effective performance measurement and improvement, measurement goals must represent organizational goals and metrics selected should reflect a balance between financial and non-financial measures that can be related to strategic, tactical and operational levels of decision-making and control. As firms begin to define the metrics, a proper documentation of measurement is essential. The definition for the metric should be agreed upon by senior management. The agreed upon definition should be published in an easy to access method. The definition should spell out:

• Purpose of the measurement
• Measurement parameters
• Mathematical techniques for measurement

The performance metrics defined should be validated. The importance of validation cannot be over emphasized. Validation is a critical step in creating metrics. The performance measurement metrics should be measurable (quantifiable), attainable, realistic and time bound.

WHY BENCHMARKING?

Benchmarking is one of the most powerful tools a business that can be used to manage and measure profitability across the supply chain. Properly applied within the appropriate parameters, benchmarking can enhance firm's competitiveness, increase shareholder value and provide the business with a long-term strategic focus. It can also identify opportunities for improving key components in the supply chain and optimize the allocation of resources.

In todays’ business world, supply chain management has a crucial role to play. It is a source of gaining competitive advantage. It creates the right environment to serve the customers better by providing material, information and on time services. To attain competitiveness, there is a need to develop a model against which company could benchmark their own supply chain performance parameters. With benchmarking, the firm has to achieve newer heights and quality in the supply chain management. Benchmarking is defined as follows:

Benchmarking is the practice of being humble enough to admit that someone else is better at something, and being wise enough to learn how to match them and even surpass them at it¹

There are three processes in benchmarking: comparison (of performance levels, processes and practices), learning (from the benchmarking partners to introduce improvements in your own organization) and improvement (which is the major objective of any benchmarking study).

Benchmarking is a process used in management and particularly strategic management, in which businesses use industry leaders as a model in developing their business practices. This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying its best practices in your firm. Benchmarking systematically studies the best firms amongst the industry, then uses their best practices as the standard of comparison, a standard to meet or even surpass.

Benchmarking is a process of setting of level of quality practice and do all that is required to achieve it. It is an ongoing process. It involves cross-firm, cross-industry or cross-regional benchmarking. It is a process for a firm to continuously search for best practices in the best firms around the world. The goal is to become an exceptional company in terms of function or task of firm's business through benchmarking. The benchmarking may be done from all the functional areas such as production, marketing, purchasing, information technology to customer service.

The benchmarking can be categorized into ‘best practices benchmarking, process benchmarking or ‘competitive benchmarking. The ‘competitive benchmarking’ needs competitor analysis. It should choose the best amongst the competitors firms for benchmarking the practices. Benchmarking is conducted in a separate project whose individual objective is to improve one of the organization's business processes. There are a number of models describing the different steps that constitute a benchmarking study. One such model is the so-called benchmarking wheel (Andersen, 1995). The procedure adopted is:

• Identify problem areas
• Identify organizations for best practices
• Study their best practices
• Implement the best
• Repeat

Benchmarking is an expensive process, but most companies find that it more than pays for itself. The cost-benefit analysis will prove its worth after gaining competitiveness which will help in business growth. In benchmarking studies there are three main types of costs: visit costs, time costs and benchmarking database costs. With benchmarking project organization can create and maintain a database of best practices and the companies associated with each of the best practices.

Benchmarking in supply chain means deciding firms performance indicators, which need to be benchmarked against the best ones of other companies. In the benchmarking process, the firm uses a performance scorecard which helps the firm to understand where the favourable and unfavourable gaps exist in the current operations. This information will help the firm to determine which improvement initiatives will yield the most strategic value to the company and which will provide the firm with the highest return on the investment.

BENCHMARKING PROCESS

In most companies, two major and very interdependent issues are commonly addressed. The first one is delivering products with customer-acceptable quality, with very short lead times, at a customer-acceptable cost and the second is keeping inventories throughout the supply chain at a minimum level.

Benchmarking is a process used in management and it is strategic in nature. In benchmarking process, businesses use industry leaders as a role model in developing their business practices. This process involves the following four things:

• Determining the area where the firm needs to improve
• Finding an organization that is exceptional in this area
• Studying that organization for the best practices
• Applying its best practices in the firm

Benchmarking exercise studies the best firms and their best practices. It is then followed by imitating the best practices as the standard of comparison. Benchmarking project is the process which is based on the following beliefs. First progressive firms must seek to continuously improve all facets of their operations. Therefore, their attitude should be one of fixing or improving a work method before it breaks. Second, best practices should be identified and studied which typically means searching outside one's own enterprise.

Supply chain performance is a key factor in a company's competitiveness. The leading companies around the world, in general, benchmark most of their supply chain processes for gaining competive-ness through productivity, cost leadership and system efficiency. By adopting the Internet tools the process of benchmarking can be expedited as data collection and analysis can be done with speed. In supply chain benchmarking, the following components of needs are to be examined with respect to the performance of the leading companies.

• On-time delivery, fill rate, lead times, etc.
• Supply chain costs and cost saving initiatives
• Demand/supply chain initiatives
• Relationship between vendors and customers

With benchmarking studies, organizations can better understand how to measure performance, close gaps and select productivity initiatives to maximize effectiveness and improve the corporate bottom line with respect to the leaders.

Strategic and operational are two components of benchmarking. As the name suggests, the strategic benchmarking is concerned with basic strategic issues like direction of the company, its global involvement, its structure in terms of centralized or decentralized and core competencies. Strategic benchmarking requires a highly structured and focused effort. Strategic benchmarking is more focused on internal aspects rather than external competition. Operational benchmarking quite evidently focuses on the operations, that is, the activities and the processes. This can be further divided into four types. They are as follows:

Working task benchmarking   This covers the single works performed in logistics like palletization. As per this, activities like loading, scheduling pick-ups, etc. are the main areas of concentration.

Function wide benchmarking   As the name suggests this involves analysing the function as a whole and not its components. Thus, if warehousing is benchmarked then all tasks under warehousing are analysed and benchmarked.

Management process benchmarking   In this type of benchmarking management aspects like quality, rewards system, etc. are earmarked for benchmarking. This is more complex as it is cross-functional and process-oriented.

Total operation benchmarking   In this type, the entire logistics operations or the supply chain on the whole is benchmarked.

STEPS IN SUPPLY CHAIN BENCHMARKING

A flow depicting the stages of benchmarking is as follows:

Identify benchmark potential   Firms should look for the very best practices in the industry. It should further conduct a research amongst customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

Target and study focus areas   Once the benchmark has been decided, the next priority is to evaluate and analyse in detail. Supply chain consists of many components like suppliers, distributors, etc. so it is necessary to analyse only those components which are the weak links.

Form benchmarking team   The team should be consisting of two to five (max) employees closest to the issue. The team should be given responsibility with power to plan, organize and implement the entire project.

Develop measurement metrics   Performance metrics will enable the team to perform gap analyses and identify areas needing improvement. The following are the key metrics for supply chain management:

• Delivery performance:   On-time delivery, delivery consistency, fill rate, and return rates.
• Cycle time: Order fulfilment cycle, replenishment cycle, manufacturing cycle and procurement cycle
• Inventory: Inventory days of supply, inventory turns.
• Cash management: Day's sales outstanding, day's payables outstanding and cash-to-cash conversion.
• Supply chain cost: Order management costs, inventory carrying costs, supply chain finance and planning costs, supply chain IT costs, procurement cost.

Design benchmark approach   The approach will have to analyse what are the components which need to be studied. It should be either strategic or operational.

Study and evaluate target areas   It can be done either through direct study wherein the people who are involved in the benchmarked supply chain help you to analyse their strengths and weaknesses. Another approach is to study the supply chain process of the company independently or maybe with the help of a consultant.

Adapt and implement findings   The responsibility should be delegated to benchmarking team members with due authority to implement the benchmarking project. The team should be necessarily cross-functional. The measurable goals need to be set with specified time frame.

PERFORMANCE DIMENSIONS AND MEASURES

The key dimensions of supply chain performance can be defined in terms of cost/financial, quality, time, productivity, flexibility, reliability and customer service which are described in Exhibit 26.1.

 

Exhibit 26.1 Performance Dimensions and their Scope

Dimension	Description	Scope
Cost	Shows eff ectiveness of cost control	Material cost, inventory cost, manufacturing cost, inbound logistics cost, outbound logistics cost, power/fuel cost, rework/rejection cost, labour cost, information carrying cost, and demand/supply planning cost
Quality	Conforms to the specified standard	Accuracy of forecast, supply planning, capacity planning, on time delivery, product quality, service quality, number of returns/rejection rate
Time	Measure how fast an activity is completed	Covers judging the performance from time dimension are cycle time, down time, supplier response time, lead time, number of days of inventory, and on time delivery
Productivity	Ability of a supply chain to use the assets as profitably as possible	Return on investment, capacity utilization, work in process inventory, value added, wastage/scrap/rework, output, eff ciency, finished goods inventory, raw material inventory
Flexibility	Usage of internal and external business changes	Measures such as number of channels, supply sources, product variety, time to adapt to change in demand, raw material availability, source flexibility, upside production flexibility, and delivery flexibility
Reliability	Aability of a system to perform under stated conditions for a specified period of time	Number of plans that meet schedules, on time delivery, incoming material quality, percent of defect items, responsiveness to urgent deliveries, order fill rate, service reliability, number of returns/rejection rate, in process failure rate, degree of information sharing with partners, and stock out rates
Customer service	Ability to satisfy the customer and meet the expectations	Customer satisfaction index, on time delivery, fill rate, customer complaints, stock out rate, service reliability, reject rate/number of returns, percent defect items, product quality and customer retention

There are two levels of performance measures: First one is internal measure and the second is the external measure (Figure 26.1). As per Vijay Govindarajan and Robert Anthony, ² firms must strike a balance between the external measures such as customer satisfaction and the internal measure such as productivity, cost, quality, and asset management because the companies normally ignore the external results in the belief that the internal measure are enough or sacrifice internal development for external results.

 

 

The performance measures must be evaluated through the various perspectives before they are evolved and implemented. In general, the performance measure may be viewed through the four perspectives such as financial, non-financial, internal and external perspectives.

Financial Measures

There are several fixed and operational costs associated with a supply chain. Ultimately, the aim is to maximize the revenue by keeping the supply chain costs low. Costs arise due to inventories, transportation, facilities, operations, technology, materials and labour. The financial performance of a supply chain can be evaluated by looking into the following items:

• Cost of raw material
• Revenue from goods sold
• Activity-based costs (material handling, manufacturing, assembling)
• Inventory holding costs
• Transportation costs
• Cost of expired perishable goods
• Penalties for incorrectly filled or late orders delivered to customers
• Credits for incorrectly filled or late deliveries from suppliers
• Cost of goods returned by customers
• Credits for goods returned to suppliers

The operating cost is the most important performance measure, which reflects the efficiency and the effectiveness of the supply chain system. The operating cost element covers warehousing cost, freight, material handling equipment running and maintenance cost, labour cost, cost of return goods, inventory carrying cost. The cost is measured in terms of percentage of total sales or per unit volume or per unit weight of the inventory moved through the system.

Return on investment (ROI) has both financial and non-financial perspective. This is an important financial performance measure to indicate whether the investment made in logistical assets such as warehouse, equipment, storage system, transportation vehicles is paying you the dividends by way of the profit enhancement through cost reductions. The numerator in the ratio is the income and the denominator is the investment. It also indicates whether the investment is properly utilized so that it generates the revenue as desired.

Non-financial Measures

The non-financial measures include productivity, asset utilization, order fill rate, quality and customer perception.

The productivity of supply chain system is judged by its out put with respect to the input into the system. It is an important performance measure of finding the efficiency of the system. For example, in the organizational context, the incremental increase in head count in the marketing team should bring additional sales revenue as per the norms set by the firm. A firm may decide on productivity norms (based on past experience), so that incremental sales generation per sales person will justify the addition of new recruits to the marketing department. In logistics, the productivity performance measures are:

• Units loaded per person per hour on to the transport vehicles.
• Cases filled and packed per person per 8 hour shifts.
• Idle time of the handling equipment.
• Through put in the warehouse per hour.

The productivity measures are sometimes difficult to compute as the outputs are hard to measure and inputs utilization is difficult to spread over and match the stipulated time frame of out put.

Asset utilization means the utilization of the capital invested in the assets such as warehouse building, storage system, and material handling equipment and also funds tied up in the inventories. The utility of the investment is measured through inventory turn over ratio, returns on investment, and inventory stock levels in number of days.

Inventory turn over ratio indicates the rotation of the given value of inventory with respect to the value of sales in a set time frame. Normally, the time frame is 1 year. The higher turn over ratio indicates the faster cash rotation in the business cycle and higher utilization of the assets. This ratio has both financial and non-financial perspective.

Order fulfilment is one of the important criteria to judge the level of the customer service of the firm. This is the relative ability of the firm to satisfy the customer. This requires a close coordination of all the functional areas of the organization. The various sub measures covered under the order fulfilment are:

• Cycle time (order processing, replenishment, procurement and manufacturing, distribution)
• Delivery (on-time/delayed)
• Fill rate (order fill, case fill, product fill)
• Stock out frequency
• Shipping errors (wrong delivery, incorrect invoice, material shortage)

For the firm to enhance its order fulfilment capability, a close coordination of all the arms of logistics is a must. The system needs a real-time information support and exceptional report generating and alarming capability for proactively initiating the corrective steps.

The perception of the supply chain process quality is created through ‘near-to-the-perfection’ in order fulfilment process. This may be interpreted as error-free order delivery. The impression of quality logistics service is created through initiating and controlling the following performance measures:

• Transit damage frequency
• Value of the total damage
• Frequency and cost of goods returned from customers (damaged/sub quality
• Material shortages frequency
• Deliver commitment deviations—frequency and tolerance

Quality measure is basically evaluation of the entire supply chain process rather than individual activities involved in supply chain operation. It speaks of the degree of effectiveness of the entire order fulfilment process to deliver error-free service.

Inventory velocity is speed of inventory movement through the supply chain. It is also measure of the efficiency and cost effectiveness of the supply chain operations.

The most important external supply chain performance measure is customer perception. For initiating the steps to achieve competitiveness in supply chain operations, the firm needs to take a regular feedback from the customers on the existing service levels and its gaps. Customer feedback may give the firm a comparative analysis of the service levels and value-added service offerings of the competitors operating in the markets. The feedback on delivery performance, reliability, responsiveness, and the relationship initiatives and practices of the firm vis-à-vis competitors needs to be regularly obtained towards the updates on external performance measures and controls thereafter. The firm should regularly conduct or sponsor customer surveys to get such measures for mapping the customer perceptions for improvement in the logistical services and enhancing competitiveness. These surveys may be conducted or organized through firms own marketing and service team, or through channel members or through consultants.

For calibrating the supply chain performance measures, firms go in for innovative techniques like benchmarking with excellent supply chain practices in the industry. The benchmarking may be with competitors, firms in related industry or firms in non-related industry. The benchmarking performance measures help the firms to gain competitive edge. For example, ×erox Copr, USA benchmarked I. L. Beans Corp for distribution procedure for improving on its lead time in exports sales.

The benchmarking may be done based on the published information, alliances with firm to be benchmarked or appointing a consulting firm/expert depending on the criticality of the results.

Federal express has point system for measuring results. Every day points are accumulated and conspicuously displayed (Exhibit 26.2) to front line workers so they can understand system performance and take measures for improvement in performance.

 

SUPPLY CHAIN OPERATIONS REFERENCE (SCOR) MODEL

The supply chain operations reference model also known as SCOR model, helps manufacturers to build best-of-class operations. It is a cross-industry standard diagnostic tool for supply-chain management. The SCOR model is a process reference model endorsed by the Supply Chain Council. It enables users to address, improve and communicate supply-chain practices within and between all interested parties. It is a management tool spanning from the supplier's supplier to the customer's customer. It is a toolkit that can be used to define measure and manage supply chain processes. The SCOR model is a pyramid of four levels (Exhibit 26.3) that represents the path a company takes on the road to supply chain improvement.

 

Exhibit 26.3 SCOR Model—Pyramid of Four Levels

Steps	Road Map
Level 1	It provides a broad definition of the plan, source, make and deliver process types and is the point at which a company establishes its supply chain competitive objectives.
Level 2	It defines the 17 core process categories that are possible components of a supply chain. A company can configure both its actual and ideal supply chain by selecting from these core processes
Level 3	It provides a company with the information it needs to successfully plan and set goals for its supply chain improvements. Planning elements include process definitions, target benchmarks, best practices and system software capabilities to enable best practices.
Level 4	It focuses on implementation, when companies put specific supply chain improvements into play. It defines practices to achieve competitive advantage and to adapt to changing business conditions.

It is a method of benchmarking and measuring improvements in supply chain performance. SCOR model contains standard process definitions, standard terminology, standard metrics, supply-chain best practices, and enabling information technology. The SCOR model defines common supply chain management process, and matches them against ‘best practices’. SCOR model was designed to enable companies to communicate, compare and learn from competitors and companies both within and outside of their industry.

SCOR includes all customer interactions from order entry through paid invoice, all product transactions (whether physical or service) and all market interactions from understanding demand to fulfilling it at each individual order level.

The SCOR model is a process reference model that expands to analyse processes involving cross-functional activity. For instance, the plan process involves sales, marketing, manufacturing, finance, logistics and others. It draws attention to process gaps rather pointing to specific departments’ performance which can help the company communicate without ambiguity and help measure, manage and refine processes.

Metrics can include a wide variety of performance measures. The commonly used parameters to measure the performance of a supply chain are as follows:

• Cycle times
• Fill rate
• Inventory turnover
• On-time shipping and delivery
• Perfect order
• Transportation measurements

However, the limitations of SCOR Model are that it excludes sales and marketing, research and technology development, product development and some elements of post-delivery customer support.

PERFORMANCE MEASUREMENT AND CONTROLS

The supply chain performance metrics are developed on various parameters. The key parameters amongst them are:

Cycle Time

There are four cycles involved in supply chain process. These are:

Order fulfilment cycle   It is the time period required to supply the product after it is ordered. In case of retail chain, the order cycle time is zero with regards to the customer. Customer will pick up the product from retail shelf if it is available there. For other products, it is the time till the product is in customers hand after he places an order.

Inventory replenishment cycle time   It is the time taken to replenish the product at retail store or dealer showroom after it is delivered to the customer. The replenishment is done from company's depot or regional distribution centre or from manufacturing plant depending on the physical distance between source and the place of delivery.

Manufacturing cycle time   It is measured from the time the firm planned order until the final production is done. It is time taken for converting raw material and components into finished product in usable form.

Procurement cycle time   It is the time required for getting the raw material and components after it is ordered to vendors. For imported material the procurement cycle time is longer.

Cash-to-cash cycle time   The number of days between paying for raw materials and getting paid for the product. It is calculated by inventory days of supply plus days of sales outstanding minus average payment period for material.

Fill Rates

The fill rate indicates the availability of inventory. It is a measure of shipping performance expressed as a percentage. The following are the variants in fill rate measurements:

• Line fill rate: This means amount of order lines shipped on the initial shipment versus the amount of lines ordered. This measure may or may not take into consideration as per the requested delivery date. For example, a customer orders 5 products one each from 5 product lines. The manufacturer dispatches 4 products from 4 product lines. In this case, the line fill rate is 80 per cent.
• SKU fill rate: This represents the number of SKUs (stock keeping units) ordered and shipped as against the ordered. For example, manufacturer has 100 SKUs. The customer ordered for 80 SKUs. The manufacturer could have only shipped 60 SKUs in full quantity. The SKU fill rate in this case shall be 75 per cent.
• Case fill rate: This represents the amount of cases shipped on the initial shipment versus the amount of cases ordered. For example, a customer orders 5 products that total 100 cases. The manufacturer ships out 85 cases within 24 hours of the order. The fill rate for this purchase order is 85 per cent.

INVENTORY TURNOVER

Inventory turnover indicates the number of times that a company's inventory turns over per year. A frequently used method is to divide the annual cost of sales by the average inventory level. The results vary by industry, a typical manufacturing company may have 6 inventory turns per year. High volume/low margin companies (like grocery stores) may have 12 inventory turns per year or more.

Inventory turnover measures the number of times inventory is sold or used over in a period such as a year. It is equal to the cost of goods sold divided by the average inventory. The low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. A high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business. An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more in that time. Stock turnover also indicates the briskness of the business. The purpose of increasing inventory turns is to reduce inventory for three reasons. Increasing inventory turns reduces holding cost. The organization spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be sold. Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant. Inventory with higher turn over helps to increase responsiveness to change requirements while allowing the replacement of obsolete items. Inventory turns of a few leading global corporations are indicated in Exhibit 26.4.

 

Exhibit 26.4 Inventory Turns of Leading Global Corporations

Company	Inventory Turns
Wall-Mart	7.5
Pantaloon Retails	3.9
Mark and Spencer	20.8
McDonalds	96.5
Apple Computers	50.8
Toyota Motors	10.1
Nokia	17.9
Pepsi	8.2
IBM	18.9

Ontime Shipping and Delivery

It is a calculation of the number of orders shipped on or before the agreed/requested date of delivery.

Other Order Measurement Metrics

The other order measures calculate the error-free rate of each stage of a purchase order fulfilment. This measure captures every step in the life of an order. It measures the errors in the order line. These are generally calculated as shown in Exhibit 26.5.

 

Exhibit 26.5 Other Order Measurement Metrics

Measure	Unit
Order entry accuracy	99.5%
Warehouse pick accuracy	96.0%
Error-free invoicing	98.9%
Delivered damage free	99.6%
Overall order measure	98.5%

Defects Per Million Opportunities (DPMO)

DPMO is a six sigma calculation used to indicate the amount of defects in a process per one million opportunities. DPMO is sometimes used instead of defect per unit to allow for comparison between processes with different levels of complexity.

Transportation Measurements

Freight cost per unit shipped   This is calculated by dividing total freight costs by number of units shipped per period.

Transit time   It is measured in terms of hours/days from the time a shipment leaves the facility to the time it arrives at the customer's place. It is also called as lead time.

Claims/Damages   It is calculated by dividing total loss and damage claims by total freight costs. A high number, generally indicates packaging problems or material handling process.

Truckload capacity utilized   It is calculated by dividing the total tonnage of goods shipped in a truck and total theoretical shipping capacity of a truck.

Truck turnaround time   This is calculated by measuring the average time elapsed between a truck's arrival at the company's facility and its departure. This ratio is important for the companies having their own transportation fleet. The companies like Pepsi or Coca Cola having large fleet of delivery vehicles which carry filled bottles to deliver to retailers on the particular route and collecting the empty bottles. The vehicle turn around time is critical for the company towards asset utilization.

On-time pickups   It is 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 also indicates the reliability of the transportation mode.

REVIEW QUESTIONS

1. ‘Performance measurement system tracks the health of supply chain of a company’. Explain.
2. Discuss the various performance measurement metrics with regards to supply chain.
3. Explain what is benchmarking and its role in achieving supply chain competency.
4. In an organization the supply chain ‘performance measurement system’ will fail due to lack of ‘information system’,. Explain.

INTERNET EXERCISES

1. Visit http://www.supplychainmetric.com/ to study further on measurement metrics used in improving the supply chain performance.
2. For studying the articles on SC performance measurement visit http://www.iimm.org/knowl-edge_bankyi_performance-measures-scm.htm
3. The Balanced Scorecard Institute, a strategy management group company, helps organizations succeed through improved strategic focus and performance. Visit http://www.balancedscore-;card.org/BSCResources/PerformanceMeasurement/tabid/59/Default.aspx http://card.org/BSCResources/PerformanceMeasurement/tabid/59/Default.aspx to study how the balance score card system works.
4. To get insights in SC performance measurement metrics, visit http://www.scmr.com/article/330620-True_Measures_of_Supply_ Chain_Performance.php

VIDEO LINKS

1. Measuring Supply Chain Performance. Supply chains are tasked with being effective, efficient, and adaptable. All the companies have supply chains, it is only via performance measurement that managers can truly prove the strength of their supply chain, http://www.youtube.com/watch?v=R4HPYYR5iLw&feature=related
2. Benchmarking Your Supply Chain, http://www.logisticsbureau.com.au/video-supply-chain-logistics.htm
3. Supply Chain Key Performance Indicators—KPIs, http://www.logisticsbureau.com.au/video-supply-chain-logistics.htm

PROJECT ASSIGNMENT

1. Supply chain management, metrics can help firms to understand how company is operating over a given period of time. Find out the key metrics of different areas in supply chain in the following industry sectors:
   1. Automobile
   2. Food products
   3. Hospitality

   Visit http://www.supplychainmetric.com to get more details.